New company law: More needs to be done
A bill that is aimed at easing the process of doing business in the country and improving governance by making companies more accountable was approved by the Indian Parliament earlier this month.
On August 8, 2013, the Upper House (Rajya Sabha) finally gave its nod to the new company Bill, which will replace the Companies Act of 1956. The draft Bill was first introduced in 2008 and then again in December last year, when it was approved by the Lower House (Lok Sabha). It has now been sent to President Pranab Mukherjee for his nod for the Bill, which will now be known as Companies Act 2013. The new company law will come to effect on April 1, 2014.
The provisions of the new law are significant as they promote gender equality on boards, allows for class action suits and makes Corporate Social Responsibility mandatory. It also seeks to strengthen accounting standards and shareholder rights in a country, where many businesses are controlled by families.
The Companies Law is expected to reduce legislation in a country where it has often been criticized for being outdated and cumbersome. In its new avatar, the Companies Bill now has only 470 sections, instead of 700 in the Companies Act, 1956. The public will have 45 days to respond to the draft rules, after which the rules will be finalised by the Corporate Affairs Ministry.
Industry leaders welcomed the move, but said a lot more needs to be done. KPMG India CEO Richard Rekhy said, “The passing of the Companies Bill is a welcome move. We expect the new Act to improve the state of corporate governance in India. The definition of independence for independent directors is stringent. The Bill also empowers directors with provisions for better exit management; outgoing directors are now required to intimate detailed reasons for their resignation to the registrar. There are several other welcome changes that help better address corporate fraud and the state of internal controls and risk management.”
The Confederation of Indian Industry (CII) has welcomed the passage of Companies Bill in Rajya Sabha. Commending the government for prioritizing the Bill, CII Director General Chandrajit Banerjee said it showed the government’s commitment to usher in a new era of corporate regulation. “The Companies Bill as in its present form is a culmination of efforts for over a decade and we are happy that many of CII’s views have been incorporated in the legislation. Now that the law is ready, it is time to focus and work on the practical aspects of complying with its provisions,” Banerjee said.
The first priority of the government is to get the National Company Law Tribunal going. The NCLT, which proposed to fast-track company cases by replacing the Company Law Board and Board for Industrial & Financial Reconstruction, was caught in a major legal wrangle and finally got the Supreme Court nod in May 2010. The government is trying to create a database of projects that require funding, which can be tapped into by companies as part of their corporate social responsibility (CSR) initiative, Corporate Affairs Minister Sachin Pilot said.
S. Mahalingam, who had retired from TCS as Chief Financial Officer & Executive Director in February 2013, said the new Companies Act will take India in the right direction. “We still need to wait for the formulation of rules under this Act before it becomes a reality. Governance in India needs to be more attuned to the fast pace that we are used to in the world now,” he said.
Some of the major provisions of the Companies Law 2013 are:
CSR spend mandatory: Any company having a net worth of Rs 500 crore or more, or turnover of over Rs 1,000 crore or a net profit of Rs 5 crore, will have to spend 2 per cent of their last three year’s average net profits on CSR activities. Corporate Affairs Minister Sachin Pilot said the government’s intention is not to make CSR mandatory, but it will prescribe a set of guidelines. The CSR committee on the board of companies would have the final say on the projects that can be taken up, Pilot said.
M&As to become easier: The new Companies Bill will make M&As easier as it now allows an Indian company to merge with a foreign company. Earlier, only foreign companies were allowed to merge with Indian companies. Many PE investors have been struggling to exit with many clauses in the shareholder agreement not enforceable. The new law says any contract or arrangement between two or more persons on transfer of securities shall be enforceable as a contract. It empowers private equity investors to enforce various agreements and check misuse by promoters by increasing transparency.
Amrish Shah, partner - transaction tax advisory at Ernst & Young India, told Economic Times in an interview that other laws like FEMA and I-T Act will have to fall in place to trigger a spate of cross-border M&A deals.
The new law will also make it easier for promoters to restructure, merge or acquire companies because only those shareholders who own more than 10 per cent stake or have more than 5 per cent of the total debt will have the power to oppose any scheme of arrangement.
Appoint women on boards: In an attempt to improve diversity and remove glass ceiling for women, the Bill has prescribed companies to appoint one women director. According to GovernanceMetrics International Ratings’ Women on Boards Survey 2013, even on the world’s best-known companies, women account for only 11 per cent of total directorships. In India, a sample of 89 companies with more than $1 billion in market valuation, the women percentage is less than 7 per cent. Whether this will help improve the diversity ratio or women is an entirely different question.
According to a 2011 Deloitte report on “Women in Board rooms”, there are no gender quotas for women on boards or in senior management positions. In fact, European Commission is drafting a proposal where Europe’s listed companies will have to reserve at least 40 per cent of their non-executive director board seats for women by 2020 or face fines and other sanctions. EU data shows that in January, women represented only 13.7 per cent of board positions in large listed companies.
Independent directors: They will comprise one-third of the board members. They have been better empowered to influence corporate governance process. They will no longer be mute spectators but will be strengthened in terms of their liability especially in peculiar situations involving corporate fraud. The maximum number of public companies in which a person can be appointed as a director cannot exceed 10. And s/he cannot be an independent director for more than two consecutive terms of five years.
The new law is expected to improve the state of corporate governance in India. A director on being absent – with or without seeking leave of the Board – from all meetings of the Board during a period of 12 months will have to vacate his office.
Class Action Suits: Had this provision come earlier, minority shareholders of Satyam Computers could have had their money back. But what is even more pertinent about this provision is whether shareholders of government-owned companies can sue the government for squashing minority interests, according to Network18 Group Editor-in-chief (Digital and Publishing) in his blog on Firstpost.com. It is worth recalling the Coal India has been sued by a minority shareholder (The Children’s Investment Fund) for following the government’s diktat to lower coal prices in 2012. There is ample scope for class action suits against ONGC, Oil India and GAIL , which are subsidising losses in the oil marketing companies, he wrote.
TOP 10 FEATURES OF NEW LAW
- Simplifies laws
- Improves corporate governance
- Provides for better and more powerful oversight
- Allows class action suits
- Enforces gender equality (it reserves board seats for women)
- Ensures independence of boards (a third will comprise independent directors)
- Limits the term of independent directors (to prevent them from becoming too close to the management)
- Makes spending on CSR de facto mandatory
- Improves quality of financial statement, which will now include details of unlisted subsidiaries
- Limits the term of auditors