Cos Panel Wants Office Of Public Trustee Abolished

The expert committee set up to recast the Companies Act, 1956, has favoured abolition of the office of public trustee and deletion of his powers to exercise voting rights at annual general meetings (AGMs) on behalf of the shares held in public trusts.

The law provides for the appointment of a public trustee by the Central government.

The selected person is usually of the rank of a joint secretary and is supposed to represent the President or a governor and exercise powers aimed at safeguarding the interests of the beneficiaries to the trust.

The practice of appointing public trustees started in the 60s when family-run corporate houses started using the trust route to manage their companies.

The route was favoured to exploit loopholes in tax laws, which permitted trusts to avail of tax shields.

Consequently, the promoter holding in several family managed units was reduced to as little as 5 per cent. Companies were, in fact, frequently managed through holding companies incorporated as trusts.

A case in point is the Tatas, where Tata Sons is the holding company managing the Tata empire.

Tata Sons is incorporated as a trust, which attracts the provisions of the company law requiring the appointment of a public trustee to vote at the AGM on behalf of the beneficiaries to the trust.

Opinions are divided on the importance of a public trustee.

One school of thinking believes that the role of the public trustee has been made redundant in the wake of the economic reforms initiated in 1991 and that corporate decision-making should revert back to the boards.

The other school believes that it is essential for a government nominee to look after the interests of beneficiariesy as public trusts are public institutions and the government is obliged to oversee the public interest.

Despite legal provisions for the Central government to intervene in the management of companies through the public trustee, a public trustee has rarely exercised his voting rights in the past.

It has been the norm for him to abstain from exercising his vote at AGMs, leaving corporate decision-making to the other shareholders.

The sole example when the government actually considered the possibility of directing the public trustee to exercise his vote was in the case of Tata Sons two years ago - at the height of the preferential allotments imbroglio - when promoters groups made a spate of such allotments at concessional rates.

Tata Sons had also created a stir at that time by considering such an allotment. Subsequently, such allotments were permitted by the Securities & Exchange Board of India (Sebi) subject to the pricing norm of a six monthly average.

It is now generally believed that the shareholders of a company, including those controlled through the trust route, are capable of taking care of their interests at the annual general meeting and that provisions for Central government interference are not necessary.

The Department of Company Affairs, which had recodified the companies bill after a prolonged debate on the issue, had however decided against the abolition of the office of the public trustee.

However, the United Front government subsequently decided to abandon this draft and set up an independent committee to redraft amendments to the Companies bill.