Friday, October 15, 2010

COMPANIES BILL 2009- A DRACONIAN LAW

The Companies Bill 2009 read with 21st standing committee of Finance of Parliament on the Companies Bill, has miserably failed to achieve the prime objective of redrafting of the Companies Act:

  • To simplify the law
  • To reduce unnecessary procedure
  • To improve corporate culture and
  • Voluntary corporate Governance
  • Investors protection mechanism similar to consumer courts.

The bill as proposed will discourage corporation and will encourage inspector raj and corruption. The bill envisages very severe penalties and prosecution even for small technical delays and defaults having no impact on the public interest. The government is also proposing to interfere into the independence of private corporate sector.

Smaller companies neglected

The government has also failed to provide separate legal requirements and procedures for 1 person companies, small companies and unlisted mid size companies. Most of the procedures and compliance's for larger companies have been made applicable even for smaller and tiny companies. The bill proposes to levy heavy fines and imprisonment in 26 cases and a large number of such defaults are of non-serious and are of routine nature. This will only breed corruption. The imprisonment should be restricted only to the cases of fraud, misfeasance and similar default only. In case of technical delays and defaults only additional filing fee can be prescribed.

Procedures and compliance's increased

The corporate sector in India has been working reasonably effectively and except very few exceptional cases, there is no large scale failure of corporate governance or frauds committed by the corporate sector. The exceptional cases, actually relates to human greed, which cannot be addressed by the proposed provisions and would require a basic structural change to correct the cause of such
failure, rather than providing for severe detailed and unnecessary regulation, which may impact the growth of the corporate sector itself.

Accounting Standards

The government proposed to continue National Advisory Committee on accounting standards (NACAS). This committee was constituted through Companies Amendment Act 1999. NACAS has not been able to contribute very effectively and has brought out only cosmetic changes to the accounting standards framed and passed by the Institute of Chartered Accountants of India.
Due to time undertaken by NACAS the implementation of mandatory accounting standard got substantially delayed and it took about l0 years to bring out Companies Accounting Standard Rules, 2009 although most of the accounting standards were already notified and prescribed by the Institute of Chartered Accountants of India. The accounting standards being implemented in India are based on international accounting standards as well as international financial reporting standards. The
government need not interfere into the technical process of framing of accounting standards and their prescription and it is important to leave it to the experts i.e. to the profession of Chartered Accountants. The bureaucracy or the polity need to concentrate on clean, efficient and effective government, rather than getting into the nuts and bolts how the businesses are managed. Medical, legal, architecture, accounting are specialised professional stream and all such matters need to be left to the expert professionals.

Auditing Standards

The proposal of the government to also commence framing and prescription of auditing standards is another major lope sided move and is a result of thinking whereby the government bureaucracy always lure to start exercising power and duty of specialized profession. The Institute of Chartered Accountants has implemented international level auditing standards in India and any move on the
part of government to interfere in framing of auditing standards will only reduce the quality of audit. It may be more appropriate that the auditing standards are recognized in the companies' bill and the power to prescribe auditing standards can be delegated to ICAI. The government needs to consider withdrawing the Companies Bill 2009. It may be important to set up a specialized committed of experts to review the existing Companies Act, 1956, with a view to analyze specific areas where amendments may be needed to simplify the existing Companies Act and to bring out specific initiative to improve corporate governance, reduce procedures and compliance's and concentrate prosecutions and penalties only on grave misconduct or fraud having impact on public interest in general. The Companies Bill 2009, as amended by the 21st report of the Standing Committee on finance of Parliament, will not be able to achieve any of the objectives. The Companies Bill is neither based on Naresh Chandra Committee Report nor based on JJ Irani Committed Report but has actually mixed up the entire thinking process and lost the corporate culture and its independence. There are number of areas in which fresh suggestions have been brought out by the Standing Committee on Finance of Parliament of India. More than 500 changes have been agreed between the Government and the committee. The amendments proposed now have not been debated by the corporate sector and the professionals. Even the Parliamentary Committee did not have a chance to consider response of corporate sector and professionals on most of the new amendments. In view of this, either the entire report or the Companies Bill can be again referred to a Select Committee of Parliament or the government can redraft the Companies Bill and present the same as a final discussion paper before it is framed into a new Companies Act. The best alternative would be to seek necessary amendments in the current Companies Act, 1956, in a phased manner, so that all the proposed changes are adequately understood and debated.
The Companies Bill 2009 need to be withdrawn from the Parliament.


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