The provisions of the Companies Bill are set to bring the Securities & Exchange Board of India (SEBI) and the ministry of corporate affairs (MCA) in conflict with each other in a number of areas such as insider trading, independent directors, and delisting of publicly-traded companies.
The new bill proposes norms that are sharply different from those specified by the market regulator. The parliamentary standing committee on finance, in its report on the Companies Bill, 2009, tabled earlier this week, has expressed concerns over such ‘regulatory overlaps’. It has recommended that where such issues of turf occur, the norms of sector-specific regulators such as SEBI should prevail.
The bill, in its current form, has several potential areas of conflict. For instance, under SEBI’s listing agreement, independent directors cannot have any ‘material’ pecuniary relationships with the company or its promoters, which may affect their independence. In contrast, the bill has proposed that the cap on such a relationship should be 10% of the turnover of the company. On being told by the members of the parliamentary committee that 10% was too high and gave ample scope for conflict of interest, the ministry revised this down to 2% where it stands currently. Since SEBI norms do not define what a material relationship is (and the bill does), the provisions in the bill may well prevail. Incidentally, the committee has recommended that such directors should have no pecuniary relationships with the company.
Under the SEBI Act, only companies listed for three years can delist from a stock exchange. The Companies Bill, however, does not lay down such a condition and allows for companies to effectively delist through a process supervised by company law tribunals.
The SEBI Act prohibits trading on non-public price-sensitive information by ‘insiders’ of a company (without specifying who such insiders are) and applies a minimum fine of Rs 25 crore for such an offence. The Companies Bill prohibits insider trading by senior management, with a penalty of five years’ imprisonment, and a fine of up to Rs 1 crore. In both these cases, it is unclear what the final shape of these provisions will be.
Some of the differences between the regulator and the ministry’s stance have narrowed since the bill’s introduction in Parliament. In a number of cases, the ministry was asked by the committee to bring the provisions in the bill in line with those specified by SEBI, and the ministry agreed.
Ministry stands its ground
“I think the overlap issue is resolved, and the ministry has been quite co-operative” says Yashwant Sinha, former finance minister and member of Parliament who chaired the standing committee.
In some cases, though, the ministry seems to have firmly opposed any attempts to align the provisions in the Companies Bill with those specified by SEBI. One of the most puzzling cases is that relating to the allotment of shares after an issue. Currently, SEBI requires shares to be allotted to investors within 15 days of an issue being closed. The bill, by contrast, expands this window to 70 days, a time frame that, as the SEBI chairman pointed out to the committee, existed quite some time ago but has been gradually reduced. The ministry however, has not agreed to reduce the time frame. The committee, on its part, has observed that the ministry’s provisions in this respect seem ‘to be out of sync with the reality’.