The proposal of virtually banning pyramid structures is also unrealistic. Sec 4(1A) does away with concept of grand subsidiary. In a scenario where foreign companies float wholly-owned subsidiaries as holding companies for their operations, this is a negative message to foreign investors. As is the requirement under Sec 372A(9A) permitting a company to invest through only one investment company. These operate as roadblocks to joint ventures, cross border investments and holdings, which the Act should facilitate, not shut out.
But the spotlight is not so much on the omissions as on the fundamental concepts the Bill sought to introduce, such as board composition. The amendments on the criteria and function of independent directors is under fire from all quarters. The majority requirement of independent directors was opposed vehemently by the chambers of commerce, predictably representing the promoters lobby.
The main bone of contention is that, in placing too much importance in the independent directors, the promoters worth is reduced to zero. Undoubtedly, Indian businesses have been traditionally promoter-driven. But new laws have to adopt themselves to the reality of global entry, and changing markets. The same sense of insecurity is demonstrated in the nitpicking criticism of the definition of independence. Puerile issues have been raised on the meaning of transaction with the company, being a relative of the management, having shareholding exceeding 2 per cent, being a former employee etc.
The counter-arguments are ESOPS should not be counted as the 2 per cent disqualification, past employees are most appropriate as independent directors, buying a pair of shoes from Bata would be a disqualifying transaction and so on.
All these positions stand addressed in existing laws; and are no different from Sarbanes-Oxley and Higgs Report recommendations. Going global means extending global policies inhouse; the Indian corporate sector is not unique to merit exception. Equally vehement is the opposition to mandatory inclusion of women directors. It is argued that the Companies Act should focus on corporate issues, not social reform. What has eluded India Inc is that shedding the gender bias has vastly improved the performance of corporates in developing countries. Gender representation is but an extension of legislative affirmative action in the corporate field.
What is validly criticised is how the mandatory training proposed in the Bill to independent directors is not feasible. As also, how after nine years, the independent director gets disqualified; and most important, how this contingent of independent directors will be available post-amendment. The Listing Agreement amendment requires financially literate and qualified persons, which makes sense. The Bill is trying to create a cadre of independent directors in a totally unfocussed manner. But the overall discontent on corporate governance norms, the reiteration that the same should be voluntary and not legislated, reflects corporate discomfort with transparent compliances.
It would have made sense to have separate Bills subject-wise certainly a separate one covering only corporate governance. The amalgamation of the 1997 Bill has created further confusion. The Bill seems to have been drafted without any effort to harmonise the whole. Dump this obsolete legislation and replace it with an up-to-date, realistic law.
The author is a practising corporate lawyer and partner in Khaitan & Jayakar, Sud, Sen, Budhiraja & Vohra, a Delhi-based law firm.