Revamp Companies Act

Updated: Jul 1 2004, 03:22am hrs
When he was a member of the Rajya Sabha, Prem Chand Gupta had asked the Union finance ministry (unstarred question 1433) to explain why the Companies Act (Amendment) Bill, 2003 had been withdrawn and whether the amended Bill would take care of the need to prevent corporate scams and to ensure transparency and accountability in the functioning of companies to shareholders.

As minister of state with independent charge of company affairs, one of his first decisions has been to announce a complete rewriting of the Act.

The irony is that Mr Gupta, a businessman-politician, has himself been slapped a Rs 10 crore penalty for violation of foreign exchange laws and his appointment as minister has been vociferously opposed.

But keeping aside contradictions between the ministers background and rhetoric, his focus on reviving the Companies Act needs to be welcomed wholeheartedly.

Mr Gupta is sensibly not in favour of resurrecting the badly drafted and controversial 2003 Amendment Bill that was withdrawn under corporate pressure.

The new Act, he says, will be compact, flexible and in tune with a globalised economy. It will also eliminate obsolete and redundant provisions and halve the number of clauses from the current high of 796 to under 300.

The minister also promises to set up the Competition Commission and the National Company Law Tribunal by July after sorting out various legal hurdles to transfer of powers and jurisdiction to the new body.

All these promises are sensible, necessary and welcome; one must hope that they are not mere political rhetoric aimed at deflecting the criticism about being a tainted minister.

Significantly, Mr Gupta also promises to end years of rivalry with the capital market regulator and improve coordination with it in order to improve investor protection. This too is a welcome development.

However, if the minister is serious about using the Companies Act to clean up corporate scams, he must consider retaining some of the proposals of the 2003 Amendment, after they are adequately cleaned up and redrafted to eliminate errors and improve implementation.

The most significant of these is the prohibition on companies to float more than one investment subsidiary.

This measure alone would check the wrongful diversion of funds by industrialists at the cost of investors.

Another important but controversial proposal worth retaining is that 50 per cent of the board should comprise independent directors and their term limited to nine years (this must however be applied prospectively) with a retirement age of 75 for board directors.

Mr Gupta knows that any tough and investor-friendly measures aimed at disciplining corporate India will again be met with stiff opposition.

The next few weeks will show whether the new Act, drafted by the ministry of company affairs, lives up to the promises made by the minister.

And if it does, whether he is able to defend it against corporate lobbying and convert it into a statute by carrying the new Bill through Parliament.