Introduction
Sixty one years ago the Bhabha Committee made recommendations for Independent India™s first Corporate Law. It was only then that the pre-independence Companies Act, 1913 was repealed and the Companies Act, 1956 was enacted. For close to 55 years, India Inc. has been regulated by this law and it has been for a while now that the act has been showing its age. It has undergone numerous amendments, but clearly, with the introduction of new concepts of corporate governance and emergence of institutions like the Securities Exchange Board of India (SEBI or Regulator) – the corporate environment has completely changed and making changes to the original structure would hardly reap benefits. So six years ago a committee under the Chairmanship of JJ Irani was mandated to put together a report on a new companies bill. The Companies Bill, 2009, (the Bill) having incorporated some of these recommendations is awaiting debate in the parliament. The Bill looks to modernize corporate structure regulations and redefine corporate relationships between shareholders, stakeholders, company managements and the board of directors. In addition, the Bill broadens the range and scope of subordinate legislation by giving the Government the right to notify rules on subjects, which are currently part of the existing Companies Act. The provisions, though do seem to be addressing the need of the hour, could create confusion due to some shoddy drafting which has led to a conflict with SEBI provisions in relation to insider trading, appointment of independent directors, de-listing of companies and allotment of shares. It is this conflict in jurisdiction that the author would venture into in this article.
SEBI and Listed Companies: to regulate or not to regulate
Section 22 of the Bill provides that in so far as a matter relates to a listed company, the same is to be dealt with by the SEBI. It recognises that there is an area of influence or area of responsibility where SEBI is paramount because of the companies being listed. The conflict arises when the same section provides that matters in relation to prospectus, an issue solely having relevance to a listed company, are to be dealt with by the Central Government. If the Bill was ready to accept the position that the administration should be done by SEBI, then the need for such a provision which creates such a tight demarcation is cast in doubt. The SEBI, in their recommendation to the Government has stated that the regulatory powers in the hands of the Government should only be in case of unlisted companies, a view that has got the endorsement of the Parliament™s Standing Committee on Finance (the Committee), which has called for the clause to be suitably modified and the existing jurisdiction of SEBI as a sectoral regulator to be preserved.
The Bill also provides for the allotment of shares to investors to be done within 70 days of an issue being closed, and thus is in conflict with SEBI regulations which provides for the allotment to be done within 15 days. Considering this provision of the Bill to be ˜out of sync with reality™, the Regulator has called on the drafters to make suitable changes so that its powers are not diluted.
Insider Trading: fine or criminal punishment
The drafters have included securities market concepts such as provisions relating to insider trading in the Bill, although the same comes within the ambit of SEBI as being part of their function of ˜regulating the market and maintaining market integrity™. The definition of an ˜insider™ though a noteworthy development did not have to be included in the Bill as the same could have been included vides an amendment to the SEBI Act. The punishment prescribed by the Bill also differs from that provided by the SEBI Act. Where the SEBI Act provides a penalty of ` 25 crore or three times the profits made from such trading, those found guilty under the new Bill are to penalised ` 5 lack to ` 1 crore and/or imprisonment up to 5 years. Such a conflict leads to an impossible situation where for the same kind of offence of insider trading you have to deal with two regimes and there is no idea of how that™s going to be dealt with.
Independent Directors: who and how many to be appointed
The listing agreement, an agreement to be signed by every company before being listed, provides vide Clause 49 that when the Chairman of the Companies Board is a non-executive director, the number of directors is be at least one-third of the Board, and in case the Chairman is an executive director, then at least one-half of the Board is to comprise of independent directors. The draft Bill on the contrary provides that the in all cases, the independent directors are to be one-third of the Board of the listed public company. Furthermore, where one side the SEBI provisions state that the independent directors are not to have any ˜material pecuniary relationship or transaction with the company, its promoters, its directors, its senior management™, the Bill provides for the relation or transaction with the company to be limited to below 10% of its gross turnover or total income during the two immediately preceding financial years or during the current financial year. The overlap, not dealt with by the Committee, has the potential of creating confusions for corporate entities as they would have to comply with both laws and could land them in a tricky situation of obeying a higher standard, and thus rendering the lower standard of the SEBI provisions as infructuous.
Delisting: who is to determine the procedure
The regulator has provided that only companies which have been listed on the stock exchange for more than three years can delist themselves. This, provided that the same is approved by the shareholders; and the price to be paid to them is determined in accordance with the process as specified by SEBI. The Bill, if comes into force without any change would render this provision as futile since it provides no restriction on the type of companies that can delist themselves and provides for an approval and price determination mechanism which is different from that specified by SEBI.
The Need For Harmony: providing over-riding effect to SEBI provisions
It is a recognised principle of interpretation of statutes that in case of conflict between two provisions of law, the general law must give way to the specific law. It is this principle which should have been borne in mind by the drafters of this Bill. The Bill being a general law must only have provided general guidelines which could have been used by the Regulator as a benchmark when dealing with its designated jurisdiction of market regulation. The argument by the Ministry that the attempt by the Bill was to define terms such as ˜insider™ and fill the void in the Regulator™s provisions also stands of dodgy legal ground, since the same could have been done vide an amendment to the SEBI regulations, which further would have avoided this problem of conflicting jurisdiction. The bill, to stand the test of legal validity, must therefore be suitably amended.
