The Companies Act, 1956, is showing its age. It has undergone innumerable amendments but clearly, making changes to the original structure of the Act has limitations. An overhaul of the Act has been long in the making and one major step taken was the appointment of a committee under the chairmanship of J.J. Irani in 2005 (there have been, of course, other committees, such as the Naresh Chandra committee on corporate governance, which have also made recommendations impacting the functioning of companies). The new Bill has accepted several recommendations of the J.J. Irani committee report, or JJICR, and was introduced in the Lok Sabha in October. The Bill seeks to, among other things, achieve the following objectives:
• Retain the desirable features of the existing framework while segregating substantial law from procedures, to provide greater flexibility in procedural aspects
• Provide responsible self-regulation and sound corporate governance practices
• Provide for a reasonable and appropriate framework for the enforcement of law, including appropriate penalties/ punishment for non-compliance/violation, keeping in view past experience
However, with elections around the corner, the fate of the Bill is uncertain; having said that, the Bill at least lays down a framework for the new government to make far-reaching changes in the Companies Act.
The Bill has several new concepts and the purpose of this article is to highlight some of these new concepts.
Jayachandran / Mint
The present Act has the concept of a private limited and a public limited company, and a private limited company needs to have at least two members. For the first time, the concept of a “one-person company”, or OPC, has been introduced in the Bill, and the intent is apparently to permit entrepreneurship of a single individual to obtain the benefit of a corporate form of organization. This will especially benefit individual professionals who want the comfort and umbrella of a corporate form of organization as a vehicle to carry on with their profession without involving equity from outsiders, but still desiring the advantage of limited liability, as well as projecting a more credible and serious face to the external world. The Bill provides for the formation of a one-person company with the letters OPC added at the end. Some other features of the Bill on this aspect are:
• The memorandum of an OPC shall indicate the name of the person who shall, in the event of the subscriber’s death, disablement, or otherwise, become a member of the company.
• It shall be the duty of the member of an OPC to intimate the Registrar of Companies of a change in name of the member of the OPC.
Incidentally, the Bill has recognized that OPCs need not be subjected to the detailed regulatory regime required for all companies and provides that for OPC (also, for “small companies”, and indeed, also for other private companies), the government has the power in relation to certain chapters, namely, the chapters relating to capital raising, including types of capital, management and administration, accounts, audit, directors/their meetings/remuneration, that these provisions shall not apply, or apply only to the extent prescribed in relation to OPCs. Clearly, it is very likely that the regulatory regime for OPCs will be more benign than it will be for other companies.
The JJICR had made recommendations designed to prevent a regulatory overhang on small companies, clearly recognizing that smaller companies do not need the kind of regulations that larger companies do, that is, the concept of “one size fits all” does not apply. With that aim in mind, the concept of small companies has been introduced and defined as a company other than a public company:
(i) whose paid up capital does not exceed a prescribed limit (not exceeding Rs5 crore);
(ii) whose turnover does not exceed a prescribed amount (not exceeding Rs20 crore).
Strangely, however, the only specific reference to small companies that one can find in the Bill is in relation to the mergers and acquisitions provision and it is designed to make the concept of compromise and arrangements for smaller companies simpler than those for others as elaborated under the heading “Mergers and demergers” that will be discussed separately in the follow-up article next week. Presumably, other dispensations for smaller companies will be prescribed in the rules separately.
As explained above in the context of OPCs, the Union government is likely to use its powers under section 421 of the Bill to considerably mitigate the regulatory overhang for small companies.
As some readers might recall, the Shardul Shroff committee had recommended a concept of registered valuers and related issues in its committee report in 2003.
Six years later, the concept has found its way into the Bill and provided for registered valuers in the context of a preferential allotment and in the case of a merger or demerger valuation, as indeed in relation to certain aspects of sick companies. While in theory the concept seems to be good, let us see what the provisions have enacted, and their practicality. First, it talks about valuers applying for registration and the eligibility criteria are to be a chartered accountant, company secretary, cost accountant or other notified profession. It provides that a company cannot be a valuer. Second, it provides for certain restrictions and caps on fees. There are several issues that arise from the prescribed framework. Let us first look at the registration-related issues. If one looks at the requirement of a partnership firm requiring all the partners to be registered valuers, it seems completely impractical, especially in the context of the crying need for larger firms (and indeed, the Bill itself raising the cap on the number of partners from 20 to 100). How will it be possible for a 30-people firm to have all 30 partners registered as valuers? Also, investment banks often have the skills to do valuations and most of them are formed as companies and hence, the disqualification of a company from being a registered valuer is an issue.
Third, one does not know what the cap on fees will be, but the fact remains that if the cap is very restrictive, it will not attract good quality valuers and will defeat the purpose for which this provision has been enacted.
Let us come to the purposes of the valuation. To begin with, in relation to preferential allotment, the law does not appear to make a distinction (in the new section 56 of the Bill) between preferential allotment by listed companies and by others. Preferential allotment by listed companies is governed by a Securities and Exchange Board of India floor price formula of the last six months, or the last two weeks, whichever is higher. If a valuation is required in addition to that, how will it work? There are not only issues of confidentiality, this is a clear case of regulatory overlap which the government should clarify before the Bill becomes an Act. Two, there are some issues in relation to valuations for mergers and acquisitions which do not seem practical and those will be dealt with separately next week, as will provisions relating to amendments to corporate governance, auditors, and so on.
This is the first of a two-part series on the Companies Bill.
Ketan Dalal is executive director of PricewaterhouseCoopers. Your comments and feedback are welcome at firstname.lastname@example.org