Business Today

'The Incredulity of the New Companies Bill'

Arvind P. Datar | Print Edition: Dec 25, 2011

Last week, the Union Cabinet cleared the Companies Bill, 2011 . Ironically, the electronic media welcomed the Bill as a step in the right direction even before its text was released to the media. It has become an unfortunate obsession with the Ministry of Corporate Affairs to repeatedly try and replace the existing Companies Act, 1956, in the hope that a new Bill will be a cure for the ills that plague the corporate sector. The tragic feature of our economy is the attempt to solve problems by merely enacting new laws. The pathetic attempt to cure industrial sickness by Sick Industries (Special Provisions) Act, 1986, is perhaps the best example. Industrial sickness was never cured and the manner in which the Board of Industrial and Finance Reconstruction functioned became a matter of serious concern. In the end, the provisions of that Act were widely misused.

The Companies Bill, 2008, lapsed with the dissolution of the 14th Lok Sabha. It simply became Companies Bill, 2009, but was not enacted by Parliament. The latest Companies Bill, 2011, is perhaps based on the 2009 draft with a few changes.

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The changes that were touted as major reforms in 2009 Bill could have been simply incorporated in the Companies Act, 1956, with a few amendments. According to media reports, the Companies Bill, 2011 now seeks to impose an obligation on all companies to contribute two per cent of their average profit of the preceding three years towards Corporate Social Responsibility, or CSR. This provision is unworkable and once again bound to be abused by the vast majority of companies that do not obey the law, and will only make life more miserable for companies that are managed well. Will the mandatory two per cent contribution be eligible for tax deduction? Can a company decide what its CSR is? For many successful companies, a significant part of their profit is already eroded in meeting the requirements of "deferred tax liability". In addition, it is now proposed to burden companies with a two per cent obligation. It will be far better to promote CSR through tax incentives than to make it compulsory under the Companies Act.

The Ministry Of Corporate Affairs has never had the courage to prosecute serious violations. The fault lies not in our laws but in their execution.

Another absurd idea in the 2009 Bill was the creation of an "Investor Education and Protection Fund". In the past, similar funds have served no purpose at all. For example, excise and customs duties which cannot be refunded are supposed to be credited to the Consumer Welfare Fund. Till date, it is not known what welfare of consumers this fund has promoted. Another ridiculous idea is the proposal to create special courts and company prosecutors.

The major failure on the part of the Ministry of Corporate Affairs is that it has never had the courage to prosecute serious violations. More than Rs 16,000 crore were lost through the issue of fraudulent prospectuses by vanishing companies, but not one conviction has been reported. Section 628 of the Companies Act provides for five years imprisonment if any balance sheet, return or report contains a false statement. In the last 55 years, there have been virtually no convictions under this section. Statistics show that the vast majority of criminal complaints are simply compounded, and utterly frivolous complaints are frequently filed only for statistical purposes.

The fault lies not in our laws but in their execution. The solution is, therefore, not in a new Bill. The solution is for the ministry to strictly implement the detailed provisions of the 1956 Act. It is a well drafted law that has stood the test of time and has ample provisions to prosecute and punish fraudulent directors. If the ministry can charge-sheet and convict a dozen directors, it will serve the cause of good corporate governance more than the most perfectly drafted company Bill. As the Nike ad says: Just do it.

The author is a senior advocate of the Madras High Court

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