When the finance minister (FM) said in his budget speech that “the Department of
Company Affairs (DCA) is now being absorbed as a Department — and will sadly no
longer stand shoulder to shoulder with Finance”, what exactly did he mean? Most
people thought that he planned to restructure the DCA. But another view in the
North Block is that the FM plans no changes. He merely wants to shorten the
long-winded name of his ministry to a more succinct one and the rest of what he
said in this context is irrelevant.
The minister himself has kept everyone guessing, and until he reveals his
mind, the ministry of finance (MoF) is presiding over an unseemly territorial
battle between the DCA and the Securities and Exchange Board of India (Sebi)
over regulating corporate governance.
Most people assume that Sebi is the obvious regulator to monitor good
governance, because bad corporate practices immediately impact investors through
lower profits/dividends or a sharp swing in stock prices. That is why Sebi
decided to mandate good behaviour on the part of companies by codifying the
rules for corporate governance in line with the Kumar Mangalam Birla Committee
However, the DCA believes that regulation of companies is its exclusive
domain. The Naresh Chandra Committee that was set up to look into the
relationship between companies and auditors echoes this view. It says that after
the abolition of control over capital issues, the work relating to public issues
and regulation of capital markets has been entrusted to Sebi. It also points out
that only 9,000 out of six lakh registered companies (doesn’t matter that a few
lakh of these are shady investment companies used to manipulate the market or to
divert funds) have accessed the capital market.
Without beating around the bush, the Chandra Committee argues that the
overlap between the powers of Sebi and DCA have “adverse consequences” with
investors, companies and other stakeholders “falling between the cracks.” It
cites the recent stock market scam and the vanishing companies scandal as
examples of such negative consequences.
This view would come as a surprise to investors. Until the Chandra Committee
told us differently, we were under the impression that vanishing companies and
those involved with the scam have not been properly traced or punished because
both regulators have been slow and uninterested in discharging their
responsibilities. They also failed to co-operate with each other. That is why
both regulators have, individually and separately, come in for harsh criticism
from the Joint Parliamentary Committee (JPC) investigating the scam.
Another example of such overlap, says the Committee, is that Sebi has
(needlessly) set up something similar to the Investor Education and Protection
Fund (IEPF) created under Section 205 C of the Companies Act. But it fails to
mention that Sebi’s investor funding is not out of a formal set-up like the IEPF
or funded out of unpaid dividends. Curiously, unlike the JPC, the Chandra
Committee does not recommend that the IEPF be transferred to Sebi, although
investor protection is clearly Sebi’s domain.
The Committee says that Sebi, through the listing agreement of stock
exchanges, has forced companies to provide detailed corporate accounts after
they had successfully lobbied the DCA to publish abridged annual reports. Again,
the Chandra Committee did not think fit to recommend greater disclosure to
investors through detailed annual reports — it merely quibbled.
Sebi and the DCA are not the only regulators who do not co-operate or
collaborate with one another. Other regulators and investigative agencies, such
as the Reserve Bank, Central Bureau of Investigation or Enforcement Directorate
are no different.
Consequently, whenever Sebi felt the need to tighten its regulations, it has
avoided seeking changes to the Companies Act and preferred to work through its
own powers. For instance, all additional disclosure requirements were
implemented through “subordinate legislation”, such as Section 49 of the Listing
Agreement of stock exchanges. The Chandra Committee objects to that too. It
recommends that “(I)f any additional requirements are sought to be prescribed
for listed companies, then, in areas where specific provision exists in the
Companies Act, it would be appropriate for Sebi to have the requirement
prescribed in the Companies Act itself through a suitable amendment.” Even
changes in subordinate legislation, such as the Listing Agreement, it says,
should be done in consultation with the DCA.
Many of these suggestions are absurd. The Chandra Committee and its band of
chartered accountants has failed to realise that Sebi has the tougher job of
monitoring a highly volatile and dynamic capital market by promoting greater
transparency and preventing insider abuse and price manipulation. In order to do
this, it has to ensure timely disclosure of price sensitive information by
companies through the stock exchanges. This requires quick action and adequate
powers to frame rules. Even assuming that there is some overlap between Sebi and
DCA; it affects only 9,000 listed companies. Surely, DCA should help create a
dynamic Sebi rather than one that is not forever negotiating rules and powers
with the DCA.
The Committee also wants “greater consultations between Sebi and the DCA
prior to crafting materially significant laws and regulations.” This is indeed
laudable if it ends the sort of stonewalling that one has seen in the past. For
instance, when it was obvious that the Sebi Act needed urgent amendment to give
it more teeth, it was the DCA that raised innumerable objections and delayed the
It is a pity that the Naresh Chandra Committee has merely aired the DCA’s
one-sided views on the issue of sharing powers. But that did not really matter
because a committee merely makes recommendations and it is upto the government
to accept or reject them.
The problem is that the DCA has apparently used the Naresh Chandra
Committee’s recommendations to lobby against Sebi for setting up a Corporate
Governance Committee under N R Narayana Murthy’s chairmanship. A month after the
N R Narayana Murthy Committee submitted its report, the finance ministry has
appropriated it and prevented it from being thrown open for public discussion.
The MoF has to remember that the N R Narayana Murthy Committee merely takes up
where the Kumar Mangalam Birla Committee had left off. The committee’s
recommendations ought to matter more than who set it up — the rest is a matter
of co-ordination and co-operation.
Had the Naresh Chandra Committee chosen to examine these issues instead of
merely mouthing the DCA’s views, it would have realised that an overlap of rules
is not really a problem, it is the petty quibbling between the regulators that
allows investors, stakeholders and regulation to fall between the cracks