REPORT ON COMPANY LAW

Dr. J amshed J . Irani

Chairman
Expert Committee on Company Law
New Delhi, 31
st
May, 2005
Dear Mr. Minister,
I have the privilege and honour to present the report of the Expert Committee to
advise the Government on the new Company Law, set up by the Ministry of Company
Affairs vide Order dated 2
nd
December, 2004.
The Committee had the benefit of participation by several experts in various
disciplines. It has tried to take a comprehensive view in developing a perspective on
changes necessary in the Companies Act, 1956 in context of the present economic and
business environment. Nevertheless, corporate law is a vast subject and we expect that
while the report of this Committee would provide useful inputs for its revision, it may
still not be the last word on various issues. However, our effort has also been aimed at
making India globally competitive in attracting investments from abroad, by suggesting
systems in the Indian corporate environment which are transparent, simple and globally
acceptable.
I thank you for providing me an opportunity for working with a wonderful group
of dedicated people in presenting our perspective on complex corporate law issues.
Yours sincerely,
Dr. J amshed J . Irani
The Honourable
Shri Prem Chand Gupta,
Minister for Company Affairs,
New Delhi.
INDEX
ExecutIve Summary
Part-1
Cbapter-I : Background
Cbapter-II : Approacb oI new Company Law
Part-2
Cbapter-III : CIassIIIcatIon and RegIstratIon oI CompanIes
Part-3
Cbapter-IV : Management and Board Governance
Cbapter-V : ReIated Party TransactIons
Cbapter-VI : MInorIty Interest
Cbapter-VII : Investor EducatIon and ProtectIon
Part-4
Cbapter-VIII : Access to CapItaI
Cbapter-IX : Accounts and AudIt
Part-S
Cbapter-X : Mergers and AcquIsItIons
Part-6
Cbapter-XI : InvestIgatIon
Cbapter-XII : OIIences and PenaItIes
Part-?
Cbapter-XIII : RestructurIng and LIquIdatIon
ExecutIve Summary
1. Background
1.1 LegaI Iramework Ior corporate entItIes Is essentIaI to enabIe sustaInabIe
economIc reIorm. Sucb Iramework bas to be In tune wItb emergIng economIc
scenarIo, encourage good corporate governance and enabIe protectIon oI tbe
Interests oI tbe stakeboIders, IncIudIng Investors.
1.2 It Is approprIate tbat comprebensIve revIews oI tbe CompanIes Act 19S6
bas been taken up tbrougb a consuItatIve process InItIated by MInIstry oI
Company AIIaIrs by exposIng a Concept Paper on Company Law tbrougb
eIectronIc medIa. Sucb broad based consuItatIon wouId enabIe workIng out an
approprIate IegIsIatIve proposaI to meet tbe requIrements oI IndIa's growIng
economy and sbouId Iorm an IntegraI part oI tbe Iaw makIng exercIse.
2. Approacb towards new Company Law
2.1 Company Law sbouId comprIse oI tbe basIc prIncIpIes guIdIng tbe
operatIon and governance oI dIIIerent kInds oI corporate entItIes In IndIa and be
avaIIabIe In a sIngIe, comprebensIve, centraIIy admInIstered Iramework. Sucb
IegaI Iramework sbouId provIde a smootb and seamIess transItIon Irom one
Iorm oI busIness entIty to anotber and be amenabIe to adaptatIon to new
busIness modeIs as tbey emerge.
2.2 Company Iaw sbouId be compact. WbIIe essentIaI prIncIpIes sbouId be
retaIned In tbe substantIve Law, proceduraI and quantItatIve aspects sbouId be
addressed In tbe RuIes.
2.3 Law sbouId enabIe seII reguIatIon but Impose greater accountabIIIty
tbrougb dIscIosures and speedy admInIstratIon oI reasonabIe IegaI sanctIons.
2.4 Tbe new Company Law sbouId enabIe barmonIous operatIon oI aII
Government and reguIatory agencIes and dovetaIIIng oI varIous governance
codes and standards compIementary wItb tbe prIncIpIes IaId down In tbe Iaw.
2.S Tbe Iaw sbouId enabIe deveIopment oI InstItutIonaI structures to address
new requIrements dIctated by cbanges In tbe economIc envIronment.
3. CIassIIIcatIon and RegIstratIon oI CompanIes
3.1 Tbe Iaw sbouId take Into account tbe requIrements oI dIIIerent kInds oI
companIes prescrIbIng tbe essentIaI requIrements oI tbeIr corporate governance
structure.
3.2 SmaII and PrIvate CompanIes sbouId be provIded greater IIexIbIIIty and
Ireedom oI operatIon wbIIe enabIIng compIIance at Iow cost. To unIeasb tbe
entrepreneurIaI taIent oI tbe peopIe In tbe InIormatIon and tecbnoIogy drIven
envIronment, Iaw sbouId recognIze One Person Company (OPC). Sucb
companIes sbouId be provIded wItb a sImpIer IegaI regIme tbrougb exemptIons.
3.3 Government CompanIes sbouId be treated at par wItb otber companIes and
be subject to a sImIIar compIIance standards.
3.4 Tbere may not be any restrIctIon to a company bavIng any number oI
subsIdIarIes or to sucb subsIdIarIes bavIng Iurtber subsIdIarIes. However, tbe
Act sbouId provIde Ior a more eIaborate regIme oI corporate governance
aIongwItb dIscIosures tbat reveaI tbe nature oI tbe transactIon trutbIuIIy.
TransactIons between boIdIng and subsIdIary companIes may be treated as
reIated party transactIons and consoIIdatIon oI IInancIaI statements sbouId be
mandatory Ior sucb companIes.
3.S SpecIaI dIspensatIons Ior Producer CompanIes and PubIIc FInancIaI
InstItutIons (PFIs) need not be provIded tbrougb tbe CompanIes Act. II need be
a separate IegIsIatIon may be consIdered Ior sucb entItIes.
3.6 Law sbouId recognIze tbat joInt ventures enabIe access to capItaI,
tecbnoIogy and markets and sbouId provIde IegaI recognItIon to joInt ventures
ensurIng tbat sucb arrangements do not become a wIndow Ior cIrcumventIng
tbe essentIaI provIsIons oI tbe Law.
3.? Tbe e-Governance Project (MCA-21) taken up by tbe Government promIses
sIgnIIIcant eIIIcIency and gaIns to companIes In compIIance processes. AII
regIstratIon process and statutory IIIIngs sbouId be made compatIbIe to tbe
eIectronIc medIum. Sucb IIIIngs sbouId be kept secure and sbouId be
IdentIIIabIe tbrougb dIgItaI sIgnatures.
3.S Process oI regIstratIon sbouId be speedy, optImaIIy prIced and compatIbIe
wItb e-Governance InItIatIves. CompanIes sbouId be requIred to make necessary
decIaratIons and dIscIosures about promoters and dIrectors at tbe tIme oI
IncorporatIon. StrIngent consequences sbouId IoIIow II IncorporatIon Is done
under IaIse or mIsIeadIng InIormatIon.
3.9 Strong actIon sbouId be taken under Iaw agaInst companIes tbat vanIsbed
wItb tbe Investors' Iunds. PreventIve actIon In respect oI sucb vanIsbIng
companIes" sbouId begIn wItb regIstratIon ItseII and sbouId be sustaIned
tbrougb a regIme tbat requIres reguIar and mandatory IIIIng oI statutory
documents. TbIs sbouId be IoIIowed up wItb cIearIy provIded IegaI process Ior
trackIng and causIng dIsgorgement oI III-gotten gaIns. Corporate veII sbouId be
IIIted to enabIe access to tbe IndIvIduaIs responsIbIe.
3.10 ReguIar IIIIng sbouId be made easy eIIIcIent and cost eIIectIve. Non-IIIIng
oI documents or Incorrect dIscIosures sbouId be deaIt wItb serIousIy. DeIays In
IIIIng sbouId be penaIIzed tbrougb non-dIscretIonary Iate Iee reIatabIe to tbe
perIod oI deIauIt. Tbere sbouId be a system oI random scrutIny oI IIIIngs oI
corporates to be carrIed out by tbe regIstratIon autborItIes.
3.11 LImIted IIabIIIty partnersbIps sbouId be IacIIItated tbrougb a separate
enactment. CompanIes Act need not prescrIbe IImItatIons on tbe number oI
members oI otber kInds oI organIsatIons.
3.12 Law sbouId requIre transparency In IunctIonIng oI cbarItabIe and IIcensed
companIes.
3.13 Procedures appIIcabIe Ior statutory compIIance sbouId be made sImpIer
and decIaratIon based. Tbe requIrement oI obtaInIng tbe certIIIcate oI
Commencement oI BusIness to be dIspensed wItb. Tbe procedure Ior a company
seekIng exIt Irom tbe CompanIes Act sbouId be made equItabIe and IaIr to tbe
stakeboIders enabIIng easy exIt to companIes tbat cease to transact busIness.
Tbe procedure Ior sbIItIng oI regIstered oIIIce Irom one State to anotber State
sbouId aIso be made sImpIer, Iaster and easIer.
4. Management and Board Governance
4.1 Law sbouId provIde an approprIate Iramework oI governance tbat sbouId be
compIIed wItb by aII companIes wItbout sacrIIIcIng tbe basIc requIrement oI
exercIse oI dIscretIon and busIness judgement In tbe Interests oI company and
Its stakeboIders.
4.2 Tbere sbouId be an obIIgatIon on tbe part oI a company to maIntaIn a Board
oI DIrectors as per tbe provIsIons oI tbe Law and to dIscIose partIcuIars oI tbe
dIrectors tbrougb statutory IIIIngs oI InIormatIon.
4.3 Law sbouId provIde Ior onIy tbe mInImum number oI dIrectors necessary Ior
varIous cIasses oI companIes. Tbere need not be any IImIt to maxImum number
oI dIrectors. Government sbouId not Intervene In tbe process oI appoIntment
and removaI oI dIrectors In non-Govt companIes. No age IImIt Ior dIrectors need
be specIIIed In tbe Act otber tban procedures Ior appoIntments to be IoIIowed by
prescrIbed companIes Ior appoIntment oI dIrectors above a partIcuIar age.
4.4 Every company to bave at Ieast one dIrector resIdent In IndIa. RequIrement
oI obtaInIng approvaI oI CentraI Govt under CompanIes Act Ior appoIntment oI
non-resIdent managerIaI persons sbouId be done away wItb. Duty to InIorm tbe
RegIstrar oI partIcuIars regardIng appoIntmentJresIgnatIonJdeatb etc. oI
dIrectors sbouId be tbat oI tbe company.
4.S Presence oI Independent dIrector on tbe boards oI companIes bavIng
sIgnIIIcant pubIIc Interest wouId Improve corporate governance. Law sbouId
recognIze tbe prIncIpIe oI Independent dIrectors and speII out tbeIr attrIbutes,
roIe, quaIIIIcatIons, IIabIIIty and manner oI appoIntment aIong wItb tbe crIterIa
oI Independence. However, prescrIptIon oI tbe number and proportIon oI sucb
dIrectors In tbe Board may vary dependIng on sIze and type oI company and
may be prescrIbed tbrougb RuIes.
4.6. DecIsIon on remuneratIon oI dIrectors sbouId not be based on a
Government approvaI based system" but sbouId be IeIt to tbe company.
However, tbIs sbouId be transparent, based on prIncIpIes tbat ensure IaIrness,
reasonabIeness and accountabIIIty and sbouId be properIy dIscIosed. No IImIts
need be prescrIbed. In case oI Inadequacy oI proIIts aIso tbe company to be
aIIowed to pay remuneratIon recommended by remuneratIon commIttee
(wberever appIIcabIe) and wItb tbe approvaI oI sbareboIders.
4.? CertaIn commIttees to be constItuted wItb partIcIpatIon oI Independent
dIrectors sbouId be mandated Ior certaIn categorIes oI companIes wbere tbe
requIrement oI Independent dIrectors Is mandated. In otber cases constItutIon
oI sucb commIttees sbouId be at tbe optIon oI tbe company. Law sbouId specIIy
tbe manner and composItIon oI varIous commIttees oI tbe Board IIke (I) AudIt
CommIttee (II) Stake-boIder's ReIatIonsbIp CommIttee and (III) RemuneratIon
CommIttee aIong wItb obIIgatIon on tbe part oI tbe company to consuIt tbem In
certaIn matters.
4.S CertaIn basIc dutIes oI dIrectors sbouId be specIIIed In tbe Act In an
IncIusIve manner.
4.9 Tbe condItIons Ior dIsquaIIIIcatIon oI dIrectors sbouId aIso be prescrIbed
In tbe Act. DIrectors sbouId be requIred to dIscIose to tbe Board tbeIr prevIous
dIsquaIIIIcatIon, II any. FaIIure to attend board meetIngs Ior a contInuous
perIod oI one year to be made a ground Ior vacatIon oI oIIIce regardIess oI
wbetber or not Ieave oI absence was granted to sucb dIrector. SpecIIIc
provIsIons to be made In tbe Law to reguIate tbe process oI resIgnatIon by a
dIrector.
4.10 Board meetIngs to be beId every tbree montbs wItb a mInImum oI Iour
meetIngs to be beId In a year. Tbe gap between two meetIngs not to exceed Iour
montbs. MeetIngs by eIectronIc means to be aIIowed. In tbe case oI companIes
wbere Independent DIrectors are prescrIbed, notIce perIod oI ? days bas been
recommended Ior Board MeetIngs wItb provIsIons Ior boIdIng emergency
meetIngs at a sborter notIce. Consent oI sbareboIders by way oI specIaI
resoIutIon sbouId be mandatory Ior certaIn Important matters.
4.11 Use oI postaI baIIot durIng meetIngs oI members sbouId be aIIowed to be
more wIdeIy used by companIes. Law sbouId provIde Ior votIng tbrougb
eIectronIc mode. AGMs may be beId at a pIace otber tban pIace oI regIstered
oIIIce (In IndIa), provIded at Ieast 10% members In number resIde at sucb pIace.
SmaII CompanIes to be gIven an optIon to dIspense wItb boIdIng oI AGM.
Demand Ior poII to be IImIted wItb due regard Ior mInorIty Interests.
4.12 ManagIng DIrector (MD)JWboIe TIme DIrectors (WTD)J ExecutIve DIrector
(ED) sbouId be In tbe wboIe-tIme empIoyment oI onIy one company at a tIme.
ProvIsIons reIatIng to optIons Ior appoIntment oI dIrectors tbougb proportIonate
representatIon to be contInued. LImIt oI paId up capItaI under exIstIng sectIon
269 Ior mandatory appoIntment oI MDJWTD to be enbanced to Rs. 10 crore.
4.13 Every company sbouId be requIred to appoInt, a CbIeI ExecutIve OIIIcer,
CbIeI FInance OIIIce and Company Secretary as Its Key ManagerIaI PersonneI
wbose appoIntment and removaI sbaII be by tbe Board oI DIrectors. SpecIaI
exemptIons may be provIded Ior smaII companIes, wbo may obtaIn sucb
servIces, as may be requIred Irom quaIIIIed proIessIonaIs In practIce.
S ReIated Party TransactIons
S.1 Law sbouId Impose a duty on every dIrector to dIscIose to tbe company tbe
contracts In wbIcb be bas any Interest or concern. TransactIons In wbIcb
dIrectors are Interested sbouId take pIace subject to approvaI oI Board oI
dIrectors and beyond a IImIt subject to approvaI oI sbareboIders. DetaIIs oI
transactIons oI company wItb Its boIdIng, subsIdIary and assocIate companIes
to be pIaced perIodIcaIIy beIore tbe Board tbrougb tbe AudIt CommIttee, II any
and tbose not In tbe ordInary course or not on an arms Iengtb basIs to be
pIaced aIong wItb management justIIIcatIon tbereoI. Loans to dIrectors and tbe
IacIIIty oI boIdIng oI oIIIce or pIace oI proIIt by reIatIve oI a dIrector sbouId be
reguIated tbrougb sbareboIders approvaI. Tbere need not be any requIrement oI
Government approvaIs Ior sucb transactIons.
6. MInorIty Interests
6.1 'MInorIty' and 'MInorIty Interest' sbouId be deIIned In tbe substantIve Law.
Law must baIance tbe need Ior eIIectIve decIsIon makIng on corporate matters
tbrougb consensus wItbout permIttIng persons In controI to stIIIe actIon Ior
redressaI arIsIng out oI tbeIr own wrong doIng.
6.2 Law sbouId prescrIbe a regIme In wbIcb mInorIty rIgbts are IaIrIy protected
wItbout enabIIng any Interest group to obstruct corporate processes. Tbere
sbouId be recognItIon oI prIncIpIe oI vaIuatIon oI sbares tbrougb an
Independent vaIuer wbenever company causes an exercIse oI mergerJ
restructurIng etc.
6.3 Tbe procedure Ior enabIIngJgIvIng an eIIectIve bearIng In company
meetIngs to mInorIty sbareboIders sbouId be prescrIbed. In order to object a
scbeme oI amaIgamatIon by Investors, a IImIt sbouId be determIned eItber
accordIng to mInImum number oI members or accordIng to mInImum
percentage oI sbareboIdIng.
6.4 Law sbouId recognIze CIass suIts' and DerIvatIve ActIons".
?. Investor EducatIon and ProtectIon
?.1 Investors sbouId be enabIed to exercIse tbeIr cboIce In an InIormed
manner wbIIe makIng Investment decIsIons. However, Interests oI smaII
Investors and deposItors sbouId be specIIIcaIIy saIeguarded.
?.2 A separate enactment Ior Investor protectIon Is not requIred. Corporate
processes sbouId recognIze tbe Investors as a stakeboIder. Tbere Is a need to
brIng about coordInatIon In tbe roIe and actIons oI varIous reguIatory agencIes
on tbe matter reIatIng to protectIon oI Interests oI smaII Investors.
?.3 MonItorIng tbe end use oI Iunds coIIected Irom pubIIc sbouId be tbe
responsIbIIIty oI tbe sbareboIders oI tbe company. Tbere sbouId be
transparency tbrougb dIscIosures oI IInancIaI operatIons oI tbe company. Tbe
Insurance optIon sbouId be expIored Ior deposIts wItb tbe companIes. CredIt
ratIng need not be mandated except Ior companIes seekIng deposIts.
?.4 Tbere Is a need to enabIe exIt optIons by Investors In a reasonabIe and
equItabIe envIronment. No provIsIon oI compensatIon except In cases oI Iraud.
Law sbouId enabIe III-gotten gaIns acquIred tbrougb cbeatIng oI Investors to be
accessed and dIsgorged.
?.S An eIIectIve Investors grIevance redressaI mecbanIsm by way oI recourse
to consumer courts and capItaI markets ombudsman sbouId be provIded Ior
saIeguardIng Interests oI Investors.
?.6 RIgbts oI Investors In respect oI uncIaImed dIvIdends etc. to be
recognIzed even aIter ? years perIod. IEPF sbouId not be based soIeIy on
exproprIated uncIaImed returns but sbouId be In tbe Iorm oI a corpus In wbIcb
Iunds may be parked to be managed and utIIIze Ior Investors educatIon.
ContrIbutIons to IEPF not to be deposIted In ConsoIIdated Iund but dIrectIy to
IEPF, to be managed by an AdmInIstrator. Scbemes InItIated by CentraI
Government under IEPF sbouId be made more comprebensIve.
S. Access to CapItaI
S.1 Tbere Is a need Ior IIexIbIIIty to manage capItaI dynamIcaIIy and to enabIe
reaIIocatIon oI capItaI between busInesses.
S.2 Tbe basIc Iramework Ior governance Issues reIatIng to maIntenance and
management oI capItaI, tbe rIgbts IIowIng Irom ownersbIps oI sucb capItaI and
reguIatIon oI varIous stakeboIders In a corporate entIty wItb regard to capItaI
sbouId be addressed In tbe CompanIes Act.
S.3 SImuItaneous to tbe barmonIous reguIatory approacb provIdIng Ior space to
eacb reguIator to operate eIIectIveIy In tbeIr domaIn, provIsIons In tbe
CompanIes Act aIIowIng muItIpIe jurIsdIctIon may be done away wItb. Tbere Is
bowever, need Ior dIIIerent reguIatory agencIes to Interact wItb eacb otber more
comprebensIveIy In operatIonaI matters.
S.4 TImeIrames prescrIbed Ior processes oI Issue oI capItaI be ratIonaIIzed to be
at par wItb InternatIonaI practIces. Processes sbouId be made tIme bound wItb
tbe IntroductIon oI concept oI Deemed ApprovaI. Corporates Issuers oI capItaI
sbouId aIso be aIIowed to use eIectronIc medIa Ior communIcatIon oI
InIormatIon In tbe process oI Issue oI capItaI.
S.S Concept oI SbeII Prospectus may be extended to otber cIass(es) oI
companIes wbo access capItaI market more IrequentIy as WeII Known Seasoned
Issuers (WKSI), In a manner to be prescrIbed by tbe capItaI market reguIator.
In reckonIng numbers oI persons to wbom oIIer Is made, tbe oIIers made to
QuaIIIIed InstItutIonaI Buyers (QIBs) sbouId be excIuded.
S.6 EnabIIng provIsIons Ior TrackIng Stock and Treasury Stocks couId be made
In tbe new Law. ActuaI IntroductIon oI tbese stocks sbouId bowever be
preceded by certaIn preparatory actIons to be taken. Targeted Buyback need
not be Introduced at tbIs stage.
S.? CompanIes sbouId be permItted to Issue perpetuaIJIonger duratIon
preIerence sbares. ReguIatory Iramework Ior payment oI dIvIdend to preIerence
sbares, partIcuIarIy wben tbey are cumuIatIve sbouId be revIewed.
S.S InstItutIonaI mecbanIsm sucb as CourtsJNCLT sbouId decIde on Issues
reIatIng to capItaI reductIon In a tIme bound manner wItb due saIeguards Ior
Interests oI credItors.
S.9 Tbe regIme oI acceptance and InvItatIon oI PubIIc DeposIts sbouId be made
strIcter.
S.10. RegIstratIon oI cbarges to be enabIed by tbe Iender II tbe borrower does
not regIster tbe cbarge wItbIn a IIxed tIme.
S.11 Non-casb consIderatIon Ior aIIotment oI sbares sbouId be vaIued tbrougb
Independent vaIuers. ProvIsIons reIatIng to Inter-corporate Ioans and
Investments sbouId be strengtbened to ensure tbat tbere Is no mIs-use oI tbese
provIsIons Ior prIce rIggIng or by dIversIon oI Iunds. PenaItIes to be Increased In
case oI non-compIIance. DetaIIed dIscIosures to be gIven, In case oI Ioan
transactIons, In tbe annuaI reports oI tbe IendIng company about tbe end use
oI Ioans and advances by recIpIent.
S.12 In case oI unIIsted pubIIc companIes, preIerentIaI aIIotment sbouId be
made on tbe basIs oI vaIuatIon by an Independent vaIuer.
S.13 PenaItIes Ior IrauduIentIy InducIng any person to Invest money sbouId be
made more strIngent
S.14 Law may aIIow, subject to adequate dIscIosures and IuIIIIIment oI
condItIons, to retaIn subscrIptIon receIved In PubIIc OIIer, notwItbstandIng non
receIpt oI amount oI mInImum subscrIptIon.
S.1S NIdbI CompanIes to be reguIated by RBI. Tbe norms reIatIng to IImIts oI
DRR In case oI NBFCs sbouId be prescrIbed by RBI.
9. Accounts and AudIt
9.1 AccountIng Standards sbouId be notIIIed under tbe CompanIes Act earIy.
9.2 ConsoIIdatIon oI IInancIaI statements sbouId be made mandatory.
RequIrement oI attacbIng IInancIaI statements oI subsIdIary company(Ies) wItb
tbe boIdIng company to be done away wItb.
9.3 Format oI IInancIaI statements sbouId be prescrIbed In tbe ActJRuIes.
Casb FIow Statement to be made part oI mandatory IInancIaI statements.
FInancIaI year sbouId be aIIgned to unIIormIy end on 31
st
Marcb. OptIon to
maIntaIn books In eIectronIc Iorm sbouId be gIven to companIes. Books oI
accounts sbouId be preserved by a company Ior a perIod oI seven years.
9.4 CompanIes sbouId bave tbe optIon to keep records outsIde tbe country
aIso aIong wItb saIeguards provIdIng Ior access and productIon oI sucb records
II needed.
9.S SmaII CompanIes sbouId be gIven exemptIonsJreIaxatIons In respect oI
dIscIosures reIatIng to IInancIaI statements.
9.6 Tbe IInancIaI statements sbouId be sIgned by MDJCEOJCFOJCompany
Secretary, wberever appIIcabIe, even II tbey were not present In tbe meetIng
wbIcb approved tbe IInancIaI statements. AII dIrectors present In reIevant
meetIng to sIgn IInancIaI statements. DIssentIng dIrector aIso to sIgn wItb
dIssent note.
9.? LIsted companIes sbouId put IuII IInancIaI statements on tbeIr websItes.
CompanIes sbouId be aIIowed to use eIectronIc means Ior cIrcuIatIon oI
IInancIaI statements. RevIsIon oI IInancIaI statements sbouId be aIIowed onIy In
extreme sItuatIon sucb as tbose dIctated by cbange In Iaw.
9.S Tbe CompanIes (TransIer oI ProIIts to Reserves) RuIes, 19?S and Tbe
CompanIes (DecIaratIon oI DIvIdend out oI Reserves) RuIes, 19?S may be done
away wItb. ProvIsIons reIatIng to payment oI Interest out oI capItaI [exIstIng
sectIon 20S] may be deIeted.
9.9 Wben CentraI Govt approves any basIs oI deprecIatIon, tbere need not be
any restrIctIon oI wrItIng oII oI 9S% oI cost oI tbe asset over a specIIIed perIod.
Tbe Act sbouId provIde IIexIbIIIty In respect oI rates oI deprecIatIon Ior
InIrastructure or sImIIar projects.
9.10 RotatIon oI audItors not be mandated In Law. AudItor to be probIbIted
Irom perIormIng certaIn non-audIt IunctIonsJservIces to be specIIIed In
LawJruIes. DIsquaIIIIcatIon oI audItors to be suItabIy mentIoned In tbe
LawJruIes. BasIc dutIes and IIabIIIty oI audItors sbouId be In tbe Act ItseII.
QuantIIIcatIon oI penaIty Ior audItors to be prescrIbed.
9.11 Investors to be educated to understand IInancIaI statements.
SbareboIders assocIatIons to be enabIed to take part actIveIy In tbIs regard.
9.12 EnabIIng provIsIons Ior empowerIng CentraI Government to order Cost
audIt In certaIn cases sbouId be retaIned. Government approvaI Ior
appoIntment oI Cost AudItor Ior carryIng out sucb audIt Is not necessary.
SpecIaI AudIt need not be contInued.
10. Mergers and AmaIgamatIons
10.1 A sIngIe Iorum Ior approvaI oI mergers and acquIsItIon scbemes In a tIme
bound manner to be provIded. Tbe concept oI Deemed approvaI" concept to be
provIded In cases wbere tbe dIIIerent reguIators do not IntImate tbeIr comments
tImeIy. In stead oI exIstIng requIrement oI separate reports Irom RegIstrar oI
CompanIes (ROC) and OIIIcIaI LIquIdator (OL) In respect oI aIIaIrs oI tbe
company, provIsIons sbouId be made Ior tIme bound responses Irom tbem In
response to notIces.
10.2 VaIuatIon oI sbares oI companIes InvoIved In scbemes oI mergers and
acquIsItIon by Independent regIstered vaIuers (ratber tban court appoInted
vaIuers) sbouId be made mandatory.
10.3 In vIew oI InconsIstency In approacb IoIIowed by varIous CourtsJState
Governments, tbere Is need to cIarIIy Issue regardIng payment oI stamp duty on
Court Orders sanctIonIng scbemes oI mergerJacquIsItIon.
10.4 Tbe concept oI EIectronIc regIstry sbouId be evoIved. JurIsdIctIonaI
Issues vIs--vIs stamp duty sbouId be resoIved to enabIe sIngIe regIstry.
Furtber, tbe Act sbouId provIde Ior compuIsory regIstratIon oI aII property oI
company above a certaIn vaIue.
10.S 'ContractuaI mergers' and 'Cross Border mergers and acquIsItIon' may
be suItabIy addressed In tbe new Act. SpecIIIc provIsIons needed Ior aIIowIng
merger oI IIsted company wItb an unIIsted company and vIce versa. Mergers
among assocIated companIes, prIvate companIes or companIes wbere no pubIIc
Interest Is InvoIved, sbouId be aIIowed tbrougb a Iess strIngent Iramework.
10.6 Subject to saIeguards reIatIng to IIquIdIty testJsecurIty pooI, any
Corporate Debt RestructurIng (CDR) proposaI approved by ?S% oI secured
credItors In vaIue sbouId be sanctIoned, notwItbstandIng tbe mInorIty dIssent.
10.? Tbe need to IIIe separate scbeme Ior reductIon oI capItaI sImuItaneousIy
wItb tbe scbeme Ior mergers and acquIsItIon sbouId be avoIded.
10.S In stead oI exIstIng provIsIons oI sectIon 396, provIsIons sbouId be made
to empower CentraI Government to approacb CourtJTrIbunaI Ior suItabIe order
Ior amaIgamatIons oI two companIes In pubIIc Interest.
10.9 Tbe Iees paId by transIeror company on tbe autborIsed capItaI sbouId be
avaIIabIe as a set oII to tbe transIeree company upon tbe sanctIon oI tbe
scbeme.
10.10 A Non obstante provIsIon to be Introduced to ensure tbat tbe assets and
IIabIIItIes oI transIeror company absoIuteIy vest In tbe transIeree company
notwItbstandIng anytbIng to tbe contrary In any otber Iaw.
11 InvestIgatIon
11.1 Instead oI separate provIsIons Ior botb InspectIon and InvestIgatIon
under tbe Act, a sIngIe comprebensIve process oI InvestIgatIon, may be provIded
Ior, IncIudIng powers to Inspect. ComprebensIve Iramework Ior carryIng out
InvestIgatIon to be specIIIed In Law.
11.2 Tbe IIabIIIty Ior compIIance oI Law sbouId be on tbe company
management. TbIs sbouId be combIned wItb a system oI oversIgbt tbrougb
random scrutIny oI documents.
11.3 On tbe basIs oI tecbnIcaI scrutIny, tbe RegIstrar may bave tbe power to
caII Ior any otber reIevant InIormatIon, documents or records as requIred under
Law.
11.4 Tbe Govt may appoInt an oIIIcer oI tbe Govt or any prIvate proIessIonaI
as Inspector to carry out InvestIgatIon.
11.S Tbe SerIous Frauds InvestIgatIon OIIIce (SFIO) sbouId be strengtbened.
A separate statute may be Iramed Ior SFIO. SFIO sbouId aIso assIst In capacIty
buIIdIng Ior sImIIar organIzatIon tbat may be set up at state IeveI.
12. OIIences and PenaItIes
12.1 Tbe Law sbouId encourage compIIance tbrougb seII-reguIatIon. It sbouId
cIearIy deIIne tbe rIgbts oI stakeboIders and means oI redressaI oI tbeIr
grIevances. State to dIscbarge an Important responsIbIIIty not onIy In IramIng
tbe Law but aIso In Its eIIectIve ImpIementatIon, enIorcement and
admInIstratIon.
12.2 Tbere Is need Ior a regIme oI penaItIes commensurate wItb tbe oIIences.
PenaItIes regIme Ior corporates sbouId be In tbe nature oI monetary IIne sInce
company beIng an artIIIcIaI economIc person can not be ImprIsoned.
12.3 Tbe IIabIIIty oI tbe Board oI dIrectors to be cIear and absoIute. A cIear
regIme Ior IdentIIIcatIon oI OIIIcers-In-deIauIt aIso to be necessary. SpecIIIc
ruIes Ior IIxIng crImInaI IIabIIIty In approprIate cases sbouId be Iramed. Tbe
IIabIIIty oI CEOsJCFOsJCompany SecretarIes as weII as otber oIIIcers oI tbe
company wbo are In deIauIt to be specIIIcaIIy provIded Ior. Tbe proIessIonaIs
advIsIng tbe companIes on varIous matters aIso to be beId IIabIe II Iound not to
be dIIIgent or Iaw compIIant.
12.4 Tbe Company Law to provIde Ior an In-bouse structure Ior IevyIng non
dIscretIonary monetary penaItIes onIy (I.e. In respect oI oIIences not InvoIvIng
ImprIsonment). CentraI Government (and Its oIIIcers) to be vested wItb powers
to Ievy sucb monetary penaItIes. MecbanIsm to transIer eIIgIbIe proceedIngs
Irom courts to In-bouse structure to be suItabIy provIded Ior.
12.S Tbe penaItIes may be cIassIIIed In tbe Iorm oI two seII-contaIned
scbeduIes -one Ior monetary penaItIes and tbe otber Ior tbose InvoIvIng
ImprIsonment, wItb or wItbout IIne. Tbe Law to Iay down tbe maxImum as weII
as mInImum quantum oI penaIty Ior eacb oIIence. Tbe Law to provIde Ior
suItabIe deIIverance In respect oI repeat oIIences.
12.6 In case oI IrauduIent actIvItIesJactIons, provIsIons Ior recovery and
dIsgorgement to be suItabIy provIded Ior. Tbe Issue oI PboenIx probIem" to be
suItabIy addressed tbrougb a combInatIon oI dIscIosures, InsoIvency processes
and dIsquaIIIIcatIon oI deIInquent dIrectors. Tbe Law to provIde Ior IIItIng oI tbe
corporate veII to cbeck any IrauduIent actIvIty.
12.? Law to provIde Ior specIaI powers to compeI IIIIng oI documents, wItb
enbanced penaItIes Ior persIstent deIauIt.
13. RestructurIng and LIquIdatIon
13.1 An eIIectIve InsoIvency system Is an Important eIement oI IInancIaI
system stabIIIty. Tbere Is a need Ior an eIIectIve InsoIvency Iramework, wbIcb
enabIes resoIutIon oI InsoIvency In a tImeIy and eIIIcIent manner. Corporate
InsoIvency may be addressed tbrougb CompanIes Act. A separate InsoIvency
Iaw Is not necessary at present.
13.2 A deIInItIve and predIctabIe tIme Irame Is needed Ior rebabIIItatIon and
IIquIdatIon process.
13.3 Tbe Iaw sbouId strIke a baIance between rebabIIItatIon and IIquIdatIon
process. It sbouId provIde an opportunIty Ior genuIne eIIorts towards revIvaI.
OnIy wbere revIvaIJrebabIIItatIon Is not IeasIbIe, wIndIng up sbouId be resorted
to.
13.4 Botb debtors and credItors sbouId bave IaIr access to InsoIvency system.
Ratber tban net wortb erosIon prIncIpIe, test Ior InsoIvency sbouId be deIauIt In
payment oI matured debt on demand wItbIn a prescrIbed tIme [IIquIdIty test].
Debtors seekIng rebabIIItatIon sbouId be abIe to approacb TrIbunaI onIy wItb a
draIt scbeme. CredItors beIng at Ieast 3J4
tb
In vaIue may aIso IIIe scbeme.
13.S A IImIted standstIII perIod Is essentIaI Ior genuIne busIness restructurIng
to be reguIated tbrougb TrIbunaI's Orders durIng wbIcb tbere Is probIbItIon on
unautborIzed dIsposItIon oI debtors' assets and suspensIon oI actIons by
credItors to enIorce tbeIr rIgbts. Tbe Iaw sbouId provIde Ior approprIate
probIbItIons on certaIn Debtors' rIgbts [transIer, saIe or dIsposIng oI assets etc.]
subject to certaIn exemptIons on InItIatIons oI InsoIvency.
13.6 Tbere sbouId be duty on companIes to convene credItors and
sbareboIders meetIng on deIauIt In payments to credItors to consIder suItabIe
steps to protect Interest oI stakeboIders, preserve assets and adopt necessary
steps to contaIn InsoIvency.
13.? Tbe debtor assets sbouId be subjected to supervIsIon or management oI
ImpartIaI, Independent, and eIIectIve AdmInIstrator.
13.S ProvIsIons sbouId be made Ior settIng up oI CommIttee oI secured
credItors to saIeguard tbeIr Interest and provIde a suItabIe pIatIorm Ior
credItors' partIcIpatIon In tbe process. Tbe Iaw sbouId aIso provIde Ior
mecbanIsm to recognIze and record cIaIms oI unsecured credItors.
13.9 A PaneI oI AdmInIstrators and IIquIdators sbouId be prepared and
maIntaIned by an Independent body out oI experIenced and knowIedgeabIe
InsoIvency PractItIoners. PrIvate proIessIonaIs sbouId pIay a meanIngIuI roIe In
aII aspects oI InsoIvency process. Tbe Iaw sbouId encourage and recognIze
concept oI InsoIvency PractItIoners.
13.10 Tbe Iaw sbouId prescrIbe a IIexIbIe but transparent system Ior dIsposaI oI
assets eIIIcIentIy and at maxImum vaIue. Secured credItors' cIaIm sbouId rank
parI passu wItb workmen. PubIIc Interests, Government cIaIms sbouId not get
precedence over prIvate rIgbts. RevIvaI pIan sbouId be requIred to be approved
by secured credItors boIdIng 3J4
tb
oI totaI vaIue to be bIndIng on aII credItors.
13.11 EstabIIsbment oI NCLT wouId provIde a major InItIatIve Ior InsoIvency
system reIorms In tbe country and sbouId be enabIed quIckIy. NCLT sbouId
bave generaI, non IntrusIve and supervIsory roIe. Tbe TrIbunaI sbouId adopt a
commercIaI approacb to dIspute resoIutIon observIng tbe estabIIsbed IegaI
prIncIpIes oI IaIrness In tbe process. SeIectIon oI PresIdent and Members oI tbe
TrIbunaI sbouId be sucb so as to enabIe a wIde mIx oI expertIse Ior conduct oI
Its work.
13.12 ProvIsIons reIatIng to rebabIIItatIon cess sbouId be repIaced by tbe
concept oI InsoIvency Fund" [Fund] wItb optIonaI contrIbutIons by companIes.
Government may make grants Ior tbe Fund and provIde IncentIves to encourage
contrIbutIons by companIes to tbe Fund. CompanIes wbIcb make contrIbutIons
to tbe Fund sbouId be entItIed to certaIn drawIng rIgbts In tbe event oI
InsoIvency. AdmInIstratIon oI tbe Fund sbouId be by an Independent
AdmInIstrator. InsoIvency Fund sbouId not be IInkedJcredIted to ConsoIIdated
Fund oI IndIa.
13.13 A suItabIe Iramework Ior Cross Border InsoIvency wbIcb provIdes Ior
ruIes oI jurIsdIctIon, recognItIons oI IoreIgn judgments, co-operatIon and
assIstance among courts In dIIIerent countrIes and cboIce oI Iaw Is requIred.
Tbe Government may consIder adoptIon oI UNCITRAL ModeI Law on Cross
Border InsoIvency wItb suItabIe modIIIcatIons at an approprIate tIme.
----------------
Cbapter I : Background
1. Tbe CompanIes Act 19S6 was enacted on tbe recommendatIons oI tbe
Bbaba CommIttee set up In 19S0 wItb tbe object to consoIIdate tbe exIstIng
corporate Iaws and to provIde a new basIs Ior corporate operatIon In
Independent IndIa. WItb enactment oI tbIs IegIsIatIon In 19S6, tbe CompanIes
Act 1913 was repeaIed.
2. Tbe CompanIes Act, 19S6, bas sInce provIded tbe IegaI Iramework Ior
corporate entItIes In IndIa. Tbe need Ior streamIInIng tbIs Act was IeIt Irom
tIme to tIme as tbe corporate sector grew In pace wItb tbe IndIan economy, wItb
as many as 24 amendments takIng pIace sInce 19S6. Major amendments to tbe
Act were made tbrougb CompanIes (Amendment) Act, 19SS aIter consIderIng
tbe recommendatIons oI tbe Sacbar CommIttee, and tben agaIn In 199S, 2000
and IInaIIy In 2002 tbrougb tbe CompanIes (Second Amendment) Act 2002,
consequent to tbe report oI tbe EradI CommIttee.
3. Many countrIes Iaced wItb tbe task oI economIc restructurIng In
response to tbe reaIItIes oI a cbangIng economIc envIronment, bave undertaken
comprebensIve revIsIons oI tbeIr respectIve corporate Iaws. UK CompanIes Act
was revIsed durIng tbe 19S0s. SubsequentIy, many countrIes wbose IegaI
systems were derIved Irom UK, sucb as AustraIIa, New 2eaIand, Canada etc
aIso undertook revIews oI tbeIr corporate Iaws and brougbt about severaI
comprebensIve reIorms. It Is wIdeIy accepted tbat reIorm and updatIon oI tbe
basIc IegaI Iramework Ior corporate entItIes Is essentIaI to enabIe sustaInabIe
economIc reIorm.
4. AIter a besItant begInnIng In tbe 19S0s, IndIa took up Its economIc
reIorms programme In tbe 1990s. EquaIIy, a need was IeIt Ior a comprebensIve
revIew oI tbe CompanIes Act, 19S6. UnsuccessIuI attempts were made In 1993
and 199? to repIace tbe present Act wItb a new Iaw. CompanIes (Amendment)
BIII, 2003; contaInIng Important provIsIons reIatIng to corporate governance
was aIso Introduced, tbe consIderatIon oI wbIcb bas been beId back In
antIcIpatIon oI tbe comprebensIve revIew oI tbe Company Law. WbIIe pIecemeaI
reIorm contInued tbrougb amendments, It bas not yet been possIbIe to brIng
about comprebensIve, new IegIsIatIon to repIace tbe exIstIng Act.
S. In tbe current natIonaI and InternatIonaI context, tbere Is a requIrement
Ior sImpIIIyIng corporate Iaws so tbat tbey are amenabIe to cIear InterpretatIon
and provIde a Iramework tbat wouId IacIIItate Iaster economIc growtb. It Is aIso
IncreasIngIy beIng recognIzed tbat tbe Iramework Ior reguIatIon oI corporate
entItIes bas to be In tune wItb tbe emergIng economIc scenarIo, encourage good
corporate governance and enabIe protectIon oI tbe Interests oI tbe Investors and
otber stakeboIders. In tbe competItIve and tecbnoIogy drIven busIness
envIronment, wbIIe corporates requIre greater autonomy oI operatIon and
opportunIty Ior seII-reguIatIon wItb optImum compIIance costs, tbere Is a need
to brIng about transparency tbrougb better dIscIosures and greater
responsIbIIIty on tbe part oI corporate owners and managements Ior Improved
compIIance.
6. It Is apprecIated tbat tbe Government bas taken up tbIs Iresb exercIse Ior
a comprebensIve revIsIon oI tbe CompanIes Act 19S6 on tbe basIs oI a broad
based consuItatIve exercIse. As a tbe IIrst step In tbIs consuItatIve process, a
Concept Paper on Company Law drawn up In tbe IegIsIatIve Iormat was exposed
Ior vIewIng on tbe eIectronIc medIa so tbat aII Interested may not onIy express
tbeIr opInIons on tbe concepts InvoIved but may aIso suggest IormuIatIons on
varIous aspects oI Company Law. TbIs was a IaudabIe step and bas evoked
consIderabIe response. Comments and suggestIons Irom a Iarge number oI
organIzatIons, proIessIonaI bodIes and IndIvIduaIs bave been receIved. TbIs
consuItatIve process wIII not onIy aIIow Ideas, comments and suggestIons to
IIow In Irom aII quarters, but wIII aIso enabIe tbe Government to work out
approprIate IegIsIatIve proposaIs to meet tbe requIrements oI IndIa's growIng
economy In tbe years to come.
?. Tbe Government, tbereIore, IeIt It approprIate tbat tbe proposaIs
contaIned In tbe Concept Paper and suggestIons receIved tbereon be put to
merIt evaIuatIon by an Independent Expert CommIttee. Tbe present CommIttee
was constItuted on 2
nd
December, 2004 under tbe cbaIrmansbIp oI Dr. J J
IranI, DIrector, Tata Sons, wItb tbe task oI advIsIng tbe Government on tbe
proposed revIsIons to tbe CompanIes Act, 19S6. Tbe objectIve oI tbIs exercIse Is
perceIved as tbe desIre on tbe part oI tbe Government to bave a sImpIIIIed
compact Iaw tbat wIII be abIe to address tbe cbanges takIng pIace In tbe
natIonaI and InternatIonaI scenarIo, enabIe adoptIon oI InternatIonaIIy accepted
best practIces as weII as provIde adequate IIexIbIIIty Ior tImeIy evoIutIon oI new
arrangements In response to tbe requIrements oI ever-cbangIng busIness
modeIs. It Is a weIcome attempt to provIde IndIa wItb a modern Company Law
to meet tbe requIrements oI a competItIve economy.
S. Tbe Expert CommIttee consIsts oI 13 members and 6 specIaI InvItees
drawn Irom varIous dIscIpIInes and IIeIds IncIudIng trade and Industry,
cbambers oI commerce, proIessIonaI InstItutes, representatIves oI Banks and
FInancIaI InstItutIons, Sr. Advocates etc. Government MInIstrIes as weII as
reguIatory bodIes concerned wItb tbe subject were represented tbrougb specIaI
InvItees. Tbe CommIttee tbus brIngs to bear a wIde range oI expertIse and
experIence on tbe Issues beIore It. In tbe exercIse taken up by It, tbe
