Companies Bill one step from reality

Companies Bill one step from reality

New Delhi: India’s government on Thursday introduced the Companies Bill, 2008, a legislation that, if approved, will define and regulate the way companies are structured and do business, and replace a 52-year-old law that currently performs these functions.

Work on the Bill, which makes it easier to start and close firms and protects the interests of shareholders and investors, started four years ago.

The Bill, which seeks to make firms and their promoters more accountable by making them responsible for their own behaviour and actions, will affect around 700,000 firms and significantly more individuals.

“In order for Indian companies to be competitive enough to attract investments, the basic principles of internal governance and a framework for their regulation in consonance with sectoral regulation have been applied in the Companies Bill, 2008," said Prem Chand Gupta, India’s minister for corporate affairs. He added that The Companies Act, 1956, was amended 25 times before the government decided to have an altogether new Bill.

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Among the provisions in the Bill is one related to the creation of one-person firms.

“This will allow an entrepreneur to set up his own company and be liable only for his actions," said Gupta. Currently, at least two people are required to open a company, even if it is a partnership.

The Bill also seeks to make promoters of firms more responsible by prohibiting insider trading, thus far barred only by the stock market regulator, but not by the Companies Act, and bars them from raising money from the public without getting requisite approvals. The Bill makes it compulsory for directors of companies to obtain a director identification number from the ministry. This is the equivalent of the permanent account number used by the income-tax department, and the ministry is hoping to use this to check frauds.

The Bill also empowers shareholders by allowing them to initiate class action suits against promoters.

In the past, there have been several instances when companies vanish after raising money from public or default on repayments. One such company, Delhi-based Morepen Laboratories, raised money through fixed deposits but defaulted on payments. The case came up before the Company Law Board (CLB), which ordered Morepen to repay the money. “After Morepen didn’t honour the CLB order, the case was referred to the judiciary and is now before the Supreme Court," said an official at the ministry of corporate affairs (MCA) who did not want to be named.

The Bill has also proposed that at least one-third of the directors in companies listed on the stock exchange be independent. It also seeks to accelerate mergers and amalgamations and the speedy incorporation and winding up of firms. “From the insolvency point of view, this is a big leap forward. Now, the exit law will be in consonance with the entry law and benchmarked against international practices.

At the same time, the Bill sends a strong message that non-compliance of company law will be treated seriously," said Sumant Batra, managing committee member of industry lobby Assocham. The Bill also facilitates easy transition of companies from one form to another. “For instance, if a body corporate wants to transform into a limited liability partnership (LLP) firm or the reverse the law will make it easy," added the MCA official.

The government on Tuesday introduced in Rajya Sabha the LLP Bill which, if enacted, will help promoters form a new type of entity, falling between a so-called body corporate and a partnership, but enjoying the benefits of both.

“The Companies Bill, 2008, has proposed some far-reaching changes in the statutory framework and is expected to address the business and investor community’s desire for a more contemporary and effective regulatory environment. It primarily seeks to reduce government control over corporate processes, impart greater transparency, focus on corporate governance, stricter compliance requirements and greater accountability to stakeholders," said Rajiv Memani, chief executive and country managing partner, Ernst and Young.

The Bill is largely based on recommendations made by an expert committee headed by JJ Irani, director, Tata Sons. Irani could not be reached for comment on Thursday.