Background
(i) The Companies Act, 1956 provides the legal framework for the administration of companies/ corporate entities in India. The need for reviewing this Act was felt from time to time as the corporate sector grew in pace with the Indian economy, with as many as 24 amendments taking place since 1956. Major amendments to the Act were made through Companies (Amendment) Act, 1988 after considering the recommendations of the Sachar Committee, and then again in 1998, 2000 and finally in 2002 through the Companies (Second Amendment) Act 2002, consequent to the report of the Eradi Committee. It is widely accepted that reform and updation of the basic legal framework for corporate entities is essential to enable sustainable economic reform.
(ii) India took up its economic reforms programme in the 1990s. A need was felt for a comprehensive review of the Companies Act, 1956. Unsuccessful attempts were made in 1993 and 1997 to replace the present Act with a new law. Companies (Amendment) Bill, 2003 containing important provisions relating to corporate governance was also introduced, the consideration of which has been held back in anticipation of a comprehensive revision of the Company Law. While piecemeal reform continued through amendments, it has not yet been possible to bring about a comprehensive, new legislation to replace the existing Act.
Need for revision
(i) In the current national and international context, there is a requirement for simplifying corporate laws so that they are amenable to clear interpretations and provide a framework that would facilitate faster economic growth. It is also increasingly being recognized that the framework for regulation of corporate entities has to be in tune with the emerging economic scenario, encourage good corporate governance practices and enable protection of the interests of the investors and other stakeholders.
(ii) In a globally competitive and technology driven business environment, while corporates require greater autonomy of operation and opportunity for self-regulation with optimal compliance costs, there is a need to bring about transparency through better disclosures and greater responsibility on the part of corporate owners and managements for improved compliance. The objective of this exercise is perceived as the desire and need to have a simplified compact law that is able to address the changes taking place in the national and international scenario, enable adoption of internationally accepted best practices as well as provide adequate flexibility for timely evolution of new arrangements in response to the requirements of ever-changing/ dynamic business models. It is a welcome attempt to provide India with a forward looking Company Law to meet the requirements of a competitive economy.
Consultative Process and the Irani Committee:-
A concept paper was placed on the website of the Ministry some time in July 2004 with a view to inviting public comment. Based on the responses received and other inputs, the Government (M/o Corporate Affairs) set up a Committee under the chairmanship of Dr. J.J. Irani, in December, 2004 for making recommendations on the new comprehensive Companies Legislation for the country. The committee submitted its recommendations in May 2005. Based on the recommendations of the Irani Committee as well as other inputs received, the Government is likely to come up with a comprehensive Companies Bill soon.
Institutional Structure for merger, amalgamation and corporate restructuring of companies
(i) Corporate issues require timely resolution: The time taken in the existing framework needs to be reviewed. This is particularly so in the context of rehabilitation, liquidation and winding up. Mergers and amalgamations also need to be facilitated to take place through a speedier process. Through the Companies (Second Amendment) Act, 2002 the Government has envisaged setting up of the National Company Law Tribunal and the National Company Law Appellate Tribunal. It is time the NCLT/ NCLAT is established with specialization to deal with corporate issues, bringing together expertise from various disciplines. There are certain legal issues to be resolved before these institutions can be set up. The matter is pending with the Apex Court. It is hoped that this process is speedily concluded so that a single forum is available for an informed consideration of corporate issues.
(ii) A business may grow over time as the utility of its products and services is recognized. It may also grow through an inorganic process, symbolized by an instantaneous expansion in work force, customers, infrastructure resources and thereby an overall increase in the revenues and profits of the entity. Mergers and acquisitions are manifestations of an inorganic growth process. While mergers can be defined to mean unification of two players into a single entity, acquisitions are situations where one player buys out the other to combine the bought entity with itself. It may be in form of a purchase, where one business buys another or a management buys out, where the management buys the business from its owners. Further, de-mergers, i.e., division of a single entity into two or more entities also require being recognized and treated on par with mergers and acquisitions regime.
(iii) Mergers and acquisitions are used as instruments of momentous growth and are increasingly getting accepted by Indian businesses as critical tool of business strategy. A large number of recent mergers and acquisitions of/by Indian companies are witness to this. Mergers and acquisitions are widely used to gain strength, expand the customer base, cut competition or enter into a new market or product segment or achieve economies of scale. Mergers and acquisitions may be undertaken to access the market through an established brand, to get a market share, to eliminate competition, to reduce tax liabilities or to acquire competence or to set off accumulated losses of one entity against the profits of other entity.