CommIttee took tbe CompanIes Act, 19S6, as amended, as tbe base and
adopted tbe IoIIowIng approacb:
I) TakIng note oI tbe Concept Paper and suggestIonsJobjectIons and
comments on tbe same receIved Irom varIous quarters, to enabIe
syntbesIs oI opInIon on tbe desIrabIe Ieatures oI tbe new Iaw;
II) IdentIIyIng tbe essentIaI IngredIents to be addressed by tbe new Iaw,
retaInIng desIrabIe Ieatures oI tbe exIstIng Iramework, segregatIng
substantIve Iaw Irom tbe procedures to enabIe a cIear Iramework Ior
good corporate governance tbat addresses tbe concerns oI aII
stakeboIders equItabIy.
III) MakIng recommendatIons to enabIe easy and unambIguous
InterpretatIon by recastIng tbe provIsIons oI tbe Iaw so as to enabIe
easy understandIng and InterpretatIon;
Iv) EnabIIng greater IIexIbIIIty In proceduraI aspects tbrougb ruIe
makIng, so tbat wItb tbe cbange oI tIme tbe IegaI Iramework may
adapt wItbout amendment oI tbe substantIve enactment, wbIcb wouId
be a tIme consumIng process;
v) AddressIng tbe concerns arIsIng out oI tbe experIence oI tbe stock
market scams oI tbe 1990s, tbe pbenomenon oI vanIsbIng companIes
and recommendatIons made by JoInt ParIIamentary CommIttee on
Stock Market Scam;
vI) EnabIIng measures to protect tbe Interests oI stakeboIders and
Investors, IncIudIng smaII Investors, tbrougb IegaI basIs Ior sound
corporate governance practIces.
vII) ProvIdIng a Iramework Ior responsIbIe seII-reguIatIon tbrougb
determInatIon oI corporate matters tbrougb decIsIons by
sbareboIders, In tbe background oI cIear accountabIIIty Ior sucb
decIsIons, obvIatIng tbe need Ior a regIme based on Government
approvaIs;
vIII) RecognIzIng tbe reIevance oI a cIImate tbat encourages peopIe to set
up busInesses and make tbem grow, addresses tbe practIcaI concerns
oI smaII busInesses so tbat peopIe may deaI wItb and Invest In
companIes wItb conIIdence, promotes InternatIonaI competItIveness oI
IndIan busInesses and provIdes It tbe IIexIbIIIty to meet tbe cbaIIenges
oI tbe gIobaI economy.
Cbapter II : Approacb oI new Company Law
Nature and Coverage oI tbe CompanIes Act
1. DurIng tbe course oI Its deIIberatIons tbe CommIttee consIdered tbe
desIrabIe scope and coverage oI tbe CompanIes Act. Many vIews were
expressed, IncIudIng tbe vIew tbat admInIstratIon oI tbe IegaI Iramework
In respect oI certaIn specIIIed companIes, sucb as IIsted companIes,
sbouId be de-IInked Irom tbe CompanIes Act and entrusted to specIaIIzed
reguIatIng agencIes, e.g., tbe capItaI market reguIator. VIews were aIso
expressed tbat It was not IeasIbIe Ior an enactment contaInIng generaI
governance prIncIpIes to address tbe specIaIIzed requIrements oI
operatIon oI entItIes In tbe new envIronment. AIter consIderIng tbese
vIews at Iengtb, we are oI tbe vIew tbat sucb opInIons do not take Into
account tbe nature and scope oI corporate governance, wbIcb goes Iar
beyond actIons IImIted to any specIaIIzed actIvIty, say, Ior Instance,
access to capItaI. ComparIsons oI tbe IndIan sItuatIon wItb tbe practIce
In some otber jurIsdIctIons, taken out oI context, wouId aIso not be weII-
merIted. For Instance, In some jurIsdIctIons, tbe IederatIng entItIes enact
tbeIr own Independent Company Law. Tbe wIde mandate provIded to tbe
capItaI market reguIator In sucb a sItuatIon, enabIes access to capItaI by
corporate entItIes across tbe Iengtb and breadtb oI tbe country on tbe
basIs oI common norms. SImIIarIy, recent enactments In many countrIes
cannot be seen In IsoIatIon to tbe judIcIaI system and Its assocIated
processes In sucb countrIes. Tbe Impact oI sucb IegIsIatIon In terms oI
compIIance costs Imposed on corporates Is yet anotber Issue tbat wouId
need to be addressed keepIng In vIew tbe reIevant envIronment.
2. IndIan corporates do not Iace a sImIIar sItuatIon as prevaIIIng In
some otber countrIes sInce tbe IndIan CompanIes Act Is a centraI
IegIsIatIon. It sbouId approprIateIy remaIn so. Tbe sovereIgn vacuum"
created by wItbdrawaI oI tbe CentraI Government Irom any area oI
corporate operatIon and entrustment oI tbe same entIreIy to a reguIator
may generate demands In tbe IndIan FederaI system Ior State IegIsIatIons
on tbe subject, wbIcb we IeeI couId Iead to dupIIcatIon and conIusIon.
Furtber, reguIatory urge to controI corporate governance oIten becomes
IntrusIve, posIng serIous reguIatory rIsks In addItIon to InbIbItIng tbe
Ireedom Ior decIsIon makIng necessary Ior corporate IunctIonIng.
3. Tbe extent to wbIcb modeIs In operatIon In varIous otber countrIes
are reIevant to tbe IndIan sItuatIon needs to be careIuIIy examIned beIore
any aspect Is Incorporated In tbe IndIan Iramework. WbIIe empbasIzIng
tbe need Ior IncorporatIng InternatIonaI best practIces, we IeeI tbat tbere
Is a need to deveIop an IndIan modeI, suItabIe to tbe IndIan sItuatIon,
tbat provIdes an adequate soIutIon to tbe pressIng concerns oI corporate
operatIon, wItbout aIIectIng tbe eIIIcIency or competItIveness oI busIness
In IndIa.
4. Corporate entItIes sbouId be abIe to reIer to a compact, easIIy
understood, comprebensIve compIIatIon oI IegaI requIrements beIore tbey
start operatIon. It wouId not be approprIate to deveIop dIIIerent Irame
works Ior corporate entItIes on tbe basIs oI tbeIr sIze, nature oI
operatIons, manner oI raIsIng capItaI etc. BusIness entItIes keep on
cbangIng tbeIr Iorm and structure Irom tIme to tIme as tbey grow and
aIso need to adapt to tbe cbangIng busIness envIronment In response to
competItIon, tecbnoIogIcaI cbange and requIrements oI operatIon In tbe
InternatIonaI arena. Presence oI dIIIerentIy admInIstered Irameworks
wouId be an obstructIon to cbange. TbIs wouId aIso resuIt In Inter-
agency overIaps and conIIIcts oI jurIsdIctIon. BesIdes, eacb Iramework
wouId bave Its own compIIance structure, IeadIng to dupIIcatIon oI eIIort
on tbe one band and uncertaIntIes and reguIatIng rIsk Ior tbe corporates
on tbe otber. EventuaIIy It wouId make adaptatIon to cbange sIow and
compIIance costIy.
S. We are tbereIore oI tbe vIew tbat In tbe IndIan context, It Is
Important tbat tbe basIc prIncIpIes guIdIng tbe operatIon oI corporate
entItIes Irom regIstratIon to wIndIng up or IIquIdatIon sbouId be avaIIabIe
In a sIngIe, comprebensIve, centraIIy admInIstered Irame work. TbIs Is
Important Ior tbe Iaw and practIce In corporate Iaw to evoIve and to brIng
about necessary reIorms In tbe appIIcatIon oI tbe Iramework. We boId tbe
vIew tbat tbIs wouId not deny tbe space to sectoraI reguIators to reguIate
bebavIour oI entItIes In tbeIr respectIve desIgnated domaIns. Ratber tbIs
wouId enabIe tbe reguIators to concentrate tbeIr resources In a more
Iocused manner on tbe substantIve Issues aIIectIng tbeIr respectIve
sectors.
6. Furtber, we are oI tbe vIew tbat tbe IegaI Iramework Ior corporate
governance and operatIon sbouId provIde a smootb and seamIess
transItIon Irom one Iorm oI busIness entIty to anotber. TbereIore, we
recommend a sIngIe corporate Iaw Iramework Ior appIIcatIon to aII
companIes. Tbe requIrements oI specIaI companIes e.g. smaII
companIes, couId be recognIzed tbrougb a scbeme oI exemptIons.
Law and adaptatIon to cbangIng cIrcumstances
?. Tbe exIstIng CompanIes Act, 19S6 Is a voIumInous document wItb
?S1 sectIons. It aIso contaIns provIsIons tbat cover aspects wbIcb are
essentIaIIy proceduraI In nature. In certaIn areas, It prescrIbes
quantItatIve IImIts wbIcb are now IrreIevant on account oI cbanges tbat
bave taken pIace over a perIod oI tIme. TbIs Iormat bas aIso resuIted In
tbe Iaw becomIng very rIgId sInce any cbange requIres an amendment oI
tbe Iaw tbrougb tbe parIIamentary process. TbereIore, tbe Iaw bas IaIIed
to take Into account tbe cbanges In tbe natIonaI and InternatIonaI
economIc scenarIo speedIIy. As a resuIt, In some quarters, It Is beIng
regarded as outdated. However, tbIs need not be tbe case sInce many
essentIaI Ieatures oI corporate governance wbIcb are aIready recognIzed
In tbe CompanIes Act, 19S6 need to be retaIned and artIcuIated Iurtber.
Wbat Is requIred Is tbat aIong wItb tbe cbanges In tbe substantIve Iaw,
wberever requIred, a revIew oI proceduraI aspects may aIso be
undertaken so as to enabIe greater degree oI seII-reguIatIon and easy
compIIance. TbereIore, we recommend tbat tbe Company Law may be so
draIted tbat wbIIe essentIaI prIncIpIes are retaIned In tbe substantIve
Iaw, proceduraI and quantItatIve aspects are sbIIted to tbe ruIes. TbIs
wouId enabIe tbe Iaw to remaIn dynamIc and to adapt to tbe cbanges In
busIness envIronment.
Growtb oI tbe corporate reguIatory Iramework
S. We IeeI tbat tbe corporate operatIon, wbIcb Is compIex, cannot In
Iact be compIeteIy reguIated by a sIngIe set oI IegaI prIncIpIes. It Is cIear
tbat In tbe tImes to come, a Iarge body oI reguIatory pronouncements,
governance codes and standards wIII compIement tbe prIncIpIes wbIcb
are IaId down In tbe Iaw. ReguIatory and proIessIonaI bodIes bave an
extremeIy Important roIe to pIay In tbIs regard. However, sucb
pronouncements bave to be consIstent wItb tbe underIyIng Iaw. A case In
poInt Is tbe barmonIous evoIutIon oI tbe accountIng standards In IndIa to
keep pace wItb tbe InternatIonaI deveIopments and tbe manner In wbIcb
It bas been IacIIItated by tbe CompanIes Act, 19S6. Sucb mecbanIsm wIII
bave to dovetaII wItb tbe CompanIes Act so as to expand Its coverage In a
meanIngIuI manner wbIIe aIIowIng a modaIIty Ior Improvements over
tIme.
ReguIatory overIap
9. PerceptIon In some quarters as to tbe need to demarcate tbe
respectIve jurIsdIctIons oI MInIstry oI Company AIIaIrs (MCA) and SEBI
bas come to our notIce. In our vIew, tbIs perceptIon Is mIspIaced. In so
Iar as, tbe IegaI Iramework Is concerned, tbe CentraI Government Is
represented tbrougb a MInIstry wbIcb wouId be requIred to exercIse tbe
sovereIgn IunctIon and dIscbarge tbe responsIbIIIty oI tbe State In
corporate reguIatIon. SEBI, on tbe otber band, Is a capItaI markets
reguIator bavIng dIstInct responsIbIIItIes In reguIatIon oI tbe conduct oI
IntermedIarIes capItaI market and InteractIon between entItIes seekIng to
raIse and Invest In capItaI.
10. We do not subscrIbe to tbe vIew tbat corporates seekIng access to
capItaI need to be IIberated Irom tbeIr responsIbIIItIes under aII otber
Iaws oI tbe Iand and , tbereby tbe oversIgbt by tbe State, and be
subjected to excIusIve controI and supervIsIon oI a specIIIc reguIator.
Corporates bave to IunctIon as economIc persons wItbIn tbe UnIon oI
IndIa In a manner tbat contrIbutes to tbe socIaI and economIc weII beIng
oI tbe country as a wboIe and as sucb must be subject to tbe Iaws
pronounced by tbe ParIIament Ior tbe weIIare oI Its cItIzens.
11. Corporate Governance goes Iar beyond access to capItaI. TakIng a
narrow vIew oI Corporate Governance as IImIted to pubIIc Issue oI capItaI
and tbe processes tbat IoIIow wouId be to tbe detrIment oI corporate
entItIes tbemseIves. EquaIIy, tbe capItaI market reguIator bas to pIay a
centraI roIe In pubIIc access to capItaI by tbe companIes and must bave
be necessary space to deveIop suItabIe Irameworks In tune wItb tbe
IIuIdIty oI tbe capItaI markets.
12. To our mInd, wItb tbe substantIve Iaw beIng compIIed to reIIect
tbe core governIng prIncIpIes oI corporate operatIons and separatIon oI
proceduraI aspects, It wouId be possIbIe Ior tbe ReguIator to provIde tbe
Iramework oI ruIes Ior Its domaIn consIstent wItb tbe Iaw. Sucb ruIes
wouId be compIementary to tbe IegIsIated Iramework and tbere wouId be
no overIap or conIIIct oI jurIsdIctIon between reguIatory bodIes. We
tbereIore recommend a barmonIous constructIon Ior operatIon oI tbe
State and reguIatory agencIes set up by It.
Framework Ior smaII enterprIses
13. Tbe CommIttee recognIzed tbat tbe IndIan economy Is yet In Its
growIng pbase. Tbe number oI companIes beIng set up wIII Increase over
a perIod oI tIme as new busIness opportunItIes emerge and new
tecbnoIogIcaI IrontIers are scaIed. Many new companIes wIII be set up as
smaII companIes wbo wIII grow bIg In tbe Iuture. It Is cIear tbat tbe smaII
companIes wouId contrIbute sIgnIIIcantIy to IndIan economy. Because oI
tbeIr sIze, tbey cannot be burdened wItb tbe same IeveI oI compIIance
requIrements as, say, tbe Iarge pubIIc IIsted companIes. Tbe smaII
companIes bave to be enabIed to take quIck decIsIons, be adaptabIe and
nImbIe In tbe cbangIng economIc envIronment, yet be encouraged to
compIy wItb tbe essentIaI requIrements oI tbe Iaw tbrougb Iow cost oI
compIIance. Tbe Government may prescrIbe specIaI regIme Ior sucb
companIes tbrougb a system oI exemptIons.
InstItutIonaI Structure
14. Corporate Issues wIII aIso requIre a quIck resoIutIon. Tbe tIme
taken In tbe exIstIng Iramework needs to be revIewed. TbIs Is partIcuIarIy
so In tbe context oI rebabIIItatIon, IIquIdatIon and wIndIng up. Mergers
and amaIgamatIons aIso need to be IacIIItated to take pIace tbrougb a
speedIer process. Tbrougb tbe CompanIes (Second Amendment) Act,
2002 tbe Government bas envIsaged settIng up oI tbe NatIonaI Company
Law TrIbunaI and tbe NatIonaI Company Law AppeIIate TrIbunaI. We
weIcome tbIs move. It Is tIme tbe Iorum wItb specIaIIzatIon to deaI wItb
corporate Issues, brIngIng togetber expertIse Irom varIous dIscIpIInes, Is
estabIIsbed. We are InIormed tbat tbere are certaIn IegaI Issues to be
resoIved beIore tbese InstItutIons can be set up. We bope tbat tbIs
process Is speedIIy concIuded so tbat a sIngIe Iorum Is avaIIabIe Ior an
InIormed consIderatIon oI corporates Issues.
Cbapter III : CIassIIIcatIon and RegIstratIon oI CompanIes
1. Tbe CompanIes Act, 19S6 broadIy cIassIIIes tbe companIes Into
prIvate and pubIIc companIes and provIdes Ior reguIatory envIronment on
tbe basIs oI sucb cIassIIIcatIon. However, wItb tbe growtb oI tbe economy
and Increase In tbe compIexIty oI busIness operatIon, tbe Iorms oI
corporate organIzatIons keep on cbangIng. Tbere Is a need Ior tbe Iaw to
take Into account tbe requIrements oI dIIIerent kInds oI companIes tbat
may exIst and seek to provIde common prIncIpIes to wbIcb aII kInds oI
companIes may reIer wbIIe devIsIng tbeIr corporate governance structure.
RIgId structures, unnecessary controIs and reguIatIons InbIbIt tbe rIsk
takIng InItIatIves oI tbe entrepreneurs. PrIvate companIes and smaII
companIes, wbo do not generaIIy go Ior pubIIc Issues or deposIts Ior tbeIr
IInancIaI requIrements but utIIIze tbeIr personaI or In-bouse resources,
need to be gIven IIexIbIIIty and Ireedom oI operatIon and compIIance at a
Iow cost. EquaIIy, pubIIc companIes tbat access capItaI Irom pubIIc need
to be subjected to a more strIngent regIme oI corporate governance. To
enabIe a comprebensIve Iramework Ior dIIIerent Iorms oI corporate
organIzatIons, tbe Company Law sbouId ensure muItIpIe cIassIIIcatIons
oI companIes. It sbouId aIso enabIe smootb cbange-over oI companIes
Irom one type to anotber.
CIassIIIcatIon oI CompanIes
2. Tbe corporate Iorm can take many sbapes In order to respond
eIIIcIentIy to tbe envIronment. Company Law sbouId tbereIore recognIze a
muItIpIe cIassIIIcatIon oI companIes. Tbe CommIttee IndIcates tbe crIterIa
Ior cIassIIIcatIon on tbe basIs oI tbe Iorms dIscernIbIe today, but
recognIzes tbat sucb cIassIIIcatIon can never be exbaustIve.
I) On tbe basIs oI sIze:
a) SmaII companIes
b) Otber companIes
II) On tbe basIs oI number oI members:
a) One person company
b) PrIvate companIes
c) PubIIc companIes
III) On tbe basIs oI controI
a. HoIdIng companIes
b. SubsIdIary companIes
c. AssocIate companIes
Iv) On tbe basIs oI IIabIIIty
a) LImIted
I) by Sbares
II) by Guarantee (wItb or wItbout sbare capItaI)
b) UnIImIted
v) On tbe basIs oI manner oI access to capItaI
a] LIsted companIes
b] Un-IIsted companIes
3. Tbe Iaw sbouId recognIze tbe potentIaI Ior dIversIty In tbe Iorms oI
companIes and ratber tban seekIng to reguIate specIIIc aspects oI eacb
Iorm, seek to provIde Ior prIncIpIes tbat enabIe economIc Inter-actIon Ior
weaItb creatIon on tbe basIs oI cIear and wIdeIy accepted prIncIpIes.
SmaII companIes
4.1 Tbe CommIttee sees no reason wby smaII companIes sbouId suIIer
tbe consequences oI reguIatIon tbat may be desIgned to ensure baIancIng
oI Interests oI stakeboIders oI Iarge, wIdeIy beId corporates. Company Iaw
sbouId enabIe sImpIIIIed decIsIon makIng procedures by reIIevIng sucb
companIes Irom seIect statutory InternaI admInIstratIve procedures.
Sucb companIes sbouId aIso be subjected to reduced IInancIaI reportIng
and audIt requIrements and sImpIIIIed capItaI maIntenance regImes.
EssentIaIIy tbe regIme Ior smaII companIes sbouId enabIe tbem to
acbIeve transparency at a Iow cost tbrougb sImpIIIIed requIrements.
Sucb a Iramework may be appIIed to smaII companIes tbrougb
exemptIons, consoIIdated In tbe Iorm oI a ScbeduIe to tbe Act.
4.2 Law couId aIso consIder an Integrated approacb wbereby a
dereguIated Iramework Ior prIvate companIes may be provIded, wbIcb
may aIso appIy to smaII companIes. However a deIInItIon oI smaII
companIes may be consIdered Ior enabIIng sucb a regIme. Tbere are
bound to be probIems assocIated In prescrIbIng sIze. In our vIew, sIze
may be assessed on tbe basIs oI gross assets comprIsIng oI IIxed assets,
current assets and Investments not exceedIng a partIcuIar IImIt as aIso
turnover. SInce tbe deIInItIon oI smaII" may cbange over tIme, tbIs may
be done tbrougb ruIes.
4.3 To quaIIIy Ior exemptIons, a smaII company sbouId bowever
neItber be a boIdIng nor a subsIdIary oI any otber company. However,
tbe CommIttee does not IeeI tbe need Ior provIdIng a specIaI InternaI
governance and constItutIonaI regIme to smaII companIes. TbIs Is IIkeIy
to come In tbe way oI tbeIr Iuture growtb. Instead tbe CommIttee
recommends enabIIng oI new vebIcIes Ior busIness, sucb as LImIted
LIabIIIty PartnersbIps, tbrougb separate IegIsIatIon, II necessary.
4.4 AssocIatIons, CbarItabIe CompanIes etc. IIcensed uJs 2S oI tbe
exIstIng CompanIes Act, sbouId not be treated as smaII companIes
IrrespectIve oI tbeIr gross assets.
4.S Tbe Iaw sbouId provIde a Iramework compatIbIe to growtb oI smaII
corporate entItIes. ExemptIons sbouId bowever IacIIItate compIIance by
smaII companIes In an easy and cost eIIectIve manner. Tbese sbouId not
IncentIvIze conceaIment oI true sIze by any entIty or be a barrIer to
growtb oI smaII companIes.
PrIvate CompanIes
S. PrIvate companIes represent a dIIIerent set oI reIatIonsbIps In
terms oI ownersbIp, rIsk and reward as compared to pubIIc companIes.
SInce prIvate companIes, do not access capItaI markets, tbey requIre Iess
rIgorous protectIon Ior tbeIr sbareboIders. Tbey bowever represent an
Important organIzatIonaI Iorm Ior conduct oI busIness. TbereIore tbere Is
a case Ior IIgbter reguIatory overbang over prIvate companIes. Tbe
exIstIng Iaw provIdes Ior certaIn reIaxatIons to prIvate companIes on
account oI tbeIr nature. We are oI tbe vIew tbat tbIs approacb sbouId be
contInued and ampIIIIed wbere approprIate. WbIIe good Corporate
Governance Is equaIIy Important Ior success oI sucb prIvate companIes,
tbe obIIgatIon Ior dIssemInatIon oI InIormatIon oI corporate process
sbouId be so structured tbat sucb enterprIses do not Iose tbe IIexIbIIItIes
In conduct oI tbeIr busIness. In partIcuIar, tbe Iaw sbouId enabIe a
prIvate company to take any decIsIon It Is otberwIse empowered to take,
wItbout observIng tbe IormaIItIes oI tbe Act II tbe members oI tbe
company unanImousIy agree. A sImpIIIIed cIrcuIar resoIutIon procedure
sbouId aIso be consIdered wbere unanImIty Is not possIbIe. SInce
dIsputes may aIso arIse amongst tbe members oI sucb companIes, tbe
costs oI wbIcb may ruIn tbe company, tbe regIme Ior prIvate companIes
sbouId contaIn dIspute resoIutIon procedures, sImpIIIIed to tbe extent
possIbIe.
One Person Company (OPC)
6. WItb IncreasIng use oI InIormatIon tecbnoIogy and computers,
emergence oI tbe servIce sector, It Is tIme tbat tbe entrepreneurIaI
capabIIItIes oI tbe peopIe are gIven an outIet Ior partIcIpatIon In economIc
actIvIty. Sucb economIc actIvIty may take pIace tbrougb tbe creatIon oI
an economIc person In tbe Iorm oI a company. Yet It wouId not be
reasonabIe to expect tbat every entrepreneur wbo Is capabIe oI
deveIopIng bIs Ideas and partIcIpatIng In tbe market pIace sbouId do It
tbrougb an assocIatIon oI persons. We IeeI tbat It Is possIbIe Ior
IndIvIduaIs to operate In tbe economIc domaIn and contrIbute eIIectIveIy.
To IacIIItate tbIs, tbe CommIttee recommends tbat tbe Iaw sbouId
recognIze tbe IormatIon oI a sIngIe person economIc entIty In tbe Iorm oI
'One Person Company'. Sucb an entIty may be provIded wItb a sImpIer
regIme tbrougb exemptIons so tbat tbe sIngIe entrepreneur Is not
compeIIed to IrItter away bIs tIme, energy and resources on proceduraI
matters.
6.1 Tbe concept oI 'One Person Company' may be Introduced In tbe
Act wItb IoIIowIng cbaracterIstIcs :-
a) OPC may be regIstered as a prIvate Company wItb one member
and may aIso bave at Ieast one dIrector;
b) Adequate saIeguards In case oI deatbJdIsabIIIty oI tbe soIe
person sbouId be provIded tbrougb appoIntment oI anotber
IndIvIduaI as NomInee DIrector. On tbe demIse oI tbe orIgInaI
dIrector, tbe nomInee dIrector wIII manage tbe aIIaIrs oI tbe
company tIII tbe date oI transmIssIon oI sbares to IegaI beIrs oI
tbe demIsed member.
c) Letters 'OPC' to be suIIIxed wItb tbe name oI One Person
CompanIes to dIstInguIsb It Irom otber companIes;
Government CompanIes
?.1 In generaI, tbere Is IIttIe justIIIcatIon Ior Government companIes
beIng provIded reIaxatIons In compIIance wItb company Iaw. It Is even
Iess II sucb companIes are IIsted. Not onIy sbouId sucb Government
companIes be abIe to compete In tbe market economy wItb otber
companIes on equaI terms, It wouId not be IaIr to tbe Investors or
credItors II sucb entItIes are aIIowed to present tbeIr perIormance on tbe
basIs oI dIssImIIar parameters.
?.2 Government companIes may be subject to ImposItIon oI non-
commercIaIJ commercIaIIy unvIabIe socIaI responsIbIIItIes. However tbe
costs oI sucb responsIbIIItIes sbouId be transparentIy assessed and
provIded by tbe Government tbrougb tbe budget as a subsIdy. It Is not
approprIate tbat appIIcatIon oI tbe Iaw or standards be reIaxed to aIIow
sucb costs to be Incurred In a non-transparent manner.
?.3 Tbere may be sItuatIons wbere sucb companIes may requIre
specIaI treatment In actIvItIes reIated to tbe securIty oI State. Tbere may
be an enabIIng provIsIon to reIax operatIon oI CompanIes Act Ior sucb
companIes. Otber companIes, engagIng In commercIaI actIvIty sbouId
compete on tbe basIs oI transparency and IeveI pIayIng IIeIds. PreIerentIaI
treatment to sucb companIes wouId be to tbe detrIment to tbe capacIty oI
IndIan companIes to survIve In a competItIve market.
?.4 A Government company sbouId be cIearIy deIIned In Iaw. It sbouId
be one wbere tbere Is a cIear majorIty stake beId by tbe state- I.e. CentraI
andJor State Government(s). Tbere Is no ratIonaIe Ior tbe deIInItIon oI
Government company beIng extended to companIes set up by
Government companIes In course oI tbeIr commercIaI actIvItIes.
HoIdIng and SubsIdIary CompanIes
S.1 Tbe CompanIes Act sbouId not pre-empt tbe decIsIon as to wbat
structure Is approprIate Ior controIIIng busInesses. Sucb prescrIptIons
wIII make tbe envIronment rIgId and put IndIan companIes at a
dIsadvantage vIs--vIs tbeIr competItors InternatIonaIIy. Sucb
restrIctIons wouId aIso not IacIIItate sound corporate pIannIng, IormatIon
oI joInt ventures, InternatIonaI operatIons or restructurIng oI companIes.
S.2 TbereIore, we are oI tbe vIew tbat tbere may not be any restrIctIon
to a company bavIng any number oI subsIdIarIes, or to sucb subsIdIarIes
bavIng Iurtber subsIdIarIes. However, tbe Act sbouId provIde Ior a cIear
deIInItIon oI botb tbe boIdIng as weII as subsIdIary body corporate. In
doIng so, IormatIon oI subsIdIary structures tbrougb controI by a boIdIng
company, dIrectIy, IndIrectIy or tbrougb one or more subsIdIarIes sbouId
be taken Into account, keepIng In vIew InternatIonaI practIces.
S.3 Tbe need to provIde Ior transparency and to controI mIsuse oI
Iunds tbrougb transIers Irom one company to anotber, IncIudIng
subsIdIarIes, bas to be recognIzed. However, It needs to be recognIzed
tbat tbe pbenomenon oI sIpbonIng oII Iunds may not be caused soIeIy on
account oI boIdIng-subsIdIary structure. CompanIes may use otber
routesJstructuresJassocIate companIes to sIpbon oII Iunds. IsoIated
Instances oI mIsuse oI tbe boIdIng-subsIdIary structure sbouId not resuIt
In doIng away wItb tbIs very Important busIness modeI Ior Investment
and corporate pIannIng. Instead oI probIbItIng IormatIon oI subsIdIarIes,
tbere sbouId be adequate dIscIosure obIIgatIons as to utIIIzatIon oI tbe
Iunds raIsed or Ioans and advances gIven by tbe company to otber
entItIes. StrIct dIscIosure and compIIance norms In respect oI boIdIng
and subsIdIary company structures sbouId be provIded Ior.
S.4 Tbe CommIttee Is oI tbe vIew tbat proper dIscIosures accompanIed
by mandatory consoIIdatIon oI IInancIaI statements sbouId address tbe
concern attendant to tbe Iack oI transparency In boIdIng-subsIdIary
structure.
S.S Tbere may be Iurtber provIsIons tbat tbe transactIons between
boIdIng and subsIdIary company may be treated as reIated party
transactIons and pIaced beIore tbe Board tbrougb tbe AudIt CommIttee,
wbere sucb a CommIttee exIsts. TransactIons not In tbe ordInary course
oI busIness andJor not on arms Iengtb basIs between tbe boIdIng and
subsIdIary company, sbouId be dIscIosed In tbe annuaI report aIong wItb
management justIIIcatIon tbereoI.
S.6 In Its examInatIon oI tbIs Issue, tbe CommIttee aIso consIdered tbe
recommendatIons made by tbe JPC on Stock Market Scam on restrIctIng
tbe Iayers oI subsIdIary Investment companIes. Tbe CommIttee noted
tbat tbese recommendatIons were In context oI tbe stock market J
bankIng scams wItnessed In IndIa over tbe past decade. At tbe same
tIme, It was argued tbat tbe creatIon oI subsIdIarIes Ior separate
manuIacturIng entItIes, joInt ventures was a reaIIty and tbere were no
restrIctIons on IoreIgn companIes operatIng InternatIonaIIy. Even banks
may bave to set up subsIdIarIes Ior tbeIr Non BankIng J JoInt Venture
companIes engaged In Insurance, asset management etc. In tbe present
sItuatIon, wben IndIan companIes were seekIng to make Investments
abroad, sucb restrIctIon wouId adverseIy aIIect tbeIr opportunItIes In Iace
oI InternatIonaI competItIon. DurIng deIIberatIons, It was IeIt tbat
protectIng IegItImate busIness actIvIty under a regIme Ior settIng up
subsIdIary companIes wouId resuIt In specIaI carve outs and monItorIng
tbe actIvItIes oI sucb companIes wouId become an admInIstratIve
nIgbtmare. For tbese reasons, tbe CommIttee took tbe vIew tbat IImItIng
tbe Iayers oI subsIdIary Investment companIes was not IeasIbIe. Instead,
a regIme Ior preventIng mIsuse oI tbIs mecbanIsm sbouId be devIsed
based on transparent Board processes and dIscIosures under cIose
supervIsIon oI tbe reguIator Ior IIsted companIes.
Producer CompanIes
9.1 Tbe admInIstratIon and management oI 'Producer CompanIes' Is
not In tune wItb generaI Iramework Ior companIes wItb IIabIIItIes IImIted
by sbaresJguarantees. Tbe sbareboIdIng oI a 'Producer Company'
Imposed restrIctIons on Its transIerabIIIty, tbereby preventIng tbe
sbareboIders Irom exercIsIng tbeIr exIt optIons tbrougb a market
determIned structure. It was aIso not IeasIbIe to make tbIs structure
amenabIe to a competItIve market Ior corporate controI.
9.2 II It Is IeIt tbat producer companIes are unabIe to IunctIon wItbIn
tbe Iramework and IIabIIIty structure oI IImIted IIabIIIty companIes. Tbe
Corporate Governance regIme appIIcabIe to companIes couId not be
properIy Imposed on tbIs Iorm. Government may consIder IntroductIon oI
a separate Act to deaI wItb tbe reguIatIon oI sucb 'Producer CompanIes'.
Part IX A In tbe present CompanIes Act, wbIcb bas bardIy been resorted
to and Is more IIkeIy to create dIsputes oI InterpretatIon and may,
tbereIore, be excIuded Irom tbe CompanIes Act.
JoInt VentureJsbareboIders Agreements
10.1 CapItaI and TecbnoIogy In tbe modern worId move Into companIes
tbrougb joInt venture opportunItIes. Tbe abIIIty to access tecbnoIogy,
know-bow, busIness, trade-marks and otber InteIIectuaI property or
servIce rIgbts Is crItIcaIIy IInked wItb tbe Iaw on joInt ventures.
10.2 Over tbe years, severaI court judgments bave been pronounced In
IndIa on tbe Issue oI vaIIdIty oI joInt venture covenants. As per tbe
judIcIaI vIew, recognItIon to sucb covenants tbrougb corporate actIon Is
possIbIe onIy II tbey are made part oI tbe ArtIcIes oI AssocIatIon oI a
company. However, In tbIs Iorm, tbey are subjected to tbe overrIdIng
eIIect oI SectIon 9 oI tbe CompanIes Act, 19S6. Tbus, wbIIe joInt venture
agreements may take pIace and provIde Ior certaIn excIusIonary or extra-
ordInary cIauses pertaInIng to InterventIons by tbe joInt venture
partners, sucb excIusIons are not generaIIy compatIbIe wItb tbe present
CompanIes Act. Tbey are, bowever, recognIzed under Contract Law. Tbe
eIIect oI tbIs Iramework Is tbat dIspute resoIutIon In respect oI joInt
venture provIsIons becomes subject to contract Iaw provIsIons and Is
subject to Iengtby arbItratIon. Tbe companIes bowever, preIer tbat sucb
aspects sbouId be addressed more speedIIy tbrougb tbe corporate
processes.
10.3 Tbere Is an Inberent InconsIstency oI tbe joInt venture Iorm wItb
tbe provIsIon oI SectIon 111 A oI tbe CompanIes Act, 19S6 aIso wbIcb
wouId need to be addressed II tbe IacIIIty oI corporate based redressaI
mecbanIsm Is to be made avaIIabIe Ior joInt ventures. It was noted tbat
joInt venture agreements bave severaI cIauses pertaInIng to votIng rIgbts,
addItIonaI quorum requIrements, arbItratIon provIsIons oustIng statutory
remedIes, pre-emptIon rIgbts or restrIctIons on transIer oI sbares.
10.4 It was represented beIore tbe CommIttee tbat tbere sbouId be an
approprIate exceptIon to tbe doctrIne oI uItra vIres under SectIon 9 oI tbe
CompanIes Act and tbe partIes sbouId bave party autonomy oI contract"
In tbeIr joInt venture documentatIon. TbIs wouId bowever ImpIy tbat any
tbIrd party deaIIng wItb any or eItber oI named sbareboIders wouId bave
an obIIgatIon and a consequent rIgbt to seek dIscIosure and must verIIy
tbe IuIIness oI Iact and terms contracted between tbe joInt venture
partners tbrougb sbareboIders agreements beIore deaIIng wItb tbe
sbares. EquaIIy tbe CommIttee noted tbe concern tbat company Iaw
sbouId not IncIude provIsIons tbat provIde IIy out" opportunItIes to
companIes seekIng to evade Its provIsIons. Nor couId company Iaw
address tbe sbortcomIngs oI otber IegaI regImes, tbe costs assocIated
wItb arbItratIon and IItIgatIon tbat wouId need to be undergone to
enIorce contracts.
10.S Tbe CommIttee, aIter consIderIng varIous aspects Is oI tbe vIew
tbat In tbe current context, It wouId be approprIate to provIde Ior a
Iramework tbat wouId enabIe IndIan entItIes to access greater
opportunItIes tbrougb joInt ventures wbIIe reIorm oI tbe IegaI system to
address dIIIIcuItIes Iaced In admInIstratIon oI cIvII Iaw must contInue. A
transparent modaIIty Ior provIdIng recognItIon to agreements between
joInt venture partners Ior corporate actIon sbouId be worked out In
Company Law, keepIng In vIew tbe concern tbat sucb arrangements
sbouId not become a wIndow Ior cIrcumventIng tbe essentIaI provIsIons
oI tbe Law.
10.6 Tbe CommIttee Is oI tbe vIew tbat tbIs conIIIct needs to be resoIved
sInce sucb restrIctIons under tbe Company Law wIII adverseIy aIIect tbe
Iree-IIow oI capItaI and tecbnoIogy Into tbe country In tImes to come.
TbereIore, a suItabIe provIsIon sbouId be Incorporated under tbe new
Company Law recognIzIng sucb arrangements between two or more
substantIaI sbareboIders or joInt venture partners.
PubIIc FInancIaI InstItutIons (PFIs)
11.1 Tbrougb tbe amendment In 19?4, a new SectIon 4A {PubIIc
FInancIaI InstItutIons [PFIs]} was Inserted In tbe CompanIes Act, 19S6.
TbIs sectIon deIIned certaIn InstItutIons as PFIs and empowered CentraI
Government (MCA) to notIIy, Irom tIme to tIme, otber InstItutIons PFIs.
About 46 InstItutIons bave been decIared as PFIs under tbIs SectIon by
tbe MCA. Tbougb tbIs term bas been deIIned under tbe CompanIes Act,
19S6, tbe term bas been used and reIerred In many Acts and a number
oI beneIIts (economIc as weII as otber) are avaIIabIe to sucb PFIs under
CompanIes Act and otber ActsJdeIegated IegIsIatIons.
11.2 In vIew oI cbangIng competItIve economIc envIronment and
contInuous reIorms In IInancIaI sector, a need bas been IeIt Ior revIew oI
tbe concept oI PFI. It Is beIng IeIt In certaIn quarters tbat tbIs concept
sbouId be deIeted, wItb suItabIe transItory provIsIons In respect oI
exIstIng PFIs. SuItabIe steps to take care oI provIsIons In otber
ActsJdeIegated IegIsIatIons, wbIcb are usIng tbIs term sbouId aIso be
taken. BesIdes, tbere does not appear to be any IogIc Ior addressIng sucb
a concept (reIatIng to FInancIaI InstItutIons) In tbe CompanIes Act. Tbe
CompanIes BIII, 199? bad, tbereIore, proposed Ior sbIItIng oI tbIs concept
to PFI (ObIIgatIons as to FIdeIIty and Secrecy) Act, 19S3, wbIcb Is
admInIstered by MInIstry oI FInance.
11.3 Tbey sbouId be subject to sImIIar reguIatory provIsIons. Tbere Is
no reason wby a reIaxed Iramework In respect oI corporate governance
sbouId be provIded to sucb InstItutIons tbrougb exemptIons In provIsIons
oI company Iaw. Sucb InstItutIons sbouId be put tbrougb sImIIar
requIrements oI IInancIaI and management prudence as otber FIs.
TbereIore, tbe CommIttee does not see any reason wby tbe specIaI regIme
Ior PubIIc FInancIaI InstItutIons provIded under tbe CompanIes Act,
19S6, sbouId contInue.
IncorporatIon
12.1 Tbe process oI IncorporatIon tbrougb regIstratIon sbouId be based
on correct InIormatIon to be dIscIosed by tbe promoters oI tbe company
wItb IuII IIabIIIty towards Its correctness. Tbe InIormatIon necessary Ior
regIstratIon may be prescrIbed tbrougb ruIes. However, tbe contents oI
tbe Memorandum oI AssocIatIon sbouId be part oI tbe substantIve Iaw
and not In tbe RuIes. Process oI regIstratIon sbouId be speedy and
compatIbIe wItb e-Governance InItIatIve taken up by tbe Government.
12.2 Tbe companIes sbouId be requIred to make and autbentIcate
detaIIed dIscIosures about promoters, dIrectors oI tbe company at tbe
tIme oI IncorporatIon. Tbese dIscIosures sbouId be prescrIbed to be made
In a manner tbat aIIows Ior addItIonsJcbanges, keepIng pace wItb tbe
deveIopments In tbe company.
12.3 Tbe Promoters and DIrectors sbouId dIscIose InIormatIon tbat
estabIIsbesJautbentIcates tbeIr prooI oI resIdence and IdentIty tbrougb
supportIng documents sucb as Pbotograpbs, PAN Number, Passport,
aIIIdavIts etc. tbat may be prescrIbed.
12.4 Every company sbouId be obIIged to bave a regIstered oIIIce and to
dIscIose It correctIy aIong wItb prooI oI address, In a manner tbat enabIes
access pbysIcaIIy and by servIce oI post. Tbe companIes sbouId aIso be
made to regIster tbeIr websItes and e-maII addresses.
12.S Tbe prImary responsIbIIIty Ior veracIty oI statements made sbouId
be tbat oI promotersJ IIrst dIrectors. II agents or proIessIonaI are
empowered, tbIs sbouId be on tbe basIs oI suItabIe power oI attorney and
sbouId not reIIeve tbe prIncIpaIs oI tbeIr IIabIIIty. StrIngent penaItIes
sbouId aIso be provIded Ior any proIessIonaIs, II engaged, wbo do not
exercIse due dIIIgence at tbe tIme oI IncorporatIon.
12.6 DIrectorsbIps by tbe promotersJdIrectors In otber companIes
sbouId be decIared at tbe tIme oI IncorporatIon. Tbe terms 'Promoters'
and 'controI' sbouId be cIearIy deIIned Ior avoIdIng any doubts.
12.? StrIngent consequences sbouId IoIIow II It Is Iound tbat
IncorporatIon bas been done under IaIse or mIsIeadIng InIormatIon.
SbIItIng oI RegIstered OIIIce
13. Tbe present procedure requIres tbe RegIstered oIIIce oI a company
beIng sbIIted Irom one state to anotber subject to order oI CLB. Tbe
CommIttee expressed Its concern at tbe deIays and costs InvoIved In tbe
process. BesIdes, corporates sbouId be aIIorded tbe opportunIty oI
beneIIcIaI busIness envIronments II avaIIabIe In dIIIerent parts oI tbe
country. A vIew was expressed tbat tbIs decIsIon sbouId be IeIt to tbe
sbareboIders. However, tbe CommIttee aIso recognIzed tbat Interests oI
otber stakeboIders wouId be InvoIved. Tbe CommIttee IeIt tbere was an
urgent need Ior makIng tbIs process sImpIer, Iaster and easIer, wItbout
reIerence to a TrIbunaIJCourt, ensurIng tbat tbe new regIstered oIIIce Is
accessIbIe to stakeboIders Ior IegaI recourse, wbere necessary.
VanIsbIng companIes
14.1 Tbe CommIttee Is serIousIy concerned at tbe pbenomenon oI
companIes tbat vanIsbed aIter raIsIng Iunds Irom tbe pubIIc, tbereby
cbeatIng Investors. TbIs bas resuIted In a Iack oI credIbIIIty not onIy on
tbe part oI tbe companIes but aIso oI tbe InstItutIonaI structure
reguIatIng sucb entItIes and enIorcement agencIes. We understand tbat
tbe CentraI Government Is now pursuIng actIon agaInst sucb companIes
tbrougb a coordInated mecbanIsm InvoIvIng botb tbe MInIstry oI
Company AIIaIrs and SEBI. However, a Iot requIres to be done to prevent
sucb pbenomenon. We IeeI tbat sucb preventIve actIon sbouId begIn wItb
regIstratIon ItseII and sbouId be sustaIned tbrougb a regIme tbat
requIres reguIar and mandatory IIIIng oI statutory documents. WItb
IntroductIon oI eIectronIc IIIIng, tbIs process wouId become convenIent to
companIes as weII as tbe stakeboIders. BebavIour resuItIng In non-IIIIng
oI documents or Incorrect dIscIosures sbouId be deaIt wItb strIctIy.
14.2 InIormatIon provIded at tbe tIme oI regIstratIon sbouId determIne
tbe addresses oI tbe company as weII as Its dIrectors. It sbouId be tbe
duty oI tbe Company to IntImate any cbange oI address wItbIn a IIxed
tIme perIod.
14.3 Tbere sbouId aIso be a system oI random scrutIny oI IIIIngs oI
corporates to be carrIed out by tbe regIstratIon autborItIes wItb beavy
penaItIes Ior tbe companIes Iound Inadequate In tbeIr dIscIosures and
IIIIngs.
14.4 Inter agency coordInatIon sbouId be enabIed to track down tbe
persons bebInd sucb companIes to brIng tbem to book. Law sbouId be
amended to make tbem dIsgorge tbeIr III-gotten gaIns by IIItIng tbe
corporate veII.
IncorporatIon- AIIIed Issues
e-Governance
1S.1 Tbe CommIttee takes note oI tbe e-governance InItIatIve Iauncbed
by MCA and recommends tbat It be ImpIemented speedIIy. It recognIzed
tbe Immense potentIaI oI tbIs programme to brIng about ease oI
compIIance at a Iower cost. However, tbe CommIttee observes tbat e-
