Community of Interest | Meaning, Features, Forms, Merits & Demerits
Community of Interest is a form of business combination devised when trusts were declared as illegal and were forced to dissolve. Community of interest is an arrangement under which control over different companies is exercised by the same group of persons.
Meaning and Definition of Community of Interest
Community of Interest is a new form of combination in which the business policy of several companies is under the control of some common direction without any central authority being formally established.
Definition of L.H. Haney
A community of interest is a form of business organization in which, without any formal central administration, the business policy of several companies is controlled by a group of common stockholders or directors .
Definition of B.F. Shields
A community of interest is a form of organization in which the separate business units are apparently under separate forms of control, yet, their business policies are largely influenced by the exchange of directors on important question.
Features of Community of Interest
Features of the community of interest are as follows:
1. The constituent companies do not give up their separate existence.
2. The constituent companies are independent and have separate Board of Directors.
3. There is no central organization to control and regulate the working of different companies.
4. The constituent companies have the same persons as directors or managers.
Strictly speaking, community of interest is not a formal agreement in the contemplation of law. It is only a device to obtain control over a number of companies. By this arrangement, However, a de facto combination is effected between the enterprises.
Forms of Community of Interests
Community of interest has taken three different forms. They are
- Inter-locking Directorate,
- Managerial Integration, and
- Financial Integration.
1. Inter-locking Directorate
When a few business leaders by virtue of their shareholding in different companies become the directors of all such companies, it is known as inter-locking of directorship. This is also known as administrative integration.
2. Managerial Integration
When a number of companies are under the same group of Managers or Secretaries and Treasurers it is said to be a managerial integration. Company management through the managing agents was a common practice in India. Now the managing agency system is completely abolished here.
3. Financial Integration
When several companies are financed by one institution or agency a community of interest results in such companies. This is known as financial integration. The financial integration can also be brought through inter-corporate investments.
Advantages of Community of Interest
Community of Interest enjoys the following advantages:
1. This enables the directors to look after the welfare of the competing organization.
2. The development of this scheme shall bring harmony among the various units.
Disadvantages of Community of Interest
In contrast to the few advantages, it suffers from many drawbacks. The important criticisms leveled against this system are as follows:
The effectiveness of this system largely depends upon the goodwill and confidence among the parties. Hence it is not stable. Besides, it may not be effective in all cases. If complete control over all the companies is not gained, this system cannot prove successful.
2. Exploitation by Dominant Groups
Dominant groups may be tempted to exploit the constituent companies for their own benefit. This had been the sad experience of many concerns tied together by the managing agents of India.
This system operates from behind the scene as such secrecy surrounds its workings. The existence of this combination itself cannot be proved and it is really difficult to identify the persons responsible for it.
Above all, community of interests paves way for the growth of monopoly houses. The Government of India is also taking concrete measures to check the unwarranted growth of community of interests by suitably amending the Companies Act.