The Rights of the Deceased: Moral Rights Incidental to Copyright Law
- Vanshika Agrawal
- 2024-04-25
Through this article the author attempts to outline the corporate personality of a company. And further discuss corporate governance in the light of its efficiency and the loopholes that accompany it.
Contents hide
1 CORPORATE PERSONALITY OF A COMPANY
2 WHAT IS CORPORATE GOVERNANCE?
3 LEGAL TRANSPLANT OF CORPORATE GOVERNANCE TO INDIA.
A registered company is a clothed with its own legal personality. It comes to have almost the same rights and powers as that of a human being. Its existence is distinct and separate from that of its members. Members may change or even die but the company goes on until it is wound up on the grounds specified by the Companies Act, 2013. [1]In other words, it means that it has perpetual succession.
A company can own property, have a banking account, be liable for taxes, raise loans, incur liabilities, and enter into contracts. Even members can contract with the company, acquire rights against it or incur liability to it. For the debts of the company, however, only its creditors can take legal action against it, and not its members. In addition, according to Section 34 (2) of the Act[2], on registration of the company, the association of persons becomes a body corporate by the name contained in the memorandum. [3]
Corporate Governance is a combination of rules, processes or laws by which businesses are operated, regulated or controlled. The term encompasses the internal and external factors that affect the interests of a company’s stakeholders, including shareholders, customers, suppliers, government regulators and management. The purpose of corporate governance is to facilitate effective, entrepreneurial and prudent management that can deliver the long term success of the company. [4]
A proposal of legal transplant or in a proposal to apply the juristic rules of a distant time or country to the conditions of a particular place in the present day, what must be kept in mind is the physical, social, and historical conditions to which that rule is to be adapted.
This article leaves no to low scope for further. Therefore, while exploring the roots of Corporate Governance in India, it is pertinent to keep in mind and continuously contrast the model adopted by India from that in the UK and the US. A direct legal transplant in general is an inappropriate way of adapting a major corporate lifestyle, especially without considering the political, social and historical conditions of the place where it must be adapted. Following H. Kanda & C. Milhaupt’s article Re-examining Legal Transplant[5] it is abundantly clear that a demand before a legal adaptation is the crux of any successful legal transplant.
Observing that “[t]ransplanting some of the formal elements without regard for the institutional complements may lead to serious problems later, and these problems may impede, or reverse, convergence”[6] and without the demand the transplanted rule would lead to either of the two situations:
(i) it would be rendered ineffective, as in case of a dormant rule that was directly lifted by Japan from the US, or,
(ii) it would leave scope for assumptions and overdependence even in unfitting circumstances, like the overdependence of SEBI on the Cadbury Committee assumption of a market with dispersed ownership, when India clearly has an accumulation of ownership with some market players.
Further, this can also be connected to why agency conflicts still persist in India. A layman answer would be highlighting the characteristic preponderance of family owned business in India. While, the more important thing in this discussion would be to explore how these family businesses have unofficially (using the term loosely) monopolized their presence in most businesses.
A two-fold argument is pertinent to tackle the question, ‘how’ have they established themselves so vigorously?
(I) The shareholders of big companies have (among many other) methods adopted pyramid schemes, crossholding , tunneling etc. [7] Pyramid schemes are those by which one firm (A) owns more than 51% shares of another firm (B) which thereby owns more than 51% of another (C) and so on. By this process of owning and re-owning, the firm at the supreme level has a wide-ranging Investor power throughout the companies in its pyramid. Crossholding on the other hand is interlocking ownership of the same owners in various companies, making each member incline to support each other’s decision.
This is in addition to the tunneling of funds for fast cash flow which further adds on to the existing investor activism in India. This vast repository of power vested in a single entity/group has high potential to be exploited, and recent researches show that the extent of such tunneling have led to considerable amount of funds tunneled by the owners , which thereby, deprive the minority shareholders of the company at the lower level of their rightful gains. [8]Even after recognizing this, in the US sense of term only some Indian companies have undergone metamorphosis and even if restructuring is done, controlling shareholders continue to play a dominant role.
