The Committee was repeatedly reminded to be careful not to increase compliance cost to companies, as ultimately, not only is this against the interest of shareholders but it has the danger of making Indian industry uncompetitive. In this connection, a serious unnecessary cost noticed by the committee was the overlap and duplication between the SEBI and DCA. The Committee has recommended removal of this overlap, keeping in mind two other principles. First, subordinate legislation cannot override provisions enacted by Parliament. Secondly, the doctrine of 'occupied space' needs to be respected and complied with.

Wherever possible, SEBI may refrain from exercising powers of subordinate legislation in areas where specific legislation exists as in the Companies Act, 1956.

If any additional requirements are sought to be prescribed for listed companies, then, in areas where specific provision exists in the Companies Act, it would be appropriate for SEBI to have the requirement prescribed in the Companies Act itself through a suitable amendment.

In recognition of the fact that SEBI regulates activities in dynamic market conditions, the DCA should respond to SEBI's requirements quickly. In case the changes proposed by SEBI necessitate a change in the Companies Act, the DCA should agree to the requirement being mandated in clause 49 of SEBI regulation until the Act is amended.· It would be appropriate for SEBI to use its powers of subordinate legislation, in consultation with the DCA, and vice versa. All committees set up either by SEBI or DCA to consider changes in law, rules or regulations should have representatives of both SEBI and DCA.

A formal structure needs to be set up to ensure that the DCA, which regulates all companies, and SEBI, which regulates only listed companies, act in coordination and harmony.

Even while we try to move our economy and our companies to the 21st century, the Department which deals with companies seems to be firmly moored in the past. Its physical strength and equipment have simply not kept pace with either the times or with the increased strength of companies in India. The Committee, therefore, recommends a paradigm shift in the approach to staffing and equipping the Department of Company Affairs. Companies pay, largely by way of fees, approximately Rs. 300 crores annually. In recommending these increases, the Committee is only asking that services be commensurate with the income from fees charged.

The Government should increase the strength of DCA's offices, and substantially increase the quality and quantity of its physical infrastructure, including computerisation.· This should be accompanied by increased outsourcing of work, contractual appointments of specialists and computerisation - all of which will reduce, though not eliminate, the need to increase the officer-level strength of the Department. · The inspection-capacity of the Department needs to be increased sharply; inspections should be a regular administrative function, carried out largely on random basis. · Officers of the DCA need to go through refresher and training courses regularly. In view of the very dynamic world in which they function, continuous upgrading of their skills is essential

Fraudsters are enemies of both the stakeholders that they cheat directly, and of the corporate sector, which loses because, the fraudsters scare away existing and potential investors. Corporate frauds are so intricate that they can only be unravelled by a multi-disciplinary task force. The Committee, therefore, suggest setting up a Corporate Serious Fraud Office (CSFO), without, at this stage, taking away the powers of investigation and prosecution from existing agencies. A corporate frauds task force has been set up recently in the US.

A Corporate Serious Frauds Office (CSFO) should be set up in the Department of Company Affairs with specialists inducted on the basis of transfer/deputation and on special term contracts.

This should be in the form of a multi-disciplinary team that not only uncovers the fraud, but isis able to direct and supervise prosecutions under various economic legislations through appropriate agencies.

There should be a Task Force constituted for each case under a designated team leader.

In the interest of adequate control and efficiency, a Committee each, headed by the Cabinet Secretary should directly oversee the appointments to, and functioning of this office, and coordinate the work of concerned departments and agencies as described in paragraphs 5.17 and 5.20.

Later, a legislative framework, along the lines of the SFO in the UK, should be set up to enable the CSFO to investigate all aspects of the fraud, and direct the prosecution in appropriate courts.

Good corporate governance is good business because it inspires investor confidence, which is so essential to attracting capital. All the confidence, however, that the good companies build, and the good work that they do over time can be largely undone by a few unscrupulous businessmen, and fly-by-night operators. Such exceptions require to be handed out deterrent punishments. The Committee felt that in doing so, the DCA is hampered as tThere are several weaknesses in law (the Companies Act, 1956) which, the Committee feels, need to be rectified as an important step towards better corporate governance in India. The principle that ill-gotten gains must be disgorged from the wrongful gainer needs to be enshrined in the Companies Act.

Wherever possible, Penalties ought to be rationalized, and related to the sums involved in the offence. Fees, especially late fees, can be related to the size of the company in terms of its paid-up capital and free reserves, or turnover, or both.