Governance sbouId be cost-eIIectIve to companIes, IncIudIng SmaII and
One Person CompanIes, easy to use and accessIbIe to aII stakeboIders
and generaI pubIIc and enabIe tbe process oI regIstratIon and IIIIng Ior
dIscIosures and retrIevaI oI data eIIIcIentIy and at a Iow cost. Furtber, tbe
system sbouId bave adequate capacItIes to bandIe tbe IIkeIy growtb In
tbe corporate sector In IndIa In tbe years to come as weII as tbe Increase
In dIscIosure requIrements tbat may be mandated by tbe IegaI and
reguIatory Iramework.
1S.2 AII statutory IIIIngs sbouId be made compatIbIe to e-IIIIng by
devIsIng suItabIe e-Iorms. Sucb IIIIngs sbouId be kept secureIy and
sbouId be IdentIIIabIe tbrougb dIgItaI sIgnatures.
1S.3 Tbe e-Governance system sbouId enabIe quIck dIsposaI oI tbe
regIstratIon and IncorporatIon processes wItb tbe use oI seII operatIng e-
systems, mInImIzIng pbysIcaI InterIace and use oI dIscretIonary statutory
powers by regIsterIng autborItIes.
1S.4 AII companIes sbouId be requIred to specIIy autborIzed sIgnatorIes
wItb autborIty to sIgn and autbentIcate IIIIngs dIgItaIIy.
1S.S On-IIne IIIIng and Ievy oI cbarges etc. sbouId be made easy. Once
tbe system bas estabIIsbed Its eIIectIveness, It may be made mandatory
Ior aII tbe companIes.
1S.6 An eIIort sbouId be made to resoIve stamp duty Issues between
tbe CentraI and State Governments so tbat In tImes to come, Iaw may
recognIze tbe concept oI sIngIe natIonaI regIstry.
1S.? Tbe CompanIes Act sbouId provIde a suItabIe IegIsIatIve Irame
work Ior Ievy oI user cbarges. Sucb cbarges sbouId be reasonabIe to
enabIe tbe operatIon oI tbe e-governance InItIatIve In a sustaInabIe
manner.
Name aIIotment
16.1 Otber IncorporatIon processes sucb as name aIIotment etc. sbouId
be made sImpIer and amenabIe to be compIeted tbrougb automatIc e-
systems. Tbe CommIttee Is oI tbe vIew tbat tbe process oI IncorporatIon
and regIstratIon sbouId be competItIve wItb deveIoped economIes oI tbe
worId.
16.2 Tbere may be reasonabIe probIbItIons Imposed under tbe Act on
tbe use oI certaIn names. Tbe Government sbouId retaIn powers to
prevent companIes bavIng names tbat gIve tbe ImpressIon tbat tbe
company Is In any way connected wItb tbe CentraI J State Government
or wItb a IocaI autborIty.
16.3 Tbere sbouId be power In Iaw to requIre a company to abandon
mIsIeadIng names or to trade under a mIsIeadIng name.
16.4 Tbe regIme Ior cbange oI name sbouId be careIuIIy revIewed. WbIIe
provIdIng tbe Ireedom to a company to cbange Its name It sbouId prevent
too Irequent a cbange oI name to prevent cbeatIng J mIsIeadIng oI
stakeboIdersJ Investors.
RestrIctIons on commencement oI busIness :
1?.1 CompanIes Act, 19S6 provIdes Ior restrIctIons on commencement
oI busIness by pubIIc companIes or exercIse oI any borrowIng powers,
unIess tbe requIrements oI capItaI subscrIptIon by tbe numbers oI tbe
company bave been met. AddItIonaIIy, tbere Is a requIrement Ior Issue oI
Commencement oI BusIness CertIIIcate by tbe RegIstrar oI CompanIes
(ROC).
1?.2 It appears tbat Issue oI a certIIIcate oI commencement oI busIness
wouId not be necessary sInce present CompanIes Act prescrIbes tbe
amount oI capItaI to be paId up ImmedIateIy aIter tbe regIstratIon. TbIs
sbouId be adequate to estabIIsb tbe borrowIng power oI tbe company. In
vIew oI tbIs, tbe requIrement oI obtaInIng a separate CertIIIcate oI
Commencement oI busIness Imposes avoIdabIe deIay and couId be
dIspensed wItb.
LImIted IIabIIIty PartnersbIp (LLP)
1S.1 In vIew oI tbe potentIaI Ior growtb oI tbe servIce sector,
requIrement oI provIdIng IIexIbIIIty to smaII enterprIses to partIcIpate In
joInt ventures and agreements tbat enabIe tbem to access tecbnoIogy
and brIng togetber busIness synergIes and to Iace tbe IncreasIng gIobaI
competItIon enabIed tbrougb WTO, etc., tbe IormatIon oI LImIted LIabIIIty
PartnersbIps (LLPs) sbouId be encouraged.
1S.2 It wouId be a suItabIe vebIcIe Ior partnersbIp among proIessIonaIs
wbo are aIready reguIated sucb as Company SecretarIes, Cbartered
Accountants, Cost Accountants, Lawyers, ArcbItects, EngIneers, Doctors
etc. However, It may aIso be consIdered Ior smaII enterprIses not seekIng
access to capItaI markets tbrougb IIstIng on tbe stock excbange.
1S.3 We recommend tbat a separate Act be brougbt about to IacIIItate
IImIted IIabIIIty partnersbIps. Tbe concept need not be addressed In
CompanIes Act.
LImItatIon on Number oI Partners specIIIed In tbe CompanIes Act.
19.1 Tbe CommIttee recognIzes tbat tbere are many Iorms oI
assocIatIon tbat wouId IacIIItate busIness operatIon. It aIso recognIzes
tbe reIevance oI proprIetorsbIp and partnersbIp IIrms In tbIs regard.
WbIIe tbe corporate Iorm oI organIzatIon wouId provIde greater cIarIty to
tbe stake boIders and entItIes InteractIng wItb tbe busIness IIrm, tbe
CompanIes Act need not compeI IImItatIons on otber Iorms oI
organIzatIons. TbIs sbouId be IeIt to be specIIIed or reguIated tbrougb tbe
respectIve IegIsIatIons reIatIng to sucb Iorms. TbereIore, tbere may be a
need Ior revIew oI tbe PartnersbIp Act. Tbe CompanIes Act bowever need
not make any prescrIptIons In tbIs regard.
19.2 TbereIore, provIsIons IImItIng tbe number oI partners as provIded
In tbe SectIon 11 oI tbe CompanIes Act sbouId be deIeted. Necessary
provIsIons In tbIs regard may be IncIuded In tbe PartnersbIp Act or otber
reIated Acts.
SpecIaI RegIme Ior CbarItabIe and otber CompanIes (Sec.2S)
20.1 Tbere Is a need Ior transparency In IunctIonIng oI sucb
companIes. Objects oI sucb companIes sbouId be cIearIy deIIned.
20.2 Framework Ior remuneratIon sbouId be sucb tbat It does not
resuIt In sIpbonIng oI tbe company's Iunds.
SImpIIIIcatIon oI tbe regIme Ior exIt oI companIes Irom tbe RegIster
oI CompanIes
21.1 Tbe CommIttee noted tbat tbe RegIster oI CompanIes IncIudes a
very Iarge number oI deIunct companIes. Tbere Is a cost assocIated wItb
carryIng tbe InIormatIon oI sucb companIes on tbe pubIIc regIster. TbIs
cost can be avoIded.
21.2 Tbe procedure Ior a company seekIng exIt Irom tbe RegIster oI
CompanIes needs to be sImpIIIIed. TbIs sbouId not requIre operatIon oI
specIaI scbemes Ior provIdIng exIt to companIes tbrougb reIaxatIon oI
ruIes. TbIs sbouId be possIbIe tbrougb normaI operatIon oI tbe Iaw. Tbe
Iaw sbouId enabIe RegIstrars oI CompanIes to use suo moto powers to
strIke oII names oI deIunct companIes (a company wbIcb Is not carryIng
on busIness or any operatIon) eIIectIveIy. Tbey sbouId aIso be empowered
to strIke oII tbe names oI companIes Irom tbe RegIster oI CompanIes on
appIIcatIon Ior tbe purpose by tbe company dIrectors or majorIty oI tbem.
Tbe appIIcatIon Iorm to be prescrIbed sbouId be sImpIe. On receIpt oI
sucb appIIcatIon, RegIstrar sbouId Issue a pubIIc notIce about bIs
IntentIon to exercIse tbe power to strIke oII tbe name oI tbe company and
aIso InvIte pubIIc comments on wby be sbouId not do so, to be IndIcated
In a tIme-bound manner, aIter wbIcb consent may be presumed.
21.3 Sucb appIIcatIon may bowever not be made II at any tIme durIng
tbe prevIous 6 montbs, tbe company bas cbanged Its name, traded or
otberwIse carrIed on any busIness. Tbe orders by tbe RegIstrar strIkIng
oII tbe name oI tbe company Irom tbe RegIster sbouId agaIn be Issued In
tbe Iorm oI a pubIIc notIce and sbouId take automatIc eIIect on expIry oI
prescrIbed perIod. PubIIc notIce may be gIven by way oI pIacIng on tbe
notIce board J web sIte oI tbe regIstratIon autborItIes and sent to tbe
company as weII as to Its Iast known dIrectors by regIstered post.
Cbapter IV : Management and Board Governance
1. Tbe Board oI DIrectors bas to exercIse strategIc oversIgbt over
busIness operatIons wbIIe dIrectIy measurIng and rewardIng
management's perIormance. SImuItaneousIy tbe Board bas to ensure
compIIance wItb tbe IegaI Iramework, IntegrIty oI IInancIaI accountIng
and reportIng systems and credIbIIIty In tbe eyes oI tbe stakeboIders
tbrougb proper and tImeIy dIscIosures.
2. Board's responsIbIIItIes InberentIy demand tbe exercIse oI
judgment. TbereIore tbe Board necessarIIy bas to be vested wItb a
reasonabIe IeveI oI dIscretIon. WbIIe corporate governance may comprIse
oI botb IegaI and bebavIoraI norms, no wrItten set oI ruIes or Iaws can
contempIate every sItuatIon tbat a dIrector or tbe board coIIectIveIy may
IInd ItseII In. BesIdes, exIstence oI wrItten norms In ItseII cannot prevent
a dIrector Irom abusIng bIs posItIon wbIIe goIng tbrougb tbe motIons oI
proper deIIberatIon prescrIbed by wrItten norms. TbereIore bebavIouraI
norms tbat IncIude InIormed and deIIberatIve decIsIon makIng, dIvIsIon
oI autborIty, monItorIng oI management and even banded perIormance oI
dutIes owed to tbe company as weII as tbe sbareboIders are equaIIy
Important.
3. However In a sItuatIon wbere companIes bave grown In sIze and
bave Iarge pubIIc Interest potentIaI, It Is Important to prescrIbe an
approprIate basIc Iramework tbat needs to be compIIed wItb by aII
companIes wItbout sacrIIIcIng tbe basIc requIrement oI aIIowIng exercIse
oI dIscretIon and busIness judgment In tbe Interest oI tbe company and
tbe stakeboIders. Tbe IIabIIIty oI compIIance bas to be seen In context oI
tbe common Iaw Iramework prevaIent In tbe country aIong wItb a wIde
varIety oI ownersbIp structures IncIudIng IamIIy run or controIIed or
otberwIse cIoseIy beId companIes.
Board oI DIrectors
4. ObIIgatIon to constItute a Board oI DIrectors :-
4.1 Tbe Board oI DIrectors oI a company Is centraI to Its decIsIon
makIng and governance process. Its IIabIIIty to ensure compIIance wItb
tbe Iaw underpIns tbe corporate governance structure In a company, tbe
aspIratIons oI tbe promoters and tbe rIgbts oI stakeboIders, aII oI wbIcb
get artIcuIated tbrougb tbe actIons oI tbe Board. Tbere sbouId be an
obIIgatIon on tbe part oI a Company to constItute and maIntaIn a Board
oI DIrectors as per tbe provIsIons oI tbe Iaw and to dIscIose partIcuIars oI
tbe DIrectors so appoInted In tbe pubIIc domaIn tbrougb statutory IIIIng
oI InIormatIon.
4.2 Sucb obIIgatIon sbouId extend to tbe accuracy oI tbe InIormatIon
and Its beIng updated reguIarIy as weII as on occurrence oI specIIIc
events sucb as appoIntment, resIgnatIon, removaI or any cbange In
prescrIbed partIcuIars oI DIrectors.
MInImum and MaxImum Number oI DIrectors
S.1 Law sbouId provIde Ior mInImum number oI dIrectors necessary
Ior varIous cIasses oI companIes. Tbe present prescrIbed requIrement Is
consIdered adequate. However new kInds oI companIes wIII evoIve to
keep pace wItb emergIng busIness requIrements. Law sbouId tbereIore
IncIude an enabIIng provIsIon to prescrIbe specIIIc categorIes oI
companIes Ior wbIcb a dIIIerent mInImum number may be IaId down
S.2 Tbe obIIgatIon oI maIntaInIng tbe requIred mInImum number oI
dIrectors on tbe Board sbouId be tbat oI tbe Company
S.3 Tbere need not be any IImIt to tbe maxImum numbers oI dIrectors
tbat a Company may bave. LImIt to maxImum number oI dIrectors
sbouId be decIded by tbe company byJIn tbe ArtIcIes oI AssocIatIon.
S.4 Every Company sbouId bave at Ieast one dIrector resIdent In IndIa
to ensure avaIIabIIIty In case any Issue arIses wItb regard to tbe
accountabIIIty oI tbe Board.
Manner oI appoIntment, removaI and resIgnatIon oI DIrectors
6.1 Tbe uItImate responsIbIIIty to appoIntJremove dIrectors sbouId be
tbat oI tbe Company (SbareboIders). II tbe DIrectors tbemseIves are
IegaIIy dIsquaIIIIed to boId dIrectorsbIps, tbey sbouId bave an equaI
responsIbIIIty Ior dIscIosIng tbe Iact and reasons Ior tbeIr
dIsquaIIIIcatIon.
6.2 Government sbouId not Intervene In tbe process oI appoIntment
and removaI oI DIrectors In non-Government companIes. It Is Important
tbat roIe and powers oI Government, under tbe present provIsIons to
Intervene In appoIntment oI DIrectors be revIewed and revIsed, vestIng
tbe responsIbIIIty on tbe sbareboIders oI tbe company.
6.3 PresentIy, as per tbe provIsIons oI ScbeduIe XIII to tbe CompanIes
Act, It Is necessary to obtaIn tbe approvaI oI tbe CentraI Government Ior
appoIntIng a person wbo Is not resIdent In IndIa, I.e. a person wbo bas
not been stayIng In IndIa Ior a contInuous perIod oI not Iess tban 12
montbs ImmedIateIy precedIng tbe date oI bIs appoIntment as a
managerIaI person.
6.4 In today's competItIve envIronment, It may be necessary Ior a
company to appoInt a person as ManagIng DIrector or WboIe-tIme
DIrector or Manager wbo Is best suIted Ior tbe job". Tbe Company
sbouId, tbereIore, bave an optIon to cboose sucb person not onIy Irom
wItbIn IndIa, but Irom otber countrIes as weII. In tbe IIgbt oI tbe above, It
Is recommended tbat requIrement oI obtaInIng tbe CentraI Government's
approvaI under tbe CompanIes Act Ior sucb non-resIdent managerIaI
person sbouId be done away wItb. Sucb person wouId contInue to be
subject to passportJvIsa, RBI and otber Government requIrements.
6.S Duty to InIorm ROC oI partIcuIars regardIng dIrectors IncIudIng
tbeIr appoIntment and removaIJ resIgnatIonJ deatb, or otberwIse ceasIng
to be DIrectors sbouId be wItb tbe company. Every DIrector, In turn,
sbouId be requIred to dIscIose bIs resIdence and otber partIcuIars, as
may be prescrIbed, to tbe Company.
6.6 ResIgnatIon sbouId be recognIzed as a rIgbt to be exercIsed by tbe
dIrector and sbouId be consIdered In IIgbt oI tbe recommendatIons
IndIcated at para 21.1-21.S beIow).
Age IImIt Ior DIrectors
?.1 No age IImIt need be prescrIbed as per Iaw. Tbere sbouId be
adequate dIscIosure oI age In tbe company's documents. It sbouId be tbe
duty oI tbe DIrector to dIscIose bIs age correctIy.
?.2 In case oI a pubIIc company, appoIntment oI dIrectors beyond a
prescrIbed age say ?0 years, sbouId be subject to a specIaI resoIutIon by
tbe sbareboIders wbIcb sbouId aIso prescrIbe bIs term. ContInuatIon oI a
dIrector above tbe age oI ?0 years, beyond sucb term, sbouId be subject
to a Iresb resoIutIon.
Independent DIrectors
Tbe Concept and Numbers oI Independent DIrectors
S.1 Tbe CommIttee Is oI tbe vIew tbat gIven tbe responsIbIIIty oI tbe
Board to baIance varIous Interests, tbe presence oI Independent dIrectors
on tbe Board oI a Company wouId Improve corporate governance. TbIs Is
partIcuIarIy Important Ior pubIIc companIes or companIes wItb a
sIgnIIIcant pubIIc Interest. WbIIe dIrectors representIng specIIIc Interests
wouId be conIIned to tbe perspectIve dIctated by sucb Interests,
Independent dIrectors wouId be abIe to brIng an eIement oI objectIvIty to
Board process In tbe generaI Interests oI tbe company and tbereby to tbe
beneIIt oI mInorIty Interests and smaIIer sbareboIders. Independence,
tbereIore, Is not to be vIewed mereIy as Independence Irom Promoter
Interests but Irom tbe poInt oI vIew oI vuInerabIe stakeboIders wbo
cannot otberwIse get tbeIr voIce beard. Law sbouId, tbereIore, recognIze
tbe prIncIpIe oI Independent dIrectors and speII out tbeIr roIe,
quaIIIIcatIons and IIabIIIty. However requIrement oI presence oI
Independent dIrectors may vary dependIng on tbe sIze and type oI
company. Tbere cannot be a sIngIe prescrIptIon to suIt aII companIes.
TbereIore number oI Independent dIrectors may be prescrIbed tbrougb
ruIes Ior dIIIerent categorIes oI companIes. However a deIInItIon oI
Independent dIrector sbouId be Incorporated In tbe Company Iaw.
S.2 In generaI, In vIew oI tbe CommIttee a mInImum oI one tbIrd oI tbe
totaI number oI dIrectors as Independent dIrectors sbouId be adequate
Ior a company bavIng sIgnIIIcant pubIIc Interest, IrrespectIve oI wbetber
tbe CbaIrman Is executIve or non-executIve, Independent or not. In tbe
IIrst Instance tbIs requIrement sbouId be extended to pubIIc IIsted
companIes and companIes acceptIng pubIIc deposIts. Tbe requIrements
Ior otber types oI companIes may be consIdered In due course.
S.3 In certaIn cases ReguIators may specIIy requIrement oI
Independent DIrectors Ior companIes IaIIIng wItbIn tbeIr reguIatory
domaIn. Sucb ReguIators may specIIy tbe number wbere provIsIon Ior
appoIntment oI Independent DIrectors bas been extended to a partIcuIar
cIass oI companIes under tbe CompanIes Act.
S.4 NomInee dIrectors appoInted by any InstItutIon or In pursuance oI
any agreement or Government appoIntees representIng Government
sbareboIdIng sbouId not be deemed to be Independent dIrectors. A vIew
poInt was expressed tbat nomInees oI BanksJFInancIaI InstItutIons (FIs)
on tbe Boards oI companIes may be treated as Independent". AIter
detaIIed deIIberatIon, tbe CommIttee took tbe vIew tbat sucb nomInees
represented specIIIc Interests and couId not, tbereIore, be correctIy
termed as Independent.
S.S Tbere sbouId be no requIrement Ior a subsIdIary company to
necessarIIy co-opt an Independent dIrector oI tbe boIdIng company as an
Independent dIrector on Its board.
DeIInItIon oI Independent DIrectorJ AttrIbutes oI Independent
DIrectors
9.1 Tbe CommIttee was oI tbe vIew tbat deIInItIon oI an Independent
DIrector sbouId be provIded In Iaw.
9.2 Tbe expressIon 'Independent dIrector' sbouId mean a non-
executIve dIrector oI tbe company wbo :-
a) Apart Irom receIvIng dIrector's remuneratIon, does not bave, and
none oI bIs reIatIves or IIrmsJcompanIes controIIed by bIm bave, any
materIaI pecunIary reIatIonsbIps or transactIons wItb tbe company,
Its promoters, Its dIrectors, Its senIor management or Its boIdIng
company, Its subsIdIarIes and assocIate companIes wbIcb may aIIect
Independence oI tbe dIrector. For tbIs purpose controI" sbouId be
deIIned In Iaw.
b) Is not, and none oI bIs reIatIves Is, reIated to promoters or
persons occupyIng management posItIons at tbe board IeveI or at one
IeveI beIow tbe board;
c) Is not aIIIIIated to any non-proIIt organIzatIon tbat receIves
sIgnIIIcant IundIng Irom tbe company, Its promoters, Its dIrectors, Its
senIor management or Its boIdIng or subsIdIary company;
d) bas not been, and none oI bIs reIatIves bas been, empIoyee oI tbe
company In tbe ImmedIateIy precedIng year;
e) Is not, and none oI bIs reIatIves Is, a partner or part oI senIor
management (or bas not been a partner or part oI senIor
management) durIng tbe precedIng one year, oI any oI tbe IoIIowIng:-
I] tbe statutory audIt IIrm or tbe InternaI audIt IIrm tbat Is
assocIated wItb tbe company, Its boIdIng and subsIdIary
companIes;
II) tbe IegaI IIrm(s) and consuItIng IIrm(s) tbat bave a materIaI
assocIatIon wItb tbe company, Its boIdIng and subsIdIary
companIes;
I) Is not, and none oI bIs reIatIves Is, a materIaI suppIIer, servIce
provIder or customer or a Iessor or Iessee oI tbe company, wbIcb may
aIIect Independence oI tbe dIrector;
g) Is not, and none oI bIs reIatIves Is, a substantIaI sbareboIder oI
tbe company I.e. ownIng two percent or more oI votIng power.
9.3 ExpIanatIon :-
For tbe above purposes :-
(I) AIIIIIate" sbouId mean a promoter, dIrector or empIoyee oI
tbe non-proIIt organIzatIon.
(II) ReIatIve" sbouId mean tbe busband, tbe wIIe, brotber or
sIster or one ImmedIate IIneaI ascendant and aII IIneaI
descendents oI tbat IndIvIduaI wbetber by bIood, marrIage or
adoptIon.
(III) SenIor management" sbouId mean personneI oI tbe
company wbo are members oI Its core management team
excIudIng Board oI DIrectors. NormaIIy, tbIs wouId comprIse aII
members oI management one IeveI beIow tbe executIve dIrectors,
IncIudIng aII IunctIonaI beads.
(Iv) SIgnIIIcant FundIng" - SbouId mean 2S% or more oI
IundIng oI tbe Non ProIIt OrganIzatIon.
(v) AssocIate Company" - AssocIate sbaII mean a company
wbIcb Is an assocIate" as deIIned In AccountIng Standard (AS) 23,
AccountIng Ior Investments In AssocIates In ConsoIIdated
FInancIaI Statements", Issued by tbe InstItute oI Cbartered
Accountants oI IndIa.
Mode oI AppoIntment oI Independent DIrectors
10. Tbe appoIntment oI Independent dIrectors sbouId be made by tbe
company Irom amongst persons, wbo In tbe opInIon oI tbe company, are
persons wItb IntegrIty, possessIng reIevant expertIse and experIence and
wbo satIsIy tbe above crIterIa Ior Independence.
'MaterIaI' TransactIons
11.1 Tbe term materIaI pecunIary reIatIonsbIp sbouId aIso be cIearIy
deIIned Ior tbe purpose oI determInIng wbetber tbe dIrector Is
Independent or not. Tbe concept oI MaterIaIIty' Is reIevant Irom tbe
recIpIent's poInt oI vIew and not Irom tbat oI tbe company.
11.2 Tbe term 'materIaI' needs to be deIIned In terms oI percentage. In
vIew oI tbe CommIttee, 10% or more oI recIpIent's consoIIdated gross
revenue J receIpts Ior tbe precedIng year sbouId Iorm a materIaI
condItIon aIIectIng Independence.
11.3 For determInIng materIaIIty oI pecunIary reIatIonsbIp, transactIons
wItb an entIty In wbIcb tbe dIrector or bIs reIatIves boId more tban 2%
sbareboIdIng, sbouId aIso be consIdered.
11.4 An Independent dIrector sbouId make a seII-decIaratIon In Iormat
prescrIbed to tbe Board tbat be satIsIIes tbe IegaI condItIons Ior beIng an
Independent dIrector. Sucb decIaratIon sbouId be gIven at tbe tIme oI
appoIntment oI tbe Independent dIrector and at tbe tIme oI cbange In
status.
11.S Board sbouId dIscIose In tbe DIrector's Report tbat Independent
dIrectors bave gIven seII-decIaratIon and tbat aIso In tbe judgment oI tbe
Board tbey are Independent. Tbe Board sbouId aIso dIscIose tbe basIs Ior
determInatIon tbat a partIcuIar reIatIonsbIp Is not materIaI.
Number OI DIrectorsbIps and AIternate DIrectors
12.1 Tbe totaI number oI DIrectorsbIps any one IndIvIduaI may boId
sbouId be IImIted to a maxImum oI 1S.
12.2 Tbe number oI aIternate dIrectorsbIps a person boIds sbouId IaII
wItbIn tbe overaII IImIt oI dIrectorsbIps (TotaI 1S). TbIs Is necessItated so
tbat tbe same person Is not an aIternate dIrector In a Iarge number oI
companIes wbIcb may resuIt In deIIcIency In dIscbarge oI dutIes.
12.3 An IndIvIduaI sbouId not be appoInted as an aIternate dIrector Ior
more tban one dIrector In tbe same company.
12.4 An aIternate dIrector may be aIIowed to be appoInted Ior an
Independent dIrector. However, sucb aIternate dIrector sbouId aIso be
an Independent dIrector.
12.S Same IIabIIIty structure as wouId be appIIcabIe to Independent
DIrectors sbouId aIso appIy to AIternate DIrectors to Independent
DIrectors.
DIrectors' RemuneratIon
13. Tbere Is a need Ior comprebensIve revIsIon oI provIsIons oI tbe
CompanIes Act 19S6 reIatIng to payment oI managerIaI remuneratIon.
13.1 CompanIes need to adopt remuneratIon poIIcIes tbat attract and
maIntaIn taIented and motIvated dIrectors and empIoyees so as to
encourage enbanced perIormance oI tbe company. DecIsIon on bow to
remunerate dIrectors sbouId be IeIt to tbe Company. However tbIs sbouId
be transparent and based on prIncIpIes tbat ensure IaIrness,
reasonabIeness and accountabIIIty.
13.2 It Is Important tbat tbere sbouId be a cIear reIatIonsbIp between
responsIbIIIty and perIormance vIs--vIs remuneratIon, and tbat tbe
poIIcy underIyIng DIrectors' remuneratIon be artIcuIated, dIscIosed and
understood by InvestorsJ stakeboIders.
13.3 PresentIy managerIaI remuneratIon Is subject to Government
approvaIs, botb In terms oI totaI remuneratIon permIssIbIe and tbrougb
specIIIed sub-IImIts. In vIew oI tbe CommIttee, empbasIs sbouId be more
on dIscIosures (botb on quantIty and quaIIty) ratber tban provIdIng
IImItsJceIIIngs.
13.4 Tbe CommIttee examIned tbe reIevance oI Government approvaIs
on managerIaI remuneratIon and Its appIIcatIon to any cIass or cIasses oI
companIes. It was noted tbat In tbe current competItIve envIronment,
wbere IndIan companIes wouId be competIng Ior specIaIIzed man-power
gIobaIIy, It may not be IeasIbIe or approprIate Ior tbe Government to
Intervene In sucb decIsIons. Tbe CommIttee acknowIedged tbe
outstandIng quaIIty oI IndIan proIessIonaIs and tbe bIgb esteem and
remuneratIon commanded by tbem InternatIonaIIy. Tbe InternatIonaI
practIce does not Impose IImIts on managerIaI remuneratIon. A restrIctIve
regIme based on Government approvaIs, apart Irom IntroducIng deIays
may aIso resuIt In best and tbe brIgbtest movIng away across borders In
searcb oI bIgber compensatIon.
13.S Tbe CommIttee IeIt tbat tbe Issue oI remuneratIon bad to be
decIded by tbe sbareboIders In context oI tbe cIrcumstances oI tbe
company. To enabIe proper decIsIon makIng In tbIs regard, It was
Important to subject tbIs aspect to proper corporate governance
processes on tbe basIs oI correct dIscIosures. TbereIore, tbe CommIttee
IeIt tbat tbIs decIsIon need not be taken by tbe Government on bebaII oI
tbe company but sbouId be IeIt to Its sbareboIders wbose approvaI
sbouId necessarIIy be taken. Sucb approvaI sbouId take Into account tbe
recommendatIons oI RemuneratIon CommIttee, wbere prescrIbed or In
exIstence, tbrougb tbe Board.
13.6 However, wbat comprIses remuneratIon sbouId be provIded Ior
under tbe RuIes to tbe Act. No quantIIIed IImIts need be prescrIbed.
RemuneratIon receIved by tbe dIrectors oI tbe boIdIng company Irom
subsIdIary companIes need not be barred but sbouId be dIscIosed In tbe
AnnuaI Report oI tbe boIdIng company.
13.? In case oI Inadequacy oI proIIts (or no proIIts), tbe company
sbouId be aIIowed to pay remuneratIon as recommended by
RemuneratIon CommIttee, wbere sucb CommIttee Is prescrIbed or exIsts,
tbrougb tbe Board and approved by sbareboIders.
13.S Tbougb tbe CommIttee bas separateIy recommended tbat tbe
Issue oI managerIaI remuneratIon sbouId be determIned by tbe
sbareboIders onIy, tbe CommIttee aIso IeIt tbat tbe exIstIng metbod oI
computatIon oI net proIIts Ior tbe purpose oI managerIaI remuneratIon,
In tbe manner IaId down In SectIons 349 and 3S0 oI tbe Act, sbouId be
done away wItb sInce tbe current provIsIons oI tbe CompanIes Act
adequateIy ensure tbat a true and IaIr pIcture oI tbe company's proIIt Is
presented.
SIttIng Fees to Non-ExecutIve DIrectors
14. Tbere need not be any IImIt prescrIbed to sIttIng Iees payabIe to
non-executIve dIrectors. Tbe company, wItb tbe approvaI oI sbareboIders
may decIde tbe sIttIng Iees payabIe to sucb category oI dIrectors and
sbouId dIscIose It In Its DIrectors' RemuneratIon Report IormIng part oI
tbe AnnuaI Report oI tbe company.
DIscIosure oI RemuneratIon
1S.1 AII type oI companIes sbouId be requIred to dIscIose tbe
DIrectors'JManagerIaI remuneratIon In tbe DIrectors' RemuneratIon
Report as a part oI tbe DIrectors' Report.
1S.2 Tbe InIormatIon In tbe DIrectors' RemuneratIon Report may
contaIn aII eIements oI remuneratIon package oI dIrectors, IncIudIng
severance package and otber detaIIs IIke company's poIIcy on dIrectors'
remuneratIon Ior tbe IoIIowIng year, perIormance grapb etc.
RemuneratIon oI Non-ExecutIve DIrectors
16. A company should also be able to decide on remuneration to non-
executive directors including independent directors. This may be in the form of
SIttIng Iees Ior Board and commIttee meetIngs attended pbysIcaIIy or
partIcIpated In eIectronIcaIIy and J or ProIIt reIated commIssIons
Board CommIttees
1?. WbIIe recognIzIng tbe need Ior dIscretIon oI tbe Board to manage
and govern tbe company tbrougb coIIectIve responsIbIIIty, tbe CommIttee
recognIzes tbe need Ior Iocus on certaIn core areas reIevant to Investor J
stakeboIder Interests. In sucb areas, Iaw may mandate tbe requIrement
oI constItutIon oI specIIIc CommIttees oI tbe Board wbose
recommendatIons wouId be avaIIabIe to tbe Board wbIIe takIng tbe IInaI
decIsIons. Tbese CommIttees are as IoIIows :-
AudIt CommIttee Ior AccountIng and FInancIaI matters
1?.1 Tbe CommIttee recommends tbat :-
(a) MajorIty oI tbe DIrectors to be Independent dIrectors II
tbe Company Is requIred to appoInt Independent
DIrectors;
(b) CbaIrman oI tbe CommIttee aIso to be Independent;
(c) At Ieast one member oI AudIt CommIttee to bave
knowIedge oI IInancIaI management or audIt or
accounts;
(d) Tbe CbaIrman oI tbe AudIt CommIttee sbouId be
requIred to attend tbe AnnuaI GeneraI MeetIng oI tbe
company to provIde any cIarIIIcatIon on matters
reIatIng to audIt. II be Is unabIe to attend due to
cIrcumstances beyond bIs controI, any otber member
oI tbe AudIt CommIttee may be autborIzed by bIm to
attend tbe AnnuaI GeneraI MeetIng on bIs bebaII;
(e) Tbe recommendatIon oI tbe AudIt CommIttee II overruIed
by tbe Board, sbouId be dIscIosed In tbe DIrectors'
Report aIong wItb tbe reasons Ior overruIIng.
StakeboIders' ReIatIonsbIp CommIttee
1?.2 CompanIes bavIng a combIned sbareboIderJdeposIt boIderJ
debenture boIder base oI a tbousand or more sbouId be requIred to
constItute a Stake HoIders ReIatIonsbIp CommIttee to monItor redressaI
oI tbeIr grIevances
1?.3 Tbe CommIttee sbouId be cbaIred by a Non-ExecutIve dIrector.
RemuneratIon CommIttee
1?.4 Tbere sbouId be an obIIgatIon on tbe Board oI a pubIIc IIsted
company, or any company acceptIng deposIts, provIded as a part oI
substantIve Iaw, to constItute a RemuneratIon CommIttee, comprIsIng
non-executIve dIrectors IncIudIng at Ieast one Independent DIrector In
tbe case oI a company wbere Independent dIrectors bave been
prescrIbed. In sucb cases, CbaIrman oI tbe CommIttee sbouId be an
Independent dIrector. SmaII companIes may be exempted Irom sucb a
requIrement.
1?.S Tbe RemuneratIon CommIttee wIII determIne tbe company's poIIcy
as weII as specIIIc remuneratIon packages Ior Its managIngJexecutIve
dIrectorsJsenIor management. Tbe CbaIrman or In bIs absence at Ieast
one member oI tbe RemuneratIon CommIttee sbouId be present In tbe
GeneraI MeetIng to answer sbareboIders' querIes.
DutIes And ResponsIbIIItIes OI DIrectors
1S.1 InternatIonaI practIce (partIcuIarIy In U.K.) recognIzes a very wIde
spectrum oI dutIes to be dIscbarged by dIrectors oI a company. Tbere Is
an obIIgatIon oI obedIence to tbe constItutIon and decIsIons oI tbe
company IawIuIIy taken under It, or under ruIes oI Iaw permIttIng sucb
decIsIons to be taken, tbe duty oI IoyaIty towards tbe company and, In
good IaItb, to promote Its success to tbe beneIIt oI members as a wboIe,
to exercIse Independence oI judgment aIong wItb care, skIII and dIIIgence
In exercIse oI dutIes, to dIscIose transactIons InvoIvIng conIIIct oI Interest
and seek sbareboIders approvaI as reIevant, not to expIoIt company
assets or beneIIts Irom tbIrd partIes Ior personaI purposes, tbe duty oI
specIaI care II a company Is unabIe to pay Its debts or Is IacIng a IIkeIy
prospect oI an InsoIvent sItuatIon. Tbe questIon Is wbetber aII sucb
dutIes, and more, can be recognIzed In Iaw.
1S.2 Tbe CommIttee Is oI tbe vIew tbat tbIs aspect sbouId be exposed to
a tborougb debate. Tbe Iaw may IncIude certaIn dutIes Ior dIrectors, wItb
cIvII consequences to IoIIow Ior non-perIormance. However, tbe Iaw
sbouId provIde onIy an IncIusIve, and not exbaustIve IIst In vIew oI tbe
Iact tbat no ruIe oI unIversaI appIIcatIon can be IormuIated as to tbe
dutIes oI tbe dIrectors.
1S.3 CertaIn basIc dutIes sbouId be speIt out In tbe Act ItseII sucb as
(a) duty oI care and dIIIgence;
(b) exercIse oI powers In good IaItb, I.e., dIscbarge oI dutIes In tbe
best Interest oI tbe company, no Improper use oI posItIon and
InIormatIon to gaIn an advantage Ior tbemseIves or someone eIse;
(c) duty to bave regard to tbe Interest oI tbe empIoyees, etc.
DIsquaIIIIcatIon oI DIrectors
19.1 Tbe condItIons Ior dIsquaIIIIcatIon oI a dIrector sbouId be
prescrIbed In tbe Act ItseII as tbey reIate to tbe substantIve Iaw and may
not requIre mucb cbange once tbe Iaw Is Iramed.
19.2 DIrector proposed to be appoInted sbouId be requIred to gIve a
decIaratIon to tbe Board tbat be Is not dIsquaIIIIed to be appoInted as a
dIrector under provIsIons oI tbe Act.
19.3 ProvIsIon oI SectIon 2?4 (1) (g) oI tbe present CompanIes Act,
prescrIbIng tbe dIs-quaIIIIcatIons oI dIrectors, Inter aIIa, provIdes tbat a
person Is dIsquaIIIIed Ior beIng appoInted as a dIrector In otber
companIes Ior a perIod oI IIve years, II sucb person Is a dIrector oI a
pubIIc company wbIcb bas IaIIed to repay Its deposIts or Interest tbereon
on due date or redeem Its debentures on due date or pay dIvIdend and
sucb IaIIure contInues Ior one year or more. TbIs dIsquaIIIIcatIon sbouId
be retaIned.
19.4 In case oI sIck companIes wbIcb bave deIauIted on payment oI
deposItsJdebentures etc., It Is necessary to re-constItute Its Board oI
DIrectors Ior tbe purpose oI rebabIIItatIon oI sucb companIes. Tbe new
dIrectors wbo joIn boards oI sucb companIes are IIkeIy to attract tbe
dIsquaIIIIcatIon under tbe present SectIon 2?4 (1) (g) oI tbe CompanIes
Act. In order to encourage quaIIIIed proIessIonaIs to joIn Boards oI sucb
companIes, It Is necessary to amend SectIon 2?4 (1) (g) oI tbe CompanIes
Act to provIde tbat sucb dIsquaIIIIcatIon wouId not be appIIcabIe Ior new
dIrectors joInIng tbe boards oI sucb sIck companIes wbIcb bave IaIIed to
repay tbeIr deposIts, debentures etc.
VacatIon oI oIIIce by tbe DIrectors
20. FaIIure to attend Board MeetIngs Ior a contInuous perIod oI one
year sbouId be made a ground Ior vacatIon oI oIIIce by tbe concerned
dIrector regardIess oI Ieave oI absence beIng gIven by tbe Board Ior tbe
meetIngs beId durIng tbe year.
ResIgnatIon OI DIrectors
21.1 ResIgnatIon sbouId be treated as a cboIce to be exercIsed by a
dIrector. In case oI resIgnatIon, It sbouId be suIIIcIent Ior tbe dIrector to
estabIIsb prooI oI deIIvery oI sucb InIormatIon wItb tbe company to
dIscbarge bIm oI any IIabIIIty In tbIs regard, or oI events takIng pIace
subsequent to bIs bavIng IntImated bIs decIsIon to resIgn. A copy oI tbe
resIgnatIon Ietter sbouId aIso be Iorwarded to tbe ROC wItbIn a
prescrIbed perIod by tbe DIrector aIong wItb prooI oI deIIvery to tbe
company. TbIs Is necessary to avoId mIsuse oI tbIs cboIce tbrougb
retroactIve communIcatIons.
21.2 Tbere sbouId not be any requIrement on tbe part oI tbe company to
IormaIIy accept sucb resIgnatIon Ior It to be eIIectIve. SbouId become
eIIectIve Irom tbe date oI resIgnatIon, provIded tbe IIIIng wItb tbe ROC Is
wItbIn tbe prescrIbed perIod.
21.3 Tbere sbouId be a specIIIc duty on tbe part oI tbe company to IIIe
InIormatIon wItb ROC oI a dIrector's resIgnatIon wItbIn a prescrIbed
perIod oI tIme oI Its beIng receIved.
21.4 ProvIsIon sbouId be made tbat II tbe number oI dIrectors and tbe
addItIonaI dIrectors IaII beIow tbe mInImum strengtb IIxed Ior tbe Board
under tbe Iaw, due to tbe resIgnatIon oI dIrector(s), tbe remaInIng
dIrectors can co-opt one or more persons as addItIonaI dIrectors.
21.S II tbere Is a resIgnatIon by aII dIrectors, tben tbe promoters or
persons bavIng controIIIng Interest sbouId eItber nomInate tbe mInImum
requIred number oI dIrectors or II tbey do not, tbey sbouId be deemed as
dIrectors In tbe IntervenIng perIod, tIII tbe generaI body oI tbe company
appoInts new dIrectors. ControIIIng Interest" sbouId be deIIned In Iaw.
However, In case oI companIes wItbout any IdentIIIabIe promoters, tbe
Iaw wIII need to specIIy tbe manner oI seIectIon oI dIrectors.
21.6 Tbe promoters oI a company sbouId be IdentIIIed by eacb
company at tbe tIme oI IncorporatIon and In Its AnnuaI Return.
21.? In tbe event oI aII dIrectors vacatIng oIIIce, tbe promoters sbouId
boId oIIIce as dIrectors tIII tbe next AGM wbereIn new dIrectors sbouId be
appoInted.
21.S To prevent dIrectors Irom dIvertIng Iunds oI companIes, It Is
necessary to Iay down some responsIbIIIty on dIrectors wbo are
appoInted on tbe Boards oI companIes wbIcb come out wItb pubIIc
Issues. SometImes, due to presence oI ceIebrIty dIrectors, tbe generaI
pubIIc gets attracted to Invest wItbout beed to tbe merIts oI tbe Issue.
TbIs Is partIcuIarIy so wben sucb personaIItIes are gIven a 'Iarger-tban-
IIIe' Image by tbe medIa. Tbe IndIan pubIIc, newIy exposed to capItaI
market may easIIy be mIsIed. CompanIes may aIso raIse Iunds bebInd
sucb a veneer and Iater on not use tbem Ior tbe avowed purpose.
TbereIore, to Iay down more responsIbIIItIes on companIes seekIng pubIIc
subscrIptIon, tbey sbouId be requIred to preserve tbe composItIon oI tbe
Board oI DIrectors Ior two years or tIII tbe procured Iunds are utIIIzed In
accordance wItb tbe objectIves stated In tbe prospectus, wbIcbever Is
earIIer. In case tbe dIrector resIgns Irom sucb a company, bIs IIabIIIty
under tbe prospectus IncIudIng utIIIzatIon oI Iunds sbouId contInue tIII
tbe above perIod.
LIabIIItIes OI Independent And Non-ExecutIve DIrectors
22. A non-executIveJIndependent dIrector sbouId be beId IIabIe onIy In
respect oI any contraventIon oI any provIsIons oI tbe Act wbIcb bad taken
pIace wItb bIs knowIedge (attrIbutabIe tbrougb Board processes) and
wbere be bas not acted dIIIgentIy, or wItb bIs consent or connIvance.
KnowIedge Test
22.1 II tbe Independent dIrector does not InItIate any actIon upon
knowIedge oI any wrong, sucb dIrector sbouId be beId IIabIe.
22.2 KnowIedge sbouId IIow Irom tbe processes oI tbe Board.
AddItIonaIIy, upon knowIedge oI any wrong, IoIIow up actIon J dIssent oI
sucb Independent dIrectors Irom tbe commIssIon oI tbe wrong sbouId be
recorded In tbe mInutes oI tbe board meetIng.
DIrectors and OIIIcers (D&O) Insurance
23. Insurance Ior key-man and Ior key dIrectors and oIIIcers oI
companIes by means oI generaI Insurance poIIcIes may be taken by
companIes. DIrectors and OIIIcers (D&O) Insurance Is a means by wbIcb
companIes and tbeIr dIrectorsJ oIIIcers may seek to mItIgate potentIaI
personaI IIabIIIty. Insurance aIds Independence as tbe dIrectors are not
dependent on tbe company. AccordIngIy, S. 201 oI tbe CompanIes Act
sbouId be modIIIed to bave tbe enabIIng provIsIon Ior provIdIng
Insurance J IndemnIIIcatIon In case no wrongIuI act Is estabIIsbed. Tbe
Insurance premIum paId by tbe company Ior sucb a poIIcy need not be
treated as a perquIsIte or Income In tbe bands oI dIrector. However, II tbe
wrongIuI act oI tbe dIrector Is estabIIsbed, tben tbe proportIonate
amount oI premIum attrIbutabIe to sucb dIrector sbouId be consIdered
as perquIsIteJIncome Ior tbe purpose oI remuneratIon.
RIgbts oI IndependentJNon-ExecutIve DIrectors
24. Independent J Non-ExecutIve dIrectors sbouId be abIe to :-
- CaII upon tbe Board Ior due dIIIgence or obtaInIng oI record Ior
seekIng proIessIonaI opInIon by tbe Board;
- bave tbe rIgbt to Inspect records oI tbe company;
- revIew IegaI compIIance reports prepared by tbe company; and
- In cases oI dIsagreement, record tbeIr dIssent In tbe mInutes.
MeetIngs OI DIrectors- ReIated Matters
2S.1 Tbe requIrement oI tbe CompanIes Act, 19S6, to boId a meetIng
every tbree montbs and at-Ieast 4 meetIngs In a year sbouId contInue.
Tbe gap between two Board MeetIngs sbouId not exceed Iour montbs.
2S.2 Tbe CommIttee Is oI tbe vIew tbat Iaw sbouId IacIIItate use oI
tecbnoIogy to carry out statutory processes eIIIcIentIy. MeetIngs oI tbe