Even though, this vast repository of powers with majority shareholders is helpful in piercing of corporate veil and acts as a good measure for public accountability w.r.t financial frauds. It comes at the cost of many oppressed minority shareholders.
(II) Another important factor that can be placed as the reason for failure of corporate governance in India is the role of independent directors, as mentioned earlier, the majority shareholders would appoint independent directors who are passive to their decision making. This can be easily exploited, as seen in the Satyam scam of 2009, wherein in pursuance of healthy balance sheets independent auditors were passive accessories to the fraud.
The incentive of theft in such cases is a great temptation for the CEO. The absence of any checks and balances aggravates the unhindered powers of shareholders to wield significant influence over corporate decision making, and this is clearly just another disaster waiting to happen.
The efficacy of a legal transplant generally is questionable and , and. Due to the rising issues of Corporate governance in the US and UK. Which are relatively much more developed and equipped to deal with the issues. That arise off of corporate governance, raise many eyebrows about the concept of corporate governance in itself. This also tantamount to an unpromising legal transplant adopted by India.
In the Indian Context, observing the recent rise in abscondment cases such as that of Vijay Mallya, Nirav Modi, and the infamous Satyam Scandal, an observably clear failure in the existing audit process which can be blamed as genesis of the misstatement of financial information. Secondly, the independent directors of Satyam were unable to prevent the falsification of the Satyam episode. Which is also symptomatic of a signaling problem with the role of independent directors
As a response to these loopholes a few steps by the Indian Government have been taken to reduce the scope of evading such laws, they would be the 2013 SEBI amendment to 28 Clause 49 of Listing Agreement and formulation of Fugitive Economic Offenders Act, 2018. [9]
28 Clause 49 in its present form provides for the following key features ofcorporate governance:
1. boards of directors of listed companies must have a minimum number of independentdirectors, with independence being defined in a detail manner;2. listed companies must have audit committees of the board with a minimum of three directors,two-thirds of whom must be independent; the roles and responsibilities of the audit committee are specified in detail;3. listed companies must periodically make various disclosures regarding financial and othermatters to ensure transparency;4. the CEO and CFO of listed companies must (a) certify that the financial statements are fairand (b) accept responsibility for internal controls;5. annual reports of listed companies must carry status reports about compliance with corporate governance norms.
In a nutshell, through these changes the primarily the role of independent directors has strengthened. So as to reduce the dominance of majority shareholders over minority stakeholders, and further the interests of all stakeholders.
[1] Companies Act, 1956, No.18, Acts of Parliament, 2013 ,(India).
[2] Supra, note 1.
[3] Arjya B. Majumdar, Corporate Personality In India, International Law Office, Newsletter, 4 Jan. 2021 at 14:00 IST.
[4] Henry Hansmann & Reinier Kraakman , What is Corporate Law? , Yale Law& Economics Review Research Paper No.300, 4 Jan. 2021 at 14:00 IST.
[5] H. Kanda & C. Milhaupt, Re-examining Legal Transplants: The Director’s Fiduciary Duty in Japanese Corporate Law, AM. J. COMP. L, Monday, 4 Jan. 2021 at 14:00 IST.
[6] Umakanth Varottil, A Cautionary Tale Of The Transplant Effect On Indian Corporate Governance, NLSIR, Monday, 4 Jan. 2021 at 13:00 IST.
[7] S. J. Sarkar & S. Sarkar, Large Shareholder Activism in Corporate Governance in Developing Countries: Evidence from India, INTERNATIONAL REVIEW OF FINANCE, Monday, 4 Jan. 2021 at 14:00 IST.
[8] K. Yoshino, The Eclectic Model of Censorship, CAL. L., 4 Jan. 2021 at 14:00 IST.
[9] Fugitive Economic Offenders Act, 2018, No.17, Acts of Parliament, 2018, (India).
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