Model Devised To Raise Public Funds, Avoid Regulations

The corporate sector has worked out a model corporate structure that will permit a company to raise funds from the public without being subject to the stringent regulatory framework prescribed for public listed companies under the draft companies bill, 1997.

According to this structure, the promoting company will be an investment company that will raise funds from the public to invest in a host of group companies which will be operating companies. The promoting company's equity in the operating companies will be less than 51 per cent. The group companies will thus qualify for the status of a private company and not a subsidiary. Besides, the operating companies will not seek public participation.

The operating companies will attract minimum regulations, as provided under the framework of the proposed company law. The proposed law envisages stringent regulations for public listed companies but minimal regulations for private companies.

Under the new company law, only the parent company will be subject to shareholders' scrutiny, and not the group companies. This structure allows a promoting company to utilise the money of the shareholders without being answerable to them, besides enabling it to circumvent the stringent regulatory framework applicable to public listed companies. Company law states that this routing of public investments through private enterprise has been made possible with the deletion of provisions relating to deemed public companies (Section 43A of the Companies Act, 1956) in the proposed company law.

Experts said the proposed company law has done away with this provision on the grounds that section 43A is extremely lengthy and convoluted, with as many as four provisos, some of which occupies over two pages of fine print.

The expert group in its report on the draft companies bill had said: The rationale for Section 43A was opaque at the time it was introduced and is certainly misplaced in the context of 1990s.

It further said that the various associations, chambers of industry and professional bodies that deposed before the group were unanimous in demanding that the section be scrapped.

The provision was introduced as part of the amendments in 1960. By virtue of this section, private limited companies can be treated as public companies under certain circumstances.