Board oI DIrectors by eIectronIc means (TeIeconIerencIng and vIdeo
conIerencIng IncIuded) to be aIIowed and dIrectors wbo partIcIpate
tbrougb eIectronIc means sbouId be counted Ior attendance and Iorm
part oI Quorum. MInutes sbouId be approvedJ accepted by sucb
dIrectors wbo attended by way oI teIeconIerencIngJ vIdeoconIerencIng
(SIgnature may be accepted by use oI dIgItaI sIgnature certIIIcatIon. II any
dIrector bas some reservatIon about tbe contents oI tbe MInutes, be may
raIse tbe Issue In succeedIng meetIng and tbe dIssent, II any, may be
recorded In tbe mInutes oI tbat meetIng.
Quorum Ior emergency meetIngs
26. In tbe case oI companIes wbere Independent DIrectors are
prescrIbed :-
- NotIce oI every meetIng oI tbe Board oI DIrectors sbouId be gIven
weII In advance to ensure partIcIpatIon by maxImum number oI
dIrectors. In vIew oI tbe CommIttee, a perIod oI ? days Is suIIIcIent
Ior tbe purpose.
- Tbe presence oI one Independent dIrector sbouId be made
mandatory Ior board meetIngs caIIed at sbort notIce.
- MeetIngs at sborter notIces sbouId be beId onIy to transact
emergency busIness. In sucb meetIngs tbe mandatory presence oI
at Ieast one Independent DIrector sbouId be requIred sInce tbIs
wouId ensure tbat onIy weII consIdered decIsIons are taken.
- II even one Independent DIrector Is not present In tbe emergency
meetIng, tben decIsIons taken at sucb meetIngs sbouId be subject
to ratIIIcatIon by at Ieast one Independent DIrector.
Matters to be dIscussed at a Board MeetIng
2?. Tbere Is a need to ensure tbat tbe meetIngs oI Board oI DIrectors
provIde suIIIcIent tIme Ior consIderatIon oI Important matters. Tbe
CommIttee was oI tbe vIew tbat tbere sbouId be a cIear recognItIon oI
vItaI Issues Ior wbIcb Board dIscussIon In tbe meetIng oI tbe Board
sbouId be mandatory. Tbese matters sbouId not be IeIt to ResoIutIon by
cIrcuIatIon sInce tbIs practIce Is open to abuse. Tbe suggestIons made In
tbe CompanIes (Amendment) BIII, 2003 may be taken as tbe basIs.
RestrIctIons on Board's Powers
2S. Under SectIon 293 oI tbe present Act certaIn restrIctIons bave
been pIaced on tbe Board oI DIrectors oI a pubIIc company or oI a prIvate
company, wbIcb Is a subsIdIary oI a pubIIc company Irom decIdIng on
certaIn matters except wItb tbe consent oI tbe sbareboIders oI sucb
company In a generaI meetIng. TbIs provIsIon sbouId be revIewed and It
sbouId be provIded tbat tbe consent oI tbe sbareboIders sbouId be
tbrougb a specIaI resoIutIon Ior certaIn Items sucb as tbose presentIy
mentIoned In 293 (1) (a), (c) and (d) oI tbe present Act. SbareboIders'
approvaI sbouId be requIred Ior saIe oI wboIe or substantIaIIy wboIe oI
tbe undertakIng In tbat IInancIaI year. wboIe or substantIaIIy wboIe"
sbouId mean 20% oI tbe totaI assets oI tbe company. Furtber, certaIn
addItIonaI Items tbat sbouId requIre sbareboIders approvaI may IncIude
saIeJtransIer oI Investment In equIty sbares oI otber bodIes corporate
wbIcb constItute 20% or more oI tbe totaI assets oI tbe InvestIng
company.
MeetIngs OI Members
29.1 Every company sbouId be permItted to transact any Item oI
busIness as It deems IIt tbrougb postaI baIIot apart Irom Items Ior wbIcb
mandatory postaI baIIot Is prescrIbed. However, tbe government sbouId
prescrIbe a negatIve IIst oI Items wbIcb sbouId be transacted onIy at tbe
AGM and not tbrougb postaI baIIot. Tbese negatIve Items couId be tbe
IoIIowIng Items oI OrdInary BusIness :-
(I) consIderatIon oI annuaI accounts and reports oI DIrectors
and AudItors;
(II) decIaratIon oI dIvIdends;
(III) appoIntment oI dIrectors; and
(Iv) appoIntment oI and IIxIng tbe remuneratIon oI tbe audItors.
29.2 SImIIarIy, Items oI busIness In respect oI wbIcb DIrectorsJAudItors
bave a rIgbt to be beard at tbe meetIng (e.g. wben tbere Is a notIce Ior
tbeIr removaI), sbouId not be transacted tbrougb votIng by postaI baIIot.
29.3 EIectronIc VotIng - Law sbouId provIde Ior an enabIIng cIause Ior
votIng tbrougb eIectronIc mode.
29.4 PIace oI MeetIng - AGM may aIso be beId at a pIace otber tban tbe
pIace oI Its RegIstered OIIIce, provIded at Ieast 10% members In number
resIde at sucb pIace (In IndIa onIy).
AGM In SmaII CompanIes
30.1 SmaII CompanIes may be gIven an optIon to dIspense wItb tbe
requIrement oI boIdIng an AGM. Sucb companIes may be permItted to
pass ResoIutIons by cIrcuIatIon.
30.2 (d) Tbe Items oI negatIve IIsts as IdentIIIed above, may aIso be
transacted by SmaII CompanIes tbrougb postaI baIIot.
Demand For PoII
31.1 Tbe demand Ior poII can be made by sbareboIder(s) boIdIng 1J10
tb
oI tbe totaI votIng power or sbares oI paId up vaIue oI Rs.S Iakbs,
wbIcbever Is Iess.
31.2 Tbe CommIttee consIdered a vIew tbat tbe CbaIrman oI tbe
meetIng sbouId bave tbe dIscretIon to overruIe a demand Ior poII, II It can
be estabIIsbed tbat a resoIutIon wItb tbe requIsIte majorIty can be passed
on tbe basIs oI representatIons or proxIes at band. TbIs vIew bas to be
baIanced wItb an apprecIatIon oI mInorIty Interests. In some cases, tbe
powers to demand poII bave been mIsused. Tbe CommIttee Is oI tbe vIew
tbat tbe tbresboId IImIt needs to be revIewed to enabIe conduct oI
busIness In an orderIy yet democratIc manner and tbe same may be
prescrIbed by way oI RuIes. AIternatIveIy, possIbIIIty oI vestIng tbe
CbaIrman oI tbe meetIng wItb tbe power to overruIe a demand Ior poII In
certaIn cIrcumstances may be provIded.
Otber RecommendatIons
HIgber deposIt amount Ior notIce regardIng nomInatIngJappoIntIng
a dIrector.
32. PresentIy, any person can gIve nomInatIon Ior appoIntment as a
dIrector wItb a deposIt oI Rs. S00J- Sucb nomInatIon sbouId be aIIowed
to be made onIy by sbareboIders constItutIng 1% oI paId up capItaI and
wItb a deposIt oI Rs. 10000J- wbIcb sbouId be IorIeIted II tbe DIrector
does not get eIected.
OptIon oI buy-back Ior sbareboIders oI de-IIsted companIes
33. To protect tbe sbareboIders oI a IIsted company tbat opts to de-
IIst, one buy-back oIIer by tbe company sbouId be mandated wItbIn a
perIod oI 3 years oI Its de-IIstIng Irom aII tbe stock excbanges In IndIa.
ApproprIate vaIuatIon RuIes Ior tbIs purpose sbouId be prescrIbed.
Corporate Structure
34.1 StakeboIders J Board Iook towards certaIn Key ManagerIaI
PersonneI Ior IormuIatIon and executIon oI poIIcIes and to outsIde
Independent proIessIonaIs Ior Independent assurances on varIous
compIIances. Tbe CommIttee IeeIs It desIrabIe to dweII on sucb
managerIaI personneI wbo bave a sIgnIIIcant roIe to pIay In tbe conduct
oI aIIaIrs oI tbe company and determIne tbe quaIIty oI Its Governance.
Tbe CommIttee Is oI tbe vIew tbat sucb key ManagerIaI PersonneI may be
recognIzed by tbe Iaw, aIong wItb tbeIr IIabIIIty In approprIate aspects oI
company operatIon.
Key ManagerIaI PersonneI:-
34.2 Tbe CommIttee IdentIIIes tbe IoIIowIng key ManagerIaI PersonneI
Ior aII companIes:-
CbIeI ExecutIve OIIIcer (CEO)JManagIng DIrector
Company Secretary (CS)
CbIeI FInance OIIIcer (CFO]
RECOMMENDATIONS -
Tbe appoIntment and removaI oI tbe key managerIaI personneI
sbouId be by tbe Board oI DIrectors.
Tbe key managerIaI personneI IncIudIng managIng J (wboIe tIme)
ExecutIve DIrectors sbouId be In tbe wboIe-tIme empIoyment oI
onIy one company at any gIven tIme.
Botb tbe managIng dIrector as aIso tbe wboIe tIme dIrectors
sbouId not be appoInted Ior more tban S years at a tIme.
As provIded currentIy, tbe optIon to a company to appoInt
dIrector by proportIonaI representatIon may be retaIned.
Tbe present requIrement oI bavIng managIng dIrectorJwboIe tIme
dIrector In a pubIc company wItb a paId up capItaI oI Rs.S crores
may be revIsed to Rs.10 crores by approprIate amendment oI tbe
RuIes. Tbe saId IImIt couId be revIewed Irom tIme to tIme.
SpecIaI exemptIons may be provIded Ior smaII companIes Irom
appoIntIng sucb personneI on wboIe-tIme basIs. Sucb companIes
may obtaIn servIces tbat may be consIdered mandatory under Iaw
Irom quaIIIIed proIessIonaIs In practIce.
Interested SbareboIders
3S. Tbe CommIttee consIdered tbe concept oI excIusIon oI Interested
sbareboIders Irom partIcIpatIon In tbe GeneraI MeetIng In events oI
conIIIct oI Interest. Tbe CommIttee IeIt tbat tbIs was an aspect oI good
Corporate Governance wbIcb may be adopted by companIes on voIuntary
basIs by makIng a provIsIon In tbe ArtIcIe oI AssocIatIon oI tbe company.
In vIew oI tbe Issues reIated wItb enIorcIng compIIance oI sucb
requIrements, tbere need not be any specIIIc IegaI provIsIon Ior tbe
purpose.
GeneraI
36.1 SometImes, board appoIntees IncIude persons wbo cIearIy Iack tbe
experIence or tbe capacIty to IunctIon as dIrectors. Low-IeveI empIoyees
or un-experIenced reIatIves oI sbareboIders aIso sometImes IInd tbeIr way
Into tbe boards, wItb 'sbadow' dIrectors puIIIng strIngs and actIng as reaI
decIsIon makers. Tbe Iaw sbouId provIde Ior a Iramework tbat aIIows
attrIbutIon by recognIzIng tbe presence oI any person In accordance wItb
wbose dIrectIons or InstructIons, tbe dIrectors oI tbe company are
accustomed to act. Tbere sbouId aIso be a requIrement oI dIscIosure oI
dIrectors background, educatIon, traInIng and quaIIIIcatIons, as weII as
reIatIonsbIps wItb managers and sbareboIders.
36.2 Tbe CommIttee recognIzes tbat to enabIe aII companIes to access
good quaIIty managerIaI taIent, eIIorts by varIous InstItutIons,
organIzatIons and assocIatIons to traIn dIrectors sbouId be encouraged.
An Important roIe can be pIayed In tbIs respect by proIessIonaI bodIes,
cbambers oI commerce, trade assocIatIons, busIness and Iaw scbooIs.
Sucb eIIorts, wbIIe upgradIng tbe skIIIs oI dIrectors wouId aIso expand
tbe pooI oI candIdates Irom wbIcb sucb candIdates may be seIected.
Sucb eIIorts sbouId aIm at better dIscbarge oI IIducIary dutIes and vaIue
enbancIng board actIvItIes. Tbere sbouId be specIIIc executIve
deveIopment programmes aImed at deveIopIng tbe awareness IeveIs oI
Board IeveI appoIntees. Sucb persons sbouId aIso be provIded an InsIgbt
Into corporate Iaw compIIance requIrements.
36.3 It Is to recognIze tbat Iaw cannot specIIy corporate governance In
Its entIrety. Tbere are severaI bebavIouraI norms tbat cannot be
addressed tbrougb a IegaI Iramework. Tbere Is, tbereIore, space Ior
Corporate Governance Codes to suppIement and strengtben tbe IegaI
provIsIons. Tbere sbouId be an InteractIve dIaIogue between proIessIonaI
bodIes and corporate sector to enabIe evoIutIon oI sucb Codes.
36.4 VoIuntary or CompIy-and-ExpIaIn codes oI conduct Ior dIrectors
sbouId be deveIoped and dIssemInated by prIvate sector and proIessIonaI
organIzatIons. Sucb codes sbouId detaII tbe mInImum procedures and
care tbat make up due dIIIgence and care. Tbe presence oI sucb codes
wouId serve to educate botb dIrectors and InvestIng pubIIc.
36.S Tbe corporates sbouId be encouraged to seek Independent
assessmentJaudIt oI tbe conduct oI poIIs durIng generaI meetIngs oI tbe
company.
36.6 PunIsbments Ior vIoIatIon oI IIducIary dutIes sbouId be suIIIcIentIy
severe so as to deter wrongdoIng.
Cbapter V : ReIated Party TransactIons
1. WbIIe dIrectors bave tbe autborIty to reguIate tbe aIIaIrs oI tbe
company coIIectIveIy as Board, tbeIr dutIes oI good IaItb and IaIr deaIIngs
are owed by eacb dIrector IndIvIduaIIy. DIrectors bave tbe duty not to
pIace tbemseIves In a posItIon wben tbeIr IIducIary dutIes towards tbe
company conIIIct wItb tbeIr personaI Interests. And In case It bappens,
dIrectors bave tbe duty to preIer Interests oI tbe company. DIrectors
sbouId not use company's assets, opportunItIes or InIormatIon Ior tbeIr
own proIIt.
2. Tbe CommIttee deIIberated on wbetber transactIonsJcontracts In
wbIcb dIrectors or tbeIr reIatIves are Interested sbouId be reguIated
tbrougb a Government ApprovaI-based regIme" or tbrougb a
SbareboIder ApprovaI and DIscIosure-based regIme". Tbe commIttee
Iooked Into InternatIonaI practIces In tbIs regard and IeIt tbat tbe Iatter
approacb wouId be approprIate In tbe Iuture IndIan context.
DIrector's duty to dIscIose Interest
3.1 Tbe Law sbouId Impose a duty on every dIrector to dIscIose to tbe
company, tbe contracts or arrangements wItb tbe company, wbetber
exIstIng or proposed or acquIred subsequentIy, In wbIcb be, dIrectIy or
IndIrectIy, bas any Interest or concern.
3.2 Tbe manner, tIme IImIt and tbe extent oI sucb dIscIosure sbouId
be specIIIed In tbe Act. Tbe notIce Ior reIevant dIscIosure sbouId be made
by tbe Interested dIrector to tbe Board oI DIrectors at a meetIng oI tbe
Board In wbIcb tbe transactIon Is to be dIscussed, so tbat InIormatIon Is
avaIIabIe to tbe Board In a tImeIy manner. Tbe provIsIons In tbe exIstIng
Law to Issue generaI notIce by tbe dIrectors In respect oI tbeIr Interest In
contractsJarrangements by tbe company sbouId contInue.
3.3 FaIIure to make dIscIosure sbouId be treated as a deIauIt. DIrector
concerned sbouId be beId IIabIe to penaItIes and be sbouId be deemed to
bave vacated bIs oIIIce. TbIs sbouId aIso be a condItIon oI dIsquaIIIIcatIon
to boId oIIIce oI dIrector oI tbat company Ior a prescrIbed perIod.
3.4 DIrectors' ResponsIbIIIty Statement sbouId IncIude an addItIonaI
cIause to tbe eIIect tbat every dIrector bas made reIevant dIscIosures as
mentIoned above.
3.S Interested dIrector sbouId abstaIn Irom partIcIpatIng In tbe Board
meetIng durIng consIderatIon oI reIevant agenda Item In wbIcb be Is
Interested.
3.6 Tbe company sbouId maIntaIn a regIster, In wbIcb aII transactIons
above a prescrIbed tbresboId vaIue In respect oI contractsJarrangements,
In wbIcb dIrectors are Interested, sbouId be entered. Tbe regIster sbouId
be kept at regIstered oIIIce oI tbe company and sbouId be open to
InspectIon to aII members.
CertaIn transactIons, In wbIcb dIrectors are Interested, to take pIace
onIy subject to approvaI oI BoardJsbareboIders
4.1 In addItIon to dIscIosure requIrements In respect oI aII
transactIonsJcontractsJarrangements In wbIcb dIrectors are Interested,
certaIn transactIons, between company and dIrector or persons
connected wItb dIrector, In respect oI saIe, purcbase oI goods, materIaIs
or servIces sbouId take pIace onIy wItb tbe approvaI oI Board oI
DIrectors. A tbresboId IImIt may be IIxed under tbe RuIes In respect oI
powers oI tbe Board In tbIs regard.
4.2 Beyond a IImIt, tbe approvaI oI sbareboIders, by specIaI resoIutIon,
sbouId be mandated. Tbe partIcuIarsJdetaIIs pertaInIng to sucb
contractsJarrangements to be IncIuded In tbe expIanatory statement (to
reIevant specIaI resoIutIon), to be sent to sbareboIders, sbouId be
specIIIed In tbe ruIes.
4.3 SImIIar provIsIons sbouId be appIIcabIe In respect oI aII
transactIons reIatIng to transIer or Iease oI ImmovabIe property toJby tbe
Interested dIrector byJto tbe company.
4.4 Tbe exIstIng exemptIon under SectIon 29? (2) (a) oI tbe CompanIes
Act In reIatIon to transactIonJcontractJarrangement takIng pIace Ior
casb at market prIce sbouId contInue.
DIscIosures
4.S DetaIIs oI TransactIons oI tbe Company wItb Its HoIdIng or
SubsIdIary J FeIIow SubsIdIary or AssocIate CompanIes In tbe ordInary
course oI busIness and transacted on an arms Iengtb basIs sbouId be
pIaced perIodIcaIIy beIore tbe Board tbrougb tbe AudIt CommIttee, II any.
4.6 DetaIIs oI transactIons not In a normaI course oI busIness and J
or not on an arms Iengtb basIs wItb HoIdIngJSubsIdIaryJFeIIow
SubsIdIaryJAssocIate CompanIes sbouId be pIaced beIore tbe Board
togetber wItb Management justIIIcatIon Ior tbe same. A summary oI
sucb transactIons wItb eacb party sbouId Iorm part oI tbe AnnuaI Report
oI tbe Company.
4.? Non compIIance oI tbese provIsIons sbouId resuIt Into:-
(a) PenaIty on dIrector wbo autborIzed
transactIonJcontract etc. wItbout approvaI oI
BoardJGeneraI meetIng.
(b) TransactIonJContract beIng voIdabIe at tbe optIon
oI tbe BoardJCompany.
(c) DIrector concerned to account to tbe company Ior
any gaIn made by bIm and to IndemnIIy tbe company
agaInst wrongIuI gaIn made at tbe cost oI tbe
company.
(d) Tbe DIrector concerned beIng deemed to bave
vacated bIs oIIIce.
(e) DIsquaIIIIcatIon oI tbe dIrector to boId oIIIce In tbe
company Ior a prescrIbed perIod.
RestrIctIons on Loan to dIrector or boIdIng oIIIce or pIace oI proIIt
by reIatIve oI dIrector
S.1 GeneraIIy tbe dIrectors sbouId not be encouraged to avaII oI Ioans
or guarantees Irom companIes. Tbey sbouId be aIIowed remuneratIon or
sIttIng Iees onIy. In case company decIdes so, Ioans to dIrectors sbouId
be aIIowed onIy wben company by specIaI resoIutIon approves sucb
Ioans. DIscIosures to be made to sbareboIders, tbrougb tbe expIanatory
statement, sbouId be specIIIed In tbe ruIes. It sbouId be open to a
company to IormuIate scbemes (sucb as HousIng Loan Scbemes) Ior tbe
beneIIt oI ExecutIve DIrectors. Once sucb scbemes are approved by tbe
sbareboIders by specIaI resoIutIon, Ioans under sucb scbemes may be
aIIowed to eIIgIbIe dIrectors, wItbout agaIn goIng to sbareboIders Ior
approvaI.
S.2 TransactIons reIatIng to sbort term QuasI-Loans to dIrector or
IundIng oI dIrector's expendIture (to be reImbursed by dIrector Iater on)
up to a specIIIed IImIt (by ruIes) may be aIIowed subject to approvaI by
tbe sbareboIders tbrougb specIaI resoIutIon.
[QuasI Ioan Is a transactIon wbere one party - tbe credItor agrees to pay
or pays otberwIse tban In pursuance oI an agreement, a sum Ior anotber
(tbe borrower) or agrees to reImburse, or reImburses otberwIse tban In
pursuance oI an agreement expendIture Incurred by a tbIrd party Ior tbe
borrower on terms tbat tbe borrower wouId reImburse tbe credItor or In
cIrcumstances tbat gIve rIse to a IIabIIIty Ior tbe borrower to reImburse
credItor.]
S.3 FundIng oI DIrector's IegItImate expendIture on duty to tbe
company sbouId be excIuded Irom tbese reguIatIons.
S.4 SpecIaI provIsIons may be made Ior Ioans or quasI Ioans by money
IendIng companIes to Its empIoyee IncIudIng dIrectors to be aIIowed,
subject to reguIatIons oI RBI and otber reguIators.
S.S Tbe dIrector or reIatIves oI a dIrector sbouId be aIIowed to boId
oIIIce or pIace oI proIIt In tbe company upto a IImIt (to be specIIIed by
ruIes) onIy II sbareboIders, by specIaI resoIutIon, approve. (Tbe oIIIce oI
MD or WTD sbouId not be treated as oIIIce or pIace oI proIIt.)
Duty on dIrectors to dIscIose InIormatIon reIatIng to dIrectorsbIp
and sbareboIdIngs In tbe company and In otber companIes
6.1 Every dIrector sbouId be under obIIgatIon to dIscIose to tbe
company:-
(I) PersonaI detaIIs as may be prescrIbed by way oI ruIes.
(II) DIrectorsbIps (IncIudIng ManagIng DIrectorsbIp, WboIe
TIme-DIrectorsbIp or ManagersbIp) beId by bIm In any
otber companyJIIrm.
(III) Sbares or debentures beId by bIm as weII as bIs reIatIve In
tbe company and aII otber companIes, as reIerred to In para
4.S above.
(Iv) Names oI CompanIes In wbIcb dIrector eItber sIngIy or
aIong wItb bIs reIatIves boId not Iess tban a specIIIed
percentage oI sbareboIdIng as may be specIIIed by Law.
(v) Names oI otber entItIes In wbIcb be Is dIrectIy or IndIrectIy
Interested as partner, member or a key person, by wbatever
name caIIed.
(vI) Any cbanges In respect oI above Items [(I) to (v)] to tbe
company sbouId be InIormed wItbIn a tIme specIIIed by
Law.
6.2 Non dIscIosure oI above InIormatIon by any dIrector sbouId boId
sucb dIrector IIabIe to pay IIne.
6.3 Tbe company sbouId keep a regIster contaInIng reIevant detaIIs
mentIoned In para 6.1 In respect oI eacb dIrector. RegIster sbouId be
open Ior InspectIon by aII members oI tbe company.
Cbapter VI : MInorIty Interests
BaIance to be struck between tbe ruIe oI tbe majorIty and tbe rIgbts
oI tbe mInorIty
1. Tbe IundamentaI prIncIpIe deIInIng operatIon oI sbareboIders
democracy Is tbat tbe ruIe oI majorIty sbaII prevaII. However, It Is aIso
necessary to ensure tbat tbIs power oI tbe majorIty Is pIaced wItbIn
reasonabIe bounds and does not resuIt In oppressIon oI tbe mInorIty and
mIs-management oI tbe company. Tbe mInorIty Interests, tbereIore, bave
to be gIven a voIce to make tbeIr opInIons known at tbe decIsIon makIng
IeveIs. Tbe Iaw sbouId provIde Ior sucb a mecbanIsm. II necessary, In
cases wbere mInorIty bas been unIaIrIy treated In vIoIatIon oI tbe Iaw, tbe
avenue to approacb an approprIate body Ior protectIng tbeIr Interests
and tbose oI tbe company sbouId be provIded Ior. Tbe Iaw must baIance
tbe need Ior eIIectIve decIsIon makIng on corporate matters on tbe basIs
oI consensus wItbout permIttIng persons In controI oI tbe company, I.e.,
tbe majorIty, to stIIIe actIon Ior redressaI arIsIng out oI tbeIr own wrong
doIng.
MInorIty and 'MInorIty Interest' sbouId be specIIIed In tbe
substantIve Law
2.1 At present, In case oI a company bavIng sbare capItaI, not Iess
tban 100 members or not Iess tban 1J10
tb
oI totaI number oI members,
wbIcbever Is Iess or any member or members boIdIng not Iess tban
1J10
tb
oI Issued sbare capItaI bave tbe rIgbt to appIy to CLBJNCLT In
case oI oppressIon and mIsmanagement. In case oI companIes not
bavIng sbare capItaI, not Iess tban 1JS
tb
oI totaI number oI members
bave tbe rIgbt to appIy.
2.2 To reIIect tbe Interest oI tbe MInorIty", a 10% crIterIa In case oI
companIes bavIng sbare capItaI and a 20% crIterIa In tbe case oI otber
companIes Is provIded Ior In tbe exIstIng Act. In SectIon 39S oI tbe Act,
tbe dIssentIng sbareboIders bave been put at tbe IImIt oI 10% oI sbares.
Tbus MInorIty couId be deIIned as boIdIng not more tban 10% sbares Ior
tbe IImIted purpose oI agItatIng tbeIr rIgbts beIore tbe approprIate Iorum.
2.3 OppressIon Is deIIned In sectIon 39?(2). It Is deIIned as conductIng
tbe company's aIIaIrs In a manner prejudIcIaI to pubIIc Interest or In a
manner oppressIve to any member or members. MIs-management bas
been deIIned In sectIon 39S(1) oI tbe Act, as conductIng tbe aIIaIrs oI tbe
company In a manner prejudIcIaI to pubIIc Interest or In a manner
prejudIcIaI to tbe Interests oI tbe company.
2.4 Tbe CommIttee on examInatIon oI tbe exIstIng provIsIons IeIt tbat
a reasonabIe Iramework couId be enabIed tbrougb specIIIc provIsIons to
be brougbt In tbe new Act to deIIne MInorIty" (on tbe IInes oI cIause (2.2)
above) and tbe MInorIty Interest (on tbe IInes oI cIause (2.3) above).
RepresentatIon oI mInorIty Interests
3. WbIIe tbe CommIttee IeeIs tbat tbe concept oI Independent
dIrectors wouId provIde an objectIve scrutIny oI management, operatIons
and decIsIon makIng, tbe Boards oI tbe companIes couId aIso Incorporate
tbe concept oI representatIon oI specIIIc mInorIty sbareboIders group. It
was observed tbat tbe exIstIng Act provIded an optIon to company to
adopt proportIonate representatIon Ior tbe appoIntment oI dIrectors but
tbIs optIon was rareIy used. A vIew was expressed tbat tbe appIIcabIIIty
oI tbe provIsIons oI SectIon 26S (exIstIng Act) couId be made mandatory.
Tbe specIIIc mInorIty appoInted dIrectorJIndependent dIrector couId aIso
pIay an Important roIe In Investor protectIon. Tbe CommIttee vIew was
tbat tbe exIstIng optIon may be retaIned.
RIgbt oI sbare boIders to be InIormed tbrougb correct dIscIosures
4. Tbe rIsks oI Investors can be reduced J mInImIzed tbrougb
adequate transparency and dIscIosures. Tbe Iaw sbouId IndIcate In cIear
terms tbe rIgbts oI members oI tbe company to get aII InIormatIon to
wbIcb tbey are entItIed In a tImeIy manner. Tbe IInancIaI InIormatIon and
dIscIosures to be provIded to sbareboIders sbouId not be In excessIveIy
tecbnIcaI Iormat but sbouId be sImpIe to understand. TbIs wIII enbance
tbe credIbIIIty oI tbe company and wIII beIp tbe sbareboIders to take an
InIormed and conscIous decIsIon In respect oI tbeIr Investments. BesIdes,
statutory InIormatIon, wbIcb wouId be reguIated tbrougb Iaw, tbe
InIormatIon couId aIso be made avaIIabIe tbrougb otber means IIke prInt,
eIectronIc medIa, company websIte etc. A regIme oI strIngent dIscIosure
norms sbouId be provIded Ior In case oI companIes accessIng Iunds
tbrougb pubIIc oIIers. Tbere sbouId be adequate and deterrent penaItIes
In Iaw agaInst wrong dIscIosures.
RIgbt oI mInorIty to be beard
S. Once tbe prIncIpIe oI protectIon oI MInorIty Interest" Is recognIzed
In tbe Act, tbere wouId aIso be a need to put In pIace an approprIate
mecbanIsm Ior ensurIng tbat sucb provIsIons reIatIng to MInorIty
Interest" do not obstruct tbe Board or tbe management Irom perIormIng
tbeIr IunctIons genuIneIy In Interests oI tbe company. Tbe Board and tbe
management sbouId, tbereIore, be protected Irom undue and unjustIIIed
InterIerence Irom unscrupuIous sbareboIders actIng In tbe guIse oI
Investors' rIgbts.
RIgbts oI mInorIty sbareboIders durIng meetIngs oI tbe company
6. SometImes, tbe meetIngs oI tbe company are so organIzed so as to
deprIve tbe mInorIty oI an eIIectIve bearIng. Tbe procedures to be
prescrIbed under tbe Act sbouId saIeguard agaInst sucb bebavIour by
tbe company. Tbere sbouId be extensIve use oI postaI baIIot IncIudIng
eIectronIc medIa to enabIe sbareboIders to partIcIpate In meetIngs.
RIgbts In case oI OppressIon and MIsmanagement
?. Tbere are adequate provIsIons In tbe exIstIng Act to prevent
OppressIon and MIsmanagement. MInorIty, represented by specIIIed
number oI members or members boIdIng requIsIte percentage oI equIty
capItaI are entItIed to approacb CourtsJTrIbunaIs Ior protectIon oI tbeIr
Interests. Tbe quasI-judIcIaI body Is empowered to order a number oI
remedIaI measures Ior reguIatIon oI tbe conduct oI company's aIIaIrs.
Tbese measures, Inter-aIIa, IncIude purcbase oI sbares or Interests oI
any members oI company by otber members; termInatIon, settIng asIde
or modIIIcatIon oI agreements reIatIng to managerIaI personneI; settIng
asIde oI transactIons reIatIng to transIer, deIIvery oI goods etc, or any
otber matter Ior wbIcb CourtJTrIbunaI IeeIs tbat provIsIons sbouId be
made. Tbe CourtJTrIbunaI Is aIso empowered to appoInt sucb number oI
persons as necessary to eIIectIveIy saIeguard Interest oI tbe company.
RIgbts oI mInorIty sbareboIders durIng mergersJ amaIgamatIonsJ
takeovers
S.1 As per exIstIng provIsIons oI tbe Act, approvaI oI HIgb Court J
TrIbunaI Is requIred In case oI corporate restructurIng (wbIcb, Inter-aIIa,
IncIudes, mergersJamaIgamatIons etc.) by a company. Tbe Scbeme Is
aIso requIred to be approved by sbareboIders, beIore It Is IIIed wItb tbe
HIgb Court. Tbe scbeme Is cIrcuIated to aII sbareboIders aIong wItb
statutory notIce oI tbe court convened meetIng and tbe expIanatory
statement uJs 393 oI tbe Act Ior approvIng tbe scbeme by sbareboIders.
S.2 Tbougb tbere may not be any protectIon to any dIssentIng
mInorIty sbareboIders on tbIs Issue, tbe Courts, wbIIe approvIng tbe
scbeme, IoIIow judIcIous approacb by mandatIng pubIIcIty about tbe
proposed scbeme In newspaper to seek objectIons, II any, agaInst tbe
scbeme Irom tbe sbareboIders. Any Interested person (IncIudIng a
mInorIty sbareboIder) may appear beIore tbe Court. Tbere bave been,
bowever, occasIons wben sbareboIders boIdIng mInIscuIe sbareboIdIngs,
bave made IrIvoIous objectIons agaInst tbe scbeme, just wItb tbe
objectIve oI staIIIng or deIerrIng tbe ImpIementatIon oI tbe scbeme. Tbe
courts bave, on a number oI occasIons, overruIed tbeIr objectIons.
S.3 It Is, tbereIore, IeIt tbat tbere sbouId be specIIIc provIsIon In tbe
Act to put a IImIt (eItber accordIng to a mInImum number oI persons or
accordIng to a mInImum percentage oI sbareboIdIng) Ior entItIIng any
body to object sucb a scbeme. It wouId aIso be approprIate to provIde Ior
acquIsItIon oI remaInIng 10% sbares In a company, oI wbIcb 90% bas
been acquIred by an acquIrer. Sucb acquIsItIon oI 10% sbares sbouId be
as per RuIes to be Iramed by CentraI Government. Tbe CommIttee bas
aIso made recommendatIons separateIy In para 19 oI Cbapter X,
concernIng a tbresboId IImIt Ior maIntaInabIIIty oI objectIons by barrIng
mInorIty sbareboIders wItb InsIgnIIIcant stake Irom obstructIng scbemes
oI arrangement.
S.4 In case oI Takeovers, as per SEBI (SubstantIaI AcquIsItIon oI
Sbares and Takeover) ReguIatIons, 199?, SEBI bas powers to appoInt
InvestIgatIng oIIIcer to undertake InvestIgatIon, In case compIaInts are
receIved Irom tbe Investors, IntermedIarIes or any otber person on any
matter bavIng a bearIng on tbe aIIegatIons oI substantIaI acquIsItIon oI
sbares and takeovers. SEBI may aIso carry out sucb InvestIgatIon suo
moto upon Its own knowIedge or InIormatIon about any breacb oI tbese
reguIatIons. Under sectIon 39S oI tbe Act, a transIeree company, wbIcb
bas acquIred 90% sbares oI a transIeror company tbrougb a scbeme or
contract, Is entItIed to acquIre sbares oI remaInIng 10% sbareboIders.
DIssentIng sbareboIders bave been provIded wItb an opportunIty to
approacb CourtJTrIbunaI. TbIs scbeme oI tbIngs appears to be IaIr and
sbouId be contInued.
In sum :-
a) In order to object a scbeme oI amaIgamatIon by Investors, a IImIt
sbaII be determIned eItber accordIng to tbe mInImum number oI
members or accordIng to tbe mInImum percentage oI
sbareboIdIng;
b) Tbe provIsIon oI sectIon 39SA wbIcb were Incorporated In tbe
CompanIes (Amendment) BIII, 2003 Ior acquIsItIon oI remaInIng
sbares may be consIdered as a basIs Ior deveIopIng an approprIate
Iramework In tbIs regard.
FaIr vaIuatIon as a means oI saIeguardIng mInorIty Interests
9.1 Tbere sbouId be recognItIon oI prIncIpIe oI vaIuatIon oI sbares oI a
company tbrougb an Independent vaIuatIon mecbanIsm as means oI
saIeguardIng mInorIty Interests. Tbe Independent vaIuer sbouId be
appoInted by AudIt CommIttee wbere sucb a CommIttee Is mandated or
by tbe Board In otber cases. Tbe sbareboIders sbouId bave tbe rIgbt to
approacb tbe Court J TrIbunaI II tbey perceIve tbe process to be unIaIr.
In sucb cases, tbe TrIbunaI sbouId be empowered to appoInt an
Independent vaIuer. Tbese prIncIpIes Ior vaIuatIon oI sbares couId aIso
appIIed In case oI companIes tbat bave deIIsted and bave a sbareboIder
base oI 1000 or more.
9.2 Furtber, tbIs CommIttee bas recommended tbat a company tbat
bas deIIsted Irom aII tbe Stock Excbanges In IndIa and bas a sbareboIder
J deposItor base oI 1000 or more sbouId be mandated to gIve one buy-
back oIIer wItbIn a perIod oI tbree years oI deIIstIng. Tbe CommIttee IeeIs
tbat sucb an oIIer, taken In tbe background oI tbe recommendatIons oI
ensurIng IaIr vaIuatIons oI sbares, wouId aIso serve to protect mInorIty
Interests.
CIass ActIonJDerIvatIve suIts
10.1 In case oI Iraud on tbe mInorIty by wrongdoers, wbo are In controI
and prevent tbe company ItseII brIngIng an actIon In Its own name,
derIvatIve actIons In respect oI sucb wrong non-ratIIIabIe decIsIons, bave
been aIIowed by courts. Sucb derIvatIve actIons are brougbt out by
sbareboIder(s) on bebaII oI tbe company, and not In tbeIr personaI
capacIty (Ies), In respect oI wrong done to tbe company. SImIIarIy tbe
prIncIpIe oI CIassJRepresentatIve ActIon" by one sbareboIder on bebaII
oI one or more oI tbe sbareboIders oI tbe same kInd bave been aIIowed by
courts on tbe grounds oI persons bavIng same Iocus standI.
10.2 Tbougb tbese prIncIpIes bave been upbeId by courts on many
occasIons, tbese are yet to be reIIected In Law. Tbe CommIttee expresses
tbe need Ior recognItIon oI tbese prIncIpIes.
Cbapter VII : Investor EducatIon and ProtectIon
1. Tbe CommIttee noted tbat tbe growtb In tbe numbers oI Investors
In IndIa was encouragIng. Tbe trends reveaIed tbat In addItIon to FIIs
and InstItutIonaI Investors, smaII Investors were aIso graduaIIy begInnIng
to regaIn tbe conIIdence In tbe capItaI markets tbat bad been sbaken
consequent to tbe stock market scams durIng tbe past decade. It Is
ImperatIve Ior tbe beaItby growtb oI tbe corporate sector tbat tbIs
conIIdence Is maIntaIned. For tbIs purpose, tbe CommIttee IeeIs tbat not
onIy sbouId corporate systems and processes be credIbIe and
transparent, tbe Interests oI tbe Investors may be saIeguarded In a
manner tbat enabIes tbem to exercIse tbeIr cboIce In an InIormed
manner wbIIe makIng Investment decIsIons, and aIso provIdIng tbem
wItb a IaIr exIt optIon.
2. Tbe concept oI Investor protectIon bas to be Iooked at Irom
dIIIerent angIes takIng Into account tbe requIrements oI varIous kInds oI
Investors I.e. (I) Investors In equIty (II) Iarge InstItutIonaI Investors (III)
ForeIgn Investors (Iv) Investors In debentures and (v) smaII
InvestorsJdeposIt boIders etc. Tbe CommIttee aIso noted tbe InItIatIves
taken by tbe CentraI Government Ior Investor educatIon and protectIon.
Some State Governments bave aIso taken InItIatIves tbrougb IegIsIatIon
Ior protectIon oI deposItors.
Separate Law Ior Investor ProtectIon?
3. Tbe questIon as to wbetber a separate Act Is requIred Ior
protectIon oI Investors was examIned. AIter detaIIed dIscussIon, tbe
CommIttee Iormed tbe vIew tbat It was essentIaI to ensure saIeguardIng
tbe Interest oI Investors tbrougb proper artIcuIatIon oI corporate
governance In a manner tbat ensures transparency and accountabIIIty.
Tbe concept oI Investor protectIon cannot be treated In IsoIatIon Irom aII
tbe corporate processes. As sucb a Iramework exIsts In tbe country to
deaI wItb crImInaI oIIences tbe requIrement Is to provIde a suItabIe
orIentatIon to corporate Iaw so tbat tbe Investor, IrrespectIve oI sIze, Is
recognIzed as a stakeboIder In tbe corporate processes. BesIdes, a
separate Act wouId requIre specIaI enIorcement mecbanIsm wItb
attendant coordInatIon Issues. TbereIore, a separate Act Ior Investor
protectIon Is not consIdered necessary. TbIs aspect may be deaIt wItb
comprebensIveIy and eIIectIveIy In tbe Company Law ItseII.
RoIe oI ReguIators
4. Tbe InterIace between tbe companIes and Its stakeboIders
IncIudIng Investors sbouId be reguIated tbrougb tbe IegIsIatIve
Iramework oI tbe CompanIes Act and otber cIvII and crImInaI Iaws oI tbe
country as weII as by dIIIerent reguIators sucb as SEBI, RBI, etc. as weII
as InstItutIons sucb as tbe Stock Excbanges tbrougb tbeIr ruIes oI
operatIon. SometImes, varIous agencIes pursue actIon In tbeIr respectIve
domaIn wItbout regard to tbe comprebensIve pIcture. TbIs resuIts In
overIap oI jurIsdIctIon or reguIatory gaps. Tbere Is a need to brIng about
coordInatIon In tbe roIe and actIon oI varIous reguIatory agencIes to
enabIe eIIectIve Investor protectIon.
S. In partIcuIar, tbe capItaI market reguIator, SEBI bas a sIgnIIIcant
roIe to pIay In saIeguardIng tbe Interest oI Investors. Tbe CommIttee IeeIs
tbat sucb a roIe couId be pIayed by tbe reguIator dIscbargIng Its
IunctIons In a ratIonaI and objectIve manner wItb due regard to tbe
Interests, rIgbts and obIIgatIons oI aII tbe stakeboIders. SEBI bas done a
commendabIe job In deveIopIng tbe Iramework Ior IndIan capItaI market
In Its IormatIve stages subsequent to tbe IIberaIIzatIon process InItIated
In tbe 1990s. However, tbere Is a need Ior tbe Iramework to deveIop
Iurtber In a baIanced manner keepIng In vIew tbe IndIan context wbIIe
enabIIng best InternatIonaI practIces. In doIng so, tbe reguIator must
examIne dIIIerent aspects oI capItaI market operatIon and tbe roIes
pIayed by dIIIerent IntermedIarIes as aIso tbe InteractIon amongst tbem
so tbat tbe capItaI market Is abIe to deIIver IInance to meet requIrements
oI tbe corporate sector promptIy, In a cost eIIectIve manner and In
keepIng wItb tbe cbangIng requIrements oI new busIness modeIs. In
carryIng out tbIs IunctIon, It sbouId ensure tbe credIbIIIty oI Its processes
In tbe eyes oI tbe Investors. Mucb remaIns to be done to acbIeve tbIs
objectIve.
End use oI Funds
6. Tbe CommIttee dIscussed tbe need Ior reguIators to monItor tbe
end use oI Iunds coIIected Irom tbe pubIIc. Tbe CommIttee IeIt tbat tbIs
sbouId be tbe responsIbIIIty oI tbe sbareboIders oI tbe company wbo
sbouId cbarge company management wItb tbe responsIbIIIty coupIed
wItb adequate autborIty to ensure prudent and proper use oI Iunds
coIIected Irom tbe pubIIc. In doIng so bowever, tbere Is need Ior
transparency so tbat botb tbe reguIators, InvestIgatIve agencIes as weII
as tbe Investor are abIe to access approprIate IInancIaI InIormatIon to
Iorm an opInIon as to tbe IInancIaI conduct and perIormance oI tbe
company. TbereIore, tbere sbouId be a proper regIme oI dIscIosures In
tbe pubIIc domaIn so tbat varIous agencIes are abIe to reacb tbeIr
concIusIon In a non-IntrusIve manner. PrIvate companIes couId devIse
tbeIr own mecbanIsm to tbe satIsIactIon oI sbareboIders and IendIng
InstItutIons.
CredIt RatIng
?. Tbe CommIttee examIned tbe utIIIty oI credIt ratIng to enabIe
protectIon oI Investor Interests. It was IeIt tbat wbIIe credIt ratIng couId
onIy provIde IndIcatIve InIormatIon Ior tbe Investor to assess tbe generaI
standIng oI tbe company, credIt ratIng was not an InIaIIIbIe assessment
oI tbe company. An ImpressIon, tbereIore, sbouId not be created tbat soIe
reIIance can be pIaced on credIt ratIngs Ior Investment decIsIons.
However, credIt ratIng wouId be a good evaIuatIon mecbanIsm and Its
wIde use wouId be generaIIy beneIIcIaI. Tbere Is bowever, no need to
mandate credIt ratIng by Iaw except Ior companIes acceptIng pubIIc
deposIts.
SpecIaI ProvIsIons Ior DeposItors
RIsk cover Ior deposItors
S.1 Tbe CommIttee deIIberated on tbe need Ior companIes to take rIsk
coverJInsurance Ior deposItors. It was IeIt tbat wbIIe rIsk cover may not
be possIbIe Ior equIty Investors, tbe Insurance optIon sbouId be expIored
Ior deposIts wItb companIes. It was IeIt tbat wbIIe tbe BankIng
companIes and NBFCs were reguIated by tbe RBI In tbe Interest oI tbe
deposItors, tbere was no sImIIar mecbanIsm In tbe case oI deposIts wItb
otber types oI companIes. DeposItors, beIng In tbe nature oI unsecured
credItors, aIso do not get adequate protectIon under Iaw In tbe event oI
IIquIdatIon or wIndIng up oI tbe company. It was aIso not IeasIbIe to
deveIop a separate reguIatory mecbanIsm Ior tbIs modaIIty oI mobIIIzIng
IInance. However, some protectIon wouId be avaIIabIe to tbe deposItors II
tbe companIes seekIng deposIts were aIso compeIIed to obtaIn Insurance
coverage Ior deposIts. Tbe CommIttee IeIt tbat tbIs was a mecbanIsm
wbIcb wouId compeI scrutIny Into tbe credIt-wortbIness oI tbe companIes
by tbe Insurance companIes In tbe Interest oI tbe deposItors and bence
recommend tbe same.
Otber provIsIons
S.2 Tbe CommIttee, durIng Its deIIberatIons dIscussed varIous aspects
tbrougb wbIcb protectIon couId be oIIered to saIeguard tbe Interests oI
deposItors and made suggestIons wbIIe consIderIng tbe reIevant
corporate operatIons. Tbe CommIttee, bowever, IeIt tbat tbe IoIIowIng
aspects need to be brougbt out In a consoIIdated manner as IoIIows :-
CompanIes acceptIng pubIIc deposIts sbouId be requIred to

