Ozg Sarfaesi / DRT Lawyer
Ahmedabad | Pune |
Kolkata | Bangalore | Delhi | Mumbai
VoIP Text / Phone
# 09811415837-61-72-84-92-94
Website: http://sarfaesi.ozg.in
Email: debt@liaisoning.com
Company Law is very very
complicated and interesting. If we look at all the corporate regulations or
law, it is very clear that it focuses mainly on the interests of the
shareholders. The liability of the members is limited in limited companies and
as such the shareholders will be clueless often when their investment in the
Company is not properly managed.
While the professionals use the
term “Corporate Governance” with its relevance, many use the term “Corporate
Governance” generally and emphasizing on good governance. While it is true that
the “Corporate Governance” is meant to provide “Good Governance” in the
Company, there is a specific way to understand the term “Corporate Governance”.
The term “Corporate Governance”
is used in Listed Public Companies as they need to comply with the “Corporate
Governance” commitments agreed with the Stock Exchanges. The term “Corporate
Governance” is specifically used under clause 49 of the model listing agreement
to be entered into with the Stock Exchanges and the violation of which may lead
an action by the Stock Exchange to de-list the company’s shares.
While we look at the logical
understanding and analysis of “Corporate Governance”, we need to look at the
corporate set-up in brief and have an understanding of the law or the
regulations governing different kinds of companies. While the provisions of
Companies Act, 1956 provides certain kinds of companies like company limited by
shares, company limited by guarantee, an unlimited company, a company
incorporated under section 25 and a producer company etc; the concept has become
vague with describing companies based on certain elements like “Family
Companies”. For the purpose of getting a basic understanding as to the law or
regulations governing the Companies in India, we can consider following kind
companies.
a) A Private Company Limited by
Guarantee.
b) A Public Limited Company.
c) A Listed Public Company.
The basic set-up and the concept
of company is as follows:
1) The term “Company” is defined
under section 3 of the Companies Act, 1956 as “a company which is registered under
the provisions of Companies Act, 1956”.
2) Every Company should provide
the basic information as to its share capital, the name, the registered office,
the objects, initial subscribers, the authorized share capital, the directors
and especially the chosen regulations. Every Company provides the basic
information as referred to above by filing “Memorandum” and “Articles of
Association”. Memorandum contains very basic and important information about
the Company as everybody knows.
3) The Company is managed by
professionals called directors and they are entrusted with certain powers to
conduct the day-to-day affairs of the Company.
4) Every Company is supposed to
conduct a meeting of all its shareholders and it is called “Annual General Body
Meeting”.
5) The shareholders are conferred
with certain vital powers in the Company and even the Board can not usurp the
powers of Shareholders at times.
6) Thus, certain decisions in the
Company are taken by the Board and certain decisions are taken by shareholders
in the Annual General Body Meetings.
7) Every Company is supposed to
provide certain vital information about the company in the form of final
reports to the shareholders like Annual Report and Financial Statements like
Balance Sheet and Profit & Loss Account.
8) The Registrar of Companies,
the Central Government, the Company Law Board and the Company Court discharges
various responsibilities in regulating the Companies.
9) Important changes, events and
data are filed by every company with the Registrar of Companies and those are
accessible by the shareholders.
10) Other professionals like
Chartered Accountants and Company Secretary discharge their responsibilities in
the Company for the protection of the shareholders and compliance of corporate
regulations.
Thus, basically, a company is a
complicated and well regulated set-up with ultimate motive of business
expansions and the interests of shareholders.
Now, let us look at the
regulations governing various kinds of companies in brief.
Private Limited Companies:
Regulated by the provisions of
Companies Act, 1956, the regulations of the Company in the form of Articles of
Association and the Central Government rules as applicable.
Public Limited Companies:
Regulated by the provisions of
the Companies Act, 1956, regulated by the Articles of Association, regulated by
the Central Government Rules, regulated by the Accounting Standards issued by
ICAI etc.
While both the Private Limited
Companies and Public Limited Companies are governed by the provisions of
Companies Act, 1956, Private Limited Companies are relaxed from many provisions
and Private Limited Companies are given liberty to modify certain provisions by
having a regulation in the Articles. The difference is from application point
of view.
Listed Public Companies:
Regulated by the provisions of Companies
Act, 1956, Articles of Association, the SEBI regulations, Central Government
rules, regulations of Stock Exchanges to some extent like complying with the
listing agreements, Accounting Standards issued by ICAI etc.
