Mumbai: Corporate affairs minister Sachin Pilot said on Monday that he was confident of getting the new Companies Bill passed in the Rajya Sabha, or the Upper House of Parliament, in the forthcoming budget session, which begins in February.
“I shall not fail you,” Pilot said in Mumbai on Monday while speaking at the awards function for India’s best-managed boards, organized by Aon Hewitt and Mint. “This is a dynamic India and a new law is required. The last time a law like this was written was in 1956 and, from then till now, there are 850,000 registered companies in India.”
Pilot said the new law aims to address the transformations that have taken place such as the emergence of e-commerce companies that do business in India, but may be present outside the country or have no physical presence here at all.
The minister pointed to a similar law that was passed in the UK in 2007, which had 1,500 clauses, while alluding to the criticism that the new Companies Bill has attracted for being voluminous. He said that, in comparison, the proposed legislation contained only 470 clauses.
Pilot also acknowledged that not enough had been done in India to spur the growth of small and medium enterprises and an enabling environment was needed for the provisions in the proposed new law to take effect, and if 10-15 million new jobs were to be created within the country to maintain economic growth.
He cautioned against a “fear psychosis” being created in the minds of companies looking to do business in India due to the various approvals and licences that were needed to start a business.
Referring to India’s ranking of 132 in the World Bank’s list of 185 countries in terms of ease of doing business, Pilot said that India didn’t “deserve a place at the bottom of the stock” and a single-window mechanism was the need of the hour to clear investment proposals.
Touching upon the aspect of corporate social responsibility (CSR), Pilot said that his ministry was working on a database that will have details of worthy projects, non-governmental organizations and best practices followed in different states, which Indian companies can refer to while deciding on their strategy. The Companies Bill requires that a part of corporate earnings be set aside for CSR activity.
“There are companies that are keen on delivering such CSR activity in their area of operations, but the question is how do they find the right agencies or projects to partner,” Pilot said. Another purpose that the database will serve is to get more companies to join hands in contributing resources for a good social welfare project.
The ministry is also working on a template to be posted on its website that will require companies to clearly spell out what CSR project they have undertaken, how much they have spent on this and what tangible benefit has arisen from it.
Dispelling the notion that the government was trying to dictate to private companies what they should do on CSR, Pilot emphasized that the government would adopt a “hands-off approach” and companies would have to self-report and self-comply in this aspect with the help of a CSR committee to be formed at the board level.
Pilot also stressed the importance of the compensation committee that the new Companies Bill would require corporate entities to form as part of an effort to ensure transparency on salaries paid to top executives. Under the provisions of the Bill, companies will also need to provide the median wage of employees, to help shareholders compare compensation levels across the organization.
Y.H. Malegam, a chartered accountant and chairman of the National Advisory Committee on Accounting Standards, cautioned against laws on corporate governance getting too detailed. If this happens, it could lead to a “checklist mentality” among companies that merely look to comply with regulations rather than enforce them in spirit, said Malegam, a member of the best boards jury.
He further recommended that a board should comprise directors from diverse backgrounds—with domain knowledge as well as information technology (IT) know-how— considering companies were increasingly relying on IT for operations.
Companies should also educate their directors in the functioning of the business to empower them to take informed decisions, and this may also happen through organizing board meetings at operational sites rather than the head office, Malegam said. He also advocated a system of peer review whereby directors on a board can evaluate each other’s efficiency as well as self-assessment.
Investor Rakesh Jhunjhunwala, chief executive of Rare Enterprises Ltd, said good corporate governance at companies “is most critical” in improving earnings per share for investors. When companies are being run with public money, all risks and methods to create wealth may not be prudent and that is where governance standards become important, Jhunjhunwala said.
Private equity investors such as KKR India are refraining from investing in sectors such as real estate and infrastructure in the country due to certain industry practices that compel companies to circumvent best corporate governance practices.
“If the corporate governance is going to be bad because of the prevailing ways in that industry, we will skip the opportunity of investing in that growth sector,” said Sanjay Nayar, chief executive of KKR India.
Uday Kotak, vice-chairman of Kotak Mahindra Bank Ltd, said the test of an entity’s corporate governance standards comes during economic tribulations. He said a large number of companies were ascribed high valuations by investors during the bull run beginning 2007 for factors such as political influence. These companies saw a sharp plunge in their stock prices when markets fell.
Nayar observed that boards in India had a long way to go before they became really effective. There isn’t enough “frank dialogue” at the board level with minority and institutional investors who can add strategic value to the operations of the company.