The Companies Bill, 2012 is likely to have a broad spectrum of effects on the Boards of directors of companies. The Bill mandates the appointment of at least one woman director to achieve gender equality. At the same time, to discourage inappropriate practices, it now proposes that any person who fails to get elected as a director in the general meeting can no longer be appointed as an additional director. With regard to the appointment process for independent directors, the Bill specifically requires the constitution and maintenance of a panel or data bank of independent directors by the Ministry of Corporate Affairs, from which companies can appoint them. A drawback of constituting such a panel is that it may discourage people from registering with the panel, thereby limiting the options available.
Similarly, with the intent of strengthening governance norms, and to bring the constitution of the Board on par with international capital markets, the Bill:
Lays down code for independent directors;
Identifies the requirement for the Board to exercise judgement on whether the independent director is a person of integrity, or has relevant expertise/ experience;
Acknowledges the importance of the audit committee, and entrusted it with additional roles and responsibilities.
However, the Bill fails to achieve synchronisation with other legislative guidance, such as Clause 49 of Equity Listing Agreement and Corporate Governance Guidelines, 2009. It also fails to acknowledge the hardship that would be faced by Boards while evaluating the integrity of an individual.
The Bill also puts forth additional compliance requirements for private companies, which, until now, were mandated only for public companies and/ or private companies that are subsidiaries of public companies.
Appointment of director to be voted individually;
Option to adopt principle of proportional representation for appointment of directors;
Ineligibility on account of non-compliance with section 274(1)(g) of the Companies Act, 1956.
Another significant area of change is that of appointment and remuneration of managerial personnel. The provisions for appointment of managing director, whole time director, or manager are no longer restricted to public companies and private companies that are subsidiaries of public companies — they are now applicable to all companies.
With respect to managerial remuneration, the Bill mandates that listed companies disclose the ratio of remuneration of each director to median employee’s remuneration and other prescribed details in their Board report. Furthermore, the existing restriction under section 309 of the Companies Act, with regard to receipt of commission from the holding company and from the subsidiary company, has been removed and the requirement is restricted to disclosure only.
The Bill contains stringent provisions in case a company is required to restate its financial statements pursuant to fraud or non-compliance with any of its rules. In case of such a restatement, the Bill enables the company to recover the excess remuneration paid (including stock options) from any past or present managing director, whole-time director, manager or chief executive officer, who has acted in such capacity during the period for which the financial statements have been restated. The current Companies Act holds no such provisions.
There are also welcome moves in the area of liberalisation of administrative procedures. There is a relaxation for obtaining Government approval for managerial remuneration, provided companies comply with certain conditions.
Further relaxations have been given for obtaining Government approval for related party transactions, falling under the purview of sections 297 and 314 of the Companies Act. The Bill has widened the ambit of these transactions to include leasing of property of any kind, and appointment of any agent for purchase and sale of goods, material, services or property.
Ridhima Dubey, Senior Manager, contributed to this article.
Harinderjit Singh is Partner – Price Waterhouse