The pendulum swings

Given its parentage, the report of the JJ Irani Committee on Company Law contains provisions that are by and large acceptable to corporate India, and takes care of their problems with the rigid provisions of the earlier company law amendment Bill.

To some extent, this reflects disillusionment with the Sarbanes-Oxley kind of strict corporate governance norms and the sense today that things had moved too far in one direction.

While the 2003 Bill, subsequently withdrawn, said that all investments would have to be routed through just one subsidiary, the Irani committee has said a company can have any number of subsidiaries.

The mandatory rotation of auditors is now frowned upon as unnecessary, and perhaps counter-productive since new auditors may be less familiar with a company’s operations.

And while Sebi has said that half of a company’s directors have to be independent ones if the company combines the roles of chairman and managing director in one person (this has to be complied with by December), the Irani panel is of the view that a third of the directors being independent is good enough.

Like many of the suggestions made by the Irani panel, this is sensible because there is no established relationship between the performance of a company and the number of independent directors it has—especially when independent directors are being absolved of various personal responsibilities on the grounds that they are not in management.

Indeed, when Enron went bust it had a board stuffed with independents. What has been suggested now is that all directors and key executives (managing director, CEO and CFO) must sign financial statements even if they were not present in the meeting where the accounts were presented.

Two other recommendations that will improve transparency are that a company must submit consolidated accounts, including those of subsidiaries, and that companies must be mandated to include cash flow reports in their accounts, since the cash picture often tells a truer story than many other parts of the annual accounts.

But a contrary suggestion that will meet with criticism is the one on not needing to attach the financial statements of subsidiaries. Nothing is lost in attaching these, especially if the number of subsidiaries is set to multiply.

Another suggestion, designed to help curb corporate theft, is the one dealing with the allotment of preference shares. While these have been ad hoc, and the subject of a recent controversy, the Irani panel’s recommendation that this be valued by an independent valuer has merit, though it is not clear whether this will solve the problem since valuers can give you the reports they are paid to give.

The decision to allow companies to issue loans to directors provided the shareholders approve these as a special resolution also appears lax.

This is a provision that has been abused often in the past, and has been the preferred route for siphoning off funds; it is strange this should be given another lease of life.

The suggestion that penalties be commensurate with the nature of the offence is also particularly welcome as, in the past, the minor nature of penalties has been a deterrent as far as getting companies to behave is concerned.

The idea on tracking shares, which enables shareholders to cherry pick divisions within the same company, is an interesting one as it increases the level of competition even within companies, though Sebi and other authorities will clearly need to walk through all aspects of the proposal.