JJ Irani commitee recommends measures for investor protection

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: The bulkiest enactment in the country, namely the Companies Act, 1956, is once again in the state of churning. With the opening up of the economy and increasing globalisation, there has been a consistent demand from the corporate sector for the simplification of the applicable laws and procedures. Companies Act is one of the main statutes directly dealing with the corporate sector. The present Minister in charge of Company Affairs, Mr.Prem Chand Gupta is pursuing the task with missionary zeal and a sense of purpose.

The Minister is very keen to have the Companies Act replaced by a lean and simple version. With a view to ensure that a proper law is drafted which specifically meets the needs of the Corporate sector, an Expert Committee under the Chairmanship of Dr.J.J.Irani, former Managing Director of TISCO and presently, a director on the Board of Tata Sons Ltd., was constituted on 2nd December 2004.

Recently, the Committee submitted its report. Based on this report, the Central Government intends to redraft the company law by producing a brand new enactment. While the report contains recommendations on various aspects relating to the functioning of the companies, the scope of this article is limited to some of the recommendations that are directly affecting the interest of investors.

The Committee has recommended that effective measures be initiated for protecting the interests of stakeholders and investors, including small investors, through legal basis for sound corporate governance practices. An underlying theme of the recommendations is that an increasing stress is sought to be laid on shareholders' democracy. While in theory, shareholders' democracy is indeed a great concept and needs to be encouraged.

Unfortunately, in actual practice, shareholders' democracy means total control by the majority to the virtual exclusion of the minority. Hence, there is a need to provide adequate checks and balances to ensure that unscrupulous promoters do not misuse the system.

The Committee has suggested that a proper framework for responsible self-regulation with clear accountability for such decisions should be in place, thereby obviating the need for a regime based on Government approvals. If such a system were effectively implemented, it would be a great boon for the shareholders as also the companies. However, I have serious doubts on this score.