appoInt Independent dIrectors;

appoInt audIt J remuneratIon J stakeboIders reIatIonsbIp

commIttees;

under take deposIt Insurance;

undertake credIt ratIng;

create adequate casb reserves beIng set asIde Ior

repayment oI deposIts as may be prescrIbed by tbe ruIes;

be subjected to cIose monItorIng In respect oI

ImpIementatIon oI any scbeme Ior repayment oI deposIts
tbat may be sanctIoned by CLBJTrIbunaIJCourt;

be subjected to a strIngent dIscIosure regIme; and

be subjected to strIngent penaItIes Ior IrresponsIbIe J

IrauduIent bebavIour by tbe companIes.
CompensatIon to Investors
9. Tbe CommIttee aIso dIscussed Issues reIatIng to compensatIon to
Investors. It was IeIt tbat tbe capItaI market IncIuded Investment Into
rIsk bearIng Instruments. In sucb cases, tbe Investor was requIred to
make bIs own assessment oI rIsk and reward. No compensatIon couId be
vIsuaIIzed Ior sucb Investors wbose Investments were In rIsk bearIng
Instruments. SImIIarIy, Investment In a IIxed return Instrument
necessItated a careIuI revIew oI tbe borrowIng entIty. Sucb actIons wouId
aIso be subjected to known or decIared rIsks. BesIdes, tbe capItaI market
aIso provIdes an opportunIty Ior an Investor to exIt. Tbe need tbereIore, Is
to ensure proper and beaItby market operatIon so tbat Investors couId
exercIse tbeIr exIt optIons In a reasonabIe and equItabIe envIronment.
However, tbere may be sItuatIons wbere sucb a Irame work Is dIstorted
tbrougb Irauds. Tbere may be provIsIons Ior compensatIon In tbe event
oI Iraud by companIes beIng estabIIsbed In securIng Iunds Irom
Investors. For tbIs purpose IIItIng oI corporate veII may be enabIed by tbe
Iaw. CertaIn pre-emptIve measures may aIso be Incorporated In tbe Iaw
so tbat tbe III-gotten gaIns acquIred tbrougb cbeatIng oI Investors can be
accessed and dIsgorged. Tbe CommIttee, tbereIore, IeeIs tbat
compensatIon to Investors may be payabIe onIy In cases oI estabIIsbed
Iraud, tbrougb a judIcIaI process Irom tbe assets oI tbe company or by
IIItIng tbe corporate veII, tbose oI tbe promoters or otber beneIIcIarIes oI
sucb Iraud, accessed tbrougb a process oI dIsgorgement.
Investor GrIevance RedressaI
10. Tbe CommIttee aIso took tbe vIews oI tbe Investor actIvIsts Into
account durIng Its deIIberatIons. Tbe CommIttee noted tbat tbe
pbenomenon oI vanIsbIng companIes bad undermIned Investor
conIIdence. Concerns about some oI tbe practIces IoIIowed by tbe
deposItory partIcIpants to tbe detrIment oI smaII sbareboIders were aIso
noted. An eIIectIve Investor grIevance redressaI mecbanIsm at tbe
corporate IeveI couId ensure protectIon oI tbe Interest oI Investors
tbrougb tImeIy InterventIons. Tbe CommIttee recommends tbat
StakeboIders ReIatIonsbIp CommIttee sbouId be mandatory Ior a
company bavIng a combIned sbareboIderJdeposIt boIderJdebenture
boIder base oI 1000 or more.
Consumer courts J CapItaI Market Ombudsman
11.1 SInce sbares and securItIes are aIso IegaIIy deemed to be goods"
under tbe Consumer ProtectIon Act, 19S6, Investors sbouId bave tbe
optIon to approacb Consumer Courts under tbe Consumer ProtectIon Act
as a Iorum to redress tbeIr compIaInts. Tbe extent to wbIcb tbe
jurIsdIctIon oI tbe Consumer Courts may appIy In sucb cases wouId bave
to be deIIned wItb regard to tbe nature oI tbe Investment and tbe
entItIements arIsIng Irom tbe reIated transactIon. Tbe capacIty oI tbe
consumer courts to adjudIcate on sucb matters wIII bave to be upgraded
tbrougb capacIty buIIdIng and traInIng oI judIcIaI oIIIcers mannIng sucb
courts. TraInIng InstItutes may be set up by GovernmentJCapItaI market
ReguIator to provIde sucb traInIng.
11.2 WItb tbe Increase In tbe number oI Investors and greater
awareness on tbeIr part, tImeIy and sImpIIIIed InstItutIonaI structure Ior
dIspute resoIutIon Is desIrabIe so tbat tbe Investors are not compeIIed to
resort to costIy IegaI proceedIngs Ior protectIon oI tbeIr rIgbts. TbIs wouId
be partIcuIar reIevant Ior tbe smaII Investors. In tbIs context, tbe
InstItutIon oI Ombudsman Ior CapItaI Market set up by SEBI sbouId aIso
be strengtbened.
Investor EducatIon and ProtectIon Fund
12.1 Tbe Government bas estabIIsbed an Investor EducatIon and
ProtectIon Fund (IEPF) under Sec. 20S C oI tbe CompanIes Act, 19S6
under wbIcb uncIaImed Iunds on account oI dIvIdends, matured
deposIts, matured debentures, sbare appIIcatIon money etc. are
transIerred tbrougb tbe IEPF to tbe Government by tbe company on
compIetIon oI seven years. Tbe Government Is requIred to utIIIze tbIs
amount tbrougb an Investor EducatIon and ProtectIon Fund. For tbIs
purpose, tbe proceeds Irom tbe companIes are credIted to tbe
ConsoIIdated Fund oI IndIa tbrougb tbIs Iund. TbIs constItutes a
cumbersome mecbanIsm and bas to be careIuIIy examIned In context oI
tbe rIgbts oI boIders oI securItIes and tbe roIe oI tbe Government In
protectIng tbem wbIIe provIdIng resources Ior Investor educatIon.
12.2 Tbe CommIttee recognIzes a need Ior ensurIng tbe exproprIated
amounts to be credIted back to tbe IEPF In tbeIr entIrety. It wouId be
desIrabIe II tbIs Is enabIed tbrougb a dIrect transIer oI uncIaImed
amounts dIrectIy to a separate statutory Iund under tbe controI,
supervIsIon and management oI an AdmInIstrator, wItbout routIng It
tbrougb ConsoIIdated Fund oI IndIa. Tbe Government sbouId aIso
provIde Iunds to augment tbe corpus oI tbe Iund tbrougb grants wbIcb
may be properIy depIoyed and managed. Returns Irom sucb a Fund
sbouId be avaIIabIe to be utIIIzed Ior a comprebensIve programme oI
educatIon oI smaII Investors. Tbe Fund may tben be entrusted wItb IuII
IIedged responsIbIIIty to carry out actIvItIes Ior educatIon oI Investors and
protectIon oI tbeIr rIgbts.
12.3 Tbe CommIttee aIso dIscussed varIous means by wbIcb Iunds
aIready avaIIabIe under tbe IEPF couId be utIIIzed more eIIectIveIy. It
noted tbat tbe MInIstry oI Company AIIaIrs, wbo admInIster tbe Fund,
bad aIready InItIated some scbemes In tbIs regard. Tbe CommIttee
recommended tbat tbe structure and admInIstratIon oI tbe Fund sbouId
be revamped as above and scbemes sbouId be made more comprebensIve
and tbeIr scope expanded to enabIe IIow oI correct InIormatIon to tbe
Investors as weII as tbeIr educatIon In respect oI tbeIr rIgbts. Sucb
programmes sbouId bave specIaI components Ior educatIon at
scbooIJcoIIege IeveI, on IIne and dIstance IearnIng, support genuIne
eIIorts In tbe Non-GovernmentaI sector, InIormatIon coIIectIon, researcb
and anaIysIs on matters oI smaII Investor concerns, enabIe capacIty
buIIdIng oI adjudIcators sucb as Consumer Courts on Issues InvoIved In
IegaI redressaI oI Investor compIaInts.
State exproprIatIon oI dIvIdend
13. Tbe mecbanIsm oI exproprIatIng certaIn uncIaImed amounts due
to tbe Investors Ior transIer to tbe IEPF as provIded In tbe present Iaw
aIso raIses a basIc Issue as to tbe rIgbt oI tbe State to exproprIate sucb
proceeds wben tbe underIyIng Instrument or securIty Is stIII In tbe bands
oI tbe Investor wbo bas not been abIe to cIaIm It Ior any reason. Tbe
CommIttee remaIned unconvInced as to bow tbe rIgbts oI tbe cIaImant
boIdIng a partIcuIar Instrument couId be extInguIsbed In sucb cases. In
vIew oI tbe CommIttee, Iaw sbouId enabIe Investors to cIaIm returns on
tbe securItIes as Iong as sucb Instruments are beId by tbem. Court
ordered reIunds sbouId aIso be made Irom tbe Iunds avaIIabIe wItb IEPF.
For tbIs purpose, tbere sbouId be suItabIe amendment In tbe Iaw. It goes
wItbout sayIng tbat tbe procedure Ior makIng cIaIms aIso needs to be
sImpIIIIed to IacIIItate reImbursement oI sucb cIaIms speedIIy. Tbere was,
tbereIore, a need to revIew tbe exIstIng provIsIons oI SectIon 20S C oI tbe
CompanIes Act and payment oI unpaId dIvIdend to tbe IegItImate
cIaImants, IrrespectIve oI tbe Iapse oI tIme.
RoIe oI NGOs In Investors educatIon
14. Many probIems reIatIng to Investors, partIcuIarIy, smaII Investors,
can be tackIed by educatIng tbe Investors. SmaII Investors sbouId be
encouraged to eItber Invest tbrougb MutuaI Fund mecbanIsms, or
sbouId take Investment decIsIons onIy aIter gettIng adequate InIormatIon
about rIsks and rewards. Tbe Investors sbouId aIso be encouraged to
partIcIpate In tbe proceedIngs at generaI meetIngs (eItber pbysIcaIIy or
tbrougb postaI baIIot, IncIudIng by eIectronIc medIa) In a constructIve
manner. TbIs requIres ImprovIng tbe generaI awareness oI tbe Investors
tbrougb InIormaI mecbanIsms. Tbe beIp oI varIous NGOs engaged In
Investor protectIon actIvItIes sbouId aIso be taken Ior tbIs purpose. Tbe
CommIttee perceIves a posItIve roIe Ior Investors' AssocIatIons J NGOs In
tbIs regard wbIcb sbouId be supported by botb tbe Government as weII
as corporate entItIes.
CIass ActIon J DerIvatIve SuIts
1S. A sItuatIon may arIse wbereby tbe Interest oI tbe company may
need to be protected Irom tbe actIons oI tbe persons In controI oI tbe
company. At tbe same tIme, tbe Interests oI tbe Iarger body oI
InvestorsJsbareboIders may bave to be provIded IegaI avenues to protect
tbe company In tbeIr Interest. For tbIs purpose, tbe Iaw sbouId provIde
Ior 'cIass actIonJderIvatIve suIts on bebaII oI deposItorsJsbareboIders.
Tbe promoters, managers beId guIIty oI mIsIeasance J Iraud sbouId be
asked to pay tbe IegaI costs, II proven guIIty. TbIs concept bas been
consIdered by tbe CommIttee wbIIe examInIng Issues reIatIng to mInorIty
rIgbts. Tbe CommIttee IeeIs tbat sImIIar prIncIpIes wouId aIso be reIevant
Ior Investor protectIon and recommends tbe same.
DIscIosures and Investor ProtectIon
16.1 Tbe CommIttee Is oI tbe vIew tbat proper and tImeIy dIscIosures
are centraI to saIeguardIng Investor Interests. Tbe Iaw sbouId ensure a
dIscIosure regIme tbat compeIs companIes to dIscIose materIaI
InIormatIon on a contInuous, tImeIy and equItabIe basIs. InIormatIon
sbouId be dIscIosed wben It Is stIII reIevant to tbe market. Tbe companIes
sbouId, tbereIore, be made to dIscIose routIne InIormatIon on a perIodIc
basIs and prIce sensItIve InIormatIon on a contInuous basIs. CapItaI
market reguIator and stock excbanges bave a sIgnIIIcant roIe to pIay In
ensurIng tbat sucb InIormatIon Is accessIbIe by aII market partIcIpants
ratber tban a Iew seIect market pIayers.
16.2 Use oI modern tecbnoIogy, Internet, computers, sbouId be enabIed
to enbance tbe eIIIcIency oI tbe dIscIosure process. It sbouId be possIbIe
to submIt and dIssemInate IInancIaI and non-IInancIaI InIormatIon by
eIectronIc means.
16.3 Law sbouId aIso provIde a regIme Ior enIorcement oI standards Ior
accountIng, audIt and non-IInancIaI dIscIosure tbrougb settIng oI sucb
standards and tbeIr eIIectIve monItorIng and enIorcement. At tbe same
tIme, tbe Government sbouId ensure tbe proIessIonaI Independence oI
standard setters, transparency oI tbeIr actIvItIes and adequate means oI
dIscIpIInIng deIauIters.
16.4 Tbere sbouId be a regIme oI strIngent penaItIes, botb cIvII and
crImInaI Ior deIauIt In dIscIosure.
Cbapter VIII : Access to CapItaI
1. CapItaI Is essentIaI Ior a busIness to conduct Its operatIons and to
grow. In a competItIve and Iast cbangIng busIness envIronment, It Is
crItIcaI Ior busIness to raIse capItaI oI tbe rIgbt amount, In tbe rIgbt
Iorm, at tbe rIgbt tIme and at tbe rIgbt prIce. Tbere Is a need, tbereIore,
Ior IIexIbIIIty to manage capItaI dynamIcaIIy and to enabIe reaIIocatIon oI
capItaI between busInesses. In order to enabIe speedIer access to capItaI
and enabIe eIIectIve capItaI management, tbere Is a need to enabIe use oI
a wIde array oI capItaI Instruments In tbe backdrop oI streamIIned
statutory and reguIatory Iramework. Sucb a Iramework sbouId aIIow
greater IIexIbIIIty Ior Issuers meetIng deIIned crIterIa and aIIow a
IunctIonIng market Ior acquIsItIon oI corporate controI.
2. However matters reIatIng to management and maIntenance oI
capItaI are equaIIy Important. Tbe Iaw sbouId, tbereIore, address
ownersbIp rIgbts eIIectIveIy by enabIIng proper regIstratIon oI ownersbIp,
transIer oI sbares, exercIse oI votIng rIgbts, equItabIe sbarIng In tbe
proIIts oI tbe company and partIcIpatIon In decIsIon makIng on tbe basIs
oI reportIng requIrements tbat enabIe transparency oI IInancIaI
operatIons by tbe corporates. At tbe same tIme, It sbouId IacIIItate
dIscIosure oI actuaI controI structures and probIbItIon oI InsIder tradIng
as weII as management entrencbment. We IeeI tbat InternatIonaI best
practIces sbouId be adapted to tbe IndIan sItuatIon wbIIe enabIIng a
Iramework tbat ensures credIbIIIty oI corporate operatIons In tbe mInds
oI tbe stakeboIders.
ReguIatIon oI FInancIaI ServIces
3. In some countrIes, separate enactment bas been brougbt about to
reguIate certaIn aspects pertaInIng to IInancIaI aspects oI corporate
operatIon, sucb as tbe FInancIaI ServIces Act, 19S6 oI tbe UK. Tbe
objectIve oI sucb IegIsIatIon couId be dIscerned as consoIIdatIon oI
varIous provIsIons reIatIng to securItIes, standardIzatIon oI ruIes
concernIng cIvII and crImInaI IIabIIIty Ior omIssIons and mIs-statements
In oIIer documents as aIso brIngIng tbe content oI aII sucb documents
wItbIn a sIngIe set oI IegaI provIsIons. Tbe purpose was to enabIe tbe
Government to set out tbe proceduraI aspects and tbe InIormatIon
dIscIosures to be provIded In tbe Iorm oI reguIatIons and to provIde a
mecbanIsm oI keepIng tbIs up to date tbrougb secondary IegIsIatIon. In
IndIa, tbIs Iramework Is provIded tbrougb tbe CompanIes Act, 19S6, tbe
SecurItIes Contract (ReguIatIon) Act (SCRA) and tbe SEBI Act. It Is not
desIrabIe to add to IegIsIatIve compIexIty and coordInatIon Issues by
addIng yet anotber enactment to tbe IIst. TbereIore, as tbe Government
takes up suItabIe revIsIons oI CompanIes Act, 19S6, we do not IInd any
pressIng requIrement Ior a separate FInancIaI ServIces Act.
StreamIInIng reguIatory Iramework
4. Tbere Is bowever a case Ior barmonIzatIon oI operatIon oI varIous
Government entItIes In tbe IInancIaI aspects oI corporate operatIon. We
IeeI tbat a re-orIentatIon oI tbe CompanIes Act ItseII can enabIe tbIs.
WbIIe It wouId be essentIaI to provIde IegIsIatIve basIs Ior tbe core
governance prIncIpIes reIatIng to maIntenance and management oI
capItaI by tbe corporate keepIng In vIew tbe Interests oI tbe sbareboIders
and credItors, tbe processes In tbe pubIIc domaIn subsequent to a
company makIng a pubIIc Issue oI capItaI are compIex and requIre to be
reguIated In context oI tbe ever cbangIng and growIng capItaI market.
Tbe capItaI market reguIator bas a sIgnIIIcant roIe to pIay In tbIs regard.
TbereIore tbere Is no need Ior tbe CompanIes Act to go Into sucb
proceduraI detaIIs apart Irom prescrIptIons tbat enabIe proper
admInIstratIon oI tbe CompanIes Act. Instead tbe CompanIes Act sbouId
bave enabIIng provIsIons tbat aIIow sucb proceduraI aspects to be taken
Into account as prescrIbed by tbe capItaI market reguIator. It sbouId be
possIbIe to enabIe sucb barmony oI tbe statute wItb pronouncements
made by reguIators or stock excbanges tbrougb tbeIr reguIatIonsJIIstIng
agreements by requIrIng tbat sucb reguIatIons be read wItb reIerences In
tbem to tbe provIsIons In tbe CompanIes Act.
S. Tbe CommIttee Is oI tbe vIew tbat tbe basIc Iramework Ior
governance Issues reIatIng to maIntenance and management oI capItaI,
tbe rIgbts IIowIng Irom ownersbIp oI sucb capItaI and reguIatIon oI
varIous stakeboIders In a corporate entIty wItb regard to capItaI sbouId
be addressed In tbe CompanIes Act. However, tbe capItaI market
reguIator bas an Important roIe to pIay In reguIatIng tbe roIe oI tbe
corporate Issuers and tbe Investors as weII as tbat oI tbe IInancIaI
IntermedIarIes, once a corporate enters tbe capItaI market. WbIIe tbere Is
no requIrement Ior tbe capItaI markets reguIator to go Into InternaI
governance processes oI tbe corporate, matters wbIcb are wItbIn
reguIatIon makIng powers oI sucb reguIator, need not be subsumed
wItbIn tbe ruIe makIng powers under tbe Company Law. Tbe reguIator
sbouId assess tbe IIabIIIty oI tbe corporate In terms oI tbe commItments
made by It In tbe pubIIc domaIn wbIIe seekIng Investors' partIcIpatIon.
Tbe IegaI Iramework sbouId provIde a mecbanIsm Ior dove-taIIIng oI tbe
substantIve provIsIons oI tbe Iaw wItb tbe detaIIed reguIatIons wbIcb may
be Issued by tbe market reguIator.
6. AII tbe Instruments oI State InterventIon, tbe MInIstry oI tbe
Government or tbe ReguIator constItuted by tbe Government under any
statutory Instrument IaII wItbIn tbe Government domaIn. It Is necessary
Ior tbe Government to enabIe necessary coordInatIon In tbe matter. Tbe
presence oI tbe ReguIator does not aIso mean tbat tbe State Is absoIved
oI aII responsIbIIIty In tbat partIcuIar domaIn. Tbe experIence In tbe
capItaI markets In tbe 1990s, wbIcb wItnessed two major stock market
scams are a case In poInt. Tbe recommendatIons oI tbe JoInt
ParIIamentary CommIttee aIso bIgbIIgbt tbe need Ior eIIectIve
coordInatIon In tbIs regard.
?. We IeeI tbat tbe reguIatory gaps cannot be pIugged by carvIng out
oI domaIn. Ratber, In a IIuId and compIex sItuatIon tbIs may create
Iurtber gaps tbat may be expIoIted by unscrupuIous eIements. Instead
sucb gaps are to be deaIt wItb by barmonIous InterpretatIon and mutuaI
capacIty buIIdIng by tbe Government and Its ReguIatory agencIes. At tbe
same tIme, respectIve enactments cIearIy specIIy tbe jurIsdIctIon oI eacb
agency. Tbere Is no requIrement Ior provIdIng Ior concurrent jurIsdIctIon
sInce sucb arrangements resuIt In conIusIon In terms oI actIon to be
taken by eacb. TbereIore, tbe CommIttee recommends tbat sImuItaneous
to tbe barmonIous reguIatory approacb provIdIng Ior space to eacb
reguIator to operate eIIectIveIy In tbeIr domaIn, provIsIons In tbe
CompanIes Act aIIowIng muItIpIe jurIsdIctIons may be done away wItb.
Tbe CommIttee Is oI tbe vIew tbat tbIs approacb wouId not restrIct tbe
IunctIonIng oI tbe capItaI market reguIator In any manner but wouId
Iocus Its eIIorts more meanIngIuIIy on capItaI market Issues. Furtber, tbe
CommIttee Is oI tbe vIew tbat tbe reguIatory approacb sbouId not resuIt
In an IntrusIve system oI controIs or revert back to tbe regIme
admInIstered by tbe ControIIer oI CapItaI Issues tbat exIsted prIor to tbe
estabIIsbment oI SEBI.
S. We are aIso oI tbe vIew tbat tbere Is a need Ior dIIIerent agencIes
to Interact wItb eacb otber more comprebensIveIy In operatIonaI matters
to enabIe sucb coordInatIon. InteractIon between SEBI and MCA need
not be IImIted to CentraI MonItorIng CommIttee on VanIsbIng CompanIes
or representatIon on tbe SEBI Board, but may be augmented Iurtber
tbrougb InstItutIonaI mecbanIsms tbat enabIe consuItatIon on varIous
Issues on a reguIar basIs. TbIs wIII enabIe tbe Government to present a
common Iramework to tbe corporate sector, tbereby resoIvIng reguIatory
uncertaInty.
SImpIIIyIng approvaI requIrements
9. It Is IeIt tbat at present tbere are muItIpIe approvaI requIrements
Ior raIsIng capItaI by companIes. Sucb companIes bave to expend tIme
and energy In obtaInIng approvaIs and compIetIng tbe admInIstratIve
processes InvoIved. It Is recognIzed tbat Issue oI capItaI by varIous
cIasses oI companIes may bave to be overseen by tbe concerned reguIator
sucb as SEBI (In tbe case oI IIsted companIes) or tbe RBI (In tbe case oI
BankIng and NBFCs). In sucb cases, oversIgbt by sucb ReguIators Is aIso
essentIaI. However, tbIs process sbouId be made tIme bound wItb
IntroductIon oI tbe concept oI deemed approvaI. TbIs sbouId equaIIy
appIy to admInIstratIve processes sucb as tbe IIIIng and regIstratIon oI
documents wItb tbe ROCs.
10. It Is aIso IeIt tbat varIous tIme IImIts prescrIbed In tbe Act Ior
varIous steps InvoIved In raIsIng oI capItaI sbouId be ratIonaIIzed and
reduced wberever possIbIe. Tbe communIcatIon cbanneIs avaIIabIe to tbe
corporates Ior tbe purpose oI dIssemInatIon oI InIormatIon sbouId aIso be
augmented by aIIowIng use oI eIectronIc medIa In tbe process oI Issue oI
capItaI.
To sum up :-
(a) BasIc Iramework and provIsIons reIatIng to Issue and
management oI capItaI, rIgbts IIowIng Irom ownersbIp oI
capItaI and reguIatIon oI varIous stakeboIders wItb regard to
capItaI sbouId be addressed In tbe CompanIes Act.
(b) CapItaI market reguIator sbouId work out tbe detaIIs tbrougb
reguIatIons governIng tbe operatIon oI tbe capItaI market.
Tbere sbouId be suItabIe dove-taIIIng between substantIve
provIsIons oI tbe Act and tbe reguIatIons oI tbe CapItaI Market
ReguIator.
(c) TImeIrame prescrIbed under Iaw Ior process oI Issue oI capItaI
sbouId be ratIonaIIzed and reduced. It sbouId be brougbt at
par wItb InternatIonaI practIces.
(d) Tbe processes on tbe part oI reguIators and otber
admInIstratIve bodIes sbouId be made tIme bound wItb tbe
IntroductIon oI tbe concept oI Deemed ApprovaI.
(e) Corporate Issuers oI capItaI sbouId aIso be aIIowed to use
eIectronIc medIa In tbe process oI Issue oI capItaI.
Costs oI raIsIng capItaI- SbeII Prospectus
11. Tbe Issue oI capItaI tbrougb reIease oI a prospectus InvoIves
varIous processes tbat are tIme consumIng and costIy. Sucb processes
aIso bave to be repeated II tbe corporate requIres to access capItaI agaIn.
It sbouId be possIbIe to avoId sucb costs. PresentIy tbe CompanIes Act
recognIzes tbe concept oI SbeII Prospectus wbIcb Is appIIcabIe Ior a
perIod oI tIme wbIcb Is specIIIed In tbe Act. At tbe tIme oI subsequent
Issue onIy specIIIed materIaI cbanges need to be IndIcated. TbIs concept
may be extended to cIasses oI companIes as may be recommended by tbe
capItaI market reguIator Irom tIme to tIme, tbrougb Issue oI notIIIcatIon
under tbe Act. It Is advIsabIe tbat suItabIe crIterIa Ior IdentIIyIng sucb
companIes tbat may be acknowIedged as WeII Known Seasoned Issuers
(WKSI), may be evoIved by SEBI tbrougb reguIatIon In respect oI
corporates wbIcb raIse capItaI more IrequentIy. Sucb corporates may be
aIIowed to provIde a MaIn Document In a year and tbereaIter onIy
IncrementaI cbanges sbouId be reportabIe by tbem every tIme tbey
access tbe market durIng tbe currency oI sbeII-prospectus.
RIgbts Issues
12. At present makIng a RIgbts Issue takes tbree montbs to be
compIeted tbus ImposIng a deIay In tbe company accessIng tbe Iunds
raIsed tbrougb Issue oI rIgbts. TbIs process sbouId be revIewed In
comparIson wItb InternatIonaI practIces so tbat tbe process In tbe IndIan
context can be compIeted In a comparabIe tIme, keepIng In vIew tbe
requIrement to aIIord a reasonabIe opportunIty to tbe Investors to
exercIse tbe rIgbt In IndIan context. It may be possIbIe to take up some oI
tbe actIvItIes sImuItaneousIy.
Deemed pubIIc oIIerIng
13. At present an oIIerIng made to S0 or more persons Is deemed to be
a PubIIc OIIer. ExemptIon Is avaIIabIe Irom tbIs requIrement to NBFCs
and PFIs. Tbere Is a ratIonaIe Ior provIdIng exemptIon to rIgbts Issues by
unIIsted companIes and Issue oI sbares to empIoyees oI prIvate
companIes Irom tbe operatIon oI tbIs provIsIon. AII IIsted companIes
seekIng to raIse capItaI sbouId be subjected to tbe dIscIpIIne oI pubIIc
Issue aIong wItb tbe attendant reguIatIon. In reckonIng tbe S0 or more
persons to wbom tbe oIIer may be made, tbe QuaIIIIed InstItutIonaI
Buyers (QIBs) may be excIuded, sInce sucb entItIes wouId be InIormed
Investors and do not requIre tbe same IeveI oI detaIIed dIscIosures
necessary Ior otber Investors. Tbe capItaI market reguIator may deIIne
QIBs approprIateIy. Tbe CompanIes Act sbouId acknowIedge and take
Into account sucb categorIzatIon.
TrackIng and Treasury Stocks
14.1 TradItIonaIIy, companIes Issue sbares, wbIcb represent tbe capItaI
oI tbe company, as a wboIe. Sbares Issued represent combIned vaIue oI
aII dIvIsIons oI tbe company. However, IInancIaI perIormance oI one or
more busIness undertakIngs couId be consIdered as a basIs Ior provIdIng
tbe sbareboIders beneIIts oI tbe proIIts oI sucb busIness undertakIng.
However, tbIs wIII requIre a specIaI category oI sbares to be Issued
termed as 'TrackIng Sbares' .Sucb TrackIng Sbares wouId conIer on tbe
boIders tbereoI a rIgbt to partIcIpate In tbe dIvIdend decIared by tbe
company based on tbe recommendatIon oI tbe Board oI DIrectors oI tbe
company Irom tbe proIIts oI tbat partIcuIar dIvIsIon. Tbe pubIIc Issue oI
sucb trackIng sbares IncIudIng as to InItIaI and contInuIng dIscIosures
may bave to be governed by sucb ruIes, reguIatIons or guIdeIInes as may
be prescrIbed by tbe capItaI market reguIator. Tbe accountIng treatment
oI trackIng sbares and matters connected tberewItb wouId be governed
by accountIng standards Ior tbe purpose. It Is IeIt tbat tbIs concept
wouId Increase tbe deptb oI capItaI market. However, tbIs wouId requIre
deveIopment oI specIIIc accountIng standards Ior tbe purpose as aIso
deveIopment oI monItorIng and controI mecbanIsm by tbe Stock
Excbanges and tbe CapItaI Market ReguIator.
14.2 SectIon ??A oI tbe CompanIes Act, 19S6 provIdes Ior buy-back oI
securItIes. Once bougbt back tbe reIevant securItIes are to be
extInguIsbed. InternatIonaIIy, bowever, a company can, subject to certaIn
restrIctIons, boId bougbt back sbares In ItseII under tbe name Treasury
Stock". In otber words, Treasury Stock are tbe sbares wbIcb a company
IegItImateIy boIds on Its sbare regIster In Its own name. Tbe votIng rIgbts
on tbese Treasury Stocks are suspended and company can not exercIse
votIng rIgbts on sucb sbares. No dIstrIbutIon oI dIvIdend (IncIudIng
dIvIdend durIng wIndIng up) can be made to sucb stock.
14.3 Tbere may be some advantage In tbIs In raIsIng oI Iunds at a Iower
cost as and wben need arIses sInce pubIIc Issue wouId be avoIded.
However, tbIs concept couId come In tbe way oI operatIng market Ior
takeover oI management controI wbIcb Is an essentIaI IngredIent.
BesIdes, monItorIng and supervIsIon requIrements wouId be compIex
sInce sucb sbares wouId not carry votIng rIgbts and wouId requIre to be
tracked careIuIIy by tbe market reguIators. At tbIs stage, tbIs wouId
Impose addItIonaI reguIatory compIexIty to prevent manIpuIatIon oI
sbares, IramIng suItabIe accountIng and taxatIon poIIcIes and recodIIyIng
tbe takeover code as a resuIt oI Increase or decrease In sbareboIdIng.
14.4 Tbe CommIttee IeIt tbat a number oI preparatory actIons were
requIred beIore tbe concepts oI TrackIng Stocks and Treasury Stocks
couId be Introduced, IIke reguIatIons to be Iramed by capItaI market
reguIator, deveIopment oI approprIate, specIIIc accountIng standards etc
and tbereIore recommends tbat wbIIe an enabIIng provIsIon Ior TrackIng
J Treasury Stocks couId be Incorporated In tbe new Law, actuaI
IntroductIon oI TrackIng and Treasury Stocks In tbe IndIan CapItaI
Markets wIII need to be preceded by tbe preparatory actIon reIerred to
above and tbe Instrument Introduced onIy wben tbe necessary
Iramework Is ready.
Targeted Buy back
1S. Tbe concept oI targeted buyback, wbere an Issuer may buyback
sbares Irom a subset oI sbareboIders on a preIerentIaI basIs was
examIned by tbe CommIttee. Tbe IacIIIty Is used In some countrIes (a)
eIIectIng a bIock repurcbase Irom Iarge sbareboIders (b) eIIectIng
purcbases Irom empIoyees (c) tbwartIng takeover attempts. TbIs concept
Is not yet addressed In IndIan Law. TbIs bas been provIded Ior In certaIn
countrIes IIke USA, AustraIIa etc. Tbe CommIttee IeeIs tbat tbIs concept
couId come In tbe way oI proper operatIon oI a competItIve market Ior
management controI wbIcb Is an essentIaI IngredIent oI tbe CapItaI
Market. TbereIore, tbe CommIttee does not IInd tbIs mecbanIsm to be
approprIate at tbIs stage.
PerpetuaI PreIerence sbares
16. At present preIerence sbares can be Issued Ior a maxImum perIod
oI 20 years. SInce many companIes may IIke to raIse capItaI oI a quasI
equIty and permanent nature on account oI Iong gestatIon project capItaI
requIrements, It Is IeIt tbat tbe concept oI perpetuaI preIerence sbares or
preIerence sbares oI bIgber tenure may be permItted In tbe new Law.
Tbere sbouId be IIexIbIIIty to tbe company to revIse tbe tenure by
obtaInIng prescrIbed approvaI oI sbareboIders Ior varIatIon oI rIgbts. Tbe
CommIttee recommends tbat companIes sbouId be permItted to Issue
perpetuaIJ Ionger duratIon preIerence sbares and tbat returns Irom sucb
sbares may be IInked to market bencbmark or reset perIodIcaIIy. In case
tbe subscrIber oI perpetuaI preIerence sbares wants to redeem bIs sbares
prematureIy, necessary enabIIng provIsIons to redeem tbe sbares by tbe
company up to a certaIn percentage oI preIerence sbares on an annuaI
basIs may be provIded. TbIs may be done tbrougb caIIJput optIon
mecbanIsm".
RedemptIon and DIvIdend on CumuIatIve RedeemabIe PreIerence
Sbares
1?.1 II a company Is redeemIng cumuIatIve preIerence sbares by Issue
oI Iresb capItaI, tbe company sbouId be permItted to raIse necessary
amounts tbrougb sucb Issues to cover tbe arrears oI preIerence dIvIdend
apart Irom tbe amount requIred Ior redemptIon oI preIerence sbares.
TbIs can be enabIed wbetber or not tbe company bad made adequate
proIIts durIng tbe reIevant IInancIaI year In wbIcb redemptIon Is
proposed to be carrIed out wItb a condItIon tbat Interest on borrowed
capItaI Is paId.
1?.2 Tbe CommIttee Iurtber noted tbat tbe exIstIng Iramework resuIted
In certaIn ambIguItIes In respect oI arrears oI cumuIatIve preIerence
dIvIdend on conversIon oI sucb preIerence sbares Into equIty sbares,
amaIgamatIonJmerger oI a company bavIng sucb arrears oI preIerence
dIvIdend. Tbe CommIttee Is oI tbe vIew tbat sucb ambIguItIes need to be
resoIved In a manner tbat tbe rIgbts oI boIders oI sucb sbares, reIatabIe
to tbe perIod oI sucb boIdIngs are adequateIy protected.
CapItaI ReductIon
1S. In tbe exIstIng Act tbe reductIon oI capItaI bas to be approved by
sbareboIders by way oI specIaI resoIutIon IoIIowed by tbe sanctIon oI tbe
HIgb Court. TbIs Is a tIme consumIng process. In order to provIde
IIexIbIIIty and tIme savIng, It Is approprIate tbat InstItutIonaI mecbanIsm
sucb as tbe courts J proposed NatIonaI Company Law TrIbunaI (NCLT)
may decIde on sucb Issues In a tIme-bound manner wItb due saIeguards
Ior Interests oI credItors.
DIscIosure Norms
19.1 In regard to access to CapItaI, tbere Is a need Ior proper dIscIosure
at every stage so as to make tbe busIness actIvItIes more transparent and
Investor IrIendIy. Tbere Is a need Ior IdentIIIcatIon and dIscIosure oI tbe
crItIcaI accountIng estImates and prIncIpIes. SbareboIders sbouId be
kept InIormed about aII materIaI Iacts wbIcb sbouId aIso get posted on
tbe websIte. Tbere sbouId be proper dIscIosure about tbe sbareboIdIng
structure Irom tIme to tIme. Sucb dIscIosures sbouId cIearIy reveaI
actuaI controI structures tbrougb dIrect or IndIrect sbareboIdIng and
sbouId be made part oI tbe AnnuaI Report oI tbe company. Tbus,
reduced reguIatory InterventIon sbouId be compIemented by Increased
dIscIosure Ior eIIectIve capItaI market supervIsIon.
19.2 Tbe companIes sbouId be aIIowed to raIse capItaI so Iong as tbey
provIde true and correct InIormatIon to Investors and tbe reguIators.
Tbere couId be IIexIbIIIty to raIse capItaI by makIng adequate dIscIosures.
However non compIIance wItb dIscIosure norms or raIsIng money
IrauduIentIy sbouId be subject to strIct penaIty regIme
Access to PubIIc DeposIts
20.1 It was brougbt to tbe notIce oI tbe CommIttee tbat a number oI
compIaInts by deposItors In respect oI deposIts made by tbem wItb
corporate entItIes are beIng receIved by MInIstry oI Company AIIaIrs
(MCA) and Reserve Bank oI IndIa (RBI). Tbere was, tbereIore, a vIew In
tbe CommIttee tbat tbe provIsIons reIatIng to aIIowIng Non-BankIng,
Non-FInance CompanIes to accept deposIts Irom pubIIc sbouId be
revIewed and tbat sucb companIes be probIbIted compIeteIy Irom
acceptIng deposIts. However, anotber vIew was tbat sInce acceptance oI
deposIts Is one oI tbe ways tbrougb wbIcb companIes (IncIudIng Non-
BankIng, Non FInance CompanIes) raIse IInances, tbere sbouId not be
compIete ban Ior acceptIng deposIts. Instead, tbe norms Ior acceptIng
deposIts by sucb companIes sbouId be made strIcter.
20.2. Tbe CommIttee, tbereIore, IeeIs tbat tbe regIme oI acceptance and
InvItatIon oI PubIIc DeposIts sbouId be made strIcter. Tbere couId be two
sets oI process vIz. Ex ante processes and Ex Post processes
Ex-ante Processes :-
ReguIatIon IncIudIng :-
(I) DIscIosure requIrement - Tbe company acceptIng deposIts
sbouId be mandated to make approprIate dIscIosures
tbrougb Issue oI advertIsement (text oI wbIcb sbouId be
detaIIed and prescrIbed by way oI ruIes) In tbe
newspapers, one EngIIsb and one vernacuIar. Tbe
appIIcatIon Iorms soIIcItIng deposIts sbouId aIso IndIcate
aII sucb dIscIosures. BesIdes, tbere sbouId be certaIn
documents (IIke baIance sbeets J annuaI reports) oI tbe
company wbIcb sbouId be open Ior InspectIon by
potentIaI deposIt boIders. On demandJpayment oI
requIsIte Iees, tbese sbouId aIso be made avaIIabIe to
potentIaI deposIt boIders.
(II) CompuIsory credIt ratIng - No company sbouId be aIIowed
to raIse deposIts unIess It obtaIns a credIt ratIng Irom
SEBI regIstered CredIt RatIng AgencIes. Tbere sbouId be
a mInImum credIt ratIng prescrIbed In tbe Act J RuIes
Ior enabIIng any company to go Ior InvItIng deposIts.
Furtber, tbe ratIng sbouId aIso be revIewabIe J
renewabIe aIter every two years.
(III) CreatIon oI reserves - BesIdes maIntaInIng certaIn
percentage oI deposIts InvIted J accepted In IIquId
Iunds, every company InvItIng J acceptIng deposIts
sbouId aIso be requIred to transIer certaIn amounts (out
oI proIIts) every year In a separate casb reserve created J
earmarked onIy Ior tbe purpose oI utIIIzatIon Ior
payment to deposIt boIders.
Ex-post processes :-
Tbese sbouId IncIude settIng up oI a dIspute resoIutIon
mecbanIsm and penaItIes tbat deter IrresponsIbIe J IrauduIent
bebavIour by corporates. Focus under sucb measures sbouId be
on boIsterIng conIIdence tbrougb an eIIectIve dIspute resoIutIon
mecbanIsm as weII as penaIIzIng oI IrresponsIbIeJIrauduIent
bebavIour by companIes. A provIsIon sImIIar to SectIon 6S oI tbe
Act, presentIy coverIng punIsbment Ior IrauduIent Inducement Ior
Investment In sbares sbouId be made In respect oI deposIts aIso.
Insurance Ior DeposIt HoIders
21. Tbe CommIttee members deIIberated on tbe Issue reIatIng to
Insurance Ior deposIt boIders. Tbougb It was brougbt to tbe notIce oI tbe
CommIttee tbat tbere are certaIn dIIIIcuItIes on tbe part oI Insurance
companIes In treatIng DeposIt" as an InsurabIe product, tbe CommIttee
members IeIt tbat steps sbouId be taken In consuItatIon wItb Insurance
companIes so tbat rIsk on tbe part oI deposIt boIders Is reduced tbrougb
Insurance. Tbe CommIttee IeIt tbat deposIt Insurance mecbanIsm
sbouId be enabIed In consuItatIon wItb Insurance CompanIes. TbereIore
tbe CommIttee recommends tbat pubIIc deposIt sbouId be aIIowed to be
InvIted or accepted onIy on compIIance oI Ex-ante and Ex-Post processes
wbIcb IncIude sound InternaI controIs, dIscIosure requIrements,
earmarkIng oI reserves In respect oI deposIt amount and mecbanIsm to
resoIve grIevances and compIaInts oI deposItors. Furtber, tbe reguIatory
mecbanIsm sbouId provIde Ior suspendIng Iuture deposIt takIng actIvIty
In case oI deIauIt In compIIance wItb tbe ruIes reIatIng to Acceptance oI
DeposIts on tbe part oI company.
RegIstratIon oI Cbarges
22. At present tbe provIsIons oI tbe Act requIres tbat botb tbe
borrower and tbe Iender wIII bave to sIgn tbe cbarge documents beIore
IIIIng wItb tbe ROC Ior regIstratIon. Tbere bave been Instances wbere
subsequent dIsputes between tbe borrower and tbe Iender resuIt In non
compIIance wItb tbe provIsIons requIrIng mandatory IIIIng. TbIs process
bas to be streamIIned. Company Law RuIes sbouId be amended to
provIde II tbe borrower does not regIster tbe Cbarge wItbIn a IIxed tIme,
tbe Iender may regIster tbe same In a specIIIc tIme Irame aIong wItb
copIes oI reIevant documents creatIng tbe cbange, wItb IntImatIon to tbe
Borrower.
Non-casb consIderatIon to be vaIued beIore aIIotment
23.1 Tbe Law sbouId specIIIcaIIy provIde tbat a pubIIc company sbaII
not aIIot sbares as IuIIy or partIy paId-up otberwIse tban In casb, unIess
tbe consIderatIon Is IndependentIy vaIued by a vaIuer appoInted by tbe
company In consuItatIon wItb tbe aIIottee and tbe vaIuatIon Is made
known to tbe aIIottee and tbe concerned ReguIator. Tbere may be
suItabIe provIsIons to provIde Ior an eventuaIIty wbere a company Is
aIIottIng sbares In connectIon wItb Its merger wItb anotber company,
wbere one oI tbe companIes proposes to acquIre aII tbe assets and
IIabIIItIes oI tbe otber company. Tbe contents oI tbe vaIuer's report may
be specIIIed by tbe Act J RuIes. TbIs wouId aIso serve to protect tbe
MInorIty Interest. CommIttee IeeIs tbat detaIIed provIsIons are aIso
requIred to be provIded In tbe CompanIes Act as tbere Is a need Ior
vaIuatIon oI sucb non-casb consIderatIon by Independent vaIuers.
23.2 In tbe event a pubIIc company enters Into an agreement to
transIer non-casb assets to anotber pubIIc company, tbe consIderatIon
tbat bas to be receIved by tbe company and any consIderatIon otber tban
casb tbat may be gIven by tbe transIeree company, sbouId be
IndependentIy vaIued. A report In a specIIIed Iormat wItb respect to tbe
consIderatIon to be so receIved and gIven sbouId be requIred to be made
to tbe transIeror company wItbIn a specIIIed perIod precedIng tbe date oI
agreement. Tbe terms and condItIons oI sucb agreements sbouId be
subject to approvaI by tbe sbareboIders oI transIeror by an ordInary
resoIutIon.
Inter-corporate Ioans and Investments
24.1 Subsequent to tbe aboIItIon oI provIsIons oI SectIon 3?0 and 3?2
Irom tbe CompanIes Act w.e.I. 31-10-199S, tbe companIes are aIIowed to
seII reguIate Inter-corporate Ioans and Investments uJs 3?2A oI tbe Act.
Upon an examInatIon oI tbe nature oI transactIons tbat resuIted In Iarge
amount oI corporate Iunds wbIcb bave been dIverted to Stock Market Ior
prIce rIggIng, tbe JPC on Stock Market Scam bad recommended tbat
suItabIe mecbanIsm sbouId be devIsed so tbat tbe corporate Iunds are
not dIverted to stock market and tbe prIces rIggIng Is cbecked. DIversIon
oI Iunds tbrougb subsIdIary and assocIate companIes notIced durIng tbe
course oI examInatIon oI accounts oI companIes InvoIved In Stock Market
Scam-2001 IndIcate tbat tbe system oI seII reguIatIon regardIng Inter-
corporate Ioans and Investments envIsaged In tbe CompanIes
(Amendment) Act, 1999 bad not been very eIIectIve and requIres a re-
Iook. Necessary cbecks and baIances Ior tbe seII-reguIatory mecbanIsms
need to be put, so tbat tbe purpose oI seII reguIatIon Is served eIIectIveIy.
24.2 Tbe CommIttee IeeIs tbat tbe provIsIons oI tbe exIstIng SectIon
3?2A oI tbe current Act may be strengtbened to ensure tbat tbere Is no
mIsuse oI tbese provIsIons by corporates Ior prIce rIggIng or by dIversIon
oI Iunds. In partIcuIar dIscIosure requIrements sbouId be strengtbened
aIong wItb strIngent penaItIes Ior non compIIance. Tbe Iaw sbouId ensure
tbat tbe capacIty oI tbe corporate to Invest or Iend surpIus Iunds Is
estabIIsbed transparentIy. Tbere sbouId be a probIbItIon on companIes
makIng Ioans to stock brokers and stock brokIng IIrmJstock brokIng
companIes subject to tbe exemptIons presentIy provIded under SectIon
3?2 A oI tbe Act. However, tbIs sbouId not resuIt In regIme oI
Government approvaIs beIng re-Imposed In tbIs regard. Tbe CommIttee
was oI tbe vIew tbat sucb approvaI couId be accorded by way oI SpecIaI
ResoIutIon. Furtber, detaIIed dIscIosures sbouId be gIven In tbe AnnuaI
Report oI tbe IendIng company about tbe end use oI tbe Ioans and
advances by tbe recIpIent entIty Ior tbe Intended purpose. DIscIosures
sbouId aIso be prescrIbed In tbe expIanatory statement attacbed wItb tbe
notIce Ior tbe meetIng. IndIan corporates sbouId bowever not be pIaced
at a dIsadvantage vIs--vIs companIes Incorporated In otber jurIsdIctIons
In any InternatIonaI competItIve bIddIng sItuatIon Ior acquIsItIons.
PreIerentIaI AIIotments
2S. Tbe PreIerentIaI Issue oI equIty sbaresJIuIIy convertIbIe
debenturesJpartIy convertIbIe debentures or any otber IInancIaI
Instruments at a prIce unreIated to tbe prevaIIIng market Is a common
source oI raIsIng capItaI. TbIs practIce Is partIcuIarIy undesIrabIe as tbe
aIIotments are made to a seIect group oI persons (even to promoters)
wbIcb may be agaInst tbe Interest oI tbe otber Investors. SEBI bas
Iramed reguIatIons Ior aIIowIng preIerentIaI aIIotments wbIcb requIre
passIng oI specIaI resoIutIon, dIscIosures to be sent to sbareboIders and
a prIcIng IormuIa dependIng on stock market quotatIons oI tbe company.
It Is, tbereIore, necessary to Impose approprIate condItIons Ior sucb
aIIotments by unIIsted pubIIc companIes IncIudIng Ior proper vaIuatIon oI
sbares, compIIance oI wbIcb sbouId be made obIIgatory beIore a pubIIc
company Issues sbares on preIerentIaI basIs. It Is IeIt tbat In case oI
unIIsted pubIIc companIes, sucb aIIotment sbouId be made subject to
vaIuatIon by Independent vaIuers. Tbe CommIttee tbereIore recommends
tbat tbe Law sbouId provIde tbat In case oI pubIIc unIIsted companIes,
preIerentIaI aIIotment can be made on tbe basIs oI vaIuatIon by an
Independent vaIuer.
PenaIty Ior IrauduIentIy InducIng persons to Invest money
26. Tbe provIsIons oI tbe CompanIes Act reIatIng to penaItIes Ior
IrauduIentIy InducIng persons to Invest money sbouId be made more
strIngent. Tbe practIce reIatIng to ImposItIon oI penaItIes under
provIsIons In tbe present CompanIes Act bave been Iound to IneIIectIve
sInce tbere are not many cases under wbIcb punIsbment bas actuaIIy
been Imposed. Tbe IegaI procedure assocIated wItb sucb prosecutIon
sbouId be revIsIted so as to make tbe process more eIIectIve. Tbe oIIence
oI IrauduIent Inducement sbouId be non-compoundabIe. Tbe
Government may aIso consIder actIons sucb as attacbment oI bank
accounts In sucb cases subject to tbe orders oI JudIcIaI MagIstrate FIrst
CIass.
AIIotment wbere Issues are not IuIIy subscrIbed
2?. SectIon 69 oI tbe present Act probIbIts aIIotment oI sbares unIess
mInImum subscrIptIon Is receIved. Tbe Act does not contempIate
aIIotment wbere Issues are not IuIIy subscrIbed. It bas to be IeIt to tbe
management to decIde wbetber It can proceed to aIIot tbe sbares even II
Issues are not IuIIy subscrIbed, partIcuIarIy wben tbe capItaI market Is
voIatIIe. Tbe oIIer Ietter or tbe prospectus must IndIcate tbe
consequences wben tbe Issues are not IuIIy subscrIbed and tbe
condItIons stIpuIated, II any, In tbe matter. Tbe Law may aIIow, subject
to adequate dIscIosures and IuIIIIIment oI condItIons prescrIbed, to retaIn
subscrIptIon receIved pursuant to PubIIc OIIer so made, notwItbstandIng
non-receIpt oI amount oI mInImum subscrIptIon. Tbe capItaI market
reguIator sbouId aIso consIder suItabIe cbanges to enabIe sucb pubIIc
oIIers.
Sbares wItb dIIIerentIaI VotIng RIgbts
2S. Tbe CompanIes Act was amended In tbe year 2000 Ior provIdIng
Issue oI equIty sbares wItb dIIIerentIaI votIng rIgbts. However, tbe
CommIttee noted tbat tbere was a Iack oI cIarIty In tbe RuIes. AIso, tbere
were no correspondIng amendments eIIected In SectIon S? oI tbe Act. As
a resuIt no corporate couId avaII oI tbe beneIIts oI tbIs provIsIon. Tbe
CommIttee IeIt tbat IntroductIon oI concept oI sbares wItb dIIIerentIaI
votIng rIgbts sbouId be retaIned. However, cIarIty sbouId be brougbt
about In tbe Iramework oI assocIated ruIes to enabIe proper use oI sucb
Instrument.
NIDHI CompanIes
29.1 Tbe CompanIes Act empowers tbe CentraI Government to decIare
a company to be a NIDHI or mutuaI beneIIt socIety. Tbe genesIs oI tbIs
amendment IIes In tbe recommendatIon oI tbe Company Law
Amendment CommIttee In 1960 tbat tbe object oI tbe NIDHI companIes
was to enabIe tbe members to save money and to secure Ioans at
IavorabIe rates oI Interest. Tbe companIes IncuIcate tbe babIt tbrIIt In
tbe pubIIc. Tbe sbares oI sucb companIes are not oIIered to tbe pubIIc Ior
subscrIptIon. SInce appIIcatIon oI some oI tbe provIsIons oI tbe
CompanIes Act creates bardsbIp and crIppIes sIender resources avaIIabIe
to sucb companIes, tbey bave aIso been provIded wItb certaIn
exemptIons Irom tIme to tIme.
29.2 InItIaIIy tbe area oI operatIon oI tbe NIDHI companIes was IocaI -
wItbIn MunIcIpaIItIes and Pancbayats. However, some NIDHIs on
account oI tbeIr IInancIaI and admInIstratIve strengtb opened brancbes
even out sIde tbeIr IocaI terrItorIes tbougb tbe prIncIpIe oI mutuaI beneIIt
remaIned IundamentaI to tbem.
29.3 A Iew IaIIures oI IeadIng NIDHI companIes caused by
mIsmanagement oI tbose In controI and InvoIvIng Iakbs oI deposItors, Ied
tbe Government to constItute a CommIttee under tbe CbaIrmansbIp oI
SbrI P. Sabanayagam to examIne tbe varIous aspects oI tbe IunctIonIng
oI NIDHI companIes. Tbe CommIttee recommended depIoyment oI Iunds
In deposIts In NatIonaIIsed Banks, sanctIon oI Ioans agaInst specIIIed
securIty and as a percentage oI tbe vaIue oI a property oIIered as
securIty, IIxIng oI ceIIIng oI Interest on deposIt, restrIctIon on openIng oI
brancbes, appIIcabIIIty oI prudentIaI norms Ior Income recognItIon and
cIassIIIcatIon oI assets oI tbe NIDHI companIes. SubsequentIy, tbe
Government bas enabIed appIIcatIon oI prudentIaI norms In matters
reIatIng to Income recognItIon and cIassIIIcatIon oI assets and
provIsIonIng Ior non perIormIng assets.
29.4 NIDHI companIes are eIIectIveIy non-bankIng IInancIaI companIes
and are engaged In tbe busIness oI acceptIng deposIts and makIng Ioans
to tbeIr members. Tbe recent IaIIures In tbe NBFC sector aIso extended
to tbe NIDHI companIes compeIIIng tbe Government to Introduce strIct
prudentIaI norms Ior sucb companIes. Tbe deposIt takIng actIvItIes oI
NIDHIs are governed by tbe RBI Act and guIdeIInes made tbereunder.
Tbe power to gIve exemptIons to tbe NIDHI companIes In tbe
admInIstratIon oI NIDHI I.e. wItb tbe MInIstry oI Company AIIaIrs. TbIs
duaI controI Ieads to conIusIon In tbe admInIstratIon oI tbe provIsIons oI
tbe RBI Act and tbe CompanIes Act, 19S6. SInce, RBI Is tbe reguIator oI
aII tbe NBFC Incorporated under tbe CompanIes Act, tbe CommIttee IeIt
tbat NIDHI companIes sbouId aIso be controIIed by RBI tbrougb cIose
supervIsIon.
Debenture RedemptIon Reserve (DRR) In case oI NBFCsJOtber
CompanIes
30. A vIew bas been expressed tbat tbe concept oI DRR Is not reIevant
In tbe case oI NBFCs wbere debentures are raIsed Ior IInancIng assets
under HIre Purcbase or LeasIng wbIcb are seII IIquIdatIng In nature.
KeepIng In vIew tbe requIrement oI NBFCs, tbe Government bas provIded
some exemptIons Irom tbIs requIrement to NBFCs by IssuIng cIrcuIars.
WbIIe doIng so, tbe obIIgatIon on tbe part oI NBFCs to maIntaIn a
percentage oI assets In unencumbered approved securItIes and creatIon
oI reserve Iunds to an extent oI 20% oI net proIIts etc. Tbe IInancIaI
prudentIaI norms under wbIcb Banks and NBFCs operate are reguIated
by tbe RBI. To avoId reguIatory overIap, we are oI tbe vIew tbat RBI
sbouId make suItabIe provIsIons In tbIs regard. Tbe exIstIng exemptIons
to NBFCs may contInue tIII sucb tIme. However, Ior tbe otber companIes,
tbe Company Law sbouId provIde an enabIIng provIsIon to enabIe tbe
CentraI Government to reguIate tbe IImIts oI DRR.
ReIevance oI Present SectIon 20S
31.1 SectIon 20S oI tbe CompanIes Act enabIes payment oI Interest on
sbare capItaI subject to condItIons prescrIbed In tbe saId SectIon. Tbe
use oI word 'Interest' Instead oI dIvIdend dIstInguIsbes returns paId out
oI capItaI and returns paId out oI proIIts.
31.2 As per SectIon 20S (1)(b) oI tbe CompanIes Act, tbe Interest on
capItaI paId pursuant to SectIon 20S can be cbarged to capItaI wbIcb
may Iead to cost overruns oI Iong gestatIon projects. Tbe return on tbe
Investment In Iavour oI tbe sbareboIders aIso acts as a dIsIncentIve on
tbe part oI tbe sbareboIders to pusb Ior earIy compIetIon oI tbe project
31.3 Furtber, rates oI Interest are decIded by tbe market Iorces and tbe
poIIcy oI tbe Reserve Bank oI IndIa In vogue Irom tIme to tIme.
31.4 Tbe arena oI corporate IInancIng bas undergone severaI cbanges
sInce InceptIon oI SectIon 20S In 19S6. Corporates are IncreasIngIy
resortIng to a varIety oI Instruments to IInance InIrastructure projects
and aIternatIve Iorms oI IInancIng are avaIIabIe at rates oI Interest wbIcb
are market drIven. SectIon 20S oI tbe CompanIes Act bas, tbereIore,
outIIved tbe purpose Ior wbIcb It was Introduced. Tbe CommIttee
tbereIore took tbe vIew tbat SectIon 20S sbouId be deIeted Irom tbe
provIsIons oI tbe CompanIes Act.
Cbapter IX : Accounts and AudIt
1.Proper and accurate compIIatIon oI IInancIaI InIormatIon oI a corporate
and Its dIscIosure, In a manner tbat Is standardIzed and understood by
stakeboIders, Is centraI to tbe credIbIIIty oI tbe corporates and
soundness oI Investment decIsIons by tbe Investors. Tbe preparatIon oI
IInancIaI InIormatIon and Its audIt, tbereIore, needs to be reguIated
tbrougb Iaw wItb strIngent penaItIes Ior non-observance. It wouId
bowever, not be IeasIbIe Ior tbe Iaw to prescrIbe aII tbe detaIIs guIdIng
tbe treatment oI tbIs subject. TbIs Is a tecbnIcaI matter wbIcb needs to
be gone Into by experts keepIng In vIew tbe requIrements oI proper
dIscIosures oI IInancIaI InIormatIon In tbe Interests oI beaItby corporate
governance. However, once deveIoped, use oI sucb prIncIpIes sbouId be
mandated tbrougb Iaw. AccountIng Standards serve a vItaI IunctIon In
tbIs respect. Tbese sbouId be deveIoped keepIng In vIew InternatIonaI
best practIces and provIded statutory backIng. Tbere sbouId be
IntegratIon oI AccountIng Standards wItb substantIve Iaw.
InstItutIonaI mecbanIsm Ior deveIopIng AccountIng Standards
2.Tbe present statute provIdes Ior a mecbanIsm Ior deveIopment oI
AccountIng Standards. We understand tbat AccountIng Standards Ior
tbe use oI IndIan corporate sector, takIng Into account InternatIonaI
AccountIng Standards, are beIng deveIoped tbrougb tbe InstrumentaIIty
oI tbe NatIonaI AdvIsory CommIttee on AccountIng Standards (NACAS).
TbIs Is an Important aspect tbat needs to be pursued. In tbe meantIme,
tbe InstItute oI Cbartered Accountants oI IndIa (ICAI) bas done useIuI
work In prescrIbIng operatIonaI standards oI accountIng to IIII tbe gap tIII
AccountIng Standards couId be notIIIed. We expect tbat tbe process oI
notIIIcatIon oI AccountIng Standards, IncorporatIng InternatIonaI best
practIces, wouId be compIeted sbortIy.
3.Tbe CommIttee took note oI tbe contrIbutIon made by tbe ICAI and tbe
NACAS In deveIopment oI proposaIs Ior AccountIng Standards and took
tbe vIew tbat tbe exIstIng InstItutIonaI mecbanIsm Ior IormuIatIng and
notIIyIng AccountIng Standards under tbe CompanIes Act, 19S6 may be
retaIned.
HoIdIng-SubsIdIary Accounts and ConsoIIdatIon
4. Tbe CommIttee took tbe vIew tbat consoIIdatIon oI IInancIaI
statements oI subsIdIarIes wItb tbose oI boIdIng companIes sbouId be
mandatory. Tbe CommIttee dIscussed tbe questIon oI tbe manner oI
maIntenance oI accounts oI entItIes otber tban companIes but controIIed
by companIes regIstered under tbe Act. WItb tbe proposed consoIIdatIon
oI accounts by boIdIng companIes, tbe CommIttee IeIt tbe need Ior
prescrIbIng maIntenance oI proper records by a non-corporate entIty
wbIcb Is controIIed by a company to wbIcb tbe provIsIons oI tbe Act
appIy. TbIs Is because companIes are now IncreasIngIy controIIIng
entItIes sucb as partnersbIp IIrms, specIaI purpose vebIcIes,
assocIatIons, etc. wbIcb are non-corporate bodIes. Furtber, tbe
responsIbIIIty Ior proper maIntenance oI records In sucb cases sbouId be
tbat oI tbe boIdIng company.
S. WItb consoIIdatIon oI IInancIaI statements by boIdIng companIes
on mandatory basIs, tbe provIsIons requIrIng attacbIng tbe accounts oI
subsIdIary companIes wItb tbose oI boIdIng companIes, Ior cIrcuIatIon to
sbareboIders In accordance wItb tbe provIsIons oI tbe present CompanIes
Act sbouId be done away wItb. In case tbe IInancIaI statements oI a
IoreIgn subsIdIary are requIred to be IurnIsbed to tbe sbareboIders oI tbe
boIdIng company, tbese sbouId be accepted In tbe same Iormat and
currency In wbIcb tbese were prepared as per Iaws oI tbe reIevant
country. WItb ImpIementatIon oI e-governance project, It sbouId be
possIbIe to vIew tbe records oI tbe companIes IIIed wItb RegIstrars
tbrougb eIectronIc medIa. NotwItbstandIng tbIs, botb boIdIng and
subsIdIary companIes sbouId be encouraged to make greater use oI
eIectronIc medIa to make tbeIr pubIIsbed IInancIaI accounts avaIIabIe Ior
vIewIng.
6. Furtber, tbe CommIttee took tbe vIew tbat tbe boIdIng companIes
sbouId be requIred to maIntaIn records reIatIng to consoIIdatIon oI
IInancIaI statements Ior specIIIed perIods. PresentatIon oI consoIIdated
IInancIaI statements by tbe boIdIng company sbouId be In addItIon to tbe
mandatory presentatIon oI IndIvIduaI IInancIaI statements oI tbat boIdIng
company.
PreservatIon oI Records by tbe CompanIes
?.At present, SectIon 209 (4A) oI tbe Act requIres companIes to preserve
tbe books oI accounts, togetber wItb tbe voucbers reIevant to any entry
In sucb books oI account, In good order, reIatIng to a perIod oI not Iess
tban S years ImmedIateIy precedIng tbe current year. Tbe CommIttee IeIt
tbat tbe ruIes may provIde Ior preservatIon oI books oI account and
records oI tbe company Ior a perIod oI ? years to brIng It In barmony wItb
Income Tax Act.
Form OI AccountIng Records And AccountIng Standard
S. In order to brIng about more transparency and unIIormIty In tbe
maIntenance oI accounts, tbe CommIttee IeIt tbat tbe companIes sbouId
contInue to be mandated to maIntaIn tbeIr books oI accounts on accruaI
basIs and doubIe entry metbod oI book keepIng. Tbe questIon arose
beIore tbe CommIttee as to wbetber tbe Iorm and content oI tbe IInancIaI
statements needs to be specIIIed separateIy In tbe Act or sbouId be IeIt to
tbe AccountIng Standards prescrIbed by tbe CentraI Government In
consuItatIon wItb NACAS. AIter consIderabIe deIIberatIons, It was
decIded tbat tbe Iorm and content oI tbe IInancIaI statements and tbe
dIscIosures requIred tbereIn need to be provIded Ior under tbe ActJRuIes.
Any cbanges made In tbe AccountIng Standards couId be Iactored In tbe
ActJRuIes Irom tIme to tIme. It was aIso decIded tbat tbe companIes
sbouId be gIven tbe optIon to maIntaIn tbe records In eIectronIc Iorm
capabIe oI conversIon Into bard copy.
MaIntenance oI Records OutsIde tbe Country
9. Tbe companIes sbouId bave an optIon to keep records outsIde tbe
country provIded IInancIaI InIormatIon In compIIance wItb tbe
CompanIes Act Is avaIIabIe wItbIn tbe country and wrItten notIce Is gIven
to tbe RegIstrar oI tbe pIace wbere tbe records are kept. However, sucb a
Company sbouId be obIIgated to produce tbe records tbat are kept
outsIde tbe country, II and wben requIred to do so as specIIIed In tbe
RuIes.
Casb FIow Statement To Be Made Mandatory
10. WorId over, tbe Importance oI Casb FIow Statement Is beIng
specIIIcaIIy recognIzed. At present, tbe IIsted companIes are mandated to
IncIude a Casb FIow Statement In tbe AnnuaI Report and tbe Standards
oI AccountIng prescrIbed by ICAI aIso requIres In specIIIed cases a Casb
FIow Statement to be submItted aIong wItb tbe BaIance Sbeet and ProIIt
& Loss Account wItb a vIew to make Casb FIow Statement mandatory.
Tbe CommIttee IeIt tbat tbere was a need to IncIude tbe deIInItIon oI tbe
term FInancIaI Statement In tbe Act, to IncIude ProIIt & Loss Account,
BaIance Sbeet, Casb FIow Statement and Notes on Accounts.
ReIaxatIonJExemptIon To SmaII CompanIes
11. Tbe CommIttee was oI tbe vIew tbat SmaII CompanIes need not be
subject to tbe costs oI a regIme suIted to Iarge companIes wItb a wIde
stakeboIder base. ReIaxatIons to smaII companIes wItb regard to tbe
Iormat oI accounts to be prescrIbed In tbe ActJRuIes may aIso be
consIdered. II necessary, a separate Iormat Ior smaII companIes may be
devIsed. ExemptIons Irom certaIn dIscIosures may aIso be consIdered
and reIaxatIons, II any requIred, In respect oI compIIance wItb
AccountIng Standards may be provIded Ior wbIIe notIIyIng tbe
AccountIng Standards. II necessary, a separate AccountIng Standard
may be Iramed Ior smaII companIes.
FInancIaI Year
12. Tbe CompanIes Act at present does not contaIn any provIsIon
reIatIng to tbe mInImum perIod oI a FInancIaI Year. Tbe Concept Paper
bas deIIned tbe FInancIaI Year wItb tbe mInImum perIod oI sIx montbs.
Tbe CommIttee dweIt on tbe subject and came to tbe concIusIon tbat tbe
IIrst IInancIaI year sbouId begIn Irom tbe date oI IncorporatIon and end
on tbe ImmedIateIy succeedIng 31
st
Marcb and tbe subsequent FInancIaI
Years sbouId aIso end on 31
st
Marcb every year. Tbe deIInItIon oI
FInancIaI Year may be modIIIed to IndIcate tbat tbe duratIon oI tbe IIrst
FInancIaI Year sbouId be mInImum tbree montbs Instead oI tbe sIx
montbs proposed In tbe Concept Paper (2004). It was aIso suggested tbat
tbe present provIsIons regardIng IayIng down oI tbe accounts beIore tbe
sbareboIders wItbIn sIx montbs oI tbe end oI tbe FInancIaI Year sbouId
contInue.
AutbentIcatIon, CIrcuIatIon and RevIsIon OI FInancIaI Statements
13. Tbe CommIttee dIscussed at Iengtb tbe exIstIng provIsIons oI tbe
Act regardIng approvaI and autbentIcatIon oI accounts, cIrcuIatIon oI
accounts and IIIIng oI accounts wItb tbe ReguIatory body. Tbe
CommIttee was oI tbe vIew tbat tbe concept oI appoIntment oI CFO
sbouId be recognIzed under tbe Act wbo sbouId be made responsIbIe Ior
preparatIon and submIssIon oI IInancIaI statements to tbe Board. Tbe
IInancIaI statements sbouId aIso be sIgned by ManagIng DIrector, CEO,
CFO, and tbe Company Secretary wberever sucb IunctIonarIes are
mandated, wbetber or not tbey are present at tbe Board meetIng at
wbIcb tbe accounts are adopted. AII tbe DIrectors wbo were present In
tbe meetIng wbIcb approved tbe accounts sbouId aIso be mandated to
sIgn tbe accounts. II a DIrector dIssents, be sbouId aIso sIgn tbe IInancIaI
statement wItb tbe dIssent note.
14. It was brougbt to tbe notIce oI tbe CommIttee tbat provIsIons
sbouId be made In Iaw Ior revIsIon oI accounts aIter Its
adoptIonJapprovaI by tbe sbareboIders subject to condItIons IaId down
under tbe Iaw. TbIs sbouId bowever be possIbIe onIy In cases wbere
cbanges In Iaw necessItate restatement wItb retrospectIve eIIect or Ior
rectIIyIng tbe errors apparent Irom tbe records.
1S. Tbe provIsIons under tbe CompanIes Act reIatIng to cIrcuIatIon oI
IInancIaI statements sbouId contInue. However, tbe CommIttee
recommended tbat tbe IInancIaI statements sbouId be permItted to be
sent by eIectronIc means Instead oI bard copy. In tbe case oI IIsted
CompanIes. Wbere abrIdged IInancIaI statements are cIrcuIated amongst
members, tbe IuII IInancIaI statements sbouId be made avaIIabIe on tbe
web-sIte and tbe bard copy tbereoI sbouId aIso be made avaIIabIe on
request.
DIrectors' ResponsIbIIIty Statement
16. Tbe CommIttee noted tbat tbe CompanIes Act was amended by
InsertIng sectIon 21? (2AA) by tbe CompanIes (Amendment) Act, 2000,
wbIcb bas brougbt about IncIusIon oI DIrectors' ResponsIbIIIty Statement
In tbe report oI tbe Board oI DIrectors. Tbe CommIttee was oI tbe vIew
tbat In addItIon to tbe exIstIng requIrements, tbe ResponsIbIIIty
Statement sbouId IncIude tbat tbe reIated party transactIons and bave
been entered Into at arm's Iengtb, and II not, tbe reIatIonsbIps oI tbe
dIrectors In sucb transactIons aIong wItb tbe amounts InvoIved bave
been dIscIosed as a part oI tbe DIrector's Report aIong wItb management
justIIIcatIon tbereoI. Tbe exIstIng requIrement In SectIon 217 (2AA)
requiring a Director ResponsIbIIIty statement IndIcatIng tbat tbe DIrectors
bave taken proper and suIIIcIent care Ior tbe maIntenance oI adequate
accountIng records In accordance wItb tbe provIsIons oI tbe Act and tbat
tbe books oI accounts compIy wItb tbe accountIng standards and poIIcIes
sbouId contInue.
Otber RecommendatIons
1?. Tbe CommIttee dIscussed otber mIsceIIaneous matters In reIatIon
to deIInItIon oI certaIn terms sucb as derIvatIve", empIoyees stock
optIon", net wortb" etc. tbe need Ior ruIes reIatIng to TransIer oI ProIIt
to Reserves" and DecIaratIon oI DIvIdend out oI Reserves" and reIated
matters. Tbe CommIttee took tbe vIew tbat tbe deIInItIon oI term
derIvatIve" couId be omItted Irom tbe CompanIes Act. However,
deIInItIons oI tbe terms EmpIoyee Stock OptIon" and Networtb" may be
retaIned wItb approprIate modIIIcatIons to reIIect tbeIr meanIng as per
generaIIy accepted termInoIogy. AIter a detaIIed debate reIatIng to
decIaratIon oI dIvIdend onIy out oI tbe proIIts oI tbe Company arrIved at
aIter compIyIng wItb tbe AccountIng Standards, tbe CommIttee endorse
tbIs prIncIpIe Ior decIaratIon oI dIvIdend.
1S. Tbe CommIttee aIso took tbe vIew tbat tbe two sets oI exIstIng
ruIes reIatIng to decIaratIon oI dIvIdend out oI reserves and transIer oI
proIIt to reserve were IrreIevant In tbe present envIronment and may be
deIeted.
19. Tbe reIevance oI SectIon 20S(2)(c) oI tbe Act requIrIng companIes
to wrIte oII at Ieast 9S% oI tbe orIgInaI cost oI tbe asset to tbe Company
was dIscussed at Iengtb. Tbe CommIttee agreed tbat tbere need not be
any restrIctIon oI wrItIng oII 9S% oI tbe orIgInaI cost to tbe company oI
tbe asset over a specIIIed perIod, on tbe CentraI Government In
approvIng tbe basIs oI provIdIng deprecIatIon.
20. Tbe measure oI deprecIatIon Is based on tbree Important
parameters vIz. deprecIabIe amount, estImated useIuI IIIe and estImated
scrap vaIue. Tbe poIIcy oI IIberaIIzatIon oI tbe economy bas brougbt
about a pubIIc-prIvate co-operatIon especIaIIy In InIrastructure projects.
Sucb projects are taken up under BOOT or BOT structure. Tbe generaI
tenure oI tbe agreement In sucb structures Is tbat tbe SpecIaI Purpose
Company (SPC) wouId be requIred to ensure constructIon oI tbe IacIIIty
and maIntenance oI tbe IacIIIty to ensure tbe requIred quaIIty oI servIce
durIng tbe concessIon perIod. Tbe asset Is banded over by tbe SPC to
tbe Government or Its agencIes In a pbysIcaI condItIon wbIcb Is sImIIar to
tbe condItIon at tbe start oI tbe project. It Is tbereIore necessary tbat tbe
metbod oI provIdIng Ior deprecIatIon by tbe SPC sbouId be admInIstered
In a dIIIerent manner.
21. Law needs to recognIze a modIIIed approacb Ior provIdIng
deprecIatIon to tbe assets comIng under tbe category oI InIrastructure
assets. In Iact, In some countrIes, Iaw bas recognIzed tbat tbere cannot
be a statutory IImIt on tbe useIuI IIIe oI a capItaI asset. ExpendIture
IncurredJto be Incurred to maIntaIn tbe operatIng capabIIItIes oI sucb
eIIgIbIe assets couId be cbarged oII towards permIssIbIe deprecIatIon. Tbe
Company Law sbouId provIde a Iramework tbat recognIzes rates oI
deprecIatIon Ior InIrastructure projects wbere sucb rates are prescrIbed
by statutory reguIator Ior concerned sector. In aII otber cases, rates oI
deprecIatIon may be provIded takIng Into account tbe specIaI
requIrements oI InIrastructure sector, as appIIcabIe to a cIass oI projects,
under tbe Company Law.
AUDIT
AppoIntment oI AudItors
22. Tbe Issue oI appoIntment oI FIrst AudItor oI tbe Company and bIs
subsequent appoIntments were dIscussed at Iengtb. Tbe reIevant
provIsIons as exIstIng In IndIan Iaw vIs--vIs tbose prevaIent In USA, UK,
AustraIIa and Canada were aIso dIscussed. Tbe CommIttee
acknowIedged tbe roIe oI tbe AudIt CommIttee wberever sucb
CommIttees were mandated, In recommendIng tbe appoIntment oI tbe
AudItors to tbe Board In generaI. Tbe CommIttee recommended tbat tbe
exIstIng provIsIons reIatIng to appoIntment oI IIrst AudItor to be made by
tbe Board, IaIIIng wbIcb by tbe sbareboIders and tbe power oI tbe
CentraI Government to appoInt tbe AudItors wbenever tbe
BoardJsbareboIders IaII to appoInt tbem were necessary and sbouId
contInue. Tbe Company sbouId aIso be requIred to send IntImatIon to
tbe RegIstrar oI CompanIes regardIng appoIntment oI FIrst AudItors,
wItbIn ? days oI sucb appoIntment.
23. Subsequent to tbe appoIntment oI FIrst AudItors, tbe appoIntment
oI AudItors sbouId be done on AGM to AGM basIs wItb a power to tbe
Board to IIII any casuaI vacancy. Tbere sbouId not be any sItuatIon
wbere tbe company Is wItbout duIy appoInted AudItors. Sucb
appoIntment oI AudItors sbouId be made by tbe sbareboIders takIng Into
account tbe recommendatIons oI tbe Board, wbIcb, In turn sbouId be
arrIved at aIter obtaInIng tbe recommendatIons oI tbe AudIt CommIttee,
wbere sucb a CommIttee Is mandated or Is In exIstence. In case any oI
tbe sbareboIders wIsb to propose any otber AudItor In pIace oI retIrIng
AudItors, tbIs process sbouId aIso necessarIIy seek tbe vIews oI tbe AudIt
CommIttee. Tbere sbouId be an obIIgatIon to IntImate appoIntment oI
AudItor to RegIstrar oI CompanIes by tbe Company wItbIn ? days.
RemuneratIon oI AudItors
24. Tbe CommIttee dIscussed tbe provIsIons reIatIng to tbe payment oI
remuneratIon to tbe AudItors and IeIt tbat tbIs sbouId be subject to
decIsIon by sbareboIders and tbat tbe provIsIons In tbe exIstIng Iaw
provIded a suItabIe Iramework Ior tbe purpose. However, tbe CommIttee
IeIt tbat tbe basIc remuneratIon to be termed as 'AudIt Fee' sbouId be
dIstInguIsbed Irom reImbursement oI expenses. ReImbursement oI
expenses to AudItors sbouId not Iorm part oI remuneratIon but sbouId
be dIscIosed separateIy In tbe FInancIaI Statements aIong wItb tbe
AudItor's Iees.
RotatIon oI AudItors
2S. Tbere was a detaIIed dIscussIon on tbe need Ior rotatIon oI
AudItors. Tbe vIew tbat rotatIon oI AudIt partner sbouId take pIace every
IIve years In tbe case oI aII IIsted CompanIes was aIso consIdered by tbe
CommIttee. However, tbe CommIttee tbougbt It IIt tbat tbe matter oI
cbange oI AudItors be IeIt to tbe sbareboIders oI tbe Company and tbe
AudItors tbemseIves ratber tban be provIded under Iaw.
ProvIsIon oI Non-AudIt ServIces
26. Tbe CommIttee took note oI tbe Iact tbat renderIng oI non-audIt
servIces by AudItors oI tbe Company was Is a matter oI generaI concern.
Tbe CommIttee was oI tbe vIew tbat renderIng oI aII servIces by tbe
AudItors wbIcb were not reIated to audIt, accountIng records or IInancIaI
statements, sbouId not be probIbIted Irom beIng rendered by tbe
AudItors subject to a prescrIbed tbresboId oI materIaIIty. AII non audIt
servIces may bowever be pre-approved by AudIt CommIttee wbere sucb a
commIttee Is mandated or In exIstence.
An AudIt IIrm sbouId bowever be probIbIted Irom renderIng tbe
IoIIowIng non audIt servIces to Its audIt cIIent and Its subsIdIarIes:

