UMAKANT TRANSPLANT

Colonization resulted in lot of legal transplants, and thereby creates corporate law families
(civil law, common law). Thus, there are several instances of transplants, but not all of them
have been successful. The success of transplants depends on the similarity between local
conditions of the host country and the origin country. Thus, transplants fail if local conditions
are not the same, or if local conditions change drastically post decolonisation. [It is wrong to
assume that every transplant will be successful].

__

Indian Company Law was directly transplanted from England originally. But gradually it
began to move away from English law because a) it borrowed from other jurisdictions b) it
was changed to meet local needs. Thus, now Indian law is different from English law and it
has developed its own native-ness – with time, it is becoming more and more independent
from English law.

Colonial Era

a) Direct Transplant

From 1600 to around 1850, there was no law governing companies in India. Around this
time, because of EIC enjoying a monopoly, lot of companies were not set up only. In 1850,
Act for Registering Joint Stock Companies passed [similar to Companies Act 1844 in
England]. At this time, there was no limited liability. Registration was optional. This act was
ineffective. Companies Act 1857 [similar to CA 1856 England] was enacted giving limited
liability to all companies except insurance and banking companies. When England gave
limited liability to banking companies, after that India also gave. Companies Act 1866
[similar to 1862 one in England] gave limited liability to everyone. Companies Act 1913.
[1908 England]. EXACT TRANSPLANT TILL NOW.

Analysis of the Transplant

 Transplant was to favour British businesses same law, so familiarity, so less risk.
Thus, it was not as if there was no ability to change law; there was no will to change.
 Law was laissez-faire to promote British interests.
 Indian Businesses like HUF suffered because they were subjected to unknown
requirements.

b) Need for change

Several people contributed ideas and capital. Only few were capable of and interested in
management however. Hence, some people managed business. This informal arrangement
became more formal. Managing agencies involved – these contracted with different
businesses to manage them. Managing agencies enjoyed autonomy, powers. They had limited
financial investment but high control. So, they started abusing their powers, enriching
themselves at the cost of investors.

Now, there was need to control Managing Agencies, and since they were peculiar to India
only, transplant was not helping. [There was also no desire to change the law for a very long
time because most managing agencies were British]. However, abuse became too much, and
colonial era was ending so Britishers had to agree to change.

Companies (Amendment) Act 1936 decided not to adopt a wholesale transplant of England
1929. It sought to introduce checks and balances on managing agencies. SO SLIGHT
CHANGE.

Initial Time post Decolonization

Post decolonization, there was distrust for Laissez Faire because it was used to exploit. So,
India changed its model to mixed economy. State Participation. License Raj – private
businesses were there but government had authority. Basically, economic system changed.

DESPITE THIS CHANGE, there was a more or less transplant. CA 1956 was picked up from
CA 1948 in England. However, this transplant was not a mechanical exercise as earlier ones
were, it was deliberate. [Bhabha Committee Report evaluated and recommended a
transplant]. SO, TRANSPLANT BUT THOUGHT OUT. Simultaneously with the
transplant other legislations were exacted.

Analysis –

 India’s policy was mixed. So, it has to have both laissez faire and socialism.
 Hence, there was transplant – because CA was meant to reflect laissez faire. There
were other regulations meant to reflect socialism e.g. Industries Development and
Regulation Act, 1952 (which required licenses)
 Managing agencies were curtailed not eliminated, so there was discontent.

Early 1960s Onwards

Departure from colonial past began. More and more socialist infusion occurred. Two ways.
Legislatively –

 Socialist Amendments to the CA 1956 were made. E.g. provisions related to audit and
investigation, concept of deemed public companies (private companies above x
turnover), amalgamation allowed only if public interest.
 CA (Amendment) Act 1969, managing agency system abolished.
 MRTP 1969 and FERA 1973 made company law more away from Laissez Faire.

Judicially -

 Court said company is a socio-economic institution

 Departure from using English law provisions in interpretations, “shaking off colonial
legacy”

SO, ALL OUT DIVERGENCE FROM UK LAW.

1991 Onwards –

Socialism Ended. We adopted LPG. Regulations now gave more space to companies, and
reduced government control –

 ESOP, Sweat equity

 Differential voting rights
 Buy back
 Deemed public companies concept erased
 MRTP Act eased
 SEBI was created – shift from merit-based regulation of securities to disclosure-based
regulation of securities. So, raising money became easier.

All these provisions made Indian law closer to USA law. SO, WE FURTHER MOVED
AWAY FROM UK LAW (even when we were not socialist anymore).

1998 Onwards –

Corporate Governance Reforms. Initial initiative was by industry only. CII came up with
Code for Desirable Corporate Governance. KM Birla Committee Report. [both influenced by
Cadbury Committee Report, UK]. Indian Regulation, Clause 49, was modelled based on
these. However, it was not a direct transplant again, the UK law was voluntary and Indian
law was mandatory. In 2000s, Scams happened globally. Narayana Murthy Committee
Report. In 2006, revised Clause 49 came into effect. [inspired by USA]
THUS, there is some influence from the UK but it is recognized that what works in UK will
not work in India. Also, we did not borrow only from the UK, we ALSO SIGNIFICANTLY
BORROWED FROM USA.

