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Issues and reforms in Company Act and Private sector development

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AKM Asaduzzaman Patwary

Research fellow, Head of R&D, DCCI.

company_actBangladesh is one of the forefront economies in modern transitional world. Our economy encounters various hurdles and challenge that cripple our economic potentials heralding our economy in unwarranted direction. Private sector has always been considered as the proven strength in our existing economic expedition as private sector contributes around 24% of our Investment to GDP ratio whereas government does only 7% and private sector investment hovers around 24% since ages. Though Industrial growth is critical in pursuing our economic dynamics including trade growth, internal resource mobilization, tax collection and new business and venture development, major socioeconomic indicators, the pace of its growth is below the expectation as private sector is laden with manifold challenges. Of the many challenges, the private sector business growth in terms of new company registration, capital formation and substantial growth are not happing in recent years at a required scale. The corporate business development in all possible forms like private and public limited, subsidiary and single business and joint venture, merger and acquisition is insignificant alongside FDI led foreign business and MNC development have witnessed an unhealthy trend with stagnation.  

$274 Billion sized Economy of Bangladesh is contributed by formal and informal economic operations. The contribution of SME in GDP is estimated around 30% and informal economy is around 35%. The range of informal economy is enormous as the corporate business culture has not grown as expected nor corporate business friendly integrated eco-system till to date. Infromal Businesses and SMEs have surged more than formal businesses in Bangladesh since there is no fundamental single law with the scope to incorporate businesses of all nature irrespective of private and public, Large small and Medium in Bangladesh. The existing Companies Act 1994 in Bangladesh has been based on Companies Act 1913 which adopted the fundamentals and idealism of English Companies Act and Indian joint Companies Act 1844. This century old Companies Act is limited to few forms of limited companies and unable to cater cross-sectional businesses in Bangladesh.

Legal experts and company act complying conventional businesses raised deep resentment and new generation businesses feel a modern, timely and locally tailored company act in the view of growing private sector emergence and need of time.

Bangladesh off late has made consistent economic stride with remarkable 7% plus GDP growth justifying a positive economic trend. Based on this growing trend, Bangladesh envisions to be a Middle income economy by 2021 and graduating into developed economy by 2041 underpinned by massive export oriented indsutrialisation and investment where trade is the centre of attraction to enhance the trade to GDP regime. In line with these cherished visions, companies act needs to be massively reformed for improved and secure business environment. And, the nexus of our impoverished ease-of doing business ranking and corporate business culture happened due to old-fashioned and ineffectual Companies act.

Companies Act is one of the important and over-arching pre-conditions for enabling corporate governance. Companies Act is the legislative document to govern different types of companies, regulate incorporation of company, and outline the capacity of the company. For inspiring business and investment growth, 50% trade to GDP ratio to be realized, the joint venture, foreign and local merger, take-over are remarkable moves in inclusive and sustainable business development predicted.

The proposed company bill requires intensive reforms as it raise huge concerns among all stakeholders, practitioners and users of this law.

There are some salient features of the proposed companies bill are protection of Basic legal provisions regarding the right and ownership of shareholders of companies, right to a secure method of registration of ownership and transfer of share; obtaining audited financial statement and other relevant information, voting rights in the general stakeholder meeting; share the profit of the company and corporate governance to protect the capital market.

Most of the people perceive the law very robust, illegible, ambiguous to large extent and partial too. This proposed law can worsen the cost of doing business and process due to complex nature and lengthy process of company registration. Bangladesh ranks in bottom rung of Ease of doing business condition over last couple of years due to challenging business startup process raking 133. Of the many concerns, the much debated screenshot-58concerns which can adversely affect the smooth business operations of both private and public limited companies are as follows:

