Last week, I dealt with some of the new concepts in the Companies Bill, 2008, such as “one-person company”, small companies, and the concept of registered valuers. This week’s article looks at changes to existing provisions relating to, among other things, mergers/demergers, corporate governance, and auditors.
Mergers and demergers
Under the Companies Act, 1956, the provisions that deal with compromises and arrangements (usually, this would be mergers and demergers) require high court approvals. If the companies under merger are located in different states, different high courts are involved, leading to delays in clearances. The new Bill has introduced the concept of the National Company Law Tribunal (NCLT), and while it is still not clear how this body will function, one of its aims is to regulate merger and demerger schemes; hopefully, since it will be a single body, the processes will be simpler. One must accept that the high court process has worked reasonably well; having said that, the span of jurisdiction of the high courts is vast and it becomes difficult for them to do full justice to the several conflicting priorities before them. A specialized body such as NCLT to deal with company law issues will provide focus and direction (and hopefully, expertise and speed) in the disposal of company matters.
Also Read Ketan Dalal’s earlier columns
As far as small companies are concerned, they don’t need to follow the NCLT process at all; the scheme only needs to be approved in the general meeting and notices are required to be issued to the registrar of companies (RoC) and the official liquidator. If the RoC or official liquidator has any objection, they may file an application with NCLT and seek its approval.
One of the important aspects of merger and demerger schemes is the possibility of delays as a result of objections, even from small shareholders/creditors. Now a threshold has been provided for raising such objections—at 10% for shareholders and 5% for creditors. This may appear to be against the interest of minority shareholders, but it will prevent frivolous objections and needless delays (especially in the context of the global meltdown and where, in the next few years, mergers and demergers are likely to become a very important restructuring exercise). One possible approach is for the Bill to revise the shareholder threshold percentage somewhat lower to, say, 5%, so as to balance both requirements.
In the context of valuations for mergers, currently a swap ratio is normally given by the valuers to the company (and not a detailed valuation). Section 201(3) of the Bill refers to the valuation report to be sent along with the notice of a meeting of auditors and shareholders proposed to be called in pursuance of an order by NCLT; it is not clear whether the swap ratio determination would itself be considered a report, or the reference is intended to be for the entire valuation report. One would believe that the term should be interpreted as only the swap ratio, since a full-scale valuation report being provided not only to the company but to the world may not be advisable, given that it may contain commercially important information.
The Bill, under section 205, has now specifically provided for cross-border mergers (the merger of a foreign company into an Indian company or vice versa). However, the caveat here is that this provision shall be applicable only in relation to companies incorporated in jurisdictions notified by the Union government.
So far, it has not been clear whether a board meeting through a video conference is possible. It has now been provided that participation of directors in a board meeting can be through “video conferencing or such other electronic means as may be prescribed”, except that the government may notify that certain matters cannot be dealt with through such means.
In this electronic age, where travel costs are a burden, and where travel is often unnecessary, this is an excellent provision and one hopes that companies will take advantage of it (as a nation, we often like to have personal meetings where none is required).
Another very important provision: Shareholders can vote through electronic means. While the phrase “electronic means” has not been defined, the Information Technology Act, 2000, seems to indicate email voting is possible. The exact method of doing so will presumably come in the rules; as a concept, this initiative, if implemented scrupulously, will clearly herald a new era in corporate activism.
So far, penal amounts on auditors prescribed in the current Act are very small, and while suits could have been filed against auditors under the general law, provisions have now been made in the Bill which require an auditor, who has wilfully contravened provisions relating to either his appointment or reporting responsibility, etc., to be subject to conviction, refund of remuneration to the company or be liable to pay damages to the company or any other person on losses arising out of incorrect or misleading statements of particulars made in his audit report. Given the complexity of modern corporate functioning and the rapidly changing economic environment, coupled with the vast number of disclosures being added continuously, the auditing profession will be under even more severe strain to live up to the expectations of the community, and will be under still greater strain with the overhang of litigation. One can see certain important implications of this if the Bill goes through: even greater engagement of auditors with the operating management of the company being audited to obtain information (taking up a lot more company management time); increase in audit fees to enable auditors to cover costs; and the squeezing out of smaller firms that may not have either the wherewithal or the credibility to deal with large companies.
As a concept, the Bill seems to proceed on the footing that a lot of flexibility is needed. As may be seen from examples such as provisions for video-conference board meetings, cross-border mergers, etc., several provisions have been left outside the Bill to be prescribed, i.e., there’s a significant amount of delegated legislation. In fact, there are approximately 275 provisions providing for delegating legislation; 35 of these are relatively substantive approvals, such as the ability to prescribe the format of financial statements, model articles for companies, rules for issuing “sweat equity” shares, rules for buyback of securities, depreciation rates, etc. This conceptual change—the significant delegated legislation—can cut both ways: While it provides for substantive flexibility, it also has the downside of permitting administering arms of the government to tinker with substantive approvals—such as depreciation rates—causing uncertainty and confusion in relation to major corporate legislative matters.
All in all, there are several good provisions, and a genuine attempt at streamlining. Particularly noteworthy are some of the new concepts. One hopes the regime for small companies and private companies will be far less intrusive and a lot smoother. At the same time, certain disturbing provisions, some of which have been pointed out in this article, include over-regulation in relation to valuers and, perhaps, going a bit overboard on the delegated legislation, especially for the substantive provisions.
But one hopes that in practice, these provisions will make corporate life easier.
Ketan Dalal is executive director of PricewaterhouseCoopers. Your comments and feedback are welcome at email@example.com This is the second in a two-part series on the Companies Bill.