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Dr. J. J. Irani Committee Report

Lecture- 10F (BECG)



Prof. C. Anand
Faculty IBS, Hyderabad
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Contents

This deals with:
(i) Introduction
(ii) Terms of Reference
(iii) Recommendations of the Committee



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(i) Introduction
Dr. J. J. Irani had submitted his report of the Expert
Committee on 31st May, 2005, to advise the
Government on the new Company Law. The
Committee was set up by the Ministry of Company
Affairs on 2nd December, 2004.
The Committee tried to take a comprehensive view in
developing a perspective on changes necessary in
the Companies Act, 1956 in context of the changing
economic and business environment. The
Committees efforts were aimed at making India
globally competitive in attracting investments from
abroad, by suggesting systems in the Indian
corporate environment which are transparent,
simple and globally acceptable.
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(ii) Terms of Reference
a. Issues arising from the revision of the Companies
Act, 1956;
b. Responses received from various stakeholders on
the concept paper;
c. Bringing about compactness by reducing the size
of the Act and removing redundant provisions;
d. Enabling easy and unambiguous interpretation by
recasting the provisions of the law;
e. Providing greater flexibility in rule making to
enable timely response to ever-revolving business
models;
f. Protecting the interests of the stakeholders and
investors, including small investors; and
g. Any other issue related, or incidental, to the above.
(iii) Recommendations
The main contents of the recommendations are divided into the
following important topics/chapters:-
1. Approach of New Companies Act
2. Classification and Registration of Companies
3. Management and Board Governance
4. Related Party Transactions
5. Minority Interest
6. Investor Education and Protection
7. Access to Capital
8. Accounts and Audit
9. Mergers and Acquisitions
10. Investigation under the Companies Act
11. Offences and Penalties
12. Restructuring and Liquidation
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(iii) Recommendations (..contd)
1. Approach of New Cos. Act:
The existing Companies Act, 1956 is a voluminous document
with 781 sections. It also contains provisions that cover
aspects which are essentially procedural in nature. Company
Law may be so drafted that while essential principles are
retained in the substantive law, procedural and quantitative
aspects are shifted to the rules. This would enable the law to
remain dynamic and to adapt to the changes in business
environment.
2. Classification and Registration of Companies: It should be:
i) On the basis of size: (a) Small companies (b) Other Cos.
ii) On the basis of number of members: (a) One person Co. (b)
Private Cos. (Min 2 & Max.50) Public Cos. (Min 12 & Max.
Any).
iii) On the basis of control : (a) Holding cos. (b) Subsidiary Cos.
Associate Cos.
iv) On the basis of liability: a) Limited by Shares b) Limited by
Guarantee.
v) On the basis of access to Capital : a) Listed; b) Unlisted.

(iii) Recommendations (..contd)
3. Management and Board Governance:
Corporate Governance should comprise of both ethical and
legal norms. Board should exercise strategic oversight over
business operations. Board should be constituted as per
provisions of law with minimum and maximum directors as
provided in the Articles of Association. The no. of independent
directors and executive directors should balance the interests
of the company. Nominee Directors are not to be considered as
independent/professional directors. The committee has dealt
elaborately with the duties, responsibilities, remuneration of
executives and non-executive directors also and similar
aspects of the key managerial personnel.
4. Related Party Transactions:
Directors have the duty not to place themselves in a position
when their fiduciary duties towards the company conflict with
their personal interests.
And in case it happens, directors have the duty to prefer
interests of the company. Directors should not use companys
assets, opportunities or information for their own profit.
(iii) Recommendations (..contd)
5. Minority Interests:
Balance to be struck between the rule of the majority and the
rights of the minority. The fundamental principle defining
operation of shareholders democracy is that the rule of
majority shall prevail. However, it is also necessary to ensure
that this power of the majority is placed within reasonable
bounds and does not result in oppression of the minority and
mis-management of the company.
The minority interests, therefore, have to be given a voice to
make their opinions known at the decision making levels. The
law should provide for such a mechanism
6. Investor Protection & Education:
Committee feels that for healthy growth of investors, not only
should corporate systems and processes be credible and
transparent, the interests of the investors may be safeguarded
in a manner that enables them to exercise their choice in an
informed manner while making investment decisions, and also
providing them with a fair exit option. Also, transparency &
accountability to be imposed thru CG.
(iii) Recommendations (..contd)
7. Access to Capital:
It is critical for business to raise capital of the right amount, in
the right form, at the right time and at the right price.
There is a need, therefore, for flexibility to manage capital
dynamically and to enable reallocation of capital between
businesses. In order to enable speedier access to capital and
enable effective capital management, there is a need to enable
use of a wide array of capital instruments in the backdrop of
streamlined statutory and regulatory framework, which is
provided through the Companies Act, 1956, SCRA and SEBI Act.
Committee feels that there is a need for different agencies to
interact with each other more comprehensively in operational
matters to enable such coordination.
(iii) Recommendations (..contd)
8. Accounts & Audit:
1. Proper and accurate compilation of financial information of a
corporate and its disclosure in a standardized manner is
central to credibility of corporates and soundness of
investment decisions by the investors.
2. Existing mechanism for formulating and notifying Accounting
Standards by adopting international best practices should be
retained. Consolidation of financial statements of
subsidiaries with those of holding cos. should be mandatory.
3. Cash flow statement should be made mandatory.
4. Relaxations should be there for small companies in regard to
format of accounts and exemptions from some disclosures.
5. CFO should be responsible for authentication, circulation and
filing of accounts.
6. Directors Responsibility statement should also include
directors related party transactions in Directors Report.
7. Other matters include appointment, rotation, remuneration,
disqualification, duties/powers of auditors/Audit Committee.

