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Business Commentary/Dilip Thakore

Big law puts rogue companies' small print under microscope

Quite often, newspaper headlines are not important. Tucked away in the corner of the newspaper's inside pages are items of momentous significance.

One such news item is that henceforth directors of 'vanishing companies' will be severely penalised for the financial sins of company promoters.

This should warm the cockles of millions of cynical lay investors. They are the people who take a hammering whenever stock-market indices plunge from dizzy heights, whenever white-collar crooks and charlatans disappear with their savings.

On the last day of the winter session of Parliament (December 23, 1999), the Companies Amendment Bill 1999 was introduced and is likely to enjoy smooth passage through both houses of Parliament.

Under the provisions of the bill, responsibility for default on repayment of deposits and interest, dividend, non-filing of annual returns and accounts, will now devolve upon all directors of defaulting companies.

Once the bill is passed, the Union government will be empowered to summarily dismiss directors of defaulting companies and debar them from reappointment to the boards of widely held companies for periods extending up to five years.

The need for such legislation is as self-evident as it is overdue. Astonishingly, the law as it exists is that directors of public companies are not answerable if their promoters collect money from investors and disappear.

I discovered this lacuna in the law the hard way. Impressed by the quality of professionals who adorned the boards of several companies, I blithely subscribed to their initial public offerings. The companies unfolded attractive future plans and invited the public to share them.

It later turned out that all the plans and promises made were bogus and mere ploys to cheat investors of their savings. Letters to the companies' offices were returned to the sender, and in several cases, their places of business -- factories, head and branch offices -- were either non-existent or hole-in-the-wall addresses.

When I took up the matter of these unseen companies with the stock exchange authorities, the answer was that they, the exchanges themselves, were aggrieved parties! It transpired that the companies did not pay the listing fees to the exchanges and so were delisted!

Not content with this reply in one instance, I had taken up the matter with my stockbroker. He was a director of one such company, and later served as the president of the Bombay Stock Exchange.

His answer was that he too had been taken for a ride by the promoters of the company in question and had lost money in the process. Enquiries with legal luminaries indicated that this stockbroker-director had not committed any offence by lending his name and conferring respectability to a giant scam, unless one could prove mala fides which was a tedious process anyway.

I was advised to forget about the sum invested and write it off!

This is precisely the type of directorial irresponsibility the Companies Amendment Bill is designed to curb. It is reasonable to expect people who accept offers to serve on the boards of companies to carefully check out the qualifications and bona fides of the promoters of the company, and to utilise their professional expertise to evaluate whether the promises that promoters make are realistic or mere pies in the sky.

Most lay investors have neither the inclination nor the time (nor the expertise) to read the small print of rambling prospectuses loaded with technical jargon. Therefore, they are perfectly justified in judging the potential of a company by the quality of its board of directors. And they are equally justified in believing that before agreeing to serve on the board of a company, the directors might have checked out the promoters thoroughly.

That such elementary legislation has been introduced almost a century after the stock exchanges became operational in India, speaks volumes about the casual manner in which they are administered.

The stock-market indices have been zooming of late. The lay investor has returned to the scam-tainted stock exchanges after a long time. This is an appropriate time to strengthen the market regulator SEBI (Securities and Exchange Board of India), the stock exchange boards and the judiciary in general to ensure the speedy enforceabilty of contracts.

All this shows that when institutions and people at large exert the pressure of public opinion upon government, it is compelled to introduce ameliorative legislation. Sustained institutional and public pressure for reform of the judicial system will ensure protection for lay citizens against white-collar criminals who abound in the stock and money markets.

ALSO SEE

Law to protect vanishing companies' investors valid, rules Madras HC
SEBI debars 62 directors of 'vanishing companies'
BSE's new president assures checks on fraudulent companies
Dubious promoters have gobbled up Rs 7 billion of public money
Rs 250 billion that investors poured into 3,500 companies have vanished!
NSE chief urges investors to protect themselves
Beware of plantation companies, cautions SEBI
Investors agitate against plantation companies
Dilip Thakore

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