AccountIng and book keepIng servIces reIatIng to accountIng

records.

InternaI AudIt

DesIgn and ImpIementatIon oI IInancIaI InIormatIon systems

IncIudIng servIces reIated IT systems Ior preparIng IInancIaI or
management accounts and InIormatIon IIows oI a company.

ActuarIaI servIces

Investment AdvIsory or Investment bankIng servIces

RenderIng oI outsourced IInancIaI servIces.

Management IunctIon IncIudIng provIsIon oI temporary staII to

audIt cIIents.
DIsquaIIIIcatIon oI AudItors
2?. Tbe CommIttee deIIberated on Issues reIatIng to dIsquaIIIIcatIon oI
AudItors. Tbe reIevant provIsIons oI tbe CompanIes Act In dIIIerent
countrIes IncIudIng tbose exIstIng In IndIa as weII as tbe vIews oI tbe
ICAI on tbe matter were dIscussed. Tbe CommIttee was oI tbe vIew tbat
tbe AudItors' posItIon and responsIbIIItIes InvoIved access to sensItIve
market InIormatIon partIcuIarIy reIatIng to tbe proIIts oI tbe company.
Tbere was a possIbIIIty oI mIsuse oI sucb InIormatIon. A vIew was
expressed tbat tbe exIstIng ban on an AudItor ownIng securItIes oI tbe
audItee company sbouId be revIewed and tbat a concept oI materIaIIty be
Introduced. ConsIderIng tbe wIde varIatIon In tbe sIzes oI companIes, a
common prescrIptIon to be IegIsIated under Iaw wouId be dIIIIcuIt. Tbe
CommIttee, tbereIore, IeeIs tbat at present tbere may not be any cbange
In tbe exIstIng Iramework. However, tbe matter may be examIned Iurtber
by tbe Government In context oI tbe Iramework oI etbIcaI conduct and
statutory requIrements under tbe Cbartered Accountants Act, 1949 In
consuItatIon wItb ICAI. Tbe concIusIons tbat emerged out oI tbe
dIscussIons and deIIberatIons are summed up as IoIIows:

Tbe amount oI IndebtednessJguarantee be Increased

beyond tbe present IImIt oI Rs.1,000J- and sucb a IImIts
couId be prescrIbed under RuIes.

Tbe IndebtednessJguarantee oI tbe AudItors sbouId aIso be

extended to cover IndebtednessJguarantee to tbe DIrectors
and aII entItIes wbose IInancIaI statements are requIred to
be consoIIdated under tbe Act.

Tbe dIsquaIIIIcatIon envIsaged under tbe ActJRuIes sbouId

be appIIcabIe not onIy to tbe AudItors but aIso to bIs
reIatIves, (tbe term reIatIves beIng deIIned under tbe
CompanIes Act) any oI tbe assocIates oI tbe audItor and any
entIty In wbIcb tbe AudItor bas a substantIaI Interest.

Tbe AudItor sbouId dIscIose boIdIngs In tbe securItIes oI

tbe company, II any, at tbe tIme oI appoIntment. However,
tbe CommIttee IeeI tbat tbe AudItor wouId be prIvy to
InsIgbt IInancIaI InIormatIon oI tbe company and tbere
couId be possIbIIIty oI makIng wrongIuI gaIn by tbe AudItors
by mIs-utIIIzIng sucb InIormatIon. Tbe work oI tbe AudItor
sbouId be credIbIe and Iree Irom conIIIct oI Interests.
TbereIore, tbe CommIttee are not In Iavour oI reIaxIng tbe
probIbItIon on boIdIng oI sbares or securItIes oI tbe subject
company by tbe AudItor. Tbe matter sbouId be examIned
by tbe Government In consuItatIon wItb tbe ICAI.
AppoIntment oI AudItors otber tban RetIrIng AudItors
2S. Tbe CommIttee dIscussed and agreed tbat tbe exIstIng provIsIons
oI tbe CompanIes Act reIatIng to appoIntment oI AudItors were weII
estabIIsbed and sbouId contInue. However, tbe retIrIng audItor sbouId be
appoInted II In tbe AnnuaI GeneraI MeetIng, tbe accounts oI tbe company
Ior tbe ImmedIateIy precedIng IInancIaI year are not approved.
DutIes and LIabIIItIes oI AudItors
29. AudItors bave tbe generaI duty oI dIscbargIng tbeIr statutory
IunctIons wItb care and dIIIgence. Many stakeboIders wouId reIy on tbe
audItor's reports Ior accessIng tbe IInancIaI pIcture oI tbe company.
However, tbere cannot be any specIIIc prescrIptIon oI negIIgence keepIng
In vIew tbe expectatIons oI aII tbe stakeboIders. However, audItors are
requIred to carry out tbeIr work wItbIn tbe dIscIpIIne oI tbe IegaI
provIsIons and tbe standards oI accountIngJAccountIng Standards
(wbere notIIIed). Tbere Is a necessIty tbat tbe work oI tbe audItors
sbouId upboId tbe bIgbest standards oI exceIIence and Independence.
Non-compIIance wItb sucb standards sbouId InvIte strIngent penaItIes.
Tbe CommIttee was oI tbe vIew tbat tbe basIc dutIes oI tbe AudItors and
tbeIr IIabIIIty need to be IaId down In tbe Iaw ItseII Instead oI In tbe
RuIes. QuantIIIcatIon oI penaIty Ior AudItors may be prescrIbed In tbe
RuIes.
Powers oI AudItor oI a HoIdIng Company
30. A vIew was expressed tbat tbe AudItor sIgnIng tbe consoIIdated
IInancIaI statement sbouId be empowered to access tbe books, records
and documents oI tbe entItIes wbose accounts are consoIIdated. It was
aIso IeIt tbat sucb rIgbt oI tbe AudItor wouId be subject to tbe ruIes to be
Iramed under tbe Act. In vIew oI tbe IegaI posItIon tbat a statutory
audItor wIII not be abIe to access to aII books and records oI aII entItIes
wbose accounts are consoIIdated, by vIrtue oI tbe IImItatIons oI bIs
appoIntment In tbe boIdIng company, adequate records statIng tbe basIs
Ior consoIIdatIon oI accounts sbouId be made avaIIabIe to bIm.
CertIIIcatIon oI InternaI ControI by CEOJCFO
31. Tbe CommIttee dweIt at Iengtb matters connected wItb AudIt and
tbe basIc prIncIpIes governIng AudIt. Tbe CommIttee IeIt tbe need Ior a
bIgb quaIIty oI IInancIaI reportIng, a strengtbened corporate governance
mecbanIsm, an Independent audIt and IearIess expressIon oI opInIon by
tbe AudItors. Tbe CommIttee IeeIs tbat tbe InternaI controIs In any
organIzatIon constItute tbe pIIIar on wbIcb tbe entIre edIIIce oI AudIt
stands. For tbIs purpose, It was IeIt tbat pubIIc IIsted companIes be
requIred to bave a regIme oI InternaI IInancIaI controIs Ior tbeIr own
observance. ActIve Interest oI tbe sbareboIders' assocIatIon In ImprovIng
tbe quaIIty oI IInancIaI reportIng, Investor educatIon Ior better
understandIng oI tbe IInancIaI statements combIned wItb presence oI
InternaI controIs wouId provIde Ior eIIectIve IInancIaI reportIng.
In sum :-

InternaI controIs as mandated by tbe company wItb tbe

approvaI oI tbe AudIt CommIttee, II any, sbouId be certIIIed by
tbe CEO and CFO oI tbe Company and In tbe DIrectors report
tbrougb a separate statement on tbe assessment.

