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Business friendly environ on the anvil

Oct 2008

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A recent report in a daily cried, “India may be one of the world's fastest growing economies but in terms of ease of doing business it ranks pathetically, even below Pakistan”. This is attributed to our antiquated laws, unnecessary regulations, and red tapism. The corporate world for long had been pining for a new set of regulations which can match up to the requirements of the current global, liberalised economic scenario. Recently, the union cabinet cleared the much awaited Companies Bill, 2008 which is an improvement over the six decade old Companies Act, 1956.

The new Companies's Bill promises to do away with redundant provisions and to restrict government's role in the internal matters of the corporates. The corporate world will see an era of responsible self-regulation with accountability once the new Companies' Law is enacted. Government's control in matters internal to the company will be replaced by shareholder's control. The Companies's Bill, 2008 upholds the concept of shareholder democracy and shareholder freedom and gives the shareholder a say in all decisions of the company including managerial remuneration. Further, the rights of minority shareholders will be protected under the new framework.

The number of companies in India has grown from 30,000 in 1956 to a whopping seven lakh today. The new global economic scenario calls for a strong corporate governance regime coupled with a liberalised set of rules that will boost investment and entrepreneurship in the country.

The much simplified version of the existing Companies Act would help bring the vast unorganized sector under a common corporate regime. In India a majority of the small and medium enterprises are family run businesses or are run by first generation entrepreneurs who are devoid of the benefits of globalization and liberalisation. Still, a vast majority of them are in the unorganized sector facing challenges such as cost of capital, infrastructure facilities, competitive procurement, technology transfer from developed countries, and talent attraction. Many of their problems arise owing to the fact that they are unorganized and often fall prey to unfair practices of the bigger corporates.

Once they come under the corporate regime, they will be placed in a better position to avail of government support and attention. This will also facilitate micro finance institutions to direct their efforts to rejuvenate the most needy entrepreneurs. The SME market today stands at an impressive $5 billion. An organized SME sector will come into the tax net, thus adding revenue to the exchequer. The Companies Act, 1956 treats the SMEs at par with the big corporates as far as compliances are concerned. However this new bill promises to make matters easier for the smaller fishes as they will enjoy a less cumbersome and liberalised regime.

The bill proposes to allow incorporation of one-person companies in contrast to the current requirement of at least two persons to form a company. This provision is expected to give a boost to the entrepreneurial spirit of millions who want to start their own businesses.

Partnership firms are expected to get a leg up as the new law proposes to raise the upper limit of the number of partners in partnership firms from twenty as in the present Companies Act to hundred. As per the new bill, no limit will be imposed on the number of subsidiaries a company can have. However companies will be required to make appropriate disclosures related to relationships and transactions.

The e-governance initiatives of the Ministry of Corporate Affairs (MCA) shall be applied to all processes involved in carrying out compliance obligations. Companies will be able to conduct board meetings through video-conferencing. Shareholders can vote via electronic mode and e-mails will be the accepted means of communication. The switch over to the electronic mode would add a refreshing new dimension to company management owing to speed, reliability and convenience. Companies may conduct board meetings online and crucial company meetings may not be postponed in case the required number of members are absent.

The new Companies Bill calls for consolidation of all fora dealing with corporate issues

such as rehabilitation of companies; liquidation and winding up etc. in the single forum of National Company Law Tribunal with appeal to National Company Law Appellate Tribunal. The framework provided in the new law proposes setting up of special courts to deal with corporate offences. This will speed up the process of resolving corporate disputes which are on the rise in today's scenario. It has been found that court cases relating to corporate offences often get protracted to decades even if the offence is minor or technical in nature. The registrar of companies and regional directors will be empowered to settle minor disputes which can be settled by leving a fine.

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