New company law finally approved
4 min read . Updated: 09 Aug 2013, 07:37 AM IST
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Legislation aims to ease the process of doing business in India, make companies more accountable
New Delhi: Parliament approved a long-awaited overhaul of the legislation that governs India’s companies that’s aimed at easing the process of doing business in the country and improving governance by making firms more accountable, making this one of the few reform measures that the Congress-led United Progressive Alliance has succeeded in getting through the House.
The Rajya Sabha approved the legislation on Thursday; the Lok Sabha had done so in December. Once President Pranab Mukherjee gives his nod, the new law—which also promotes gender equality on boards, allows for class action suits and makes spending on corporate social responsibility (CSR) mandatory—will be formally promulgated as the Companies Act, 2013, replacing the Companies Act of 1956.
“The new law will simplify the existing Companies Act, which was mired in complexities and in which several provisions had been repealed," said Mukesh Butani, chairman of BMR Advisors Pvt. Ltd.
The new legislation introduces the concept of an independent director. For every listed company, at least one-third of the directors should be independent, with every such board member allowed a maximum two terms of five years each.
It further requires that independent directors should not have any monetary transaction with the company of a value equivalent to or more than 10% of revenue.
The new law will mandate the setting up of a National Financial Reporting Authority, which will monitor compliance with accounting and auditing standards. It will also have the power to investigate auditors that are registered under section 22 of the Chartered Accountants Act, 1949.
While the new legislation has been pruned to around 470 clauses, compared with 700 sections in the older law, several key changes have been introduced to promote transparency in investments, strengthening the rights of minority shareholders, making it tough for companies to hide illegal transactions, and promoting gender equality on company boards.
A certain class of companies—these will be determined by the rules that are being framed—will be required to have at least one woman on their boards, corporate affairs minister Sachin Pilot said.
“We will encourage companies to appoint women on their boards," he said. A person familiar with the process said the criteria may be based on market capitalization.
Butani expressed doubts about how such a move will be implemented.
The new legislation will, for the first time, also permit class action suits against companies. A class action suit is typically a lawsuit in which a group of people file a claim before a court in which a specific class of defendants is being sued.
Moreover, in a bid to protect the interests of minority shareholders, the new law will make it mandatory for an individual or a group of people acquiring more than 90% of the shares in a company to make an offer to the remaining shareholders to buy them out at an independently determined value.
To ensure transparency, the new law makes it mandatory for the publication of consolidated balance sheets by companies with unlisted subsidiaries.
Another contentious issue that the law addresses is spending on CSR. While such spending has not been made mandatory, it does ask boards of companies with a net worth of more than ₹ 500 crore or turnover of more than ₹ 1,000 crore or net profit of more than ₹ 5 crore, to spend at least 2% of annual net profit towards such activities. While non-compliance will not be penalized, companies will be required to disclose reasons for this.
The new law also caps the tenure of a company auditor to a maximum period of 10 years; the existing law had no such provisions.
“I certainly hope auditor rotation doesn’t become a sham and this is where audit committees will have a critical role to play to ensure due opportunity has been provided to multiple service providers to pitch for the work," David Jones, partner and practice leader at Walker Chandiok and Co., said in an emailed statement.
The new legislation will permit inbound and outbound mergers.
“It would also help group reorganization as it provides for direct merger as well as a more robust process for considering merger," Amrish Shah, partner and transaction tax leader at EY, said in a release. “Even deal making would be smoo-thened as inter-se shareholder rights have been specifically recognized as enforceable."
The industry has welcomed the passage of the Bill. “We commend the government for prioritizing the Bill. It shows the government’s commitment to usher in the new era of corporate regulation," Chandrajit Banerjee, director general of the Confederation of Indian Industry, said in a release.
However, some experts said the new law had fallen short of expectations.
For instance, the provision of non-retiring directors should be scrapped and every board member should be a retiring director, said J.N. Gupta, a former executive director at the Securities and Exchange Board of India and managing director of Stakeholders Empowerment Services, a proxy advisory firm.
“Further, I would have wanted the tenure of independent directors should not be counted from the date of the passing of the Bill, but their past tenure should also be counted," he added.
