Business

A strong conceptual base for company law reform

The Irani committee report has its thrust on stakeholder democracy and self-regulation

SET UP to structurally evaluate the views of several stakeholders in the development of company law in India in respect of the concept paper promulgated by the Union Ministry of Company Affairs, the J J Irani committee has come out with suggestions that will go far in laying a sound base for corporate growth in the coming years.

There has been a movement for some years now in many countries to create better frameworks of corporate governance. This has happened along with a trend towards global alignment of laws governing companies. Drawing from developments in countries such as the U.K., Australia, New Zealand and Canada, the Irani committee report has made suggestions to reform and update the basic corporate legal framework essential for sustainable economic reform.

The committee's report is a laconic, balanced and provocative document. It delicately equates the pulls and pressures of modern business and those of shareholder democracy. It is a step towards providing a growth oriented modern company law, with the thrust on stakeholder democracy and self-regulation.

The report has taken a pragmatic approach keeping in view the ground realities, and has sought to address the concerns of all the stakeholders to enable the adoption of internationally accepted best practices.

It bases ite recommendations on the assumption that those who want to promote and run companies should easily understand the law governing companies. The approach adopted by the committee that the basic principles guiding the operation of corporate entities should be available in a single, simple and promotional framework is a welcome departure from the scheme of the existing Companies Act.

Since a board of directors is seen as a primary source of creating competitive advantage and, in turn, shareholder value in the global marketplace, the quality of corporate governance has been rightly stressed in the report.

As the stakeholders' confidence in corporate functioning needs to be enhanced, the committee has provided for a minimum quota of one-third in the board for independent directors in companies having significant public interest, who are truly independent and who do not represent any sectional interests. The expanded liabilities for celebrities holding board positions and the prescription of basic duties for directors will definitely create an environment of responsibility and accountability.

One distinctive approach of the committee is in allowing corporates to self-regulate their affairs. This is a much-needed orientation for corporate growth in an overall policy regime being provided by the Government. Introducing the concept of One Person Company (OPC) as against the current stipulation of at least two persons to form a company, the committee has pitched for entrepreneurship in individuals.

It is noteworthy that the committee has favoured mandatory consolidation of holding subsidiary companies' financial statements. Instead of prohibiting formation of multi layer subsidiaries, it has called for adequate disclosure obligations regarding the utilization of funds raised or loans given by the company to other entities. This will help deal with the problem of siphoning of funds.

It is progressive thinking to let companies have the option to keep records outside the country, and to insist on expanding the scope of directors' responsibility statement to include related party deals.

To protect the rights of minority shareholders and also to ensure investor protection, the committee has aptly suggested that the new company law should recognise principles such as `class actions' and `derivative action'.

The recommendation that the liquidation/rehabilitation process should be time bound with the overall objective of maximising the chances of preserving value for the stakeholders is a welcome step.

In order to strengthen the deterrent provisions in the present framework, the report has mandated publication of information relating to convictions for criminal breaches of the Companies Act on the part of the company or its officers in the annual report.

The suggestions to provide stringent penalties will certainly help the regulator to curb fraudulent behaviour of companies.

The committee calls for a significant shift from a `government approval' regime to a `shareholder approval and disclosures' regime.

It has created a new leaf in the history of company law. As Indian company law has been out of tune with the modern world, it has brought back the timeless values of forthright accountability and transparency coupled with self regulation and responsibility.

This is commendable more so as the committee recognizes the key role of the triumvirate of CEO, CFO and Company Secretary. The burden of responsibility and accountability to all stakeholders will vest on the shoulders of this trio.

R. RAVI

President, Institute of Company Secretaries of India

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