New Companies Bill: More Generous to Foreigners

Companies Bill 2011 was presented in the Parliament during the winter session. Apart from other things, there are several new provisions in the bill, which include provisions with regard to corporate social responsibility, mandatory rotation of Auditors, independent directors, one-man company etc. Of course, when a new law is enacted, it is expected that it will help solving the problems with respect to the existing law. If this bill becomes a law, it will replace the Indian Companies Act, 1956. It is being said that the new legislation is being enacted in view of expansion and development of Indian economy. Initially a bill was presented in the Lok Sabha in August 2009, which was referred to the Standing Committee of Parliament with the objective of in-depth study and to invite suggestions and amendments of the various stakeholders. After the Standing Committee submitted its report in August 2010, the government withdrew the earlier bill and a new Company Bill was drafted incorporating suggestions from various stakeholders.

Indian Companies Act was enacted by the Parliament in 1956, for regulation, operation and control of joint stock companies. After independence, this Act was enacted with an objective of consolidating and amending the existing laws, with respect to formation and regulation of companies. As per the need, this Act has been amended from time to time. For the first time, altogether a new Companies Bill is proposed with an objective to replace existing Companies Act 1956.

Can The New Law Help Solving the Woes of Small Investors?
If we take cognizance of the problems of the public from the existing laws, we find that several new companies were created, publishing, balance sheets and other books of accounts in a fraudulent manner. These companies siphoned off more than Rs. 16000 crores from the public and vanished. But Department of Company Affairs, Government of India could not dare to take any action against promoters of such companies. However, there are sufficient provisions against fraudulent balance sheet and books of accounts, such promoters and managers have never been subject to any major conviction except small penalties. Infamous Ranalingum Raju is also out on bail after a short spell of 2 years despite a fraud of more than 8000 crores. Raju is said to be close to the corridors of power. Though some ‘employees’ of the auditing company, Price Water House Cooper were sent behind the bars, but the main culprit company is still continuing with its business in the country, despise circumventing the law of the land.

Generally, we come across the cases of insider trading. Insider trading means trading (buying and selling) of shares by promoters and directors of the company). Insider trading is illegal and causes heavy loss to general investors. Despite many cases have been brought to the limelight by enlightened experts, but hardly have we found any major conviction in such cases except imposition of fines, that too after a prolonged struggle. We hardly find suo-moto action by the government, its agencies and regulators.

Exit Provision is Good
Though for most of the problems of investors, new bill fails to provide any solution, introduction of exit provision seems to be good for small investor. As per this provision if promoters holding majority shares in the company decide to go for merger with or acquisition of other companies and the minority shareholders are not satisfied with this decision, they will have the right to exit from the company. Such minority shareholders would be compensated and their shares would be purchased by the promoters at a price as per the formula devised for this purpose. For the first time in independent India’s history, investors will not only have a right to object to a proposal of majority, but also exit the company. Still there is a problem is this provision. As per the prevailing laws, a promoter cannot hold more than 75 percent of shares and in case of small investors deciding to exercise exit provision, holding of a promoter may exceed 75 percent, which will be in circumvention of the law.

In addition to these cases, many cases of violation of Company Law have been brought to lime light from time to time. It is not that the existing Indian Company Law has no provision to deal with these problems. The problem is not in the law, as there are enough provisions within the framework of law. The problem is actually that the government lacks will power to enforce the law.

More Generous to Foreigners
A new provision is being added with regard to acquisition of the companies in the bill. As per the existing laws, a foreign company could purchase majority stake in an Indian company but it cannot merge the same with itself. However, this provision is now being amended. If this bill becomes a law, a company constituted under a foreign law can acquire an Indian company and merge the same with itself and similarly an Indian company can acquire a foreign company and merge the same with itself. How many Indian companies would be able to acquire foreign companies, only the time will tell, however this provision will definitely clear the roadblocks in the way of acquisition of Indian companies by foreign companies. It is no secret that presently Foreign Institutional Investors (FIIs) own a significant proportion of shares of Indian companies. If foreign companies purchase these shares from FIIs, most of the Indian companies may go into foreign hands. It is in this context that new Company Bill seems to be over generous towards foreign investors. Though the bill says that rules would be framed to regulate such overseas acquisitions, but it is expected that in order to protect national interests, this provision is properly debated in the Parliament before this bill be legislated.