We can see the clear difference
among the regulations governing Private Limited Companies, Public Limited
Companies and Listed Public Companies. The difference is due to their exposure
to the market and the interests of shareholders. While the Private Limited
Companies are not allowed to solicit investment from the public by issuing
prospectus or advertisement etc., the Public Limited Companies are allowed to
issue a prospectus or advertisement soliciting investment from the public. The
listed companies tend to attract more capital in view of the well regulated
primary market and the option of easy transfer of shares in the secondary
market.
Now let us look at the issue of
Corporate Governance. Every Company which has opted to list its shares in the
recognized Stock Exchanges should enter into a listing agreement and
non-compliance of the terms and conditions of the agreement can lead to a stringent
action by the Stock Exchanges like de-listing of shares.
Clause 49 of the listing
agreement to be entered into by the listed companies with the Stock Exchanges
refers to certain conditions under the heading “Corporate Governance”. The said
clause 49 mandates various conditions to be complied with by the Companies
under the head “Corporate Governance”. Thus, it is specific to the Listed
Public Companies though the word “Corporate Governance” is used in general and
as a synonymous to “Good Governance”.
We know the authority of SEBI
over listed public companies. In view of section 55A of Companies Act, 1956,
SEBI governs certain issues like issuance of shares etc. SEBI issues very very
detailed regulations governing the Listed Public Companies with frequent
changes, amendments and introductions with the ultimate object of regulating
the capital market or protecting the interests of investors/shareholders.
Though, the SEBI regulates the
companies on certain issues, the shares are listed actually with the Stock
Exchanges and trading takes place there as we know. As an additional protection
to the shareholders, Stock Exchanges are permitted to impose additional
conditions to be complied with by the listed public companies and the listing
agreement is one among them.
The listing agreement to be
complied with by all the listed companies, though lists out many conditions,
clause 49 occupies significance. Clause 49 of the listing agreement emphasizes
on executive directors, composition of directors, independent directors,
disclosures by non-executive directors and their compensation, provisions as to
committees like Audit Committee, Code of Conduct, some additional disclosures,
CFO/CEO certification and a report on Corporate Governance etc.
The logic behind the further
conditions on the listed companies under clause 49 of the listing agreement is
just a further effort to eliminate the loopholes and for the protection of
investors/shareholders.
The provisions of Companies Act,
1956 itself deal with the rights of the shareholders, the responsibilities of
Board, the books to be maintained by the Company, the reports to be filed with
the statutory authorities like Registrar of Companies, the financial
statements, the clear bifurcation of powers with sound logic and a mechanism
for the protection of the interests of the shareholders and frauds inside. We
have a mechanism for the enforcement of the provisions of Companies Act, 1956,
but, a need was felt for further stringent regulations and specialist
enforcement agencies in view of the market participations and the stakes
involved. This is the logic behind establishment of SEBI and various connected
regulations governing listed companies including listing agreements to be
entered into with the Stock Exchanges.
The SEBI or Stock Exchanges may
not have the power to enforce the provisions of Companies Act, 1956, but, it is
not right to say that the Company Law Board or the Company Court can not
enforce SEBI regulations etc. though it is followed as a practice.
After Saytam Episode, everybody
focused and criticized at “Corporate Governance” regulations. But, there always
exist a limitation. The listed agreement refers to the appointment of
independent directors, but, how can we expect that an independent director,
being a human being, is impartial always. These are all the limitations and
upon which nobody can have any control. When the auditors of Satyam were
attacked, the ICAI has rightly focused on the limitations on auditing as I
feel. There are standards and law as to how the auditors should audit the
accounts of the Company. It may be standard governing Chartered Accountants
that they should find the truth in the averments in a document or a particular
transaction. The standard may be ideal, but, it is not possible practically.
This can be a limitation on auditing. Likewise, there tend to be limitations on
“Corporate Governance” too.
We have been working so hard to
strengthen our regulations further and ensure the safety of the investment of
shareholders/investors. It will be a continuing process as ICAI and ICSI always
focuses on the new areas upon which they can prescribe standards. Some obsolete
regulations will go, some regulations may get amended and new regulations may
come in the course.
Ozg Sarfaesi / DRT Lawyer
Ahmedabad | Pune |
Kolkata | Bangalore | Delhi | Mumbai
VoIP Text / Phone
# 09811415837-61-72-84-92-94
Website: http://sarfaesi.ozg.in
Email: debt@liaisoning.com
