The Companies Bill provides a much needed fillip to corporate governance. It enhances the role of independent directors and audit committee, encourages disclosure and transparency, and introduces several new concepts such as corporate social responsibility (CSR), and auditor rotation.
Corporate social responsibility
This was one of the most debated points in the Bill. Companies crossing the specified threshold limits of net worth/ turnover/ net profit have been mandated to contribute 2 per cent of their average profits of the preceding three years towards CSR activities listed in the Companies Bill.
This applies to private and public companies. The board of directors would have to specify reasons in case of non-compliance, and companies that do not report will face severe penalties. The law makers have clearly taken the ‘comply or explain’ approach, in line with the UK and other commonwealth nations.
There seems to be sound rationale behind directing companies to give preference to the local area. The hope is that companies will use the opportunity to contribute to social causes, and not as a mere ‘tick in the box’.
Rotating auditors
For listed companies, rotation of auditors is proposed to be made mandatory. Companies would be given a period of three years to make the transition. There were counter arguments, such as steep learning curve for new auditors, increase in audit cost, and so on, which seem to have been disregarded.
Statutory compliance
Regulatory violations can result in the imposition of penalties, and prosecution of senior management, leading to irreparable damage to the reputation of a company. The proposal to enhance the scope of the directors responsibility statement, to include an affirmation with respect to proper systems to ensure compliance, is a step in the right direction. Currently, clause 49 of the Listing Agreement mandates the boards of listed companies to review compliance reports at periodic intervals.
Other measures
There are several liberal measures, such as one-man company, electronic maintenance of records, and fast-track mergers that are futuristic.
Another notable change is the removal of ambiguity in the status of private companies that are subsidiaries of public companies. Such companies can now retain the basic features of a private company in the Articles of Association.
Concerns
In a number of clauses, there are references to rules that will be framed in future. Clearly one cannot comment unless the rules are prescribed.
However, prima facie , this approach is fraught with a couple of risks — first being uncertainty in governance, and second, the undesirable phenomenon of executives stepping into the legislative domain.
Another concern is that private companies will be subject to greater control and regulations. Presently, private companies are subjected to a more liberal regime based on the logic that these companies do not access public funds, and thus public interest in them is minimal.
SEBI consultation paper
Listed companies are also regulated by SEBI, and there are instances of overlaps in the proposed amendments in the Bill, (for example, independent directors, audit committee, insider trading and so on).
In a proactive and consensus-building move, SEBI has floated a consultation paper on review of corporate governance norms in India, with a view to addressing inconsistencies vis-à-vis the Company’s Bill. In the interim, corporates would have to follow the stricter provisions to be on the right side of the law.
Satyavati Berera is Leader Risk Advisory Services, PwC India