New Delhi: India’s new Companies Bill, which will overhaul the Companies Act of 1956 that governs business entities, was passed by the Lok Sabha in the recently concluded winter session of Parliament. To become law, it needs to be approved by the Rajya Sabha as well, likely in the forthcoming budget session. Corporate affairs minister Sachin Pilot in an interview spoke on various aspects of the new legislation and the government’s other initiatives. Edited excerpts:
In the new Companies Bill, the Serious Fraud Investigation Office (SFIO) is set to get more powers. In India, however, implementation is an issue. What is the government doing to ensure things actually work on the ground?
The word governance has traditionally been identified with the government. Increasingly now, in the corporate sector, good governance is the need of the hour in the country. I believe there are some elements who try to misuse the existing law. So many cases of corporate fraud have come to the forefront.
The SFIO, as a unit, I think, needs further strengthening. The fact that we all try and chase the guilty party once the fraud has happened is not sufficient. We have to be proactive in terms of identifying the likely pressure points where malpractice is to happen. So, as a deterrent, the SFIO needs to be strengthened.
I don’t think the idea is to create a fear psychosis in the corporate world. When there are regulations to ensure compliance, then the surety of punishment is a much bigger deterrent. It has to be an organization that instils confidence in the corporate community. Any corporate entity that tries to misuse the law should be brought to justice swiftly.
Are you looking at raising the budget for the SFIO?
Even when I have enough sanctioned positions, we need more resources. I have spoken to many agencies which are going to cooperate with the SFIO. I have written to the concerned minister for tying up Natgrid (National Intelligence Grid) and Cert-IN, which is the (Indian computer) emergency response team. We are also looking at state police forces and the economic offences wings. Whatever information exists in either of their domains must be shared.
Within the SFIO, we are establishing a market and analysis research unit. This new unit will do the data mining of all the transactions that happen today, including wire transfers, changes in shareholding, transactions on the MCA (ministry of corporate affairs) website and bank transactions. Everything is happening in a digitized mode. So there are ways for us to understand what the landscape is.
My biggest concern is the smallest of our investors, say, a retired school teacher who invests say Rs.20,000 in a fund. Once the investment is lost, you can put the company directors and the chairman in prison for 20 years, but the money of the poor person is lost. So, therefore, we now have the Investor Education and Protection Fund, and it is going to be given the responsibility of making sure that the capacities of people to understand the wrong investments that they are making are well in place. I am going to have workshops across the country. I have told the secretary (of corporate affairs) that this fund must be working along with Sebi (market regulator Securities and Exchange Board of India) and the state governments because the chit funds are regulated by the state governments. I am going to start next month from the eastern sector of our country.
The corporate affairs ministry is drafting rules in the light of the fact that the Companies Bill has been introduced in Parliament. Could you throw some light on what major changes are likely to be made in it?
These rules are a subordinate legislation. But let me be very clear, the rules are not going to be the baby of the government alone. They are going to be made in full consultation with industry, the chambers of commerce, public at large, NGOs (non-governmental organizations). Anybody who feels that they have a stake can come and give their views.
So the drafting of the rules will not happen behind closed doors. It cannot be opaque. It will have to be publicly displayed, transparently done, and as much consensus as possible must be attained before we draft the rules because the devil is in the detail. Even if there is opposition to what we have said, we are happy to look at it.
How will you ensure companies follow corporate social responsibility (CSR) norms outlined in the new Bill, especially the 2% cess? There has been speculation that there could be tax sops for such companies. Could you clarify?
Let me just correct you, it is not a cess. The 2% is not something that anybody is giving to the government of India. If you qualify as a company for this, it is your money and you decide how to spend it. It’s a contribution that their conscience should approve for them to spend anyway. This is an evolving concept.
India is perhaps the only country in the world to have CSR in a statuette. Other countries that have some loose legislation are Indonesia and France. I believe that a company that has a turnover of Rs.1,000 crore and an asset value of Rs.500 crore, and has been making a profit of Rs.5 crore and above for three years, is not a company in gestation period. It’s a well-established organization. This is for a company to be able to spend 2% of its profit in doing things in which it believes principally its ethos lies.
We are making sure that there is a CSR committee in the board. The committee will approve the projects. We have urged the companies that please do not be philosophical in your CSR activity and (this) should rather be project driven, timeline driven, and tangible benefits should be identified before the work starts. Everybody I have met is happy that they have been given the opportunity to spend and do things as they like. I don’t want to impose what CSR should be. This is a leap of faith.
Is the government moving any closer to defining lobbying and what constitutes such a practice, especially in light of the recent disclosures related to Wal-Mart?
Lobbying as a concept has not been defined in India. Many countries have a very strict and a very clear definition. It’s time when we as a nation think about whether we want to have lobbying defined, regulated, or whether we want to leave it as vague as it is, because then it has all sorts of connotations. Advocacy of a certain policy, speaking for the rights of certain issues, the negatives and positives of a law that is coming into place, that sort of advocacy is happening as we speak. But time has come, I think, when we need to think about having a clear definition of what lobbying is.
You are a Wharton graduate and now an agent of the Indian state. Do you actually see Capitol Hill-style lobbying coming to India?
You can’t compare India to any other country in the world. But because we operate in a global environment, and the economies are getting intertwined, the best way to avoid controversies and to have a clear demarcation of right and wrong is to have a legal definition of what the term means. That is my personal view.
But as a government, there is no formal move on it. I cannot, however, comment on what I discuss with my colleagues informally. But you see, advocacy is something we do all the time. There is no harm in people’s groups and associations coming, but if they are batting for a policy, then they must openly come out and say what they stand for.
In the new Companies Bill, a provision for the incorporation of a one-person company has been included. How will that help?
For an entrepreneur who has got a good idea, or an artisan who wants to do something as a corporate, why must he or she only be doing proprietorship or an Llp (limited liability partnership)? For small-scale companies or an individual, they can get a formalized structure for doing business. This is a new concept, and I am very excited about it because it will give a lot of encouragement to young people who don’t want to get into compliance issues of audit and filing and returns.
Do you see class-action suits becoming a norm in India. Will they be beneficial for minority shareholders?
I don’t know if they will become a norm. We have also said that some companies can have directors representing the minority shareholders. A class-action suit is a very well prevalent global phenomenon and a very important aspect of the Companies Bill.