Business

Irani panel's approach to issues less stringent than expected

The capital market gets plenty of attention

BARELY DAYS after the Irani Committee on company law reform submitted its report; its recommendations are being evaluated from two standpoints.

At one level, the committee has as its central theme simplification of existing corporate law. The Companies Act 1956 with its 658 sections (and 15 schedules) is to be pruned to around 300 sections.

If the committee has its way the new legislation will lay down only core principles, leaving procedural details to be decided by changes in rules. This will ensure flexibility.

Power to shareholders

The report gives more power to shareholders, allowing them rather than the company law administration to decide on certain crucial matters. Mergers between willing companies will be quicker.

They will not be subject to the vagaries of the legal system any more. Ratification by shareholders will be enough.

The capital market gets plenty of attention from the committee. There are proposals to devise an exit option for shareholders who have stayed with a company and not participated in a buy back scheme implemented earlier.

The practice of companies embellishing their boards with "ornamental directors" for a brief period during a public issue will be discouraged. Such directors will hereafter be held responsible for their acts for at least two years after quitting the boards.

All the principal officers of a company will sign financial statements whether they were present at the board meeting called to approve the accounts or not. Most of these suggestions can be regarded as non-controversial and will in all probability be accepted.

Administration to blame

However, there are experts who feel that it is not the existing law as much as its administration that is at fault. Therefore, any moves to effect procedural changes through rule making and without parliamentary scrutiny will make a bad situation worse.

At another level, however, it is seen that the committee's approach to some of the topical issues of governance is decidedly more lenient than what other expert groups and regulators in India and abroad would like.

In fact, in many countries including the U.S., the law relating to malfeasance among corporates and their officers has been considerably tightened and governance standards raised.

So much so, in the West, there is a hue and cry over "the costs of compliance". In the U.S., the Sarbanes-Oxley legislation, which was the culmination of several attempts to make laws more stringent and to avoid Enron type scandals, is now facing a backlash.

It is too early to interpret the Irani committee — it has just submitted its recommendations — but is its thrust reminiscent of attempts in the U.S. and elsewhere to tone down the rigour of the emerging law?

Governance standards

Those who believe that the Irani committee will make corporate law and governance standards less stringent point to its advocacy of a smaller number of independent directors (just one - third of a company's board) compared to the much higher proportion (one half) specified by the Securities and Exchange Board of India under clause 49 of the listing agreement. While corporate India has managed to get an extension till December this year, the SEBI maintains that no further extension is possible. That makes the committee's recommendations particularly intriguing.

There are other points of differences too between the committee and the regulators. But it is not correct to look at an expert committee's report purely from the points of its departure from current developments in those areas.

It is hoped that the committee's views will give a fresh perspective to the Government.

While the Minister has promised to table a new company law bill during the monsoon session itself, past experience suggests that it may not be easy.

The Companies (Amendment bill) 2003 actually made it to Parliament before it was withdrawn.

C. R. L. NARASIMHAN

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