Disqualification under section 274(1)(g) of the Companies Act, 1956 should be triggered for certain other serious offences than just non-payment of debt. However, independent directors need to be treated on a different footing and exempted as in the case of nominee directors representing financial institutions.

A stricter regime should be prescribed for companies registered as brokers with SEBI. Greater accountability should be provided for with respect to transfer of money by way of Inter

Corporate Deposits, or advances of any kind, from listed companies to any other company, as a necessary concomitant of the liberalisation that section 372A of the Companies Act, 1956 provides.

DCA's prosecution wing needs to be considerably strengthened. Streamlined procedures be prescribed in the Companies Act, on the lines of the recent amendments to the Code of Civil Procedure.· To ensure that proceeds from illegal acts and frauds do not escape recovery, Companies Act needs to be amended to give DCA the powers of attachment of bank accounts etc., on the lines of the powers recently given to SEBI. Ill-gotten gains must be disgorged.

Managers/promoters should be held personally liable when found guilty of offences. In such cases, the legal fees and other charges should be recovered from the officers in default, especially if the offences pertain to betrayal of shareholder's trust, or oppression of minority shareholders. It is patently unfair that the shareholder is penalised twice, once when spulcted-mulcted, and again to have to incur the legal expenses to defend the fraudster.· Consolidated Financial Statements should be made mandatory for companies having subsidiaries.In such cases, the fees will also be recovered from the officers in default.

Lack of basic statutory compliance, like filing returns with the ROC, is a source of concern as it prevents the stakeholders from discovering corporate misgovernance. The inability of ROC offices to regularly file all the documents received by them makes the situation worse. Strengthening of ROC offices to ensure better compliance has been recommended elsewhere by this Committee. The converse side of increasing strength of ROC offices is reduction in the workload at these offices. The Committee recommends outsourcing of non-statutory work, and tightening the law regarding lapses in secretarial compliance, by inserting a section analogous to section 233A (which permits the government to order special audits), to allow the government to order special compliance audits.

Wherever possible, DCA should consider reducing workload at offices of ROCs by providing for a system of "'pre-certification'" by company secretaries; the system should provide for strict monetary and other penalties on company secretaries who certify incorrectly, even through error or oversight· The Companies Act be amended to enable the DCA to order a "'compliance audit'", much in the same manner as it can order "special audits" under section 233-A of the Companies Act.

The Committee also recommends a number of other steps that, it feels, would contribute to better corporate governance regime; these have been grouped under the head 'miscellaneous' towards the end of chapter 5. Broadly, these cover areas such as preventing stripping of assets, random scrutiny of accounts, better training for articles, and propagation of an internal code of ethics for companies.

Wherever possible, MAOCARO should be amended to provide that auditors report certain violations, such as those listed in paragraph 5.39.

Section 293(1)(a) should be strengthened to prevent any unnatural stripping of assets, or sale of shares by management/promoters

To reduce its workload in ROC offices, as well as to improve auditing standards, the government should consider introducing a system of "'random scrutiny'" of audited accounts, in the same way as is done by the Accountancy Foundation in the UK, or is proposed to be done by the Public Oversight Board in the USA. However, this recommendation should be implemented only if, and after, DCA can take care of concerns such as the genuineness of randomness, client confidentiality etc., and is confident of its own manpower strengths and skills · ICAI should re-consider the limits it has set on the number of articles that a partner can train; something that has the unintended consequence of denying young prospective accountants the chance to train with the best in the profession.

Companies should be required to establish, and publish, an "Internal Code of Ethics".· DCA should sponsor, and financially support, from the IEPF, research on corporate governance and allied subjects that have a bearing on investor/shareholder well- being.

The profession of accountancy in India is dominated by small firms. This has not only opened them to threats of competition from larger better organised international firms, but has also limited their ability to fund top class human resource development. The Committee feels that, in the long run, Indian audit firms will have to consolidate and grow if they are to compete, especially in non-statutory functions, internationally. The Committee makes two recommendations in this regard.

Wherever possible, ICAI should propose to the Government a regime and a regulatory framework that encourages the consolidation and growth of Indian firms, in view of the international competition they face, especially with regard to non-audit services.

The Government should consider amending the Partnership Act to provide for partnerships with limited liability, especially for professions which do not allow their members to provide services as a corporate body.