Corporate India will finally be governed by a new Act after 56 years of complying with Companies Act, 1956. Under Sachin Pilot, the Ministry of Corporate Affairs has achieved that which several attempts in the past failed to do. With the Rajya Sabha giving its assent to Companies Bill, 2012 on August 8, the Bill now only awaits the President’s assent to become the new law.
The Bill envisages significant changes aimed at greater accountability, additional disclosure norms, investor protection, e-governance, facilitating mergers and acquisitions, corporate social responsibility and so on. It has simplified several archaic and tedious administrative processes, providing significant respite to corporates in day-to-day compliances. It has adopted principles such as self-governance and ‘comply or explain’, which developed countries have used with some success.
A significant effort involves incorporating in the Bill some of the salient requirements mandated by SEBI in clause 49 of the Equity Listing Agreement. The Bill recognises the importance of independent directors in the current governance structure. It acknowledges that the role of independent directors should be distinguished from other directors in terms of appointment, duties and liabilities. It seeks to keep their appointment independent of the company management by constituting a panel or data bank, which might prove difficult for corporates. Even with the enhanced responsibilities, independent directors would not be entitled to stock options; however, they may get fees and profit-linked commission subject to limits. The Bill also proposes a code for independent directors.
The mandatory appointment of a woman director will go a long way in encouraging gender diversity.
For mergers and acquisitions, there are changes aimed at simplifying and rationalising the procedures involved, as well as ensuring higher accountability from the company and majority shareholders, and greater flexibility for corporates. The provisions have simplified cross-border mergers, introduced squeeze-out provisions, the need for certifying accounting treatment and so on. All mergers and acquisitions should go through the National Company Law Tribunal, which will be constituted.
With respect to financial statements, the changes have serious implications such as the need for every company to follow an April-March yearend and prepare consolidated financial statements if there are subsidiaries. This is likely to substantially increase the cost of compliance for private companies. Further, where it varies with the accounting standards, there will be challenges in implementation, particularly over the manner in which subsidiaries and joint ventures have been defined.
The Bill has proposed stringent measures to increase auditor accountability, including mandatory auditor or audit firm rotation. However, there are questions over whether this will help increase objectivity, independence and professional scepticism, which are fundamental to audit quality. The Audit Committee is required to act in accordance with the terms specified in writing by the Board, such as examining the eligibility and independence of the auditor and recommending the appointment to the Board. The accountability of an auditor has been increased substantially by restricting non-audit services, and increasing the penal provision manifold, including debarring the audit firm.
The Bill has also increased the accountability of the company in general. The provisions for dealing with fraud are significantly more stringent and will prove an effective deterrent.
Another significant change relates to corporate social responsibility. The concept of requiring companies to spend a specific amount on CSR does not find favour in corporate circles.
The Bill has introduced several new concepts such as class action suits, registered valuers, one-person company and so on. It has empowered groups of shareholders to take legal action in case of any prejudicial activities by the company, and to take part in investor protection activities and class action suits.
It is interesting to note that the entire impact of the proposed law is still unknown, as the Rules have not been issued yet. Generally, the rules are considered merely an elaboration of administrative procedures. However, in this case the length of the Bill has been considerably reduced by delegating several substantive portions to the Rules. It follows that to realise the true impact of the proposed law, it has to be read in conjunction with the Rules. The changes proposed in the Bill have far-reaching implications and will significantly change the manner in which corporates operate in India.
The author is Partner, Price Waterhouse
Madhuri Ravi, Senior Manager, contributed to the article