Maximising social welfare

By: |
Published: February 22, 2016 1:16:20 AM

A Theory of the Firm’, the seminal body of work authored by Michael C Jensen and co-authors, asserted that the shareholder was the firm’s residual claimant.

A Theory of the Firm’, the seminal body of work authored by Michael C Jensen and co-authors, asserted that the shareholder was the firm’s residual claimant. Flowing from this, it has been claimed that it would be in the interest of the corporation to have a direct pecuniary interest in making sure that all the parties dealing with the firm derive some benefit from its transactions. Thus, the goal of corporate law in most parts of the world is related to shareholder value, and through it, serving the larger goal of advancing overall social welfare.

The report of the Companies Law Committee, published recently, recommending a number of highly anticipated amendments to the Companies Act, 2013, aims to address the interests of the various parties transacting with a ‘firm’, particularly those that ease the method or process of doing business in the economy. That the views of a diverse group of stakeholders were taken into account in the process is evidenced by the fact that the changes suggested are both holistic and comprehensive. In the words of the chairman of the Committee, every effort has been taken “to reconcile competing interests, being mindful of the need for facilitating ease of doing business in India, and incentivising start-up companies.”

Of course, this would tie in nicely with RBI’s recent regulations and initiatives, aimed to boost start-ups in India, Sebi’s forthcoming regulations to help start-ups get listed and raise funds in the domestic market easily, and the government’s wider Start-up India action plan.

In its endeavour to facilitate the ease of doing business, the Committee has proposed amendments to a wide range of provisions, ranging from the incorporation of a company and the raising of capital, to a reduced compliance regime. Companies have been allowed to have a more generic object clause, with the period of currency of name approval being reduced from 60 to 20 days, self-declarations replacing affidavits for incorporation, more relaxed processes for authentication of documents, and the ability of the companies to have registered offices within 30 days of their incorporation.

In the same vein of promoting business, the Committee has also recommended, for Sebi and the government, to devise a way to reduce the size of the prospectus, so that the purpose of regulatory oversight could be achieved with minimum disclosures. With regard to private placement, a number of forms have been suggested to be omitted and streamlined, and greater flexibility given to companies over the offer of securities to a prescribed class of investors. From the perspective of small companies, one-person companies and private companies, the report makes way for a number of exemptions, including a review of thresholds to be carried out by the government for small companies, and the prescription of a simpler format for the Board’s report for one-person and small companies. For easier management and administration of companies, a number of reporting requirements have been both reduced and clarified. For private and wholly-owned subsidiaries of unlisted companies, the provision of holding annual general meetings has been recommended for amendment too.

Some other important recommendations to bolster a more attractive business climate in the country include doing away with the requirement to place the standalone financial statements of the step-down subsidiaries on the website in certain cases; and reducing some of the disclosures in the Board’s report, commensurate with international best practices in this regard, which mandate reducing multiple disclosures by different regulators. Directors can also breathe easy now, with amended residency requirements and the introduction of the concept of materiality in the testing of independence of independent directors. To further facilitate business, related-party transactions not requiring Board approval under the provision dealing with related-party transactions under the Act, between holding and wholly-owned subsidiary companies, have been exempted from audit committee approval. A major relief to companies in terms of making investments will also be the removal of restrictions on layering. In this regard, the introduction of the concept of beneficial ownership ought to allay any fears of regulatory arbitrage.

Lastly, it is heartening to note that the role of the government in the form of granting approvals has also been eroded with regard to managerial remuneration, and the provisions on insider trading and forward dealing are being omitted from the Act.

This enabling framework is reflective of contemporary developments in the field around the world. With these recommendations, it is hoped that there will be a greater convergence of corporate law with governance that inspires confidence in the business climate of the country, and that entrepreneurs will find it easier to transact through the medium of the corporate entity.

The author is research fellow, Corporate Law & Financial Regulation, Vidhi Centre for Legal Policy

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.