Proposed Relaxations to Private Companies

One of the difficult tasks for any companies’ legislation
is that it must be flexible and dynamic to be in position to deal with varying
types of companies. Such companies can range from the one-person company, a
private limited company, a public unlisted company to finally a public listed
company. Despite widely differing characteristics that operate in each of these
companies, the legislative focus has been somewhat homogenous. While it
understandable that it is difficult for a single legislation to effectively
deal with all types of company (and it would equally be unwieldy to have
separate legislation for each type), various approaches are generally adopted.
One approach is for companies’ legislation to lay down the minimum norms that
are applicable to all companies, and then to set up additional norms applicable
to large or publicly listed companies. The converse approach would be to set up
the most stringent norms to be the generality, and then carve out specific
exemptions for smaller or private companies. In India, the Companies Act has
historically followed the latter approach.
The Companies Act, 1956 was generally applicable to
all companies, but carried specific carve outs for private limited companies.
The Companies Act, 2013 (the 2013 Act) has gone much farther in making most of
its provisions applicable even to private limited companies, to such an extent
that most norms generally relatable to public companies must also be adhered to
by private companies. What else would explain the possibility that the key
managerial personnel of even private limited companies would be subjected to
rules against forward dealing in securities (section 194) and against insider
trading (section 195)? One needs rules against forward dealing to prevent
speculation that occurs only in widely traded companies, and similarly those
against insider trading where there is a possibility of markets being efficient
(i.e. that the availability of information can impact the market price). The relevance
of these prohibitions to private companies continues to be confounding.
Even the philosophy and focus of regulation varies
between private and public companies. In private companies, the relationships
between the shareholders and directors are usually strong and they are
incorporated partnerships of sorts (that often partakes the legal character of
quasi-partnerships). In such cases, parties are able to set out the terms and
conditions of their relationship in the constitutional documents such as
memorandum and articles of association, with considerable flexibility as to how
they are to be governed. Since no public interest is involved, matters of
minority protection are limited to private disputes between shareholders that
are usually resolved through mechanisms such as oppression and mismanagement.
Public companies (especially listed ones), on the other hand, require a greater
focus on public shareholders, corporate governance and investor protection. The
company law in India has been far from recognizing this crucial difference in
regulatory philosophy and has continued to adopt a “one-size-fits-all”
approach, more so than ever in the 2013 Act.
Part of this is sought to be moderated now by the
Ministry of Company Affairs (MCA) through a proposal
made yesterday that is now open for consultation. Through this proposal, the
MCA seeks to make exemptions from certain provisions of the 2013 Act, many of
them with conditions and only to certain types of companies. The Firm has a
helpful summary
of the provisions that will be exempted/modified for private companies and also
an analysis
by Vinod Kothari on some of the specifics.
While this move is welcome and helps to break out of
the unnecessary rigours imposed by the 2013 Act, this is arguably inadequate.
Some of the dispensations are limited in nature. Others, such as the forward
dealing and insider trading provisions discussed earlier, are not even covered
in the proposal. This is therefore only of some partial utility, and may
require a rather wholesome approach to restructure the 2013 Act.
Moreover, the method of introducing such significant
changes through rulemaking would also suggest that the same benefits now
conferred upon private companies might also be taken away by a sleight of hand
sometime in the future. It was always well-known and the deliberate structure
of the 2013 Act to confer significant rulemaking powers to the Government, but
its exercise to bring about a paradigm shift in the regulatory scope of the
companies’ legislation could raise some consternation.

Comments are due on the MCA proposal by July 1,
2014.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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