(iii) At present, the process of mergers and acquisitions in India is court driven, long drawn and hence problematic. The process may be initiated through common agreements between the two parties, but that is not sufficient to provide a legal cover to it. The approval of the High Court is required for bringing it into effect. The entire process has to be to the satisfaction of the Court. This sometimes results in delays. In the context of increasing competitiveness in the market, speed is of the essence, especially in an expanding and vibrant economy like ours.
(iv) Contractual mergers should be given statutory recognition in the Company Law in India as is the practice in many other countries. Such mergers and acquisitions through contract form (i.e. without court intervention), could be made subject to subsequent approval of shareholders by ordinary majority. This would eliminate obstructions to mergers and acquisitions, ex-post facto protection and ability to rectify would be available. It is hoped that Irani Committee recommendations on this matter are accepted by the Government.
(v) Cross Border Mergers: A forward looking law on mergers and amalgamations needs to also recognize that an Indian company ought to be permitted with a foreign company to merge. Both contract based mergers between an Indian company and a foreign company and court based mergers between such entities where the foreign company is the transferee, needs to be recognized in Indian Law. Irani Committee had recognized that this would require some pioneering work between various jurisdictions in which such mergers and acquisitions are being executed/ created. There has been a steady increase in cross-border mergers with the increase in global trade. Such mergers and acquisitions can bring long-term benefits when they are accompanied by policies to facilitate competition and improved corporate governance.
(vi) Valuation of shares: Irani Committee had recommended that valuation of the shares of companies involved in schemes of mergers needs to be made mandatory in respect of such companies. It has also been recommended that such valuation should be carried out by independent registered valuers rather than by Court appointed valuers. Valuation standards may also be developed on the lines of ‘International Valuation Standards’ issued by the International Valuation Standards Committee. The valuation should be transparent so that the aggrieved person may get an opportunity to challenge the same before Court/Tribunal. Benchmarking of valuation techniques and Peer Review Mechanism for Valuers was also suggested to be provided for. It is hoped that these measures are considered by Government in the proposed Companies Bill. It is also understood that the Government is considering a Bill to regulate the profession of valuers as in the case of professions of Company Secretaries and the Chartered Accountants. This is a welcome step.
(vii) Separate Electronic Registry for merger/amalgamation: Further reforms like a separate electronic registry for schemes under Sections 391/394 of the Companies Act, Stamp Duties reforms, compulsory registration of all property of a company above a certain value, simplification of the mutation procedure subsequent to scheme of arrangement between two or more companies would also strengthen the corporate laws regulation in the country. Since these would involve a coordinated effort/approach to be followed by the Central Government, State Governments and Courts, it may take some more time before these reforms come into effect.
(viii) Merger of class of Companies: The Irani Committee had recommended that for mergers within a group, the Companies Act may prescribe a short form of amalgamation. Conceptually a scheme of amalgamation or merger between holding company and subsidiary company stands on a different footing from amalgamation and merger between two independent companies. So also merger between two private limited companies should be viewed differently as compared to the merger of two public limited companies. It is likely that the proposed new Bill provides for less regulation in respect of mergers among associate companies/two private limited companies where no public interest is involved. The concept of contractual merger should also be thought of as an alternative to the form of merger available under the Act as on date.
(ix) Takeovers: Acquisitions of companies can also take in the form of substantial acquisition of shares or takeovers. SEBI has prescribed SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 for listed companies in this regard. With more companies restructuring their businesses due to various reasons, it is likely that this route is used more often used by companies for such restructuring.
(x) Indian Depository Receipts: The Indian shareholders should be permitted to invest in the form of Indian Depository Receipts (IDR) issued in India by foreign companies so that they become members of the foreign companies. The Central Government (M/o Corporate Affairs) has, in view of powers available to it under section 605A of the Companies Act, 1956, prescribed Companies (Issue of Indian Depository Receipts) Rules, 2004 in this regard. As per such rules, listing of IDRs in India would be mandatory. SEBI has accordingly modified its SEBI (Disclosure and Investor Protection) Guidelines in 2006 to enable the operation of IDR mechanism. It is hoped that soon foreign companies would be using this mechanism to raise capital in India. This measure is likely to make Indian capital market more strong and confident.
(xi) Corporate Debt Restructuring: The Reserve Bank of India has specific tools for fast track debt restructuring known as the CDR Mechanism (Corporate Debt Restructuring Mechanism). It is often seen that sometimes even though 75% of the secured creditors consent to the debt restructuring and make significant sacrifices, minority secured creditors or unsecured creditors obstruct such restructuring. As a result, such schemes that would otherwise enable the return of the corporate to viable operation get delayed or scuttled. Irani Committee had recommended that if the petitioning creditors or petitioning company is prima facie able to prove that 75% of the secured creditors who have consented to the CDR Mechanism have made sacrifices to restructure the company then, notwithstanding the minority dissent, such a scheme should be sanctioned on filing. It is possible that suitable provisions to this effect are found in the proposed Companies Bill.