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(iii) Recommendations (..contd)
9. Mergers and Acquisitions:
Mergers and Acquisitions are used as instruments of
momentous (Inorganic) growth and are increasingly getting
accepted by Indian businesses as critical tool of business
strategy. They are widely used in a wide array of fields such as
IT, telecom, and BPO as well as in traditional business to gain
strength, expand customer base, cut competition or enter into a
new market or product segment . Mergers and acquisitions may
be undertaken to access the market through an established
brand, to get a market share, to eliminate competition, to
reduce tax liabilities or to acquire competence or to set off
accumulated losses of one entity against the profits of other
entity. Committee is of the view that Indian law may be
modified to provide only for approval by 3/4th in value of
shareholders and creditors, present and voting (and not
majority in number+3/4 in value as per existing Indian Law).
(iii) Recommendations (..contd)
10. Investigation under the Companies Act:
The Committee is of the view that instead of separate
provisions for both inspection and investigation under the Act,
a single comprehensive process of investigation, to be taken
up in a manner mandated by law and protecting the rights of
the companies, may be provided for. This would enable
Government to focus in a better and more result-oriented
manner for enquiry into the defaults by the Companies.
The Committee also feels that overregulation and excessive
supervision could disrupt the functioning and the decision
making processes in a company. If a random scrutiny is made,
sufficient grounds may arise warranting investigation of the
affairs of the co. and the same may be considered by the
Central Government.
Investigations may be made by private professionals as
investigators/inspectors.
(iii) Recommendations (..contd)
11. Offences and Penalties:
Cos. Act, 1956 provides the legal basis for various corporate
governance norms that are considered essential for proper
corporate operation and protecting the rights of stakeholders.
Violations of such norms are defined as offences with
associated penalties.
The law should clearly define the rights of stakeholders and the
means of their redressal. The state should provide the
wherewithal for quick redressal of the wrong committed and
deterrent signals to others, clearly demonstrating
consequences of non-compliance.
There is also a need to provide for a regime of penalties
commensurate with the offence.
Law should recognize the Whistle Blower Concept by
enabling protection to individuals who expose offences by
companies, particularly those involving fraud. Such protection
should extend to normal terms and conditions of service and
from harassment.
(iii) Recommendations (..contd)
12. Restructuring and Liquidation:
Businesses need efficient and speedy procedures for exit as
much as for startup. World over, insolvency procedures help
entrepreneurs close down unviable businesses and start up
new ones, to ensure that the human and economic resources of
a country are continuously rechannelised for increasing the
overall productivity of the economy.
The Committee noted the setting up of a new institutional
structure in the form of National Co. Law Tribunal (NCLT) and
the National Co. Law Appellate Tribunal (NCLAT). However, the
process is not complete and a lot yet needs to be done. The
constitution of NCLT is facing legal challenge and many parts
of the enactment have not yet been notified.
Corporate insolvency should be addressed in the Company
Law. There is no need of a separate Insolvency Law for the
present.
Law should provide a reasonable opportunity for rehabilitation
of a business before a decision is taken to liquidate it so that it
can be restored to productivity and become competitive. ***