The apprehension that the Ministry of Corporate Affairs (MCA) would misuse its rule-making powers under the Companies Act, 2013 is coming true. This can be seen from the recently released Rules by the MCA. The Companies Act provides for substantial delegation of powers to the MCA to frame rules for implementation of the new law.
Around two-thirds of the provisions of the new Act will be regulated through the Rules, so it is very important to ensure that the rule making process is impeccable.
However, the MCA’s performance in shouldering this responsibility of rule-making has not been impressive at all.
First, if the Ministry was so clear (which it was) that the new law would be implemented from April 1, 2014, the Rules should have been released at least three to six months in advance, giving corporates and advisors time to absorb the implications of the new laws.
It could have taken a cue or two from SEBI. The market regulator recently modified corporate governance norms, but said that these will be effective from October 1, 2014, giving all the stakeholders a clear six months to prepare for the new norms. In contrast, the MCA started releasing the final Rules only at the eleventh hour — in the last week of March.
The April 1 date was sacrosanct for the Rules to come into force. This is because Sections of the Companies Act, to which the Rules correspond, have already been notified in the official gazette, making the Sections effective from April 1. Surprisingly, some Rules were not even released until April 2 but the MCA’s website shows that they were issued on March 31; that is a classic case of back-dating. The MCA’s website keeps discreetly updating version after version of the same Rule and no one is sure if what they have is really the final version.
Strangely though, till date there is no official gazette notification which says that the Rules have come into force effective April 1, except for one public notice released by the MCA! That’s not how the law requires Rules to come into force. So, now, what does one do? Comply with the Rules even though there is no gazette notification?
There appears to be no other option, as sections pertaining to those Rules have been notified. This wasn’t expected from the MCA. It has taken it almost 20 years to create the new company law, and now there is chaos all around.
Overstepping limitsSurprisingly, in many areas, the MCA doesn’t even have power under the Companies Act to make the provisions; any attempt to do so would mean overstepping its power. For instance, the Rules provide for the definition of ‘total share capital’ to include only convertible preference shares.
The concept of ‘total share capital’ is essential to determining a holding-subsidiary relationship and associate company. While this clarification in the definition is good, the real question is whether the MCA was at all vested with the powers to modify the definition under the Companies Act.
Another example is that the Rules provide that ‘preferential issue’ of shares will need to follow the same provisions as for ‘private placement’ of shares. Both are different concepts and, hence, the Companies Act covers them in separate sections; nowhere does it provide that ‘preferential issue’ will also have to follow the provisions of ‘private placement’. Why is the MCA exceeding its power in this case?
Then again, the MCA in a Rule says the loans, investments, and guarantee for a loan by a holding company for its wholly-owned subsidiary are permitted. This is a much-awaited relief for the industry, but that is not the question.
The point is whether the MCA can make amendments to the provisions of the Companies Act. Delegated legislation is not new in India and neither is implementation of a new law in phases. In fact, both the RBI and SEBI hold delegated powers, but such situations did not arise with them. It is time the MCA took a cue from these regulators.
The author is a partner with J. Sagar Associates. Views are personal