Other areas
Insolvency Practice/Private Official Liquidators: An effective insolvency system is an important element of financial system stability. It may be necessary to provide for a sound framework for restructuring and rehabilitation of companies along with a framework for winding up and liquidation. The framework should seek to preserve estate and maximize the value of assets; recognize inter se rights of creditors and provide equal treatment of similar creditors while dealing with small creditors equitably. It should enable a timely and efficient resolution of insolvency and establish a framework for cross border insolvency. The present framework does not provide a balanced resolution of various stakeholder issues, is time consuming and inefficient. Further, the law does not support effective participation of professionals and experts in the Insolvency process. There is no shortage of quality professionals in India. Disciplines of chartered accountancy, company secretaryship, cost and works accountancy, law etc can act as feeder streams, providing high quality professionals for this new activity. In fact, private professionals can play a meaningful role in all aspects of process. Insolvency practice can also open up a new field of activity for service professionals while improving the quality of intervention at all levels during rehabilitation/winding up/liquidation proceedings. Accordingly, Dr. Irani Committee had recommended that Law should encourage and recognize the concept of Insolvency Practitioners (Administrators, Liquidators, Turnaround Specialists, Valuers etc). Greater responsibility and authority should be given to Insolvency Practitioners under the supervision of the Tribunal to maximize resource use and application of skills. It is hoped that suitable measures are likely to be introduced in the proposed Companies Bill.
OPCs: The proposed Companies Bill proposes to introduce a new type of company viz One Person Company (OPC). One of the features of this company is that the risks mitigated are limited to the extent of the value of shares held by one such person in the company. This would enable entrepreneurial minded persons to take the risks of doing business without the botheration of litigations and liabilities getting attached to the personal assets. It is also possible that with this concept having been introduced, many existing companies may convert themselves into OPCs. The concept could throw more opportunities for professionals/law firms.
Competition Act, 2002 as amended by Competition (Amendment) Act, 2002: The Competition Act, 2002 regulates certain combinations/mergers/ amalgamations from the point of view of regulation of competition law and policy in the country. Such Act provides that no person or enterprise shall enter into a combination which causes or is likely to cause an appreciable adverse effect on competition within the relevant market in India and such a combination shall be void. Such mergers and acquisitions, combinations or amalgamations have been brought within the ambit of the Competition Act. Once the Competition Commission of India is duly constituted and starts its operations, which is in the offing, it is likely to open new vistas for legal practitioners in terms of business potential for this service sector. The demand for experts in this part of the legal domain is going to increase shortly as against the current availability and provide for new avenues for the legal practitioners, economists and financial analysts in processes before the Competition Commission of India.
Taxations aspects of mergers and amalgamations: The issues like accounting for gain on transfer of capital assets; treatment of unabsorbed of business losses/depreciation and overall tax planning in the merger/amalgamation exercise require specific expertise of professionals.
Limited Liability Partnership Bill, 2006: This Bill has been introduced in the Parliament in December, 2006. This would allow all business/service entities including professionals to carry out their operations/service in an agreement based (but with limited liability) business model/vehicle. It is anticipated that this business model would be more suited to entrepreneurs who want to combine wealth and skill for mutual benefit, without risk of their personal assets being at risk.
Joint Venture/shareholders Agreements: The access to technology, know-how, business, trade-marks and other intellectual property or service rights by way of joint ventures is being used by corporate entities. Indian entities have been accessing greater opportunities through joint ventures. It is quite possible that adequate legal recognition and more clarity on role, legal rights and liabilities of joint venture partners is achieved in India in coming years either by way of legal framework or by way of judicial interpretations.
Independent Directors: Given the responsibility of the Board to balance various interests, the presence of Independent directors on the Board of a Company would improve corporate governance. Independent directors bring an element of objectivity to Board process in the general interests of the company and thereby to the benefit of minority interests and smaller shareholders. The proposed Companies Bill is likely to recognize this concept. Advising and training the independent directors could be a new area for Law firms.
Conclusion
Thus, it is hoped that in the light of economic reforms and changing scenario on the international horizon, the Ministry of Corporate Affairs (GOI) is able to pull off a good show in terms of getting the Bill approved as with cross-border mergers, valuation of shares, Separate Electronic Registry for merger/amalgamation, etc, the situation is expected to improve manifold and thus also once this happens, corporates can be expected to adhere to UN Millennium Development Goals and OECD Principles more cogently and effectively.
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VIKRAMADITYA SINGH MALIK is a 2nd year student pursuing B.A.LL.B (Hons) from NALSAR University of Law, Hyderabad. He also advises India Law Journal on issues of importance. |
