In reorganising the finance ministry and reverting to the “simpler and more
direct name as Ministry of Finance (MoF)”, Jaswant Singh said “the Department of
Company Affairs (DCA) is now being absorbed as a Department— and will sadly no
longer stand shoulder to shoulder with finance”.
There is nothing sad about the development. In fact, it is one of those
decisions that will find unequivocal support from all but those companies that
thrived on the confusion that prevailed due to its separate status. The DCA was
a power centre during the license-permit raj and many Indian Prime Ministers
found it convenient to keep it separate from the finance ministry and dump it
under the law ministry, which usually had little interest in the administration
of the Companies Act.
Over the years, the DCA’s ‘permit’ powers have dwindled, and its glaring
inadequacy as a supervisor, regulator and registrar of companies have been
repeatedly exposed. The most recent and scathing indictment of the DCA is to be
found in the Joint Parliamentary Committee (JPC) report, which acknowledged that
penalties prescribed under the Companies Act are too nominal, that DCA’s
regulatory powers need to be strengthened and that the quality of its inspection
by the DCA “leave much to be desired”. It also said that DCA’s inspectors were
untrained and unable to cope with the quality of inspection.
To be fair, Vinod Dhall, who has been one of the longest serving DCA
Secretaries in the last five years, has tried to make a difference. The Naresh
Chandra Committee was set up to clean up the quality of audit and examine the
Auditor-Company relationship. Another committee has been set up to look into
rationalising penalties under the Act. Serious efforts have also been made to
put in place a Serious Frauds Office. Unfortunately, the task is humongous and
the DCA’s structure as a government department offers it little flexibility to
work with a dedicated staff and effect swift changes.
In addition, there is schism caused by the fact that DCAs regulatory powers
often overlap those of the Securities and Exchange Board of India (Sebi). Also,
since the DCA has usually reported to a separate minister, there were the
additional turf issues that arose between bureaucrats of MoF and the DCA.
Jaswant Singh has taken a welcome and much needed decision to absorb the DCA
into MoF and ended a big source of needless discord. Hopefully, this is only the
first step of a much larger restructuring plan. Jaswant Singh proposes to
restructure the Department of Economic Affairs (DEA) with separate divisions
dealing with banking, capital market, economic policy, infrastructure etc.
However, he doesn’t say whether the DCA will also be part of the DEA or remain a
separate division within MoF. If it remains separate, then some of the confusion
will continue. If the finance minister is serious about restoring investor
confidence, he needs to take his restructuring effort further and at least
ensure that DCA and the capital markets division work in tandem to improve the
supervision of capital markets and the corporate sector.
In July last year, this column had said that “ideally, one would like to see
Jaswant Singh use his seniority, negotiating skills and proximity to the Prime
Minister to merge the DCA into the finance minister’s portfolio in such a way
that it cannot be separated in future”. He has done exactly that.
I had also argued that “one would also like him to switch to a US type
regulatory structure where the Securities Exchange Commission (SEC) is primarily
responsible for regulating listed companies as well as auditors, analysts and
rating agencies. This would involve disbanding the dreadfully slow and
incompetent DCA and Company Law Board and transferring all their powers to
Securities and Exchange Board of India”.
Last July, this suggestion had seemed rather drastic, so I went on to say
that “Mr Singh should at least consider going half-way and restructuring the DCA
and making it a separate and independent body like Sebi with its own cadre of
officials and subject to more direct public scrutiny”.
But clearly, its time to revise our expectations from the finance minister
and raise them considerably. He has managed to ‘absorb’ the DCA without needless
debate or rancour and it is clear that he can push through much bigger
structural changes in order to create a powerful single regulator like the SEC
to supervise capital markets and companies.
This is crucial for putting in place effective regulation to monitor
disclosure and corporate governance practices of companies. So far, Sebi has
tried to avoid issues arising out of the overlapping regulatory jurisdiction
with DCA by simply loading all disclosure requirements under clause 49 of the
listing agreement of stock exchanges. This in turn means that stock exchanges
are burdened with much of the responsibility for monitoring compliance and are
forced to undertake this effort with inadequate supervisory powers.
Similarly, the finance minister’s objective of improving investor confidence
and awareness will also be better achieved through Sebi rather than the DCA.
Today, both Sebi and the DCA have their own separate investor awareness
programme and accreditation procedures for investor associations. However, while
Sebi supports investor awareness efforts from its own funds, the DCA has access
to a huge cache of money through the Investor Education and Protection Fund
(IEPF). The IEPF has been set up under section 205 C of the Companies Act and is
created by transferring unpaid dividends from companies. Nearly Rs 200 crore has
been transferred to this fund by the corporate sector (and credited to the
Consolidated Fund of India), but the IEPF has barely managed to utilise a couple
of crore of rupees for investor education programmes.
The JPC too has recommended that the administration of the IEPF should be
transferred to Sebi. This would happen automatically if many of DCA’s powers and
responsibilities are transferred to Sebi or they are merged into a single, more
Merging the DCA and Sebi into one regulatory entity is a monumental job and
is bound to meet with a lot of initial resistance. But it has two things going
in its favour. First, that finance minister Jaswant Singh has the appropriate
standing in this government to make it happen. Secondly, the power, freedom and
working conditions at Sebi have made it an attractive enough posting to weaken