Column : Lost in translation

Jan 08 2013, 01:05 IST
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SummaryCompanies Bill 2012 is a watershed for greater corporate governance in the area of loans, investments, deposits and capital raising.

Many of the well-meaning changes, such as on loans to directors, have been rendered useless due to clumsy drafting

KS Mehta

Companies Bill 2012 is a watershed for greater corporate governance in the area of loans, investments, deposits and capital raising. Exemptions to private companies for loans to subsidiaries have been withdrawn; loans to all persons and not just to companies are now covered within the stipulated limits. Similarly, deposit raising from public for non-NBFC companies must be secured and credit rated. Some critical provisions need amendments to be in line with what the law makers intended.

Loans by private companies to directors, their relatives, partners or companies where they control 25% or more voting power including loans to subsidiary companies now require approval (Bill clause 184). However, it does not provide for the process for such approval. The only exemption is if it is the normal business of the company and interest is at bank rate or above, or it is to working directors. Related party transactions approval process (clause 188) covers only transactions in goods, property, services, agency appointments or appointment to a place of profit but not the granting of loans or providing guarantee or security for loans. It is therefore necessary to expand the scope to cover related party loans, guarantees and securities; otherwise, even loans to 100% subsidiary cannot be given. A unique feature of this approval process (clause 188) is that any member who is a related party cannot vote on any special resolution regarding such contracts even at the general meeting. This strengthens public shareholder power in companies of notified classes but will block normal working even of private companies having 100% promoter and associate ownership. Who will vote on such interested party contracts at the general meetings of such companies? A process has to be built in.

Regulation of inter-company loans and investments have been a major feature of the law since 1956. The Bill expands it considerably to cover loans to all persons, and not merely to companies; and the exemption to private companies and to transactions with subsidiary companies has been withdrawn. Exemption to investment company, banks, insurance, NBFC, HFC companies continues; but the law needs an amendment to clarify exemption to companies engaged in providing finance to infrastructure facility providers as was perhaps the intent but not the meaning of the current proposed clause [clause 186 (11)(a)]. The central government is to make

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