Tbe Investors be educated and Imparted wItb better

understandIng and apprecIatIon oI tbe IInancIaI statements.
Tbe Iaw sbouId aIso provIde Ior an actIve roIe Ior tbe
sbareboIders' assocIatIons In ensurIng bIgb quaIIty oI IInancIaI
reportIng.
Tbe AudIt CommIttee
32.WbIIe consIderIng Issues reIatIng to management and governance
structures In a company (Cbapter IV, para 1?.1), tbIs CommIttee bas
recommended a commIttee oI tbe Board on accountIng and IInancIaI
matters to be termed as tbe AudIt CommIttee.
33.AII matters reIatIng to appoIntment oI audItors, examInatIon oI tbe
audItor's report aIong wItb IInancIaI statements prIor to consIderatIon
and approvaI by tbe Board, reIated party transactIons, vaIuatIons and
otber matters InvoIvIng conIIIcts oI Interest sbouId aIso be reIerred to tbe
Board onIy tbrougb tbe AudIt CommIttee.
Cost AudIt
34.At present, tbe CompanIes Act contaIns provIsIons reIatIng to
maIntenance oI Cost Records under sectIon 209 (1) (d) and Cost AudIt
under sectIon 233B oI tbe CompanIes Act In respect oI specIIIed
IndustrIes. Tbe CommIttee IeIt tbat Cost Records and Cost AudIt were
Important Instruments tbat wouId enabIe companIes make tbeIr
operatIons eIIIcIent and exIst In a competItIve envIronment.
3S.Tbe CommIttee noted tbat tbe present corporate scenarIo aIso
IncIuded a sIzeabIe component oI Government owned enterprIses or
companIes operatIng under admInIstered prIce mecbanIsm or a regIme oI
subsIdIes. It wouId be reIevant Ior tbe Government or tbe reguIators
concerned wItb non-competItIve sItuatIons to seek costIng data. Tbe
CommIttee, tbereIore, took tbe vIew tbat wbIIe tbe enabIIng provIsIon
may be retaIned In tbe Iaw provIdIng powers to tbe Government to cause
Cost AudIt, IegIsIatIve guIdance bas to take Into account tbe roIe oI
management In addressIng cost management Issues In context oI tbe
IIberaIIzed busIness and economIc envIronment. Furtber, Government
approvaI Ior appoIntment oI Cost AudItor Ior carryIng out sucb Cost
AudIt was aIso not consIdered necessary.
SpecIaI AudIt
36. Tbe CommIttee IeIt tbat tbe provIsIons In tbe present Act requIrIng
SpecIaI AudIt under certaIn cIrcumstances were not reIevant In vIew oI
tbe detaIIed InvestIgatIon provIsIons recommended by tbe CommIttee.
DurIng tbe course oI InvestIgatIon, It Is expected tbat tbe Inspector wouId
bave access to tbe specIaIIzed expertIse oI varIous proIessIonaIs as may
be requIred. Furtber, sucb InvestIgatIon may be carrIed out by prIvate
proIessIonaIs operatIng IndIvIduaIIy or In teams. In tbIs background,
SpecIaI AudIt taken In IsoIatIon wouId serve no useIuI purpose and may
be dIspensed wItb.
AudIt oI Government CompanIes
3?. Tbe CommIttee dIscussed tbe appIIcatIon oI tbe corporate Iaw
Iramework to Government companIes on many occasIons and took tbe
vIew tbat In generaI, tbere sbouId not be any specIaI dIspensatIon Ior
sucb companIes. In respect oI audIt oI Government companIes bowever,
CompanIes Act provIde a specIaI regIme. Pursuant to SectIon 19(1) oI
ComptroIIer and AudItor-GeneraI's DutIes, Powers and CondItIons oI
ServIce Act, 19?1, audIt oI tbe accounts oI Government companIes Is
conducted by tbe ComptroIIer and AudItor GeneraI (C&AG) In accordance
wItb tbe provIsIons oI tbe CompanIes Act, 19S6, tbe AudItor (Cbartered
Accountant) oI a Government Company Is appoInted or re-appoInted by
tbe C&AG. It Is Iurtber stIpuIated tbat C&AG sbaII bave tbe power to (a)
dIrect tbe audItor to conduct tbe audIt In a specIIIed manner, (b) gIve
InstructIons on any matter reIatIng to tbe perIormance oI bIs IunctIons,
(c) conduct bImseII a suppIementary or test audIt oI tbe company's
accounts and (d) comment upon or suppIement tbe audIt report In sucb
manner as be (C&AG) tbInks IIt. Tbe comments oI C&AG are to be
pIaced beIore AGM aIong wItb AudItor's Report.
3S. Tbe CommIttee noted wItb concern tbe deIays In IInaIIzatIon oI tbe
accounts oI Government companIes. In many cases, Government
companIes and tbeIr dIrectors become IIabIe Ior penaI actIon but are
provIded seIectIve excIusIons Irom tbeIr IIabIIItIes onIy because tbey are
Government companIes. TbIs Is IeadIng to an unbeaItby sItuatIon wbIcb
must be addressed.
39. WbIIe consIderIng cIassIIIcatIons oI companIes In Cbapter III oI
tbIs Report, tbe CommIttee dIscussed tbe manner In wbIcb company Iaw
sbouId appIy to Government companIes (Cbapter III, para ?.1-?.4). Tbe
Iaw sbouId cIearIy provIde tbe deIInItIon oI a Government company In
context oI ownersbIp oI tbe CentraI andJor State Government. TbereIore,
tbe extensIon oI specIaI exemptIons and protectIons to varIous
commercIaI ventures taken up by Government companIes In tbe course
oI tbeIr commercIaI operatIons aIong wItb strategIc partners or generaI
pubIIc sbouId be done away wItb so tbat sucb entItIes can operate In tbe
market pIace on tbe same terms and condItIons as otber entItIes. In
partIcuIar, reIIectIon oI IInancIaI InIormatIon oI sucb ventures by
Government companIes and tbeIr audIt sbouId be subject to tbe common
IegaI regIme appIIcabIe. Tbe exIstIng deIays are enabIIng a Iarge number
oI corporate entItIes to evade tbeIr responsIbIIItIes and IIabIIIty Ior correct
dIscIosure oI true and IaIr IInancIaI InIormatIon In a tImeIy manner. In
tbIs context, tbe reIevance oI tbe present sectIon 619B oI tbe Act was
consIdered approprIate Ior a revIew.
40. Tbe CommIttee IeIt tbat sInce statutory audIt Is conducted by tbe
statutory audItor appoInted by tbe C&AG In tbe manner dIrected by bIm,
tbe testJsuppIementary audIt Is superIIuous sInce It wouId dupIIcate
audIt work aIready done by statutory audItor. Furtber, wbere any
dIrectIons are gIven by tbe C&AG to tbe Statutory AudItor not In
accordance wItb tbe AccountIng Standards, tbe Statutory AudItor may be
requIred to mentIon tbe same In tbe notes on accounts.
Cbapter X : Mergers and AcquIsItIons
1. A busIness may grow over tIme as tbe utIIIty oI Its products and
servIces Is recognIzed. It may aIso grow tbrougb an InorganIc process,
symboIIzed by an Instantaneous expansIon In work Iorce, customers,
InIrastructure resources and tbereby an overaII Increase In tbe revenues
and proIIts oI tbe entIty. Mergers and acquIsItIons are manIIestatIons oI
an InorganIc growtb process. WbIIe mergers can be deIIned to mean
unIIIcatIon oI two pIayers Into a sIngIe entIty, acquIsItIons are sItuatIons
wbere one pIayer buys out tbe otber to combIne tbe bougbt entIty wItb
ItseII. It may be In Iorm oI a purcbase, wbere one busIness buys anotber
or a management buy out, wbere tbe management buys tbe busIness
Irom Its owners. Furtber, de-mergers, I.e., dIvIsIon oI a sIngIe entIty Into
two or more entItIes aIso requIre beIng recognIzed and treated on par
wItb mergers and acquIsItIons regIme as recommended beIow, and
accordIngIy reIerences beIow to mergers and acquIsItIons aIso Is Intended
to cover de-mergers (wItb tbe Iaw & RuIes as Iramed duIy caterIng to tbe
same).
2. Mergers and acquIsItIons are used as Instruments oI momentous
growtb and are IncreasIngIy gettIng accepted by IndIan busInesses as
crItIcaI tooI oI busIness strategy. Tbey are wIdeIy used In a wIde array oI
IIeIds sucb as InIormatIon tecbnoIogy, teIecommunIcatIons, and busIness
process outsourcIng as weII as In tradItIonaI busIness to gaIn strengtb,
expand tbe customer base, cut competItIon or enter Into a new market or
product segment. Mergers and acquIsItIons may be undertaken to access
tbe market tbrougb an estabIIsbed brand, to get a market sbare, to
eIImInate competItIon, to reduce tax IIabIIItIes or to acquIre competence
or to set oII accumuIated Iosses oI one entIty agaInst tbe proIIts oI otber
entIty.
3. Tbe process oI mergers and acquIsItIons In IndIa Is court drIven,
Iong drawn and bence probIematIc. Tbe process may be InItIated tbrougb
common agreements between tbe two partIes, but tbat Is not suIIIcIent to
provIde a IegaI cover to It. Tbe sanctIon oI tbe HIgb Court Is requIred Ior
brIngIng It Into eIIect. Tbe CompanIes Act, 19S6 consoIIdates provIsIons
reIatIng to mergers and acquIsItIons and otber reIated Issues oI
compromIses, arrangements and reconstructIons, bowever otber
provIsIons oI tbe CompanIes Act get attracted at dIIIerent tImes and In
eacb case oI merger and acquIsItIon and tbe procedure remaIns Iar Irom
sImpIe. Tbe CentraI Government bas a roIe to pIay In tbIs process and It
acts tbrougb an OIIIcIaI LIquIdator (OL) or tbe RegIonaI DIrector oI tbe
MInIstry oI Company AIIaIrs. Tbe entIre process bas to be to tbe
satIsIactIon oI tbe Court. TbIs sometImes resuIts In deIays.
4. NeedIess to say, In tbe context oI IncreasIng competItIveness In tbe
market, speed Is oI tbe essence, especIaIIy In an expandIng and vIbrant
economy IIke ours. A sIgn oI corporate readIness, skIII and stratagem Is
tbe abIIIty to do sucb mergers and acquIsItIons wItb 'dIgItaI' speed. E-
governance couId provIde a beIpIuI tooI In acbIevIng tbe objectIve oI
speed wItb provIsIons Ior onIIne regIstratIon, approvaIs etc.
S. Tbe CommIttee was oI tbe vIew tbat contractuaI mergers may be
gIven statutory recognItIon In tbe Company Law In IndIa as Is tbe
practIce In many otber countrIes. Sucb mergers and acquIsItIons
tbrougb contract Iorm (I.e. wItbout court InterventIon), couId be made
subject to subsequent approvaI oI sbareboIders by ordInary majorIty.
TbIs wouId eIImInate obstructIons to mergers and acquIsItIons, ex-post
Iacto protectIon and abIIIty to rectIIy wouId be avaIIabIe.
6. Tbere bas been a steady Increase In cross-border mergers wItb tbe
Increase In gIobaI trade. Sucb mergers and acquIsItIons can brIng Iong-
term beneIIts wben tbey are accompanIed by poIIcIes to IacIIItate
competItIon and Improved corporate governance.
?. Tbe CommIttee went Into severaI aspects oI tbe provIsIons In tbe
exIstIng Iaw constItutIng a separate code In tbemseIves and reguIatIng a
very Important aspect oI restructurIng and consoIIdatIon oI busIness In
response to tbe economIc envIronment. An eIIort was made to IdentIIy
tbe areas oI concern under tbe present Iaw and to recommend means oI
addressIng tbem.
S. At present, In case oI a proposed scbeme Ior amaIgamatIon oI
company wbIcb Is beIng dIssoIved wItbout wIndIng up, tbe Iaw requIres a
report Irom tbe OIIIcIaI LIquIdator (OL) or RegIstrar oI CompanIes (ROC)
tbat tbe aIIaIrs oI company bave not been conducted In a manner
prejudIcIaI to tbe Interest oI Its members or to pubIIc Interest. Tbe Act
aIso requIres tbat no order Ior dIssoIutIon oI any transIeror company
sbaII be made by tbe Court unIess tbe OL makes a report to tbe Court
tbat tbe aIIaIrs oI tbe company bave not been conducted In a manner
prejudIcIaI to tbe Interest oI Its members or to pubIIc Interest. Tbe
CommIttee IeIt tbat tbe above two requIrements under tbe present Iaw
can be covered by IssuIng notIces to ROC and OL respectIveIy; wbo may
IIIe beIore tbe Court, InIormatIon tbat may bave a bearIng on tbe
proposed merger. Tbere Is no requIrement oI a separate InIormatIon In
response to tbe notIce to be IIIed Ior tbe purpose. FIIIng oI sucb report
may be tIme-bound, beyond wbIcb It may be presumed tbat ROCJOL
concerned bave no comments to oIIer.
SIngIe wIndow concept.:
9. Tbe Iaw sbouId provIde Ior a sIngIe Iorum wbIcb wouId approve
tbe scbeme oI mergers and acquIsItIon In an eIIectIve tIme bound
manner. Tbe Iaw sbouId aIso provIde Ior mandatory IntImatIon to
reguIators In respect oI specIIIed cIass oI companIes. Tbe concept oI
'deemed approvaI' sbouId be provIded Ior In cases wbere tbe reguIators
do not IntImateJInIorm tbeIr comments wItbIn a specIIIed tIme perIod to
tbe CourtJTrIbunaI beIore wbIcb tbe scbeme oI mergerJamaIgamatIon Is
submItted Ior approvaI.
VaIuatIon oI sbares:
10. Tbe CommIttee wbIIe dIscussIng tbIs aspect In detaII, aIso took
Into account tbe SbroII CommIttee Report on VaIuatIon oI Corporate
Assets and Sbares" durIng tbe course oI Its deIIberatIon on tbe subject
and took tbe vIew tbat vaIuatIon oI tbe sbares oI companIes InvoIved In
scbemes oI mergers sbouId be made mandatory In respect oI sucb
companIes. It was aIso recommended tbat sucb vaIuatIon sbouId be
carrIed out by Independent regIstered vaIuers ratber tban by Court
appoInted vaIuers. Tbe Iaw sbouId Iay out tbe exceptIon, II any, to tbe
mandatory vaIuatIon requIrements. Tbe Iaw sbouId aIso recognIze
vaIuatIon oI IncorporeaI property. VaIuatIon standards may aIso be
deveIoped on tbe IInes oI 'InternatIonaI VaIuatIon Standards' Issued by
tbe InternatIonaI VaIuatIon Standards CommIttee. Tbe vaIuatIon sbouId
be transparent so tbat tbe aggrIeved person may get an opportunIty to
cbaIIenge tbe same beIore CourtJTrIbunaI. BencbmarkIng oI vaIuatIon
tecbnIques and Peer RevIew MecbanIsm Ior VaIuers sbouId aIso be
provIded Ior.
11. Wbere an AudIt CommIttee Is mandatory Ior a company, tbe task
oI appoIntIng tbe vaIuer sbouId be entrusted to tbe AudIt CommIttee. Tbe
AudIt CommIttee sbouId aIso bave tbe duty to verIIy wbetber tbe vaIuer
bas an advIsory mandate and bad past assocIatIon wItb tbe company
management. Tbe AudIt CommIttee sbouId verIIy tbe Independence oI tbe
vaIuer Ior tbe purposes oI an Independent vaIuatIon. In tbe case oI
companIes not requIred to bave AudIt CommIttee, tbIs task sbouId be
carrIed out by tbe Board.
RegIstratIon oI merger and acquIsItIon
12. Tbe CommIttee dIscussed wItb concern, tbe dIIIerentIaI stamp
duty regIme prevaIent In dIIIerent States, wbIcb InbIbIts merger and
acquIsItIon actIvIty. It bas been a questIon Ior consIderatIon wbetber an
order oI a court sanctIonIng a compromIseJarrangement under SectIons
391-394 oI tbe CompanIes Act, 19S6 wouId be stampabIe as a
conveyance" at tbe rates appIIcabIe to sucb entry In tbe varIous state
Stamp Acts. CertaIn states IIke Mabarasbtra, Gujarat, Karnataka and
Rajastban sougbt to address tbIs probIem by amendIng tbeIr stamp
IegIsIatIons to make an order oI tbe HIgb Court under SectIons 391-394
stampabIe. However, majorIty oI tbe states In IndIa bave not adopted tbIs
stand, resuItIng In a conIusIon on tbe Issue. TbIs conIusIon Is more
acuteIy present In tbe case oI mergers oI companIes tbat bave regIstered
oIIIces In dIIIerent states. However, as tbIs subject IaIIs wItbIn tbe
domaIn oI tbe States under tbe ConstItutIon, tbe States wIII bave to take
InItIatIve In tbIs regard. It wouId be approprIate Ior tbe CentraI
Government to IacIIItate a dIaIogue In tbIs regard.
13. Tbe Concept Paper on Company Law (2004) contempIates tbat an
order oI tbe scbeme oI merger wIII be eIIectIve onIy II a certIIIed copy oI
tbe order oI tbe Court Is IIIed wItb tbe RegIstrar and duIy regIstered. Tbe
CommIttee IeIt tbat It sbouId be enougb II tbe company compIIes wItb tbe
IIIIng requIrement wItb tbe RegIstrar oI CompanIes as Is presentIy
provIded, to make tbe scbeme eIIectIve.
14. Tbe CommIttee aIso IeIt tbat a separate eIectronIc regIstry sbouId
be constItuted Ior IIIIng scbemes under SectIons 391J394 oI tbe
CompanIes Act. Instead oI IIIIng tbe scbemes wItb tbe RegIstratIon
OIIIces wberever tbe propertIes oI tbe company are Iocated, IIIIng tbe
scbeme wItb tbe eIectronIc regIstry sbouId be consIdered suIIIcIent
compIIance. TbIs bowever, couId raIse jurIsdIctIonaI Issues vIs--vIs
Stamp DutIes appIIcabIe wbIcb may be resoIved by an approprIate
ConstItutIonaI amendment to enabIe a unIIorm, reasonabIy prIced Stamp
Duty regIme across tbe country. Furtber, tbere must aIso be a provIsIon
In tbe Company Law Ior compuIsory regIstratIon wItb tbe eIectronIc
regIstry oI aII property oI a company above a certaIn vaIue. TbIs wIII
sImpIIIy tbe mutatIon procedure subsequent to scbeme oI arrangement
between two or more companIes. Tbe CommIttee took tbe vIew tbat
enabIIng unIIormIty and overaII reductIon oI Stamp DutIes appIIcabIe In
pursuance oI mergers, demergers, amaIgamatIons or scbemes oI
reconstructIon, takeover wouId be desIrabIe as competItIon requIres cost
reductIon and IndIan IIrms need to be competItIve In restructurIng
exercIse In tbe gIobaI context.
Merger oI a IIsted company Into an unIIsted company and vIce-
versa:-
1S. Tbe CommIttee examIned Issues reIatIng to tbe merger oI IIsted
company wItb an unIIsted company and vIce-versa. It was IeIt tbat tbe
Act needs to provIde specIIIcaIIy tbat de-IIstIng tbrougb a scbeme oI
merger under sectIon 391-394 oI tbe CompanIes Act Is possIbIe by
mergIng a IIsted company wItb an unIIsted company. However, sucb a
process sbouId enabIe a saIety net or a cIear exIt optIon Ior tbe pubIIc
sbareboIders oI tbe IIsted company. SImIIarIy, II substantIaI assets are
moved out oI a IIsted company In tbe case oI de-merger, a saIety netJexIt
optIon needs to be provIded to tbe pubIIc sbareboIders and tbe resIduaI
company needs to be de-IIsted (In case more tban 90% oI tbe pubIIc
sbareboIders exercIse sucb optIon).
16. Tbe Iaw sbouId enabIe companIes to purcbase tbe stake oI
mInorIty sbareboIders In order to prevent expIoItatIon oI sucb
sbareboIders wbere a promoter bas bougbt back more tban 90% oI tbe
equIty. Sucb purcbase sbouId, bowever, on tbe basIs oI a IaIr oIIer.
ApproprIate vaIuatIon ruIes Ior tbIs purpose sbouId be prescrIbed, or, tbe
Iast known prIce prIor to deIIstIng, couId be made tbe bencbmark Ior
sucb acquIsItIons.
ApprovaI oI tbe Scbeme
1?. Tbe exIstIng Law requIres tbat a scbeme Ior merger andJ or any
arrangement sbouId be approved by a majorIty In number representIng
aIso 3J4
tb
In vaIue oI sbareboIdersJcredItors present and votIng. Tbe
requIrement oI majorIty In number does not serve any useIuI purpose
consIderIng tbat vaIue Is sImuItaneousIy beIng consIdered as a crIterIon.
BesIdes, InternatIonaI practIce recognIzes vaIue as tbe determInIng Iactor
and does not appear to Impose sucb addItIonaI condItIons. Tbe
CommIttee Is, tbereIore, oI tbe vIew tbat tbIs requIrement, In IndIan Iaw,
may aIso be modIIIed to provIde onIy Ior approvaI by 3J4
tb
In vaIue oI
sbareboIders and credItors, present and votIng.
1S. Under tbe present scbeme oI Act, tbe manner oI boIdIng oI tbe
meetIngs oI tbe credItors and sbareboIders as aIso dIspensIng wItb tbe
same Is IeIt to tbe dIscretIon oI tbe courts. However, dIIIerent courts
IoIIow dIIIerent procedures. Tbe CommIttee IeeIs tbat tbere Is a need Ior
unIIormIty In tbIs regard and recommends tbat ruIes may be IormuIated
under tbe Act to cover tbIs aspect, IncIudIng dIspensIng oI tbe
requIrement to boId sucb meetIngs.
MInorIty Interest
19. Tbe CommIttee examIned tbe vIew tbat quIte IrequentIy
sbareboIdersJcredItors wItb InsIgnIIIcant stake raIse objectIons to
scbemes oI mergerJacquIsItIon and tbe process oI deaIIng wItb sucb
objectIon becomes vexatIous. AIter a detaIIed dIscussIon, tbe CommIttee
recommended tbat wbIIe protectIon oI mInorIty Interest sbouId be
recognIzed under tbe Iaw, onIy sbareboIdersJcredItors bavIng sIgnIIIcant
stake at a IeveI to be prescrIbed under Iaw sbouId bave tbe rIgbt to object
to any scbeme oI mergers. Tbe pbIIosopby bebInd sucb a move wouId be
to streamIIne tbe procedure oI artIcuIatIon oI tbe mInorIty Interest wbIIe
restrIctIng obstructIonIst attItude on tbe part oI any sectIon oI mInorIty.
Merger oI cIass oI CompanIes
20. Tbe CommIttee revIewed tbe InternatIonaI modeIs oI mergers and
amaIgamatIons. In tbe case oI mergers wItbIn a group, tbe Act may
prescrIbe a sbort Iorm oI amaIgamatIon. ConceptuaIIy a scbeme oI
amaIgamatIon or merger between boIdIng company and subsIdIary
company stands on a dIIIerent IootIng Irom amaIgamatIon and merger
between two Independent companIes. So aIso merger between two
prIvate IImIted companIes sbouId be vIewed dIIIerentIy as compared to
tbe merger oI two pubIIc IImIted companIes. Tbe amended new Act
sbouId provIde Ior Iess reguIatIon In respect oI mergers among assocIate
companIesJtwo prIvate IImIted companIes wbere no pubIIc Interest Is
InvoIved. Tbe concept oI contractuaI merger sbouId aIso be tbougbt oI as
an aIternatIve to tbe Iorm oI merger avaIIabIe under tbe Act as on date.
Cross Border Mergers
21. A Iorward IookIng Iaw on mergers and amaIgamatIons needs to
aIso recognIze tbat an IndIan company ougbt to be permItted wItb a
IoreIgn company to merger. Botb contract based mergers between an
IndIan company and a IoreIgn company and court based mergers
between sucb entItIes wbere tbe IoreIgn company Is tbe transIeree, needs
to be recognIzed In IndIan Law. Tbe CommIttee recognIzes tbat tbIs
wouId requIre some pIoneerIng work between varIous jurIsdIctIons In
wbIcb sucb mergers and acquIsItIons are beIng executedJcreated.
22. Tbe IndIan sbareboIders sbouId be permItted to receIve IndIan
DeposItory ReceIpts (IDR) In IIeu oI IndIan sbares especIaIIy In IIsted
companIes or IoreIgn securItIes In IIeu oI IndIan sbares so tbat tbey
become members oI tbe IoreIgn company or boIders oI securIty wItb a
tradIng rIgbt In IndIa (especIaIIy In IIsted companIes). Furtber, In sucb
cases, tbe sbeII oI sucb company sbouId be aIIowed to be dIssoIved
wItbout wIndIng up wItb court InterventIon. Tbe present Act does not
permIt tbIs Iorm oI merger In vIew oI tbe specIIIc deIInItIon oI company
under sectIon 390(a) oI tbe CompanIes Act. Tbe CommIttee noted tbat
apart Irom amendments to tbe CompanIes Act, suItabIe cbanges may be
necessary In tbe Income Tax Act, ForeIgn Excbange Management Act and
provIsIons reIatIng to IDR to enabIe merger oI an IndIan Company wItb
IoreIgn entIty. Tbe CommIttee tbereIore recommended adoptIon oI
InternatIonaI best practIces and a coordInated approacb wbIIe brIngIng
amendments to tbe code oI merger In tbe CompanIes Act.
DIscIosure RequIrements:
23. As tbe sbareboIders need to bave compIete InIormatIon In tbe case
oI a scbeme oI mergerJacquIsItIon, specIaIIy In tbe case oI promoter
InItIated mergers, tbe ActJRuIes sbouId IIst out tbe dIscIosure
requIrements In tbe expIanatory statements to be sent to tbe
sbareboIders In respect oI tbe scbeme IIIed beIore tbe CourtsJTrIbunaIs.
In tbe case oI CompanIes requIred to appoInt Independent dIrectors, tbe
Act sbouId mandate tbe CommIttee oI Independent dIrectors as a
monItorIng body to ensure adequacy oI dIscIosures.
Otber matters:
Corporate Debt RestructurIng
24. Tbe Reserve Bank oI IndIa bas specIIIc tooIs Ior Iast track debt
restructurIng known as tbe CDR MecbanIsm (Corporate Debt
RestructurIng MecbanIsm). It Is oIten seen tbat sometImes even tbougb
?S% oI tbe secured credItors consent to tbe debt restructurIng and make
sIgnIIIcant sacrIIIces, mInorIty secured credItors or unsecured credItors
put a spoke tbrougb tbe wbeeI. As a resuIt, sucb scbemes tbat wouId
otberwIse enabIe tbe return oI tbe corporate to vIabIe operatIon, get
deIayed or scuttIed.
2S. As In tbe case oI contractuaI mergers or scbemes oI arrangement,
tbe CommIttee recommends tbat II tbe petItIonIng credItors or petItIonIng
company Is prIma IacIe abIe to prove tbat ?S% oI tbe secured credItors
wbo bave consented to tbe CDR MecbanIsm bave made sacrIIIces to
restructure tbe company tben, notwItbstandIng tbe mInorIty dIssent,
sucb a scbeme sbouId be sanctIoned on IIIIng.
26. ApproprIate remedIes Ior mIsstatement and tbe abIIIty to revoke
sucb an order wItb punIsbment Ior any mIsstatement wouId be an
adequate saIeguard Ior IaIse mIsstatement. Tbe unsecured credItors are
subsequent In tbe queue and wItbout tbe consent oI tbe secured
credItors and tbeIr debt restructurIng, tbey wouId bave no bope to
receIve tbeIr dues. However, to saIeguard tbeIr Interests and to ensure
tbe contInuIty oI tbe company's IunctIonIng, tbe scbeme must satIsIy a
mInImum IIquIdIty test and sbouId bave provIsIons Ior a securIty pooI
eItber made avaIIabIe by tbe secured credItor as casb avaIIabIIIty or by
tbe promoter to progress tbe scbeme oI restructurIng.
2?. Sucb scbemes must contaIn saIeguards agaInst IrauduIent
preIerence and must bave a credItors' responsIbIIIty statement, sImIIar to
a dIrectors' responsIbIIIty statement, appended to It. WItbdrawaI Irom tbe
securIty pooI provIded Ior by tbe IIquIdIty test couId be reguIated by tbe
CourtJ NatIonaI Company Law TrIbunaI.
2S. Tbe CommIttee recommended tbat tbe need to IIIe a separate
scbeme Ior reductIon oI capItaI sImuItaneousIy tbe scbeme Ior merger
and acquIsItIon sbouId be avoIded. Tbe provIsIons reIatIng to obtaInIng
consent Irom unsecured credItors sbouId be done away wItb. To ensure
contInuIty oI tbe exIstence oI transIeree companyJresuItIng company, tbe
CommIttee IeIt tbe need to mandate requIrement oI a satIsIactory
IIquIdIty test and prescrIbed debt equIty norms. Tbe credItors consent
may be necessary onIy In case oI companIes not meetIng tbe IIquIdIty
test.
AmaIgamatIon In pubIIc Interest
29. ExIstIng SectIon 396 empowers CentraI Government to order
amaIgamatIon oI two or more companIes In pubIIc Interest. It bas been
suggested tbat tbese provIsIons sbouId be revIewed. It Is IeIt tbat
amaIgamatIon sbouId be aIIowed onIy tbrougb a process overseen by tbe
CourtsJTrIbunaIs. TbereIore, Instead oI exIstIng provIsIons oI SectIon
396, provIsIon sbouId be made to empower CentraI Government to
approacb tbe CourtJTrIbunaI Ior approvaI Ior amaIgamatIon oI two or
more companIes.
Fees on Increased AutborIzed Sbare CapItaI
30. At any poInt oI tIme tbe transIeror company and tbe transIeree
company, botb companIes wouId bave paId Iees oI tbeIr respectIve
autborIzed sbare capItaI at tbe rates specIIIed In ScbeduIe X oI tbe
CompanIes Act, 19S6. Upon dIssoIutIon oI tbe transIeror company Into
tbe transIeree company, tbe Iees paId by tbe transIeror company go
waste and tbe transIeree company gets no set oII Ior tbe same.
31. In order to IacIIItate and encourage merger and acquIsItIon
actIvItIes, It Is recommended tbat tbe Iees paId by tbe transIeror
company on tbe autborIzed sbare capItaI sbouId be avaIIabIe as a set oII
to tbe transIeree company upon tbe sanctIon oI tbe scbeme oI
amaIgamatIon by tbe HIgb Court. TbIs prIncIpIe sbouId appIy botb In
respect oI merger and demerger cases.
IntroductIon oI Non Obstante CIause In SectIon 394(2)
32. SectIon 394(2) oI tbe CompanIes Act, 19S6 provIdes Ior vestIng oI
assets and IIabIIItIes oI tbe transIeror company In tbe transIeree
company upon tbe sanctIon oI tbe scbeme oI amaIgamatIon by tbe HIgb
Court. SInce tbe sectIon does not contaIn a non-obstante cIause, It
creates Immense practIcaI dIIIIcuItIes In actuaI transIer oI tbe varIous
propertIesJassets oI tbe transIeror company Into tbe transIeree company.
33. It was noted tbat tbe SIck IndustrIaI CompanIes (SpecIaI
ProvIsIons) Act, 19SS and SectIon 32 tbereoI bad cIear provIsIons In tbe
nature oI a non-obstante decIaratory order wbIIst sanctIonIng a scbeme
oI restructurIng. Tbe SIck IndustrIaI CompanIes Act bas been subsumed
In tbe company Iaw and tbe prIncIpIes tbereIn, tbereIore, are emInentIy
capabIe oI beIng modIIIed and appIIed In tbe new company Iaw to be
made.
34. It Is tbereIore recommended tbat a non-obstante provIsIon be
Introduced In tbe reIevant provIsIons oI tbe Iaw to ensure tbat tbe assets
and IIabIIItIes oI tbe transIeror company absoIuteIy vest In tbe transIeree
company notwItbstandIng anytbIng to tbe contrary In any otber Iaw Ior
tbe tIme beIng In Iorce. TbIs wouId ensure tbat tbe transIeree company Is
not subjected to cumbersome IormaIItIes Ior tbe transIer oI assets and
IIabIIItIes In Its own name.
Cbapter XI : InvestIgatIon under tbe CompanIes Act
1. Tbe CompanIes Act, 19S6 provIdes Ior InvestIgatIon oI tbe aIIaIrs
oI companIes under sectIons 23S-2S0A oI tbe Act. In addItIon, tbe Act
provIdes Ior a separate process oI InspectIon oI Books oI Accounts oI
companIes under SectIon 209A. Tbe CommIttee consIdered tbese
provIsIons.
InspectIons
2. A vIew was taken tbat InspectIon oI Books oI Accounts, taken up
In IsoIatIon, wouId not serve mucb purpose. Indeed, In tbe present Iorm
as provIded Ior under S209 A oI tbe Act, tbere Is a danger tbat sucb
InspectIons may be taken as a part oI admInIstratIve routIne. Tbere
wouId be a consIderabIe expendIture oI tIme and energy botb on tbe part
oI tbe InspectIng agency as weII as tbe company wItbout accompIIsbIng
mucb. CompIIance wItb Iaw cannot be enabIed by a presumptIon oI
vIoIatIon. Nor can It be ensured by pbysIcaIIy cbeckIng oI entItIes
InvoIved. II tbat were tbe case It wouId be practIcaIIy ImpossIbIe to
enIorce any IegaI system. Tbe beneIIts oI bavIng an eIaborate Iramework
oI statute and ruIes wouId be Iost II Iaw enIorcIng agencIes are requIred
to aIso pbysIcaIIy Inspect tbe subject entItIes to be conIIdent tbat tbey
are compIyIng wItb It. CompIIance sbouId be based on enIIgbtened seII
Interest, requIrIng IntrusIon by Iaw enIorcement agencIes onIy In IImIted,
weII estabIIsbed cIrcumstances. It sbouId not be tbe IntentIon oI tbe Iaw
to estabIIsb an Inspector Raj"
3. Tbe CommIttee was oI tbe vIew tbat state IntrusIon Into tbe aIIaIrs
oI a corporate entIty sbouId be regarded a sIgn oI coIIapse oI Its
governance structure. However, II and wben sucb IntrusIon takes pIace,
It sbouId be weII dIrected, eIIectIve and sbouId bave deterrent eIIect.
More damage wouId be done by Irequent IntrusIon Into tbe aIIaIrs oI
companIes wItb IIttIe or Iow appIIcatIon oI sanctIons. Sucb InteractIon
between tbe state and tbe corporate cItIzen wouId resuIt In an unbeaItby
reIatIonsbIp, ImposIng undesIrabIe transactIon costs. Nor, sbouId Iaw
provIde excessIve powers to enIorcement agencIes to compIeteIy dIsrupt
or paraIyze tbe IunctIonIng oI a corporate entIty tbrougb arbItrary
exercIse oI statutory powers on mere suspIcIon or an engIneered or a
IrIvoIous compIaInt. Tbe CommIttee are tbereIore oI tbe vIew tbat Instead
oI separate provIsIons Ior botb InspectIon and InvestIgatIon under tbe
Act, a sIngIe comprebensIve process oI InvestIgatIon, to be taken up In a
manner mandated by Iaw and protectIng tbe rIgbts oI tbe companIes,
may be provIded Ior. TbIs wouId enabIe Government to Iocus In a better
and more resuIt-orIented manner Ior enquIry Into tbe deIauIts by tbe
CompanIes.
Random ScrutIny
4. Tbe CommIttee IeIt tbat overreguIatIon and excessIve supervIsIon
couId dIsrupt tbe IunctIonIng and tbe decIsIon makIng processes In a
company. TbIs wouId aIso tend to penaIIze actIons taken In good IaItb by
managements partIcuIarIy oI smaII companIes wbo may not bave access
to expert proIessIonaI advIce. An atmospbere oI suspIcIon Is unIIkeIy to
resuIt In Improvements In corporate governance. CompanIes wouId be
wastIng resources In evasIve tactIcs wbIcb wouId Impose unnecessary
costs In a competItIve envIronment. Tbe CommIttee Is oI tbe vIew tbat
ratber tban InspectIon oI tbe workIng oI companIes tbrougb tbe
enIorcement macbInery mereIy to assess wbetber a company Is
compIIant wItb tbe Iaw, tbe Iaw sbouId pIace tbe IIabIIIty Ior compIIance
on tbe managements and ownersJcontroIIIng Interests oI tbe companIes,
combIned wItb a system oI oversIgbt tbrougb random scrutIny oI tbe
IIIIngs oI documents by tbe companIes. TbIs exercIse sbouId not onIy
enabIe up to date IIIIngs but sbouId aIso IdentIIy gaps In dIscIosures by
tbe companIes. On tbe basIs oI sucb random scrutIny, tbe RegIstrar may
aIso bave tbe power to caII Ior InIormatIon, documents or records as
requIred under Iaw. II, Irom sucb random scrutIny, suIIIcIent grounds
arIse warrantIng InvestIgatIon oI tbe aIIaIrs oI tbe company, tbe same
may be consIdered by tbe CentraI Government.
InvestIgatIons
S. Tbe CentraI Government may be empowered to appoInt Inspectors
to InvestIgate eItber on Its own II It Is oI tbe opInIon tbat sucb
InvestIgatIon Is requIred In pubIIc Interest, or on tbe request oI tbe
company on tbe basIs oI a specIaI resoIutIon, or on tbe dIrectIon oI tbe
courtJTrIbunaI or Irom sucb members oI tbe company bavIng requIsIte
number oI sbares as may be specIIIed.
6. Tbe CommIttee Is oI tbe vIew tbat InvestIgatIon oI tbe aIIaIrs oI a
company sbouId be treated serIousIy. Once taken up, It sbouId resuIt In
deterrent ImposItIon oI penaItIes. For tbe process oI InvestIgatIon to be
eIIectIve, suItabIe powers sbouId be provIded to compeI actIon by tbe
company to enabIe proper InvestIgatIon IncIudIng productIon oI reIevant
records. Tbe exIstIng Act provIdes Ior a Iramework to enabIe tbIs. Tbe
CommIttee bowever recommends tbat tbIs Iramework sbouId be revIewed
and made more eIIectIve. Powers to caII Ior and Inspect records oI a
company wouId be a part oI tbIs Iramework.
?. Any reported vIoIatIon oI a specIIIc provIsIon oI tbe Iaw sbouId not
become justIIIcatIon Ior an InvestIgatIon. It sbouId be possIbIe Ior
prosecutIon Ior sucb oIIences to take pIace aIter IssuIng a statutory
notIce. BeIore an InvestIgatIon oI tbe aIIaIrs oI a company Is taken up,
tbere sbouId be a reasonabIe opportunIty avaIIabIe to tbe company to
expIaIn Its conduct.
S. CompIaInts agaInst tbe company sbouId be by cIearIy IdentIIIed
compIaInant and sbouId be requIred to be accompanIed by a IIIIng Iee.
Sucb compIaInts sbouId InvarIabIy be reIerred to tbe company to
ascertaIn tbe company poInt oI vIew beIore any opInIon Is Iormed as to
justIIIcatIon Ior InvestIgatIon.
PrIvate proIessIonaIs as InspectorsJInvestIgators
9. Tbe CentraI Govt. may appoInt any oIIIcer oI Govt., any prIvate
proIessIonaI or groupJIIrm oI proIessIonaIs as Inspector Ior InvestIgatIon.
It sbouId bowever be ensured tbat tbere Is no conIIIct oI Interest. Tbe
InspectorJInvestIgator or bIs partners sbouId not bave any materIaI
reIatIonsbIp wItb tbe corporate entIty or Its boIdIng or subsIdIary entItIes.
Tbe present provIsIons reIatIng to powers oI tbe Inspector, dutIes oI
dIrectors, oIIIcers or otber persons durIng tbe course oI InvestIgatIon,
punIsbment Ior non-productIon oI records and IurnIsbIng oI IaIse
InIormatIon and otber reIated matters may be retaIned. Tbe Act may
provIde Ior punIsbment Ior destroyIng or mutIIatIng company's records
by Its dIrector or oIIIcers. Tbe provIsIons oI InvestIgatIon sbouId aIso be
extended to IoreIgn companIes wbIcb are carryIng out busIness In IndIa.
Expenses oI InvestIgatIons
10. Tbe expenses oI InvestIgatIon sbouId be borne by tbe CentraI
Government wbere sucb InvestIgatIon bas been ordered on Its own. It
sbouId bowever be recovered Irom tbe appIIcant II tbe InvestIgatIon bas
been ordered on tbe request oI an appIIcant.
InvestIgatIon oI SerIous Frauds
11. Tbe CommIttee took note oI tbe Iact tbat tbe Government bave
estabIIsbed tbe SerIous Frauds InvestIgatIon OIIIce (SFIO), a specIaIIzed,
muItI-dIscIpIInary organIzatIon to deaI wItb cases oI corporate Iraud. Tbe
CentraI Government may reIer compIex cases InvoIvIng substantIaI
pubIIc Interest or muItI-dIscIpIInary ramIIIcatIons to tbe oIIIcers oI tbe
SFIO. Tbe CommIttee IeeI tbat settIng up oI sucb an organIzatIon Is
essentIaI to unraveI tbe compIex corporate processes tbat may bIde
IrauduIent bebavIour. Tbe SFIO sbouId be strengtbened Iurtber and Its
muItI-dIscIpIInary cbaracter retaIned.
12. In addItIon to InvestIgatIon, tbere Is aIso a need to take up
prosecutIon oI tbe concerned corporate and oIIIcers In deIauIt In tbe
approprIate Iorum. For tbIs purpose, procedures wouId need to be
sImpIIIIed to enabIe SFIO to move swIItIy and purposeIuIIy Ior successIuI
prosecutIon oI tbe guIIty. To enabIe tbIs, tbere are certaIn ambIguItIes In
tbe Iaw wbIcb wouId bave to be removed to enabIe SFIO to take up
prosecutIon under tbe IPC In addItIon to vIoIatIon oI tbe CompanIes Act.
Tbe CommIttee recommends tbat a separate statute may be Iramed to
reguIate and guIde tbe IunctIonIng oI tbe (SFIO) and to address sucb
Issues to enabIe successIuI InvestIgatIon and prosecutIon oI cases oI
corporate Iraud. TbereIore, presence oI SFIO may be recognIzed In tbe
CompanIes Act. OIIIcers oI tbe SFIO may aIso be autborIsed by CentraI
Government to IIIe compIaInts Ior oIIences under CrImInaI Procedure
Code In addItIon to Ior oIIences under tbe CompanIes Act.
13. Tbe CommIttee took note oI tbe Iact tbat corporate Irauds were
generaIIy tbe resuIt oI very compIex and IntrIcate serIes oI actIons. It may
not be easy Ior tbe Iaw enIorcement agencIes at tbe State Government
IeveI to respond eIIectIveIy to sucb sItuatIons In tbe absence oI proper
traInIng and deveIopment oI skIIIs oI tbe concerned Iaw enIorcIng
personneI Ior sucb InvestIgatIons. Tbe CommIttee recommends tbat tbe
SFIO, set up by tbe CentraI Government, sbouId serve as a NodaI Agency
Ior deveIopment oI sucb expertIse and Its dIssemInatIon to tbe State
Governments, wbo may aIso be encouraged to set up sImIIar
organIsatIons and provIde requIsIte specIaIIzatIon as a part oI tbeIr actIon
agaInst economIc oIIences. TbIs wouId aIso enabIe better coordInatIon In
respect oI prosecutIon oI oIIences under IPC.
Cbapter XII : OIIences and PenaItIes
1. Tbe CompanIes Act, 19S6 provIdes tbe IegaI basIs Ior varIous
corporate governance norms tbat are consIdered essentIaI Ior proper
corporate operatIon and protectIng tbe rIgbts oI stakeboIders. VIoIatIons
oI sucb norms are deIIned as oIIences wItb assocIated penaItIes.
EssentIaIIy, Iaw sbouId be sucb tbat aII subject entItIes sbouId compIy
wItb It In tbeIr own Interest. NevertbeIess, It wouId not be reaIIstIc to
expect tbat aII companIes wouId compIy wItb tbe Iramework voIuntarIIy.
Tbere wouId be some entItIes tbat wouId seek gaIns at tbe cost oI
IegItImate rIgbts oI otbers, sometImes by IrauduIent bebavIour or
tbrougb vIoIatIon oI tbe IegaI regIme. However, Iaw must aIso provIde
cIear deIInItIon oI wbat constItutes an oIIence and provIde penaItIes tbat
act as deterrent to companIes Irom takIng sucb actIon. SImuItaneousIy,
It sbouId provIde Ior procedures tbat enabIe appIIcatIon oI penaItIes
promptIy and eIIectIveIy.
2. Tbe scbeme provIded under tbe Iaw sbouId encourage compIIance
tbrougb seII reguIatIon. Tbe best enabIIng envIronment Ior compIIance
wItb Iaw Is tbe presence oI an InIormed and vIgIIant group oI
stakeboIders. TbereIore, tbe Iaw sbouId cIearIy deIIne tbe rIgbts oI
stakeboIders and tbe means oI tbeIr redressaI. Tbe state sbouId provIde
tbe wberewItbaI Ior quIck redressaI oI tbe wrong commItted and
deterrent sIgnaIs to otbers, cIearIy demonstratIng consequences oI non-
compIIance. Tbe State sbaII bave to dIscbarge an Important responsIbIIIty
not onIy In IramIng oI tbe Iaw, approprIateIy recognIzIng stakeboIder
rIgbts, but aIso In Its eIIectIve ImpIementatIon and admInIstratIon.
3. Tbere Is aIso a need to provIde Ior a regIme oI penaItIes
commensurate wItb tbe oIIence. ActIons vIoIatIve oI governance
provIsIons In a manner tbat deprIve tbe sbareboIders oI tbeIr rIgbts need
to be treated serIousIy. Tbe CommIttee are oI tbe vIew tbat aII IrauduIent
bebavIour sbouId be addressed tbrougb strIngent penaItIes. Inadequate,
wrong or IrauduIent dIscIosures, or actIons tbat do not aIIow
sbareboIders democracy or a competItIve market Ior corporate controI to
operate aIso need to be addressed tbrougb suItabIy deterrent provIsIons.
VIoIatIons oI a proceduraI nature tbat do not IrretrIevabIy damage
stakeboIders rIgbts need to be treated dIIIerentIy.
4. At present, tbe process oI prosecutIon Ior oIIences Iaces many
deIays. Under tbe present Iaw, aII Iapses, bowsoever trIvIaI, are requIred
to be trIed by tbe TrIaI Court as crImInaI oIIences. DeIays are aIso
attrIbutabIe to tbe proceduraI aspects requIred to be IoIIowed to brIng tbe
oIIender to book under CompanIes Act, 19S6. Most vIoIatIons are oI
proceduraI nature. However, tbere Is no structure Ior deaIIng wItb sucb
oIIences speedIIy. Tbe deIayed processIng oI compIaInts Ieads to
enormous admInIstratIve burden and bIgb cost to tbe economy. Tbe
process oI prosecutIon gets proIonged and tbe deterrent eIIects oI tbe
penaI provIsIons get dIIuted.
RevIew oI penaIty IeveIs
S. Tbe CommIttee dIscussed at Iengtb tbe need Ior enbancIng tbe
penaI provIsIons under tbe Company Law. It was IeIt tbat exIstIng
penaIty structure dId not provIde suItabIe deterrence and needed to be
revIewed and enbanced. DurIng tbe course oI Its deIIberatIons tbe
CommIttee aIso receIved presentatIons made by SbrI SbarduI SbroII, wbo
bad separateIy been commIssIoned by tbe MInIstry oI Company AIIaIrs to
go Into tbe penaIty structures under tbe CompanIes Act 19S6 and make
recommendatIons Ior Its revIsIon. Tbe CommIttee aIso noted tbe
constItutIon oI a CommIttee beaded by SbrI O.P. VaIsb to consIder ways
and means to Improve tbe process oI prosecutIon under tbe CompanIes
Act, 19S6. TbIs CommIttee Is yet to submIt Its report. Tbe CommIttee Is
oI tbe vIew tbat tbe present Iramework oI penaItIes does not bave tbe
desIred deterrent eIIect and needs to be revIewed. Tbe approprIateness oI
a penaIty sbouId aIso be seen In context oI tbe damage, tbe vIoIatIon oI
Iaw causes to stakeboIder rIgbts and tbe deterrent Impact requIred. Tbe
CommIttee aIso IeIt tbat tbe Iaw sbouId enabIe tbe IIexIbIIIty oI sucb a
regIme by groupIng quantum oI aII penaItIes In a ScbeduIe tbat may be
revIsed Irom tIme to tIme.
OIIences by CompanIes
6. Tbe CommIttee Is oI tbe vIew tbat In tune wItb IegaI deveIopments
In tbe country, guIded by recent pronouncements oI tbe Apex court It
wouId be approprIate Ior tbe Iaw to provIde a regIme oI penaItIes Ior
companIes. Tbese wouId be monetary In nature sInce It wouId not be
IeasIbIe to ImprIson an artIIIcIaI person sucb as a company. Sucb
penaItIes sbouId aIso be reIatabIe to tbe sIze oI tbe company In addItIon
to tbe nature oI tbe oIIence.
LIabIIIty oI tbe Board
?. In tbe system oI Governance In tbe corporate entIty, It Is evIdent
tbat tbe Board wouId pIay a crucIaI roIe. Tbe IIabIIIty oI tbe Board wouId
bave to be cIear and absoIute Ior tbe actIons oI tbe company. However, a
dIstInctIon bas to be drawn In sItuatIons wbere tbere Is coIIectIve IIabIIIty
oI tbe Board or tbat oI IndIvIduaI dIrectors. Wbere an oIIence Is so
obvIous and IundamentaI tbat tbe very partIcIpatIon In tbe decIsIon
makIng process Is enougb to estabIIsb cuIpabIIIty, coIIectIve
responsIbIIIty may be tbougbt oI. In aII otber cases, Iocus bas to be on
IndIvIduaI IIabIIIty oI dIrectors.
S. WbIIe examInIng tbe questIon oI appoIntment oI Independent
dIrectors, tbe CommIttee went Into tbe questIon oI attrIbutabIIIty oI
knowIedge or IntentIon Ior wrong-doIng beIore boIdIng an Independent
DIrector IIabIe. Tbe CommIttee Is oI tbe vIew tbat sImIIar regIme sbouId
appIy to non-WboIe TIme DIrectors.
9. In tbe case oI WboIe TIme DIrectors, tbe regIme bas to take Into
account tbeIr specIaI posItIon and access to tbe InIormatIon and
resources oI tbe company. Tbe responsIbIIItIes oI sucb dIrectors bave to
be correspondIngIy bIgber. BesIdes, tbey are In a better posItIon to
expIaIn tbe conduct oI tbe company. TbereIore, wbIIe takIng tbe process
oI InvestIgatIonJprosecutIon oI dIrectors oI tbe company, statutory
notIces sbouId Issue onIy to WboIe TIme DIrectors. Non-WboIe TIme
DIrectors may be asked to expIaIn on appIyIng attrIbutabIIIty or
'knowIedge' test.
10. Tbe Iaw sbouId aIso seek to dIscourage sbadow dIrectors" wbo
tend to operate Irom bebInd be scenes by adoptIng a Iramework oI
'attrIbutabIIIty' oI dIrectIons to sucb persons, II tbe Board Is accustomed
to act on tbeIr InstructIons In any or aII matters.
OIIIcers In DeIauIt
11. At tbe same tIme a cIear regIme Ior IdentIIIcatIon oI tbe oIIIcers In
deIauIt Is necessary. EIsewbere, we bave suggested companIes oI certaIn
types bavIng CEOsJCFOsJCompany SecretarIes on a mandatory basIs.
Tbe IIabIIIty oI sucb IndIvIduaIs as aIso otber oIIIcers oI tbe company In
deIauIt bas to be provIded Ior. EquaIIy Important wouId be tbe roIe oI
quaIIIIed proIessIonaI sucb as tbe accountant, tbe audItor, Iawyer,
company secretary provIdIng corporate advIce. Sucb IndIvIduaIs sbouId
be aIso be beId IIabIe Ior wrong doIng II It can be estabIIsbed tbat tbey
bad not specIIIcaIIy advIsed agaInst actIons or bebavIour vIoIatIve oI tbe
Iaw.
12. Tbe CommIttee aIso recommends tbat In reIatIon to crImInaI
IIabIIIty oI oIIIcers In deIauIt, tbe ruIes sbouId provIde tbat :-
(I) dIrectors sbouId be IIabIe wbere tbey autborIze, actIveIy
partIcIpate In, knowIngIy permIt, or knowIngIy IaII to take
actIve steps to prevent (IncIudIng monItorIng IaIIures wbere
approprIate) tbe deIauIt;
(II) ManagIng DIrectorJWboIe TIme
DIrectorsJCEOJCFOJCompany Secretary sbouId be IIabIe
on tbe same condItIons, wbere Board bas properIy cbarged
tbem wItb tbe reIevant IunctIon;
(III) Any person otber tban a ManagIng DIrectorJWboIe TIme
DIrectorJCEOJCFOJCompany Secretary (wbetber or not
empIoyed by tbe company) wbo, under tbe ImmedIate
autborIty oI tbe BoardJManagIng DIrectorJWboIe TIme
DIrectorJCEOJCFOJ Company Secretary, Is cbarged wItb
certaIn IunctIons IncIudIng maIntenance, IIIIng or
dIstrIbutIon oI accounts or records sbouId aIso be IIabIe
wbere be autborIzes, actIveIy partIcIpates In, knowIngIy
permIts, or knowIngIy IaIIs to take actIve steps to prevent,
tbe deIauIt;
(Iv) tbese deIInItIons sbouId be draIted so as to cover de Iacto
dIrectors, secretarIes and managers;
(v) consIderatIon wIII aIso need to be gIven on a case by case
basIs to tbe appIIcabIIIty oI oIIences to receIvers,
admInIstrators and IIquIdators.
In tbe case oI (III), tbe Iact tbat someone Iurtber up tbe cbaIn oI
command Is IIabIe wouId not reIIeve tbe deIegatee oI IIabIIIty.
Promptness In appIyIng IegaI sanctIons
13. WbIIe tbe need Ior a revIew oI tbe exIstIng penaIty IeveIs was
necessary to provIde suIIIcIent deterrent eIIect, It was IeIt tbat enbancIng
tbe penaI provIsIons aIone was not adequate to ensure compIIance oI tbe
Law. It was IeIt tbat tbere was need Ior prompt admInIstratIon oI tbe
IegaI sanctIons on detectIon oI an oIIence. For tbIs, an In-bouse structure
Ior deaIIng wItb cases oI tecbnIcaI deIauIt InvoIvIng ImposItIon oI
monetary penaItIes sbouId be provIded under tbe Company Law. It was
noted tbat a vast majorIty oI prosecutIons IIIed reIated to sucb cases but
due to deIays InvoIved resuIted In deIayed appIIcatIon oI tbe IegaI
sanctIon, tbus reducIng Its Impact. Sucb structure couId be vested wItb
powers to Impose penaItIes Ior oIIences otber tban tbose punIsbabIe wItb
ImprIsonment, or ImprIsonment and IIne. SuItabIe oIIIcers oI tbe CentraI
Government couId be desIgnated to carry out tbIs IunctIon on Its bebaII.
ScbeduIes to contaIn quantum oI penaIty
14. In tbe present Act, penaI provIsIons are generaIIy contaIned In
eacb sectIon. Tbe CommIttee supports tbe vIew tbat tbe company Iaw
sbouId state cIearIy In reIatIon to every ruIe wbat tbe consequences oI
vIoIatIonsJbreacb are to be. TbIs may be possIbIe by cIassIIyIng tbe
penaItIes In tbe Iorm oI scbeduIes tbat may specIIy wItb reIatIon to a