Hence, we are consciously moving more and more away from UK Law, more so with the
CA 2013.

UMAKANT STAKEHOLDER APPROACH

There are two theories about what the nature and purpose of a company is –

Nexus of Contracts Theory – Company has a private character. It is a network of contracts

governing relations between actors who get together to carry on business. Company law is
private in nature, it promotes private interests. Shareholder interests are the most important,
other interests take a back seat. ALL INTERESTS CONSIDERED; SHAREHOLDER
INTERESTS HAVE PRIORITY.

Stakeholder Theory – Company has a public character. It is a body which affects society.
Company law extends beyond the private realm, it takes into account public interests also.
Company is to take care of not only shareholder interests but also interests of non-
shareholders e.g. creditors, employees, customers, environment, community, without
preferring one over another. ALL INTERESTS CONSIDERED; SHAREHOLDER
INTERESTS DO NOT HAVE PRIORITY.

Colonial Era - England followed nexus of contracts theory. Our laws were a transplant, so
we also followed nexus of contracts theory, and a laissez faire approach. Reason: Protect
British interests (British did not care about Indian society as such, so nexus approach makes
sense)

Immediately Post Decolonization – We still followed nexus of contracts. [Same logic for
following as in the transplant reading]

Post 1960s – Socialism started impacted corporate law more. Corporate scandals further led
to socialistic ideals being infused. We moved to stakeholder theory. E.g. employees got
benefits on winding up, employees had right to be heard in important things concerning the
company like amalgamation, creditors could convert their loans to equity, creditors could
appoint nominee directors on boards of debtor company, public interest became important in
company law e.g. amalgamation, merger could only be with public interest. [Same Act +
judiciary thing as in transplant reading + Amendment in 1976 saying socialist.] Actions of
companies curbed keeping in mind society interests – departure from UK law’s
shareholder emphasis.

Post 1991 – We wanted to encourage investment. Stock markets promoted. Licenses reduced.
[See Transplant reading] So, we briefly went back to nexus of contracts. Shareholder interests
became paramount. Minority shareholder interests also gained weight. However, other
stakeholders were not entirely eliminated. [This was not because we were blindly following
UK law, it was because of our circumstances, that is, LPG]

Post 2004 – Irani Committee Report 2005 was very shareholder centric, with brief mention of
employee interests. Draft CA 2008 Bill was based on this Report so it was also shareholder
centric (nexus of contracts). It said that Directors had to carry on business “fir the benefit of
its members as a whole”.

Satyam Scam. Immediately post this in 2009, Draft CA was presented in Parliament. In the
shadow of the scam, there was a lot of political pressure. Draft Bill was referred to Standing
Committee – here, stringent regulations were introduced, and the view of the nature and
purpose of the Company changed. Now, the changed Draft Bill provided that directors have a
duty “to promote the objects of the company in the best interests of its employees, the
community and the environment as well”. [NO PRIORITY GIVEN TO SHAREHOLDERS]
CSR was also introduced. Bill came back to Parliament in 2011. It was passed. SO, NOT
NEXUS OF CONTRACTS. This approach is a PLURALIST APPROACH (similar to
stakeholder only).

Further, in the CA 2013, Independent Directors also have duties towards stakeholders.
[Schedule IV]. They have to “safeguard the interests of all stakeholders, particularly the
minority shareholders” and “balance the conflicting interest of the stakeholders”.

Given that we are always changing, it is not clear how long this tendency will last.

Comparison with England

England was strongly shareholder centric. In 2009, the Company Law Review Steering
Group considered two approaches –

 Pluralist approach –stakeholder interests are not subordinate to shareholder interests –

broader version of stakeholder approach
 Enlightened shareholder value (ESV) approach – company law should support
generation of maximum shareholder value, and this is also the best means of securing
 protection of all interests (primarily for the benefit of the shareholders, but also
obliquely considers other interests) – combining both the approaches, preserving
interest of one necessarily results in preserving interest of the other. In case there
is a conflict however, shareholder interest prevails.

ESV is followed in England. This is like nexus of contracts only (shareholders are of primary
importance), just with a little more importance to stakeholders. In India however, pluralist
approach is followed. So, Indian corporate law has moved away from NOT ONLY
COLONIAL ENGLISH LAW BUT ALSO CONTEMPORARY ENGLISH LAW

Trends –

 Whenever we borrowed even a little from UK Law, knowingly or unknowingly, we

have pursued nexus of contracts theory
 Colonial origins are VERY VERY shareholder centric, however later we have moved
towards being more stakeholder centric. (pluralist)
 Now there is largely a shareholder focus in UK, in India we are pluralist.
 Whenever there are stricter requirements on companies, there is stakeholder approach.
 The change in purpose is driven by the economic and political imperatives of the
time.

One extreme is nexus of contracts. Other extreme is stakeholders. Pluralism is near

stakeholder only, and is effectively the same. ESV is closer to nexus of contracts, but is not
single-minded shareholder as such.