Sucheta Dalal :Ending The Needless Discord (3 March 2003)
Sucheta Dalal

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Ending The Needless Discord (3 March 2003)  

In reorganising the finance ministry and reverting to the “simpler and more direct name as Ministry of Finance (MoF)”, Jaswant Singh said “the Department of Company Affairs (DCA) is now being absorbed as a Department— and will sadly no longer stand shoulder to shoulder with finance”.

There is nothing sad about the development. In fact, it is one of those decisions that will find unequivocal support from all but those companies that thrived on the confusion that prevailed due to its separate status. The DCA was a power centre during the license-permit raj and many Indian Prime Ministers found it convenient to keep it separate from the finance ministry and dump it under the law ministry, which usually had little interest in the administration of the Companies Act.

Over the years, the DCA’s ‘permit’ powers have dwindled, and its glaring inadequacy as a supervisor, regulator and registrar of companies have been repeatedly exposed. The most recent and scathing indictment of the DCA is to be found in the Joint Parliamentary Committee (JPC) report, which acknowledged that penalties prescribed under the Companies Act are too nominal, that DCA’s regulatory powers need to be strengthened and that the quality of its inspection by the DCA “leave much to be desired”. It also said that DCA’s inspectors were untrained and unable to cope with the quality of inspection.

To be fair, Vinod Dhall, who has been one of the longest serving DCA Secretaries in the last five years, has tried to make a difference. The Naresh Chandra Committee was set up to clean up the quality of audit and examine the Auditor-Company relationship. Another committee has been set up to look into rationalising penalties under the Act. Serious efforts have also been made to put in place a Serious Frauds Office. Unfortunately, the task is humongous and the DCA’s structure as a government department offers it little flexibility to work with a dedicated staff and effect swift changes.

In addition, there is schism caused by the fact that DCAs regulatory powers often overlap those of the Securities and Exchange Board of India (Sebi). Also, since the DCA has usually reported to a separate minister, there were the additional turf issues that arose between bureaucrats of MoF and the DCA.

Jaswant Singh has taken a welcome and much needed decision to absorb the DCA into MoF and ended a big source of needless discord. Hopefully, this is only the first step of a much larger restructuring plan. Jaswant Singh proposes to restructure the Department of Economic Affairs (DEA) with separate divisions dealing with banking, capital market, economic policy, infrastructure etc. However, he doesn’t say whether the DCA will also be part of the DEA or remain a separate division within MoF. If it remains separate, then some of the confusion will continue. If the finance minister is serious about restoring investor confidence, he needs to take his restructuring effort further and at least ensure that DCA and the capital markets division work in tandem to improve the supervision of capital markets and the corporate sector.

In July last year, this column had said that “ideally, one would like to see Jaswant Singh use his seniority, negotiating skills and proximity to the Prime Minister to merge the DCA into the finance minister’s portfolio in such a way that it cannot be separated in future”. He has done exactly that.

I had also argued that “one would also like him to switch to a US type regulatory structure where the Securities Exchange Commission (SEC) is primarily responsible for regulating listed companies as well as auditors, analysts and rating agencies. This would involve disbanding the dreadfully slow and incompetent DCA and Company Law Board and transferring all their powers to Securities and Exchange Board of India”.

Last July, this suggestion had seemed rather drastic, so I went on to say that “Mr Singh should at least consider going half-way and restructuring the DCA and making it a separate and independent body like Sebi with its own cadre of officials and subject to more direct public scrutiny”.

But clearly, its time to revise our expectations from the finance minister and raise them considerably. He has managed to ‘absorb’ the DCA without needless debate or rancour and it is clear that he can push through much bigger structural changes in order to create a powerful single regulator like the SEC to supervise capital markets and companies.

This is crucial for putting in place effective regulation to monitor disclosure and corporate governance practices of companies. So far, Sebi has tried to avoid issues arising out of the overlapping regulatory jurisdiction with DCA by simply loading all disclosure requirements under clause 49 of the listing agreement of stock exchanges. This in turn means that stock exchanges are burdened with much of the responsibility for monitoring compliance and are forced to undertake this effort with inadequate supervisory powers.

Similarly, the finance minister’s objective of improving investor confidence and awareness will also be better achieved through Sebi rather than the DCA. Today, both Sebi and the DCA have their own separate investor awareness programme and accreditation procedures for investor associations. However, while Sebi supports investor awareness efforts from its own funds, the DCA has access to a huge cache of money through the Investor Education and Protection Fund (IEPF). The IEPF has been set up under section 205 C of the Companies Act and is created by transferring unpaid dividends from companies. Nearly Rs 200 crore has been transferred to this fund by the corporate sector (and credited to the Consolidated Fund of India), but the IEPF has barely managed to utilise a couple of crore of rupees for investor education programmes.

The JPC too has recommended that the administration of the IEPF should be transferred to Sebi. This would happen automatically if many of DCA’s powers and responsibilities are transferred to Sebi or they are merged into a single, more powerful entity.

Merging the DCA and Sebi into one regulatory entity is a monumental job and is bound to meet with a lot of initial resistance. But it has two things going in its favour. First, that finance minister Jaswant Singh has the appropriate standing in this government to make it happen. Secondly, the power, freedom and working conditions at Sebi have made it an attractive enough posting to weaken bureaucratic resistance.

-- Sucheta Dalal