By Ashwin Mathew

India’s growth since 1992 is a result of two complementary factors – a relaxed regulatory regime and the Indian entrepreneurial spirit reflected in successful private enterprise.

The Satyam scam and a few other unfortunate instances of corporate greed driven by individual compromise have given the Executive the opportunity to indirectly license private enterprise. The instrument of this example of Executive excess is the Companies Bill 2012 that received the seal of approval of the House of the People on 18 December 2012 without any debate or discussion by our esteemed representatives.

This Bill saw its genesis in 2009 when the Companies Bill 2009 was introduced in Parliament by the then Congress Government. The Bill was referred to a Parliamentary Standing Committee headed by our former Finance Minister, Shri Yashwant Sinha, which suggested certain revisions. The revised Bill in a new avatar was introduced in the Lok Sabha in 2011.

Stung by criticism on policy paralysis and hobbled by allegations of scams, in a sudden burst of Executive activity propelled by the prospect of general elections in 2014, the Companies Bill 2012 was created out of the 2011 Bill and rushed through the Lok Sabha in the dying minutes of the 2012 winter session. The Ministry of Corporate Affairs and the Law Minister were quick to point out how efficacious and timely this new law to replace the Companies Act, 1956 was. The Government gave itself congratulatory pats on the back for their decisiveness to root out malpractice in private commercial enterprise. Satyam would now be a distant memory and not an abiding criticism of Government inaction, apathy and some would argue, tacit connivance.

In this backdrop, we need to take a step back and take an objective and holistic view of the new Bill.

The Statement of Objects and Reasons of the 2012 Bill derives its base from the objects of the 2009 Bill. Ostensibly this new law seeks to address the “need to help sustain the growth of the Indian corporate sector by enabling a new legal framework that would be compact, amenable to clear interpretation and respond in a timely and appropriate manner to meet the requirements of ever evolving economic activities and business models while fostering a positive environment for investment and growth.” An additional object is “a need to avoid overlapping and conflict of jurisdiction in the area of sectoral regulations.” For these reasons “a piecemeal re-engineering of the corporate regulatory framework was not considered adequate to enable the systemic changes required…”

Lofty objectives, no doubt, that mask the underlying malice – arbitrary and unreasonable law that will kill private enterprise through the threat of pervasive interference by the Government machinery. I submit that this Bill violates every Indian’s fundamental right to practice any profession, or to carry on any occupation, trade or business without a reasonable restriction in the public interest (Article 19(1)(g) read with Article 19(6) of the Constitution of India).

As Plato said, “Good People do not need laws to tell them to act responsibly, while bad people will find a way around the laws.” Should a Satyam or a Sahara which suggests Executive complicity result in a categorisation of all corporates in India as rotten? The Bill breeds uncertainty and concentrates regulatory power in the hands of the Executive without adequate checks and balances. As a result, the Bill violates our fundamental right to live since it concentrates power in the hands of the Executive, has been passed without legislative deliberation and uses objects to try and hoodwink our judiciary. Private enterprise stands at the altar seeking redemption! As Abraham Lincoln said, “To repeal a bad law, enforce it strictly.” A strict enforcement of the Bill will undo the great strides this country has made to recognise economic free will as a cornerstone of individual self realisation.

Tagore wrote:

“...Where tireless striving stretches its arms towards perfection,

Where the clear stream of reason has not lost its way into the dreary desert sands of dead habit,

Where the mind is lead forward by thee into ever widening thought and action,

Into that heaven of freedom, my Father, let my country awake.”

Our representatives seem to have fallen asleep while a Dark Age reminiscent of Emergency could descend on the Indian corporate sector. Cut the goose with the golden egg, so to speak!

Let me illustrate my argument through a few examples from this disastrous legislation:

1. A company’s incorporation is always subject to Tribunal oversight on grounds of fraud. Therefore, a certificate of incorporation is no longer conclusive. Can a company ever represent that it is validly incorporated in such a case? Can a legal professional ever opine that a company is a legally incorporated entity? If not, how is a company’s personality created?

2. A company can have an omnibus objects clause without distinction between main and other objects. What then is the objective test to determine the main object of the company? Has the doctrine of ultra vires ceased to exist?

