The latest circular issued by the ministry of corporate affairs (MCA) amounts to a self-goal. How else would you explain why a new company law makes e-voting mandatory for a large number of companies but words the provisions so confusingly that they are forced to defer mandatory e-voting to next year? But then, why be surprised, the MCA is playing to lose. It has been doing that since late last year.
On August 29, 2013, the Companies Act, 2013, received Presidential assent. The next day section 1, of the 470 sections, was notified. The rest remained in limbo as the rules to the new Act were yet to be finalised. India?s new company law is slimmer than before but is accompanied by more voluminous delegated or secondary legislation?rulemaking in simple English. The Act has more than 300 rules.
The first set of draft rules were published for consultation by the ministry on September 9, 2013. Just three days later?on September 12, 2013?the MCA, with no prior notice, notified 98 sections of the Act. Granted that these were sections with no rules attached, yet it was not clear why the ministry was in such a hurry to force a sudden, piecemeal implementation of the Act. Companies were stuck between two laws, between 1956 and 2013, with no clarity on the timeline for a full transition. Thereafter, six sets of draft rules were published through September, October and November last year. They reportedly generated over 30,000 responses. As 2013 ended, we had a new law, with 99 sections implemented, 371 sections pending and draft rules under consultation.
January, February and most of March were suspenseful months. If the Act was to be fully effective on April 1, 2014, as was the expectation?fuelled by ministry ?sources??then surely the final rules would be issued at least a month in advance? How else would companies, directors, auditors, etc, familiarise themselves with the full extent of the law and be in compliance?
But the MCA seemed apathetic to those concerns. On March 26, 2014, with the final rules nowhere in sight, the MCA announced that an additional 183 sections would come into effect starting April 1. Some sections pertaining to NCLT (National Company Law Tribunal) were held back as the Tribunal is yet to be operationalised. Besides, it is currently being challenged by the Madras Bar Association in the Supreme Court.
Then, barely five days before 282 sections and 7 schedules came into force, MCA released the final rules. Nine chapters of final rules on March 27, two chapters the next day, one chapter on March 30 and barely 24 hours before most of the new law came into force, seven more chapters of the final rules were released. It was nightmarish. The rules issued on the MCA website were not gazetted?necessary process to give them force of law. The gazetted versions became available only over April. The situation was dire enough to draw the attention of Bombay High Court Justice Gautam Patel. In the Godrej Industries case, relating to voting at shareholder meetings, the judge sought to reference the new Companies Act, 2013, rules. Except, he couldn?t find them!
?A final word about the manner in which these rules and sections are purportedly being brought into force. The website of the ministry of corporate affairs has, on its front page, a link to a single scanned PDF file entitled ?Companies Act 2013-Statement of Notification of Rules?. Some 21 rules are listed. They are all said to be effective April 1, 2014. Several of these are not yet gazetted; at least I have not been able to find any gazette. I do not see how any such rules can be made effective on this basis where a ministry simply puts up some scanned document under the signature of one of its officers but sans any publication in the official gazette. That publication is not an idle formality. It has a well-established legal purpose. That purpose is not and cannot be achieved in this ad hoc manner. Therefore, till such time as these rules are gazetted, or there is some provision made for the dispensation of official gazette notification, none of the rules in the ministry of corporate affairs PDF document that are not yet gazetted can be said to be in force,? Justice Patel noted.
This was on May 8. This was the Bombay High Court saying that the final rules cannot be said to be in force. And yet companies were lumped with the task of having to read the final rules, then the gazetted versions to ensure there were no changes and simultaneously be in compliance as much of the Act was already in force. In some cases, the gaps served as a blessing. The NBFC industry, aggrieved about a 50% Debenture Redemption Reserve requirement in the final rules, was able to convince the ministry to tone it down in the gazette version. But that change sparked fear among the rest?what if all the gazetted rules are materially different from the final rules? It was a ludicrous case of final rules that weren?t quite final.
Please note that I haven?t yet mentioned a word about the content of the rules. All this is just about process pain. Now, let?s get to the ?death by drafting? problems.
Section 180 of the Companies Act, 2013, and the accompanying rules make e-voting mandatory for all listed companies and companies with 1,000 shareholders or more. The intent is to make voting more participative. But a prior section (section 107) seems to suggest that if a resolution has been voted upon electronically, then it cannot be voted upon by a show of hands. Typically, most resolutions in an AGM are decided by a show of hands, unless a poll is ordered or called for. A poll requires distribution of polling slips at the meeting. So, if providing e-voting rules out a ?show of hands?, then all such resolutions have to be decided by individual polls, which can be cumbersome and time-consuming. That is one interpretation. On the other hand, some company secretaries are questioning if they need to do a poll at all. That suggests there cannot be a show of hands because of how one section is drafted and there needn?t be a poll because no specific section requires this. Essentially, that interpretation does away with all voting at meetings?why then would shareholders attend meetings? And would e-voting results be the final determinant?
The confusion it generated moved the MCA to act. So this week it issued a circular that didn?t quite solve the problem but postponed it. The mandatory e-voting provision has been deferred to 2015. But it may be too little, too late. Because with AGM season under way, some companies may have already issued meeting notices and provided e-voting facility details. More importantly, Sebi, drawing cue from the Companies Act, 2013, has made e-voting mandatory for all resolutions to be passed via postal ballots or at shareholder meetings. The amended Clause 35B of the Listing Agreement is already in force. It is not clear if Sebi will change its mind like MCA did. And till then listed companies will still have to provide for e-voting under the confusing Act and rules that the ministry is trying to temporarily save them from.
Even if Sebi were to relent, look at the outcome?a measure that was to increase shareholder participation is being deferred only because of ambiguous drafting. This from a law that ushers in more ambitious changes such as majority of minority approval for related-party transactions, independent director rotation and auditor independence.
All that good intent is being overshadowed by the haphazard implementation. Already, four chapters of rules have been amended (one of them is not even available on the MCA website, I found it only on the e-gazette site), the depreciation schedule has been amended and the ?Removal of Difficulty? provision has been used four times. There is no denying that some of these changes are for the better, like the change in depreciation provisions or the clarification that an independent director on a company?s board can also be an independent director on its parent/subsidiary company?s board. Others tell of a ministry susceptible to lobbying. Company secretaries and their institutes have succeeded in convincing MCA to make it mandatory for more companies to hire whole-time company secretaries. The earlier threshold was companies with a paid-up share capital of R10 crore or more. That has now been revised down to R5 crore or more.
This weekend the new corporate affairs minister will meet stakeholders to get feedback on the new law and its implementation. Already some are crying for its repeal. Others want an Amendment Act to rectify errors like the one mentioned here and dozens of others. Some are lobbying for minority shareholder friendly provisions to be watered down. The fear is they might succeed under the guise of this all-pervasive ?implementation pain?, taking away the good stuff this new law brings and leaving behind the likes of Section 180?in suspended animation no less.
PS: There is some hope. Thanks to the Bombay High Court order in the Godrej Industries case, some companies are now providing for e-voting at shareholder meetings. Maybe the courts will undo what the MCA won?t.
The author is Executive Editor at CNBC TV18. Views are personal
