Sucheta Dalal :Mouthing The DCA's Views (10 March 2003)
Sucheta Dalal

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Mouthing The DCA's Views (10 March 2003)  

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 recommendations.

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 amendments.

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

-- Sucheta Dalal