  • Adverse and risky responsibilities of auditors which can lead to rivalry among the companies, investors, audit professionals and Government.
  • Minority protection is essential for protecting the small group of investors in large companies and proposed Company Bill gives extreme protection and privilege to the minority group of shareholders which assumed to abuse and exploit in many instances and affect the smooth business operation of renowned companies.
  • Anti-Corruption Commission (ACC) has been engaged in inspection and any litigation or suit in the ground of suspicion and right investigation has failed. The ACC cannot file any allegation against the Government officials without permission of Government and this is against the spirit of rule of law.
  • Unlimited liability needs to be repealed and the Companies Bill contemplates single shareholding company and single shareholder would be one person. This means that a single shareholding cannot have a holding company.
  • Limitation in flexibility to use technology like e-voting, video conference for shareholders’ participation in the AGM and EMG of listed companies.
  • Liquidation process of the company is very cumbersome.
  • Provision of Merger and amalgamation of companies has not been well clarified in case of local and foreign partners and asset valuation process.
  • In case of securing bank loan for the company, director needs to provide personal guarantee with Bank as additional security contradicting limited liability concept of private limited company which add business liability burden and cost of business.
  • One Bench of High Court Division deals company litigations resulting serious backlog of cases which questions justice and disinterest foreign investors.
  • Company act does not look friendly and pro-capital market for venture and equity capital formation at more affordable cost than banking sector backed debt capital.

In the view above, the recommendations can be as follows for easing pro private sector ambience:

  • Inspection, Inquiry and Investigation, conduct of inspection allow both fiscal and non-fiscal punishments which need to be addressed as unnecessary judicial harassment hurt business trend.
  • Businesses are usually subjected by various regulations as absolute power from regulations creates absolute discomfort the business. Most of the existing regulations give extreme authority to government officials and engagement of ACC could lead biasness and abuse adding fuel to flame in the business perspective. Provision of ACC for extreme investigation could be prerogative of court.
  • Voluntary winding up of the company process needs simplification.
  • The foreign company and local company merger needs to be subject to check of the company profile, credit report check and discouraging this creates risk to local businesses.
  • Corporate governance needs to be established in order to discouraging the practice of personal guarantee in Limited Liability Company.
  • Companies may be categorized as small, medium and large, depending upon manpower and size of business, capital, profitability, turnover, etc. Company size should be treated differently so far as compliance are concerned accordingly compliance burden will be rationally proportionate and minimum for respective business.
  • SEC has got extreme power to oversee the Capital Market specially DSE and CSE operations in case of companies involved in malpractice and subversive activities. The company act should not have any supreme provisions contradicting the power of SEC.
  • More company law benches with full-fledged support facilities needs to be introduced in order to expedite the disputes and suits alongside encouraging conciliation, and arbitration process as ADR mechanisms.
  • Businesses irrespective of size should ensure access to capital market vibrating the lethargic capital market.

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  • Aligning Central Depository System (CDS) with traditional system and covering various reports and returns for Registrar of Joint Stock Companies & Firms (RJSCF).
  • The proposed act should be well-defined, precise and accurate as well users’ friendly in both Bangla and English language aligning with context of Bangladesh.
  • The Act must favour the private and public sector business development with balanced interests of all stakeholders.
  • In line with digitalization era, E-technology backed provisions should be allowed as time and cost effective means.

The aforesaid reform initiatives of Government are required to update the Companies Act 1994 considering growing private sector context in global trade landscape. The proposed reforms are expected to heighten our economic drivers and indicators including doing business and business freedom and economic vulnerability indices and other relevant factors and paving solidification for private sector led all major economic visions. Since Bangladesh is heading to immense trade and industrial trajectory due to strategic regional and sub-regional trade and investment importance of Bangladesh, investment feasibility, industrial relocation and demographic dividend can leverage and privilege all Asian developing economies as next business home. In this context, the core Companies act can give relief of sigh and height of aspiration among all potential investors. Since this amendment discourse of the given Act continues more than a decade, the implementation the given Act without any further delay is essential to end up Bangladesh into new stature of business excellence through realizing promises of our prestigious and competitive investment hub in the years to come.

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