gIven sectIon, tbe generaI nature oI oIIence, tbe mode oI prosecutIon,
punIsbment and daIIy deIauIt IIne, wbere appIIcabIe.
CategorIzatIon oI OIIences
1S. It Is suggested tbat oIIences may be cIassIIIed Into two broad
categorIes to be contaIned In dIIIerent scbeduIes (a) oIIences caIIIng Ior
ImposItIon oI monetary penaItIes onIy (b) oIIences caIIIng Ior ImposItIon oI
ImprIsonment wItb or wItbout IIne.
DeIauIts oI TecbnIcaI Nature
16. DeIauIts tbat are tecbnIcaI In nature may be addressed wItb a Ievy
oI Iate Iee, tbe process oI IevyIng oI wbIcb couId be made non-
dIscretIonary. It was aIso suggested tbat tbe term `IIne' couId be
substItuted wItb word `penaIty' to enabIe tbe proposed In bouse
structure to deaI wItb oIIences In questIon. To be In IIne wItb tbe
crImInaI justIce system In tbe Country, no order ImposIng penaIty may
be made unIess tbe company bas been gIven a reasonabIe opportunIty oI
beIng beard.
FIIIng oI documents
1?. Tbe CommIttee note wItb concern tbat a Iarge number oI
companIes are In deIauIt In respect oI IIIIng oI documents. TbIs In tbe
envIsaged scbeme oI tbIngs wouId resuIt In vItaI dIscIosures beIng
wItbbeId Irom tbe pubIIc JstakeboIders. Tbe CommIttee IeeIs tbat
addItIonaI steps may be requIred to enbance compIIance IeveIs.
ProvIsIon bas to be made to book repeat oIIenders as weII as tbose wbo
are not deterred by Iate Iees. Tbe Iaw sbouId provIde specIaI powers to
compeI IIIIng oI documents. Tbe RegIstrar oI CompanIes sbouId be
enabIed to make specIaI orders In tbIs regard. Non-compIIance wItb tbIs
order sbouId be enIorced wben prosecutIng Ior reIated reguIatory
oIIences oI deIauIt In IIIIng obIIgatIons. FaIIure to compIy wItb an order
made In exercIse oI sucb powers by tbe RegIstrar sbouId resuIt In
strIngent enbanced punIsbment Ior tbe company and Its dIrectors. TbIs
power sbouId be seem as beIng In addItIon to any actIon to enIorce
specIIIc compIIance by tbe order oI tbe CIvII Court.
1S. Tbe CommIttee aIso recommends coordInatIon oI eIIort between
MCA, SEBI, Income-Tax and BankIng autborItIes to ensure tbat IInancIaI
InIormatIon and partIcuIars quoted by companIes Is on tbe basIs oI
statutory IIIIngs onIy.
DIscIosures oI oIIences by companIes
19. Tbere sbouId aIso be a provIsIon Ior pubIIcatIon oI tbe InIormatIon
reIatIng to convIctIons Ior crImInaI breacbes oI CompanIes Act on tbe
part oI tbe company or Its oIIIcers or key empIoyees In tbe annuaI report
oI tbe company. TbIs obIIgatIon sbouId extend to crImInaI convIctIons In
respect oI CompanIes Act onIy. BesIdes sucb dIscIosures may be
requIred to be dIscIosed Ior tbe year In wbIcb tbey occurred and need not
be repeated In subsequent annuaI reports.
SpecIIyIng penaItIes
20. Tbe CompanIes Act may Iay down tbe maxImum as weII as
mInImum quantum oI penaIty Ior a partIcuIar oIIence. However, tbe Act
sbouId aIso provIde tbat wbIIe IevyIng a partIcuIar quantum oI penaIty,
tbe IevyIng autborIty sbaII aIso take Into consIderatIon tbe sIze oI
company, nature oI busIness, Injury to pubIIc Interest, nature & gravIty
oI deIauIt, repetItIon oI deIauIt etc.
PenaItIes Ior IrauduIent conduct
21. At present tbe current CompanIes Act provIdes Ior a regIme Ior
addressIng IIabIIIty Ior IrauduIent conduct oI busIness by company uJs
S42 read wItb sectIon 406 Ior a workIng company. We are oI tbe vIew
tbat tbIs provIsIon wouId provIde a vaIuabIe basIs Ior deaIIng wItb
IrauduIent bebavIor on tbe part oI companIes and tbeIr management.
We recommend tbat tbese sectIons sbouId be used Ior enabIIng
dIsgorgement oI gaInsJdIverted Iunds, II any, tbrougb IrauduIent actIvIty
by tbe companIes and tbeIr managements. We aIso recommend tbat
penaItIes Ior oIIences commItted wItb tbe Intent oI commIttIng Iraud
sbouId be enbanced to provIde Ior suItabIe deterrent eIIect.
22. We aIso recommend tbat tbe provIsIons oI tbese sectIons sbouId
aIso be appIIed to companIes Incorporated overseas but doIng busIness
In IndIa to remove IncentIve Ior IrauduIent actIvIty by regIsterIng
companIes abroad to avoId crImInaI sanctIons.
Procedures, JurIsdIctIon and AppeaI Ior Levy oI PenaIty :
23. Under tbe proposed In-bouse" procedure, tbe power to Impose
penaIty (In tbe Iorm oI IIne) may be vested wItb tbe RegIstrar oI
CompanIes wbo Is a statutory autborIty. SInce tbe mInImum and
maxImum quantum oI IIne wouId be deIIned In tbe Act, tbIs wouId
restrIct tbe scope Ior dIscretIonary exercIse oI power. However, It wouId
be necessary to provIde Ior a mecbanIsm Ior appeaIs agaInst tbe orders
oI sucb autborItIes. Sucb appeIIate autborIty may aIso be specIIIed In tbe
Act. It Is understood tbat tbe Government Is contempIatIng settIng up oI
an InstItutIonaI structure to adjudIcate on Company Law Issues wItb tbe
constItutIon oI NCLTJNCLAT. TIII tbe settIng up oI tbe NCLT, tbIs wouId
be subject to tbe jurIsdIctIon oI tbe HIgb Courts. AppeaI to Supreme
Court agaInst tbe order oI NCLAT wIII IIe onIy on substantIaI questIon oI
Iaw.
24. It Is understood tbat under tbe CompanIes (Second Amendment)
Act, 2002 constItutIon oI NCLT Is envIsaged to address matters reIatIng
to company Iaw. Tbe CommIttee Iurtber understands tbat tbIs Forum
wouId be beaded by a person wItb judIcIaI quaIIIIcatIons not Iess tban
tbat oI a HIgb Court Judge. Its jurIsdIctIon wouId extend to cIvII remedIes
to company Iaw Issues reIerred to It. However, In order to enabIe speedy
ImposItIon oI penaItIes In respect oI crImInaI oIIences, tbe possIbIIIty oI
vestIng certaIn specIIIed bencbes oI tbe NCLT wItb crImInaI jurIsdIctIon
sbouId aIso be examIned. Sucb bencbes may comprIse oI members
bavIng judIcIaI background onIy. Tbe process wouId be subject to appeaI
to tbe NCLAT (AppeIIate Body) wbIcb Is In any case envIsaged to be
beaded by a person wbo bas been CbIeI JustIce oI a HIgb Court or a
JustIce oI Supreme Court.
LImItatIon PerIod Ior Commencement oI PenaIty ProceedIngs
2S. Tbe Act sbouId contaIn a IImItatIon perIod In respect oI
commencement oI penaIty proceedIngs by tbe Government, compIetIon oI
proceedIngs, tIme Ior appeaI and tbe reIated matters. SInce tbe
Government wouId exercIse quasI-judIcIaI powers, suIIIcIent judIcIaI
traInIng sbouId be gIven to tbe OIIIcers oI tbe CentraI Government to deaI
wItb tbe penaIty proceedIngs.
Recovery oI PenaIty Amounts
26. CentraI Government sbouId bave tbe powers to recover tbe
penaIty amounts as arrears oI Iand revenue by attacbment and saIe oI
moveabIeJImmovabIe property oI tbe person In deIauIt or by appoIntIng a
ReceIver Ior tbe management oI tbe propertIes oI tbe person In deIauIt.
Tbe autborIty ImposIng penaIty may aIso Impose InterestJaddItIonaI
penaIty Ior deIayed payment oI tbe penaIty. Tbe AppeIIate autborItIes
may be gIven powers to award costs wItb a vIew to dIscouragIng IIIIng oI
IrIvoIous appeaIs.
RevIsIon oI Orders PrejudIce to PubIIc Interest
2?. SpecIIIc autborIty may caII Ior and examIne tbe record oI any
proceedIngs under tbe Act, and II any order passed tbereIn by tbe
autborIty beIow Is consIdered prejudIcIaI to pubIIc Interest, may pass
sucb order tbereon as tbe cIrcumstances may justIIy, IncIudIng an order
enbancIng or modIIyIng penaIty or dIrectIng a Iresb Ievy oI penaIty.
2S. No order sbouId be made under tbIs provIsIon aIter tbe expIry oI
two years Irom tbe end oI tbe IInancIaI year In wbIcb tbe order sougbt to
be revIsed was passed.
RectIIIcatIon oI MIstakes
29. SuItabIe provIsIons sbouId be made In Iaw to enabIe rectIIIcatIon
oI mIstakes In orders, reIund oI amounts becomIng due on appeaIs or
revIsIons, etc.
Power oI CompoundIng
30. Any compoundabIe oIIence under tbe Act may, eItber beIore or
aIter tbe InstItutIon or proceedIngs, be compounded at any stage oI tbe
proceedIngs. Tbe Act may suItabIy prescrIbe tbe scaIe oI compoundIng
Iees and tbe autborIty empowered to compound.
ProsecutIon
31. Any person commIttIng an oIIence reIerred to In tbe Second
scbeduIe I.e. oIIences punIsbabIe wItb ImprIsonment or wItb
ImprIsonment aIong wItb penaIty may be proceeded agaInst In tbe
crImInaI Court but onIy wItb tbe prevIous approvaI oI tbe CentraI
Government or any otber autborIty specIIIed by tbe CentraI Government.
No prosecutIon sbouId be Iauncbed unIess tbe oIIender Is provIded wItb
a reasonabIe opportunIty oI beIng beard In tbe matter.
32. A suItabIe mecbanIsm sbouId exIst In tbe amended Act Ior
transIer oI proceedIngs pendIng In tbe Court to tbe proposed In bouse
structure oI deaIIng wItb tbe IIrst scbeduIe oIIences.
PboenIx CompanIes
33. Tbe CommIttee aIso deIIberated upon tbe probIem arIsIng Irom tbe
dIrectorsJmanagement oI a company actIng In a manner tbat Is
deIIberateIy detrImentaI to tbe company and tben resumIng operatIons
agaIn under a separate name or guIse. It Is understood tbat tbIs
pbenomenon bas been notIced In otber economIes aIso wbere It Is termed
as tbe pboenIx probIem". TbIs probIem resuIts Irom contInuance oI tbe
actIvItIes oI a IaIIed company by tbose responsIbIe Ior tbe IaIIure, usIng
tbe vebIcIe oI a new company. Tbe new company, oIten tradIng under
tbe same or a sImIIar name, uses tbe oId company's assets, oIten
acquIred at undervaIue and expIoIts Its goodwIII and busIness
opportunItIes. MeanwbIIe tbe credItors oI tbe oId company are IeIt to
prove tbeIr debts agaInst a vaIueIess ceII and tbe management to conceaI
tbeIr prevIous IaIIure Irom tbe pubIIc. However, It Is to be recognIzed
tbat not aII IegItImate busInesses succeed at tbe IIrst attempt and tbere
may be occasIons wbere bonest IndIvIduaIs may, tbrougb mIsIortune or
Iack oI expertIse IInd tbat tbey cannot make tbe busIness run
successIuIIy. In sucb cases, It wouId be approprIate Ior tbem to seek
rebabIIItatIon or pIace tbeIr company In IIquIdatIon on voIuntary basIs.
Tbe CommIttee IeeIs tbat tbIs Issue sbouId be addressed tbrougb a
combInatIon oI dIscIosures, InsoIvency processes and dIsquaIIIIcatIons oI
deIInquent dIrectors.
LIItIng tbe Corporate veII
34. In certaIn sItuatIon, despIte tbe provIsIons oI tbe company Iaw
provIdIng Ior constItutIon oI tbe Board and pIacIng tbe IIabIIIty on tbe
board and oIIIcers In deIauIt, It may be possIbIe Ior tbe promoters oI
controIIIng Interests to cIrcumvent tbe spIrIt oI tbe Iaw wbIIe observIng
Its Ietter. Wbere IrauduIent actIvIty bas been estabIIsbed tbrougb
InvestIgatIon tbe Iaw sbouId provIde Ior IIItIng tbe corporate veII to
provIde access to sucb promoters or sbareboIders and to estabIIsb
wbetber IrauduIent actIon took pIace wItb tbeIr knowIedge or at tbeIr
Instance. A Iramework oI penaItIes sbouId be provIded In respect oI sucb
entItIes aIso.
ProtectIon to WbIstIe BIowers
3S. Law sbouId recognIze tbe WbIstIe BIower Concept" by enabIIng
protectIon to IndIvIduaIs wbo expose oIIences by companIes, partIcuIarIy
tbose InvoIvIng Iraud. Sucb protectIon sbouId extend to normaI terms
and condItIons oI servIce and Irom barassment. Furtber, II sucb
empIoyees are tbemseIves ImpIIcated, tbeIr cooperatIon sbouId Iead to
mItIgatIon oI penaItIes to wbIcb tbey may otberwIse be IIabIe.
Cbapter XIII : RestructurIng and LIquIdatIon
1. BusInesses need eIIIcIent and speedy procedures Ior exIt as mucb
as Ior start-up. WorId over, InsoIvency procedures beIp entrepreneurs
cIose down unvIabIe busInesses and start up new ones. TbIs ensures
tbat tbe buman and economIc resources oI a country are contInuousIy
recbanneIIsed to eIIIcIent use tbereby IncreasIng tbe overaII productIvIty
oI tbe economy.
2. However, as busInesses grow In sIze tbere Is aIso a danger tbat
poor management, bad busIness judgement or pIaIn Iraud may resuIt In
a busIness becomIng unvIabIe. In sucb cases It Is possIbIe Ior tbe
productIvIty oI tbe enterprIse to be restored at a Iow cost and wItbout
attendant trauma Ior tbe stakeboIders by provIdIng more capabIe
managerIaI taIent an opportunIty to run It. In Iact recent tImes bave
sbown possIbIIIty oI growtb by entrepreneurs, some oI tbem IndIan, wbo
bave become domInant busIness entItIes InternatIonaIIy by acbIevIng
turnaround oI sIck IIrms and revItaIIzatIon oI dormant capacItIes.
3. Tbe IndIan system provIdes neItber an opportunIty Ior speedy and
eIIectIve rebabIIItatIon nor Ior an eIIIcIent exIt. Tbe process Ior
rebabIIItatIon, reguIated by tbe SIck IndustrIaI CompanIes (SpecIaI
ProvIsIons) Act 19SS tbrougb tbe InstItutIonaI structure oI BIFR Is
amenabIe to deIays and does not provIde a baIanced or eIIectIve
Iramework Ior aII stakeboIders. Tbe process oI IIquIdatIon and wIndIng
up Is costIy, InordInateIy Iengtby and resuIts In aImost compIete erosIon
oI asset vaIue.
4. Tbe CommIttee noted tbat a begInnIng towards reIorm was made
wItb tbe enactment oI CompanIes (Second Amendment) Act, 2002, wbIcb
In addItIon to sIgnIIIcant cbanges In tbe restructurIng and IIquIdatIon
provIsIons provIded Ior tbe settIng up oI a new InstItutIonaI structure In
tbe Iorm oI tbe NatIonaI Company Law TrIbunaI (NCLT)JTrIbunaI and Its
AppeIIate Body, tbe NatIonaI Company Law AppeIIate TrIbunaI (NCLAT).
However, tbe process Is not compIete and a Iot yet needs to be done. Tbe
constItutIon oI tbe TrIbunaI Is IacIng IegaI cbaIIenge and many parts oI
tbe enactment bave not yet been notIIIed.
S. GIobaIIy, reIorm In InsoIvency processes Is recognIzed as an
Important means oI ImprovIng competItIveness oI any economy. It Is
partIcuIarIy so In IndIan context. Under tbe supervIsIon oI tbe UnIted
NatIons CommIssIon on InternatIonaI Trade Law (UNCITRAL), a
LegIsIatIve GuIde on InsoIvency Law and ModeI Law on Cross Border
InsoIvency bave been IormuIated and cIrcuIated to aII countrIes. SImIIar
InItIatIves bave been taken up by otber muItIIateraI InstItutIons. Tbe
CommIttee bas bad tbe beneIIt oI consIderatIon oI sucb InItIatIves.
OccasIonaIIy, a doubt Is expressed as to wbetber deveIopIng countrIes
sbouId consIder IncorporatIon oI sucb IegaI Irameworks. Tbe CommIttee
IeeI tbat tbe IndIan economy Is now at a stage wbere artIcuIatIon oI a
comprebensIve Iramework tbat addresses InsoIvency Issues wouId make
a materIaI dIIIerence to tbe productIvIty oI tbe economy. Tbe CommIttee
Is oI tbe vIew tbat a revIew oI tbe system Ior addressIng corporate
InsoIvency In tbe IndIan context Is urgentIy caIIed Ior and recommends
tbe IoIIowIng to tbe poIIcy pIanners In IndIa.
InsoIvency Law
6.1 An eIIectIve InsoIvency system Is an Important eIement oI IInancIaI
system stabIIIty. It Is, tbereIore, essentIaI to provIde Ior a sound
Iramework Ior restructurIng and rebabIIItatIon oI companIes aIong wItb a
Iramework Ior wIndIng up and IIquIdatIon. Tbe Iramework sbouId seek to
preserve estate and maxImIze tbe vaIue oI assets; recognIze Inter se
rIgbts oI credItors and provIde equaI treatment oI sImIIar credItors wbIIe
deaIIng wItb smaII credItors equItabIy. It sbouId enabIe a tImeIy and
eIIIcIent resoIutIon oI InsoIvency and estabIIsb a Iramework Ior cross
border InsoIvency. Tbe present Iramework does not provIde a baIanced
resoIutIon oI varIous stakeboIder Issues, Is tIme consumIng and
IneIIIcIent.
6.2 Corporate InsoIvency sbouId be addressed In tbe Company Law.
Tbere Is no need oI a separate InsoIvency Law Ior tbe present.
LIquIdatIon and RebabIIItatIon
?.1 Tbe InsoIvency Iaw sbouId strIke a baIance between rebabIIItatIon
and IIquIdatIon. It sbouId provIde an opportunIty Ior genuIne eIIort to
expIore restructurIngJ rebabIIItatIon oI potentIaIIy vIabIe busInesses wItb
consensus oI stake boIders reasonabIy arrIved at. Wbere revIvaI J
rebabIIItatIon Is demonstrated as not beIng IeasIbIe, wIndIng up sbouId
be resorted to.
?.2 Wbere cIrcumstances justIIy, tbe process sbouId aIIow Ior easy
conversIon oI proceedIngs Irom one procedure to anotber. TbIs wIII
provIde opportunIty to busInesses In IIquIdatIon to turnaround wberever
possIbIe. SImIIarIy, conversIon to IIquIdatIon mIgbt be approprIate even
aIter a rebabIIItatIon pIan bas been approved II sucb a pIan was procured
by Iraud or tbe pIan can no Ionger be ImpIemented.
?.3 Tbe CommIttee noted tbat a recent survey by WorId Bank (DoIng
busIness In 200S - IndIa RegIonaI ProIIIe) bas poInted out tbat It took 10
years on an average to wInd up J IIquIdate a company In IndIa as
compared to 1 to 6 years In otber countrIes. Sucb Iengtby tIme-Irames
are detrImentaI to tbe Interest oI aII stakeboIders. Tbe process sbouId be
tIme-bound, aImed at maxImIzIng tbe cbances oI preservIng vaIue Ior tbe
stakeboIders as weII as tbe economy as a wboIe.
?.4 Tbe InsoIvency process sbouId be overseen by a neutraI Iorum In a
non-IntrusIve manner. Sucb a sIngIe, Independent Statutory Iorum,
sbouId bave tbe capacIty and expertIse to deaI wItb tbe specIaIIzed
commercIaI and tecbnIcaI cbaracterIstIcs oI tbe InsoIvency Law and tbe
process; make an assessment and decIde tbe course oI actIon
(rebabIIItatIon or IIquIdatIon) tbat may need to be adopted at tbe earIIest
possIbIe stage wbIIe baIancIng tbe Interests oI aII stakeboIders equItabIy.
Tbe CommIttee noted tbat tbe CompanIes (Second Amendment) Act,
2002 bad brougbt about sIgnIIIcant cbanges In tbe provIsIons deaIIng
wItb rebabIIItatIonJwIndIng up J IIquIdatIon oI companIes In tbe present
Act and bad aIso proposed tbat an InstItutIonaI structure Ior tbe purpose
be set up In tbe Iorm oI NCLTJNCLAT. TbIs InstItutIonaI Structure,
wbIcb wouId provIde tbe desIrabIe sIngIe Independent Iorum Is yet to be
constItuted. Tbe CommIttee bope tbat tbIs Is done speedIIy and are oI tbe
vIew tbat Its estabIIsbment wouId provIde a major InItIatIve Ior tbe reIorm
oI tbe InsoIvency system In tbe country.
Focus on RebabIIItatIon
S. Law sbouId provIde a reasonabIe opportunIty Ior rebabIIItatIon oI
a busIness beIore a decIsIon Is taken to IIquIdate It so tbat It can be
restored to productIvIty and become competItIve. However tbIs
opportunIty sbouId IncentIvIze genuIne eIIort. SpecIaI care sbouId be
taken to ensure tbat tbIs Is not mIsused by any stakeboIder to deIay
proceedIngs, strIp asset vaIue or otberwIse work to tbe detrIment oI tbe
busIness and otber stakeboIders.
TIme bound proceedIngs
9.1 A deIInIte and predIctabIe tIme Irame sbouId be provIded Ior
attempt at rebabIIItatIon and Ior tbe IIquIdatIon process. Tbe exIstIng
tIme Irame In IndIa Is too Iong and keeps precIous assets Iocked In
proceedIngs Ior many years, destroyIng tbeIr vaIue In tbe process.
9.2 A perIod oI one year sbouId be adequate Ior rebabIIItatIon process
Irom commencement oI tbe process tIII sanctIon oI a pIan. Tbere sbouId
aIso be a deIInIte tIme perIod wItbIn wbIcb proceedIngs may commence
Irom tbe date oI IIIIng oI tbe appIIcatIon Ior rebabIIItatIon.
9.3 Tbe process sbouId IImIt tbe possIbIIIty oI appeaIs at every stage so
tbat tbe process Is not deIayed tbrougb IrIvoIous appeaIs or staIIIng
tactIcs.
9.4 On an average a tIme Irame oI two years sbouId be IeasIbIe Ior tbe
IIquIdatIon process to be compIeted.
9.S A IIxed tIme perIod sbouId be provIded Ior eacb stage oI
rebabIIItatIon and IIquIdatIon process. ExtensIon at every stage sbouId be
rare and aIIowed onIy In exceptIonaI cIrcumstances and In any case
wItbout eIIectIng tbe outer tIme IImIt provIded Ior tbe process.
AppIIcabIIIty and AccessIbIIIty
10.1 Tbe InsoIvency process sbouId appIy to aII enterprIses or corporate
entItIes IncIudIng smaII and medIum enterprIses except banks, IInancIaI
InstItutIons and Insurance companIes.
10.2 Tbe concept oI sIck IndustrIaI company sbouId be repIaced by
InsoIvent company or enterprIse to brIng It In barmony wItb tbe
prIncIpIes oI tbe proposed InsoIvency Law.
10.3 Botb Debtors and CredItors sbouId bave IaIr access to tbe
InsoIvency system upon sbowIng prooI oI deIauIt.
10.4 Ratber tban erosIon oI net wortb prIncIpIe, test sbouId prescrIbe
deIauIt In payment oI matured debt on demand (IIquIdIty test) wItbIn a
prescrIbed perIod. Tbe baIance sbeet test tends to be more costIy as It
generaIIy requIres an expert evaIuatIon to revIew books, records and
IInancIaI data to determIne tbe enterprIse's IaIr market vaIue. WbIIe
IacIIItatIng tbe InvocatIon oI process at an earIy stage, tbIs wouId
dIscourage manIpuIatIon oI accounts to create erosIon In net-wortb. Tbe
opportunIty oI restructurIng sbouId be avaIIabIe beIore tbe asset Is
rendered non-perIormIng.
10.S Debtors seekIng recourse to rebabIIItatIon sbouId be aIIowed to
approacb tbe TrIbunaI onIy wItb a draIt scbeme Ior rebabIIItatIon Ior tbe
consIderatIon oI TrIbunaI. TbIs wouId brIng Iorward genuIne eIIorts oI
rebabIIItatIon and provIde an opportunIty Ior assessIng tbe vIabIIIty oI
tbe busIness at tbe earIIest to decIde tbe approprIate course oI actIon to
be adopted.
10.6 CredItors beIng at Ieast 3J4
tb
In vaIue sbouId aIso be IIabIe to IIIe a
scbeme Ior rebabIIItatIon.
10.? II credItors approacb Ior wIndIng up, opportunIty sbouId be gIven
to debtor to IIIe a scbeme II sucb an opportunIty Is sougbt. Tbe process
sbouId enabIe consuItatIon oI scbeme wItb tbe credItors and convertIng
tbe IIquIdatIon proceedIngs Into restructurIng proceedIngs, II tbe
TrIbunaI Is oI tbe opInIon tbat tbere are IaIr cbances tbat tbe company
may revIve.
10.S Tbe Iaw sbouId requIre tbe provIsIon oI reIevant InIormatIon about
tbe Debtor to be made avaIIabIe Ior eIIectIve consIderatIon oI tbe scbeme.
Tbe Iaw sbouId enabIe obtaInIng by tbe TrIbunaI, Independent comment
and anaIysIs oI tbat InIormatIon by experts.
DutIes and probIbItIons on admIssIon
11.1 On admIssIon oI appIIcatIon Ior rebabIIItatIon, tbe Iaw sbouId
Impose certaIn dutIes and probIbItIons to appIy to debtors and credItors
Ior an eIIectIve resoIutIon oI InsoIvency and baIancIng tbe stakeboIders'
Interests In tbe process.
11.2 Tbere sbouId be an automatIc probIbItIon on Debtors' rIgbts to
undertake transIer, saIe or dIsposItIon oI assets or parts oI tbe busIness.
PermIssIon may be granted onIy to tbe extent necessary to operate tbe
busIness, wItb tbe approvaI oI tbe TrIbunaI. TbIs wouId protect tbe
assets, buIId conIIdence oI secured credItors and encourage tbem to
partIcIpate In tbe InsoIvency process.
Summary DIsmIssaI oI proceedIngs
12. Tbe Iaw sbouId vest wItb tbe TrIbunaI tbe power to summarIIy
dIsmIss tbe proceedIngs Ior not meetIng commencement standards wItb
cost J sanctIon. Once rejected no Iurtber reIerence sbouId be
maIntaInabIe. FIIIng oI repeated reIerences by debtor In spIte oI earIIer
rejectIon bas Ied to abuse oI tbe process.
MoratorIum and suspensIon oI proceedIngs
13.1 A IImIted standstIII perIod Is essentIaI to provIde an opportunIty to
genuIne busIness to expIore re-structurIng.
13.2 Tbe Iaw sbouId, tbereIore, Impose a probIbItIon on tbe
unautborIzed dIsposItIon oI tbe Debtors' assets and suspensIon oI
actIons by CredItors to enIorce tbeIr rIgbts or remedIes agaInst tbe
Debtor on tbe assets Ior a IImIted prescrIbed perIod to preserve and
protect assets besIdes maxImIzIng Its vaIue. TbIs wIII IacIIItate
unobstructed conduct oI InsoIvency process by tbe TrIbunaI wItbout
bavIng to deaI wItb compIexItIes oI muItIpIe credItor actIons In Debt
Recovery TrIbunaIs. TbIs wIII aIso encourage credItors to partIcIpate In
tbe InsoIvency process besIdes acbIevIng IaIr and orderIy admInIstratIon
and upboIdIng IundamentaI objectIves and poIIcy oI tbe InsoIvency Law.
13.3 Ratber tban beIng automatIc, tbe probIbItIons sbouId be on
TrIbunaI's order on a specIIIc appIIcatIon wItb approvaI oI majorIty
credItors In vaIue. Tbe TrIbunaI sbouId bave adequate power to IIIt or
modIIy tbe probIbItIon In case tbe cIrcumstances so warrant.
13.4 Tbe Iaw sbouId provIde Ior treatment oI unperIormed contracts.
Wbere tbe contracts provIde Ior automatIc termInatIon on IIIIng oI
InsoIvency, Its enIorcement sbouId be stayed on commencement oI
InsoIvency.
13.S Tbere sbouId be enabIIng provIsIons to InterIere wItb tbe
contractuaI obIIgatIons wbIcb are not IuIIIIIed compIeteIy. Sucb
InterIerence or overrIdIng powers wouId assIst In acbIevIng tbe objectIves
oI tbe InsoIvency process. Tbe power Is necessary to IacIIItate takIng
approprIate busIness and otber decIsIons IncIudIng tbose dIrected at
contaInIng rIse In IIabIIItIes and enbancIng vaIue oI assets.
13.6 ExceptIons oI sucb powers are aIso essentIaI to be Insured In tbe
Iaw wbere tbere Is a compeIIIng, commercIaI, pubIIc or socIaI Interest In
upboIdIng tbe contractuaI rIgbts oI tbe counter party to tbe contract.
GovernanceJManagement (RebabIIItatIon proceedIngs)
14.1 In regard to tbe potentIaIIy InsoIvent companIes, It Is essentIaI
tbat seII-reguIatory measures be requIred to be taken by a company to
protect tbe Interests oI varIous stakeboIders, preserve assets and adopt
sucb otber measures as may be necessary to contaIn InsoIvency. TbIs
wouId enabIe WbIstIe BIowIng on ImpendIng InsoIvency. Tbe CommIttee
Is oI tbe vIew tbat a meetIng oI tbe secured credItors sbouId be convened
by tbe debtor to consIder a rebabIIItatIon pIan wben tbe Company bas
IaIIed to repay Its due debt wItbout waItIng Ior credItors to act on deIauIt
or IIIIng oI appIIcatIon Ior rebabIIItatIon. Tbere sbouId be a provIsIon tbat
wben accumuIated Iosses In any IInancIaI year are equaI to 2S% or more
oI Its average net wortb durIng Iast two IInancIaI years and tbere Is a
deIauIt In makIng payments to tbe credItors, tbe companIes sbouId
convene a GeneraI MeetIng oI sbareboIders wItbout any deIay to consIder
sucb a sItuatIon.
14.2 Tbere sbouId aIso be a greater roIe and responsIbIIIty Ior partIes
most aIIected by tbe InsoIvency once tbe proceedIngs aImed at
addressIng It are InItIated. Tbe key stakeboIders sbouId be IncentIvIzed
to actIveIy partIcIpate In tbe process. Tbey sbouId be consuIted In tbe
decIsIon makIng.
14.3 WbIIe tbe Iaw sbouId permIt use and dIsposaI oI assets In ordInary
course oI busIness, capacIty Ior management oI tbe aIIaIrs oI tbe
busIness by debtors sbouId be put to test In consuItatIon wItb secured
credItors. OtberwIse credItors sbouId be provIded rIgbts oI substItutIon oI
debtors. Assets sbouId In eItber case be subjected to supervIsIon or
management by ImpartIaI, Independent, eIIectIve and capabIe
AdmInIstrator. TbIs wouId enbance tbe conIIdence oI tbe secured
credItors In tbe process wbIIe preservIng and protectIng tbe assets.
14.4 Wbere cIrcumstance justIIy sucb as IaIIure to protect assets or
deaI wItb tbem In prejudIcIaI manner, In tbe opInIon oI tbe TrIbunaI or
majorIty credItors, IuII controI oI assets may be aIIowed to pass to
admInIstrator nomInated by credItors tbrougb exercIse oI rIgbt oI
substItutIon.
14.S In Iurtberance oI acbIevIng a IaIr, Independent and baIanced
resoIutIon oI stakeboIders Interest, tbe roIe oI OperatIng Agency
envIsaged under tbe exIstIng Iaw sbouId be perIormed by on Independent
AdmInIstrator or sucb otber quaIIIIed proIessIonaI as may be prescrIbed.
CurrentIy banks and IInancIaI InstItutIons are appoInted as OperatIng
Agency. Engagement oI experts wIII aIso enbance tbe eIIIcIency oI
process. Tbe banks and IInancIaI InstItutIons sbouId partIcIpate In tbe
operatIon tbrougb commIttee oI credItors.
GovernanceJManagement In IIquIdatIon
1S.1 Tbe management oI tbe goIng concern sbouId be repIaced by a
quaIIIIed AdmInIstrator appoInted by tbe TrIbunaI In consuItatIon wItb
tbe secured credItors wItb board autborIty to admInIster tbe estate In tbe
Interest oI aII stake boIders. An Independent AdmInIstrator wouId be
abIe to provIde tbe best treatment to tbe assets and preserve Its vaIue
and take otber necessary decIsIons In tbe best Interest oI tbe busIness.
1S.2 Tbe Iaw sbouId provIde Ior AdmInIstrator to be abIe to prepare and
IIIe a scbeme Ior turnaround oI tbe company, II tbe busIness Is vIabIe In
wbIcb case tbe credItors and ex-management sbouId bave an
opportunIty to comment on tbe scbeme.
1S.3 Tbe AdmInIstrator sbouId bave tbe same obIIgatIon as tbe
management to secured credItors wItb rIgbt oI InIormatIon and
supervIsIon.
Governance : Secured CredItors and CredItors CommIttee
16.1 Secured credItors Interests sbouId be saIeguarded by estabIIsbIng
a CommIttee oI secured credItors. Tbe CommIttee sbouId enabIe credItors
to actIveIy partIcIpate In tbe InsoIvency process, monItor tbe process, and
serve as a conduIt Ior processIng and dIstrIbutIng reIevant InIormatIon to
otber credItors and organIzIng credItors to decIde on crItIcaI Issues. TbIs
wouId provIde a pIatIorm to aII kInds oI secured credItors to dIscuss tbe
dIvergent vIews and buIId consensus and agreement on tbe Issues tbat
arIse Ior consIderatIon and decIsIon. Tbe process wouId aIso assIst In
expedItIng tbe InsoIvency process.
16.2 Law sbouId provIde Ior major decIsIons by generaI credItors
assembIy. Tbere sbouId be ruIes Ior appoIntment oI members In tbe
CredItors CommIttee and to determIne tbe CommIttee's membersbIp,
quorum and votIng ruIes, powers and conduct meetIngs.
16.3 Tbe Law sbouId enabIe appoIntment oI proIessIonaI experts and
specIaIIsts by CredItor CommIttee to advIse tbem on varIous tecbnIcaI
and IegaI Issues.
16.4 DIrectors oI a debtor corporatIon sbouId be requIred to attend
meetIngs oI CredItors CommIttee so tbat tbe decIsIons can be made on a
weII InIormed basIs.
Governance : Unsecured CredItors
1?.1 Unsecured credItors bave no representatIon In tbe restructurIng
process. Lack oI InIormatIon Ieads to suspense and anxIety on tbeIr part
resuItIng In muItIpIe IegaI and otber proceedIngs. TbIs Impacts tbe
overaII eIIIcIency oI tbe rebabIIItatIon process.
1?.2 A separate CommIttee to represent otber categorIes oI credItors
and unsecured credItors and stakeboIders couId be Iormed wItb IImIted
rIgbt to represent and bearIng wItbout rIgbt to vote on tbe pIan and otber
decIsIons. Separate and Independent ruIes Ior appoIntment oI tbe
credItors (otber tban secured) commIttee may be made wItb detaIIs oI
procedures Ior membersbIp, quorum and votIng ruIes, powers etc.
1?.3 EnabIIng provIsIons wouId be requIred to coordInate meetIngs oI
unsecured and secured credItors to take decIsIons to move cIaIms.
1?.4 Tbe Iaw sbouId provIde Ior mecbanIsm to recognIze and record
cIaIms oI unsecured credItors In preparatIon oI tbe rebabIIItatIon pIan.
AdmInIstratIon oI InsoIvency : AdmInIstrator and LIquIdator
1S.1 A paneI oI AdmInIstrators and LIquIdators sbouId be prepared and
maIntaIned by an Independent body out oI proIessIonaIs wItb approprIate
experIence and knowIedge oI InsoIvency practIce. Tbe paneI sbouId be oI
IndIvIduaI advocates, accountants, company secretarIes, costs and works
accountants and otber experts ratber tban tbe IIrms so tbat tbe
Independence and accountabIIIty oI IndIvIduaIs may be determIned. Tbe
paneI sbouId be prepared In a IaIr and transparent manner. TbIs wouId
aIso ensure tbat approprIate proIessIonaIs wbo are appoInted on tbe
strengtb oI tbeIr knowIedge and experIence provIde tbe servIce ratber
tban tbe otber partners or coIIeagues In tbeIr IIrms. Tbe Iaw sbouId
bowever provIde power to tbe TrIbunaI to make exceptIons to tbe ruIe
and appoInt IIrms.
1S.2 Tbe TrIbunaI sbouId bave powers to appoInt AdmInIstrator and
LIquIdators out oI tbe paneI maIntaIned by tbe Independent body and
OIIIcIaI LIquIdators Irom paneI oI oIIIcIaIs made avaIIabIe by tbe
Government.
IdentIIIcatIon, CoIIectIon, PreservatIon, DIsposItIon oI Debtor assets
and Property
19.1 Law sbouId provIde a Iramework tbat IncentIvIzes maxImIzatIon oI
estate vaIue.
19.2 Tbe Iaw sbouId IdentIIy tbe assets tbat constItute tbe InsoIvency
estate IncIudIng assets oI debtor (IncIudIng tbose subject to securIty
Interest) and tbIrd party owned assets (sucb as Ieased and bypotbecated
assets) wberever Iocated and provIde Ior coIIectIon oI assets IormIng part
oI InsoIvency estate by AdmInIstratorJ LIquIdator. In tbe cases oI
rebabIIItatIon, Ieased assets sbouId Iorm part oI InsoIvency estate.
19.3 Tbe Iaw sbouId provIde Ior avoIdance or canceIIatIon oI pre-
bankruptcy IrauduIent and preIerentIaI transactIons, compIeted wben
tbe enterprIse was InsoIvent or tbat resuIted In Its InsoIvency.
19.4 Tbe suspect perIod prIor to InsoIvency, durIng wbIcb tbe payments
are presumed to be preIerentIaI and may be set asIde, sbouId be sbort to
avoId dIsruptIng normaI commercIaI and credIt reIatIons. Tbe perIod
may be Ionger In case oI gIIts and reIated party transactIons. ApproprIate
dIscIosure norms sbouId be deveIoped Ior tbIs purpose.
19.S Tbe Iaw sbouId prescrIbe a IIexIbIe but transparent system Ior
dIsposaI oI assets eIIIcIentIy and at maxImum vaIues IncIudIng saIe by
prIvate treaty.
19.6 Wbere necessary, tbe Iaw may aIIow Ior saIes Iree and cIear oI
securIty Interests, cbarges or otber encumbrances, subject to preservIng
tbe prIorIty oI Interests In tbe proceeds Irom assets dIsposaI.
19.? Tbe saIe oI assets sbouId be carrIed out by tbe AdmInIstratorJ
LIquIdator under tbe supervIsIon oI court.
VaIuatIon oI debtor estate
20.1 Tbe TrIbunaI sbouId appoInt accountancy experts J proIessIonaIs
to ensure tbat true and IaIr pIcture oI accounts oI tbe debtor enterprIse
and IInancIaI assets Is avaIIabIe.
20.2 Independent experts may be appoInted as vaIuers Ior vaIuatIon oI
assets oI a busIness concern under IIquIdatIon.
20.3 Debtors and CredItors sbouId bave tbe power to scrutInIze and
cbaIIenge tbe vaIue beIore IInaI order oI IIxIng vaIue.
20.4 Tbere sbouId be powers Ior annuIment In approprIate cases wItb
recoveryJdIsgorgement.
CIaIms ResoIutIon : Treatment oI Stake boIders RIgbts and prIorItIes
on IIquIdatIon
21.1 Tbe Iaw sbouId provIde Ior prompt and InterIm dIstrIbutIon oI
cIaIms to credItors In IIne wItb prIorItIes determIned by Iaw.
21.2 RIgbts and prIorItIes oI credItors estabIIsbed prIor to InsoIvency
under commercIaI Iaws sbouId be upbeId to preserve tbe IegItImate
expectatIons oI credItors and encourage greater predIctabIIIty In
commercIaI reIatIonsbIp.
21.3 Tbe status oI secured credItors sbouId be wItb
empIoyees In respect oI tbeIr cIaIms aIter payment oI cIaIms reIated to
costs and expenses oI admInIstratIon oI IIquIdatIon. RemaInIng proceeds
sbouId be dIstrIbuted, wItb otber credItors, unIess tbere are
compeIIIng reasons to justIIy gIvIng preIerentIaI status to a partIcuIar
debt.
21.4 Tbe number oI prIorIty cIasses sbouId be kept to mInImum so tbat
rIgbts and expectatIons oI cIasses created prIor to InsoIvency are not
dIIuted.
21.S PubIIc Interests, Government cIaIms sbouId not get precedence
over prIvate rIgbts In tbe InsoIvency process. Assets are created In tbe
enterprIse by tbe secured credItors wbo bave a prIor rIgbt over tbe
proceeds wben assets are IIquIdated. Tbe dues oI otbers arIse due to tbe
actIvIty tbese assets create and sbouId be coIIected wben tbe busIness Is
runnIng.
PIans : FormuIatIon, ConsIderatIon, VotIng and ApprovaI
22.1 Tbe Iaw sbouId not prescrIbe nature oI pIan except In terms oI
IundamentaI requIrements and to prevent commercIaI abuse. TbIs wIII
provIde tbe desIred IIexIbIIIty In preparatIon oI tbe pIan. Tbe TrIbunaI
sbouId bave tbe power to obtaIn Independent comments on tbe pIan.
22.2 RevIvaIJrebabIIItatIon pIan sbouId be approved by majorIty oI
secured credItors (?S%) to bInd aII credItors. TbIs wouId ensure tbat a
smaII credItor Is not abIe to staII tbe entIre process even tbougb tbe
majorIty oI tbe credItors are In Iavour oI tbe pIan.
22.3 In case no pIan Is approved, tbe busIness concern sbouId
automatIcaIIy be IIquIdated.
22.4 Tbere sbouId aIso be enabIIng provIsIons to estabIIsb a
mecbanIsm Ior IIIIng a negotIated pIan Ior approvaI by TrIbunaI by tbe
same majorIty cIass oI credItors aIong wItb dIscIosure statements etc.
and wItb supportIng evIdence oI approvaI by majorIty.
ScbemeJPIan : BIndIng EIIect, ImpIementatIon and Amendment,
DIscbarge and ConcIusIon
23.1 Tbere sbouId be provIsIon Ior monItorIng and eIIectIve
ImpIementatIon oI tbe scbemeJ pIan.
23.2 ProvIsIon sbouId aIso be made to amend tbe pIan In tbe Interest oI
rebabIIItatIon II an amendment becomes necessary due to cbange In
cIrcumstances and deveIopments tbat eIIect tbe successIuI
ImpIementatIon oI tbe pIan.
23.3 Tbere sbouId be a provIsIon In Iaw Ior termInatIon oI tbe pIan and
to IIquIdate tbe company.
23.4 Tbe Iaw sbouId provIde Ior a dIscbarge or aIternatIon oI debts and
cIaIms tbat bave been dIscbarged or otberwIse aItered under tbe pIan.
Wbere approvaI oI tbe pIan bas been procured by Iraud, tbe pIan sbouId
be subject to cbaIIenge, reconsIdered or set asIde.
23.S ReorganIzatIon proceedIngs sbouId concIude wben pIan Is IuIIy
ImpIemented or at an earIIer date to be determIned by tbe TrIbunaI.
23.6 LIquIdatIon proceedIngs sbouId concIude IoIIowIng IInaI
dIstrIbutIon or determInatIon tbat no dIstrIbutIon can be made.
Tbe TrIbunaI (NatIonaI Company Law TrIbunaI)(NCLT)
24.1 As per CompanIes (Second Amendment) Act, 2002, tbe NatIonaI
Company Law TrIbunaI (NCLT) Is envIsaged as tbe Iorum to address
InsoIvency Issues. It Is boped tbat tbIs Iorum Is constItuted speedIIy. Tbe
CommIttee bowever takes tbIs opportunIty to Iocus on some Important
aspects wIdeIy consIdered Important Ior proper IunctIonIng oI sucb a
body.
24.2 Tbe InsoIvency TrIbunaI sbouId bave a generaI, non-IntrusIve and
supervIsory roIe In tbe rebabIIItatIon and IIquIdatIon process. Greater
InterventIon oI tbe TrIbunaI Is requIred onIy to resoIve dIsputes by
adoptIng a Iast track approacb. Tbe TrIbunaI sbouId adopt a commercIaI
approacb to dIspute resoIutIon observIng tbe estabIIsbed IegaI prIncIpIes
oI IaIrness In tbe process.
24.3 Tbe TrIbunaI sbouId set standards oI bIgb quaIIty and be abIe to
meet requIsIte IeveI oI pubIIc expectatIons oI IaIrness, ImpartIaIIty,
transparency and accountabIIIty. SeIectIon oI PresIdent and Members oI
tbe TrIbunaI sbouId be sucb so as to enabIe a wIde mIx oI expertIse Ior
conduct oI Its work.
24.4 Tbe TrIbunaI wIII requIre specIaIIzed expertIse to address tbe
Issues reIerred to It. Tbe Iaw sbouId prescrIbe an adequate quaIIIIcatIon
crIterIon Ior appoIntment to tbe TrIbunaI as weII as traInIng and
contInuIng educatIon Ior judgesJmembers.
24.S RuIes sbouId be made In sucb way tbat ensure ready access to
court records, court bearIngs, debtors and IInancIaI data and otber
pubIIc InIormatIon.
24.6 Standards to measure tbe competence, perIormance and servIces
oI tbe TrIbunaI sbouId be Iramed and adopted so tbat proper evaIuatIon
Is done and Iurtber Improvements can be suggested.
24.? Tbe TrIbunaI sbouId bave cIear autborIty and eIIectIve metbods oI
enIorcIng Its judgments. It sbouId bave adequate powers to deaI wItb
IIIegaI actIvIty or abusIve conduct.
InsoIvency PractItIoners
2S. CurrentIy, tbe Iaw does not support eIIectIve partIcIpatIon oI
proIessIonaIs and experts In tbe InsoIvency process. Tbere Is no sbortage
oI quaIIty proIessIonaIs In IndIa. DIscIpIInes oI cbartered accountancy,
company secretarysbIp, cost and works accountancy, Iaw etc can act as
Ieeder streams, provIdIng bIgb quaIIty proIessIonaIs Ior tbIs new actIvIty.
In Iact, prIvate proIessIonaIs can pIay a meanIngIuI roIe In aII aspects oI
process. InsoIvency practIce can aIso open up a new IIeId oI actIvIty Ior
servIce proIessIonaIs wbIIe ImprovIng tbe quaIIty oI InterventIon at aII
IeveIs durIng rebabIIItatIonJwIndIng upJIIquIdatIon proceedIngs. Law
sbouId encourage and recognIze tbe concept oI InsoIvency PractItIoners
(AdmInIstrators, LIquIdators, Turnaround SpecIaIIsts, VaIuers etc).
Greater responsIbIIIty and autborIty sbouId be gIven to InsoIvency
PractItIoners under tbe supervIsIon oI tbe TrIbunaI to maxImIze resource
use and appIIcatIon oI skIIIs.
ReguIatIon, SupervIsIon and Costs
26. Tbe Iaw sbouId create tbe mecbanIsm Ior debtor to meet tbe cost oI
rebabIIItatIon and IIquIdatIon. In IIquIdatIon process, tbe Iaw sbouId
IacIIItate quIck dIsposaI oI assets to meet tbe baIance cost oI tbe
InsoIvency. EIIorts sbouId be made to generate Iunds to meet tbe cost oI
restructurIng by dIsposaI oI surpIus assets, II any oI tbe company. A vIew
was expressed by tbe representatIves oI some banksJIInancIaI
InstItutIons tbat credItors sbouId not be requIred to suppIement tbe
expense oI rebabIIItatIon J IIquIdatIon. Tbe CommIttee examIned tbIs
vIew and IeIt tbat busInesses tbat were vIabIe and couId be rebabIIItated
sbouId be provIded a IaIr opportunIty Ior tbe purpose. TbIs may requIre
aII stakeboIders IncIudIng credItors to make sacrIIIces. In tbe Interest oI
avoIdIng busIness IaIIure and consequent dIstress, wberever possIbIe,
tbIs wouId be weII wortb tbe eIIort. BesIdes, under tbe proposed
Iramework, rebabIIItatIon eIIort wouId be taken up In consuItatIon wItb
credItors In a manner tbat Is not open ended. InternatIonaIIy, banks bave
actIveIy partIcIpated and bave IacIIItated busIness rebabIIItatIon. It was
tIme tbat a comprebensIve and a baIanced approacb was adopted In
IndIa as weII. Tbe banksJIInancIaI InstItutIons sbouId, tbereIore,
approacb tbe new Iramework, wbIcb was consIstent wItb InternatIonaI
practIces In a posItIve manner and partIcIpate meanIngIuIIy In sucb
exercIses.
Tbe InsoIvency Fund
2?.1 Tbe CommIttee noted tbat consequent to tbe CompanIes (Second
Amendment) Act, 2002, a provIsIon bas been made Ior Ievy oI
rebabIIItatIon cess by tbe Government, to be cbarged on tbe basIs oI
turnover oI a company. AII companIes wouId be subject to sucb cess
wbIcb wouId be utIIIzed Ior rebabIIItatIon oI sIck companIes. Tbe
CommIttee was oI tbe vIew tbat sucb a modaIIty resuIted In eIIIcIent
IIrms beIng penaIIzed to tbe beneIIt oI IneIIIcIent ones and as sucb was
undesIrabIe. BesIdes, tbe structure resuIted on a tax on turnover ratber
tban on Income wbIcb tended to dIs-IncentIvIze growtb. Tbe CommIttee,
tbereIore, recommended repeaI oI tbIs provIsIon.
2?.2 Tbe CommIttee, bowever, took Into account tbe concerns
assocIated wItb protectIon oI vuInerabIe stakeboIders wbo suIIer tbe
most durIng InsoIvency. BesIdes, tbe cost oI tbe InsoIvency process
wouId aIso bave to be met. TbereIore, tbe CommIttee took tbe vIew tbat
an InsoIvency Fund may be set up to meet tbe costs oI tbe InsoIvency
process. CompanIes may contrIbute to tbe Fund on tbeIr own optIon.
Tbe corpus oI tbe Fund may aIso be enbanced by grants Irom tbe
Government. Government sbouId consIder provIdIng IncentIves,
IncIudIng tax IncentIves to encourage contrIbutIons by companIes to
sucb a Fund.
2?.3 ContrIbutIons by companIes to sucb a Fund sbouId entItIe tbem to
certaIn drawIng rIgbts In tbe event oI an InsoIvency. A company under
restructurIng and IIquIdatIon sbouId be abIe to draw out oI tbe Fund
onIy In proportIon oI tbe contrIbutIon made by It to tbe Fund In tbe pre-
restructurIng and pre-IIquIdatIon perIod. TbIs wouId enabIe bIgb rIsk
companIes to decIde on tbe optImum contrIbutIon to be made to tbe
Iund.
2?.4 Tbe appIIcatIon oI tbe Fund to tbe InsoIvencyJrebabIIItatIon
process sbouId be subject to tbe orders oI tbe TrIbunaI. Tbe TrIbunaI
may, In suItabIe cIrcumstances aIIow an over draIt Irom tbe Fund In tbe
rebabIIItatIon process, In wbIcb case tbe overdraIt amount sbouId be
sbown agaInst tbe credIt oI tbe company and provIsIon oI Its repayment
sbouId be made In tbe rebabIIItatIon scbeme.
2?.S InsoIvency Fund sbouId be credIted to a separate account and not
to tbe ConsoIIdated Fund oI IndIa. Tbe Fund sbouId be managed by an
Independent AdmInIstrator appoInted by tbe Government.
InternatIonaI consIderatIons
2S.1 InsoIvency Iaws sbouId provIde Ior ruIes oI jurIsdIctIon,
recognItIon oI IoreIgn judgments, co-operatIon and assIstance among
courts In dIIIerent countrIes and cboIce oI Law. Many countrIes bave
aIready adopted tbe UNCITRAL ModeI Law on Cross Border InsoIvency
wItb or wItbout modIIIcatIons. AdoptIon oI tbe ModeI Law by IndIa may
aIso be consIdered wItb suItabIe modIIIcatIons keepIng pace wItb Its
adoptIon by countrIes bavIng sIgnIIIcant trade J Investment IInkages wItb
IndIa.
2S.2 Tbe Iaw sbouId contaIn enabIIng provIsIons to deaI wItb Issues
concernIng treatIes and arrangements entered Into wItb dIIIerent
countrIes by IndIa, present and Iuture. IndIa bas deveIoped commercIaI
reIatIonsbIp wItb new countrIes In recent years and tbere wouId more
new busIness reIatIonsbIps In Iuture IeadIng to treatIes and
arrangements Irom tIme to tIme. Tbe Iaw sbouId IacIIItate recognItIon oI
jurIsdIctIon, courts, judgments, cooperatIon and assIstance Irom tbese
countrIes.
-----------------------
Acknowledgements
The Committee wishes to acknowledge the assistance received from many
quarters in completing its task. All relevant information and records needed by
the Committee were promptly supplied by the Ministry of Company Affairs, who
also provided logistical and administrative support as well as secretarial assistance
to the Committee. The Institute of Chartered Accountants of India helped the
Ministry in arranging the venues and making other arrangements for holding of its
meetings.
The Committee was also supplied with technical documentation and
background material by the Institute of Chartered Accountants of India (ICAI),
the Institute of Company Secretaries of India (ICSI) and the Institute of Cost and
Works Accountants of India (ICWAI), who also made valuable suggestions
through their representatives on the Expert Committee.
The Committee would like to record its high appreciation for the efforts
put in by many professionals and experts who met the Committee or had sent in
their suggestions in writing to the Concept Paper published by the Ministry in
2004.
The Committee would also like to acknowledge the in-depth analysis done
in papers prepared by all the members of the Committee. The Committee would
also specially acknowledge the painstaking work put in by Shri M.M.K. Sardana,
Shri U.K. Sinha, Shri Bhagwat Swarup, Shri R.S.Loona, Shri M.R.Umarji and
Shri Sumant Batra, special invitees, in preparing papers on various subjects and
participating actively in related discussions.
Specific mention is to be made of the work put in by Shri Bharat Vasani
and Ms.Sandhya Kudtarkar of the House of Tatas, Shri Allwyn Noronha of
ASSOCHAM and Shri Sunderarajan of CII in assisting the Committee.
The Committee wish to record its high appreciation of the hard work put
in by the team of officials from the Ministry of Company Affairs who laboured
ceaselessly to enable timely and smooth holding of meeting, making technical
material available, collating and compiling responses from a host of
organizations, experts etc and providing the same to the Committee, conducting
presentations by various subgroups and compilation of the recommendation of the
Committee. The Committee would like to convey its thanks to Shri Jitesh Khosla,
Member-Convener of the Committee, Shri R.Vasudevan, Shri Samir Biswas and
other members of the support team provided by the Ministry of Company Affairs
to this Committee.