New Delhi: India’s Parliament got down to business on Tuesday with the Lok Sabha passing two critical Bills, the Companies Bill, 2011, and the Banking Laws (Amendment) Bill, 2011, although it deferred consideration of the land acquisition Bill.

The new Companies Bill, when it is enacted, is expected to improve the quality of corporate governance by strengthening the hand of the Serious Fraud Investigation Office (SFIO). It prescribes more stringent rules for auditors, and seeks to protect small investors by regulating entities such as chit funds, the oversight of which was previously a grey area. And it also mandates that companies above a certain size spend at least 2% of their net profit on corporate social responsibility activities.

The banking amendment seeks to increase the powers of the Reserve Bank of India (RBI), allowing it to supersede bank boards, which is now expected to issue new bank licences to entities including business houses wanting to enter the banking business. It also makes it easier for banks to recover dues.

Neither measure is a reform in itself, said analysts, but the new Companies Bill does replace an archaic legislation dating back to 1956 with a contemporary and more effective law that emphasizes transparency and investor rights (for instance, the new law makes class action suits possible).

The Bills have also been in the works for some time—the Companies Bill since 2008 and the banking amendment since 2011—and their passage does indicate the intent of the government to get some business done.

The Congress-led United Progressive Alliance pushed the two Bills through with two days remaining in the winter session. The opposition sought more time to study new clauses in the revised land acquisition Bill.

The Bills will have to be passed by the Rajya Sabha before becoming law.

Apart from paving the way for new bank licences, the banking Bill will give shareholders greater say in both private and state-owned banks.

Although the government was also planning to introduce the Insurance Laws (Amendment) Bill, 2008, and the Pension Fund Regulatory and Development Authority Bill, 2011, parliamentary affairs minister Kamal Nath indicated that it would not be possible as the session concludes on Thursday.

The new Companies Bill will be “moderately good" for Indian firms, said Prabal Banerji, chief financial officer at Adani Power Ltd.

The new legislation may not be beneficial for companies that aren’t enjoying government subsidies. However, the new framework will streamline cross-border acquisitions, mergers and reverse mergers, he said.

The Companies Bill is an important and long-overdue milestone, said Amit Tandon, founder and managing director of Institutional Investor Advisory Services, which provides consultancy to minority shareholders.

“It is a step in the right direction," he said. “The Bill is much more contemporary and addresses the concerns raised by people such as lawyers, shareholders, regulators and companies themselves."

To woo the opposition, especially the Bharatiya Janata Party (BJP), the government dropped a controversial clause from the banking Bill allowing banks to trade in commodity futures. The BJP had threatened to oppose the Bill if the government didn’t withdraw the clause.

“In deference to the wishes of a section of the opposition, the government has decided to withdraw the clause although the standing committee has unanimously recommended for it in another Bill," finance minister P. Chidambaram said.

The government also deleted the clause that would have put banking mergers and acquisitions (M&As) outside the purview of the competition regulator. Now, the Competition Commission of India (CCI) will approve bank M&As, except in the case of failing banks.

“RBI will be the regulator for all banking issues, and CCI will be the authority for all anti-competitive practices. We decided in the cabinet that we won’t take out the banking sector from under CCI—that caution of the standing committee has been accepted," Chidambaram said.

The banking Bill will also give the central bank powers to supersede bank boards and scrutinize associate companies of the promoter group. RBI had made the passage of the Bill an essential precondition for issuing new bank licences.

Since 22 November, the start of the winter session of Parliament, stocks of some non-banking financial companies likely to apply for banking licences have risen. For instance, L&T Finance Ltd has gained 20.69%, Shriram Transport Finance Ltd 22.1%, Reliance Capital Ltd 24.9%, Indiabulls Financial Services Ltd 21.54% and India Infoline Ltd 29%. During this period, BSE’s bellwether equity index, the Sensex, has risen 4.58%.

The Bill also has provisions to increase the voting rights of shareholders in private banks to 26% from 10% now. In state-owned banks, the cap on voting rights has been increased to 10% from 1%.

Communist Party of India leader Gurudas Dasgupta cautioned against giving bank licences to large industries, reasoning that RBI won’t be able to keep track of them.

The banking Bill is an important piece of legislation that will lay the foundation for reforms in the sector, said Naina Lal Kidwai, the new president of the Federation of Indian Chambers of Commerce and Industry lobby group, in a statement.

“This will help expand the reach of banking services to the financially excluded," she said. “New bank licences will also provide an excellent impetus to the government’s and RBI’s financial inclusion agenda."

The removal of the forward contracts clause from the banking Bill wasn’t surprising, said Kishore Narne, associate director (commodities) at Motilal Oswal Commodities Broker Pvt. Ltd.

“Reforms have been slow in the commodities sector, and apart from the banking Bill, everyone is frustrated with waiting for the Forward Contracts (Regulation) Amendment Bill," he said.

The revamped version of the Companies Act of 1956 will not only bring about greater transparency in the corporate sector, but will also make companies more accountable. The Bill, which was first introduced in Parliament in 2008, provides for greater protection of minority shareholders and employees, seeks to reduce gender disparity by mandating at least one woman director in certain companies, and makes the rotation of auditors mandatory after every five years.

The Bill has already been hailed by analysts and investors as one that will promote transparency in investments and make it tough for companies to hide illegal transactions.

India will be the first country to mandate corporate social responsibility under the law, minister of state for corporate affairs Sachin Pilot said in Parliament.

It mandates that firms having 5 crore or more profit in the last three years allocate 2% of their profit to “ensure that corporate entities contribute meaningfully" to society.

The law also mandates that companies publish the average salary of their employees along with the current practice of stating the remuneration of their board members.

The interests of small investors, those vulnerable in instances of corporate fraud, will be protected by the legislation, he said.

“All agencies also have to work together so that fraud is able to be detected before it happens," Pilot said.

The law seeks to give SFIO more teeth and create a National Company Law Tribunal.

Although rural development minister Jairam Ramesh tried to push for the acceptance of the Land Acquisition, Rehabilitation and Resettlement Bill, 2011, seen as a crucial measure aimed at boosting infrastructure development and thereby economic growth, the opposition, including the BJP and the Left parties, insisted there had to be a detailed study of the Bill as it had incorporated more than 150 amendments.

BJP leader Rajnath Singh and Samajwadi Party leader Mulayam Singh Yadav suggested that the winter session could be extended or the Bill be taken up in the budget session for a detailed debate. Trinamool Congress’s Saugata Roy suggested it be sent back to the standing committee.

Communist Party of India (Marxist) leader Basudeb Acharya said the amendments were distributed only on Tuesday morning.

“If the government was so keen, it should have brought the Bill to the House in the first week itself. This is a new Bill altogether," he said. Among other things, the original Bill didn’t cover “public purpose" and “manufacturing zone", he said,

The land acquisition Bill aims to provide extra protection for landowners by stipulating that the consent of 70% of landowners will be required for “public-private-partnership" projects, while the approval of 80% of landowners will be needed for private projects. If the government acquires the land for public purpose projects without private participation, it does not require consent.

The law will apply retrospectively to all cases where “no award" has been made under the existing Land Acquisition Act, 1894, according to the new draft of the Bill.

If the land is not used for the purpose for which it was acquired within five years, it has to be returned to the owner or to the land bank, which will be set up by the state governments, said a person familiar with the legislation. It also says the new prescribed compensation package will apply even in cases where payments have been announced, but possession of the land has not been taken or compensation not paid.

Kirthi V. Rao in New Delhi, and Ruchira Singh, Ravindra Sonavane, Aveek Datta and P.R. Sanjai in Mumbai contributed to this story.

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