3. The distinction between a private company and a public company no longer exists in real terms. It is up to the Government to decide to exempt a class of companies “in the public interest.” If the Government chooses to exempt private companies from the purview of certain erstwhile inapplicable provisions like share capital (Sections 85 to 89 of the current Act), further issue of capital (Section 81 of the Act), Meetings (Section 170 of the Act) would this be an exercise of power in the public interest? How is the public interest served through relaxing regulations for a whole class of companies? Thus, the current Act specifically excludes private companies from certain onerous provisions to encourage partnerships to become corporations without turning into illegal associations. The autonomy of private companies fosters corporatisation and streamlines business. Without statutory relaxation, the Bill encourages bureaucratic whim at the expense of conceptual clarity.

4. Corporate Governance is the most shocking part of the Bill that shows the underlying intent of the law maker. Substitute the Board with the babu seems to be the mantra! The list of excesses is condemnable:-

- Concept of Independent Director – 9 objective criteria after a subjective – “The Board should think the person integral with relevant experience and expertise.” Who remains? Those in a Government data bank that may be created? Do we in the Indian context really need independent directors when our businesses are promoter driven and not diversified in shareholding? Will a sensible promoter jeopardise his own interests and need the oversight of a person who needs to have expertise without experience? Why would anyone choose to be an independent director when he or she can be held liable for consenting or conniving with the Board or failing to act diligently? Who decides? Schedule IV has a mandatory Code of Conduct with guidelines and principles to be adhered to compulsorily – isn’t this an opportunity for more Executive excess?

- Duties of Directors – a series of normative principles with prescription. The directors must act for the interests of his community and environment. Who decides this? – otiose and completely arbitrary. The executive can rule with an iron fist!

- Related Party Transactions must be both at arms-length and in the ordinary course- why? Does not an arms-length transaction suffice? Thus, even an arms-length transaction cannot be undertaken if it is outside the ordinary course – what is the rationale for this double edged sword?

- Consultants, advisors and experts can be held liable for advice rendered to a company that is considered misleading. Who would want to consult with a company?

- Insider trading applies to all companies! With no market how can a person trade in securities to the detriment of a public shareholder?

- Class action is possible for oppression and mismanagement without meeting the test of just and equitable grounds to wind up a company. The reputational risk of frivolous complaints will result in the death of an honest entrepreneur at the hands of a street smart or crooked one - “survival of the fittest” or is it “survival of the bureaucrat” again?

- Corporate Social Responsibility is an effort to subsidise the Government’s failure to ensure equitable distribution and eliminate leakage of public money to corrupt interests. Why tax the deserving because the Government cannot direct state policy and implementation towards the ideals in Chapter IV of the Constitution?

One rotten egg does not render a basket of eggs rotten and one rotten tomato needs inaction to render all other tomatoes rotten. Do you then blame the person safeguarding the tomatoes or the basket in which the tomatoes are kept?

The answer to regulatory apathy is not an unreasonable law but a more refined process of implementation.

Given the above, does the new Companies Bill achieve its object? Will investment be fostered? Will growth enhance? Is regulatory overlap avoided? Will the Executive take over commerce through patronage rather than do its duty to guide growth through an arms-length assessment of social good and public interest?

In short, is commercial freedom under the threat of extinction in India?

I believe the answer is a resounding Yes!

The Supreme Court in its wisdom laid down important guidelines to determine the reasonableness of exceptions to Article 19(1)(g) of the Constitution in Reliance Energy Limited v. MSRDC Ltd. MANU/SC/3810/2007; [2007] 8 SCC 1 (2J) (paras 22-24). In sum, the court held that an uncertain process was violative of commercial free will enshrined in Article 19(1)(g) of our Constitution. The Companies Bill leaves 74% of its content to executive determination. Is this a certain law? Oversight of the legislature is non-existent so the Executive can cherry pick and sort and then enforce as it chooses?

As Tolstoy averred “Writing laws is easy, but governing is difficult.”

Res Ipsa Loquitur – The facts speak for themselves.

Ask yourself, is the Companies Bill reasonable or does it violate the underlying basis of commercial regulation which is to allow individuals to transact in what they consider their own best interest rather than the State’s perception of public good? Is a distorted Marxian model back to harm us?

We gave ourselves a Constitution to ensure freedom after colonisation. Are we now to sit quietly and watch the colonisation of private enterprise by public greed?

Is an overhaul required or would a strengthening of the implementation process and a more qualified bureaucracy be the answer? Is our civil service still worthy of its status after such a blatant attempt at usurping individual will?

Quad Erat Demonstrandum (QED).