With the passage of Companies Bill by the upper house of Parliament and the declaration by the corporate affairs ministry that the new Act will be notified along with its rules by 1st April 2014, now we can reasonably hope that the new mother of corporate law in India is almost there to bless the corporate world and to ease the regulators and the regulated of their numerous regulatory woes. So I believe that it’s the time to celebrate, soak in the good feeling and rejoice and it will be worth our while to look at what is being changed and take note of the significance thereof.
As we know the Companies Act, 1956 has been in effect for more than 50 years, but in the meanwhile there have been tremendous changes in terms of: massive rise in sheer number of companies (30,000 in 1956 to nearly 8 lakhs companies now) in operation; national and international economic and regulatory environment; substantial expansion and growth in the Indian economy (till last year we were a trillion dollar economy). But these changes necessitated legislation of the new law because they were beyond the imagination of the legislators and conceptual framework of the law which no amount of amendments (Act of 1956 been amended at least 25 times during its existence) could do justice to the situation. So in view of the changed ground realities, the new companies law, aims to bring suitable changes in regulatory structure for the corporate sector so that there is regulatory harmony, good corporate practices are recognized and incorporated and finally also to incorporate technological improvements in the overall work environment.
Here is a brief description of noteworthy change in the overall structure of the new company law.
A single person may now start her/his company under “One Person Company” as per Section 3 (1) (c) of the new law by subscribing his name to a memorandum and complying with the requirements of the Act. According to corporate experts, it will help bring the unorganised sector of proprietorship firms under the organised version of private limited company. The Section is also expected to give greater flexibility to an individual or a professional to manage her/his business efficiently and at the same time enjoy the benefits of bring a ‘company’.
The concerns related to levelling the play field and giving board level representation to women has been provided by way of Proviso 2 to sub-section (1) of Section 149. This provides for having at least one woman as a director on the board of prescribed class or classes of companies, compulsorily.
As per Section 135. (1) of the new law, every company with net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more, or a net profit of rupees five crore or more during any financial year shall constitute a Corporate Social Responsibility (CSR) Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.
The Board of every company referred to in sub-section (1) shall ensure that the company spends, in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its CSR Policy. This policy shall be formulated by the committee. And it is further mandated that in the event the company fails to spend such amount, the Board shall, in its report made under clause (o) of sub-section (3) of section 34, specify the reasons for not spending the amount.
Schedule VII of the new law provides an exhaustive list of activities which may be pursued by corporations. It includes “eradicating extreme hunger and poverty promotion of education, promoting gender equality and empowering women, reducing child mortality and improving maternal health, combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases, ensuring environmental sustainability, employment enhancing vocational skills; social business projects; contribution to the Prime Minister’s National Relief Fund or any other fund set up by the central government or the state governments for socio-economic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women”.
In addition to disclosures proposed in such report in the Companies Bill, 2009, certain policy level disclosures are permitted. The additional disclosures include disclosure qua a risk management policy like development and implementation of risk management policy, corporate social responsibility policy, manner of formal evaluation of performance of board of directors and individual directors included in the board report.
Accounts of foreign subsidiaries will be attached for filing them with the registrar. Subsidiary to include associate and joint venture for the purpose of consolidation.
Every listed company required to file a return with the registrar regarding change in the shareholding position of promoters and top ten shareholders of such company.
Facilitating raising of capital by companies
Provisions for offer or invitation for subscription of securities on private placement basis revised to ensure more transparency and accountability.
Companies being allowed to issue equity shares with differential voting rights.
Specific disclosure regarding effect of merger on creditors, key managerial personnel, promoters and non-promoter shareholders has been provided.
The Board may have a director representing small shareholders who may be elected in such manner as may be prescribed by rules.
Under Section 206, an investor may complain to RoC against a company and if a fraud is detected, then the offender may also be punished.
Acceptance of deposits from public has been made subject to a more stringent regime.
The central government to have power to prescribe class or classes of companies which shall not be permitted to allow use of proxies. The Bill also to have provisions to provide that
Provisions for Class Action Suits revised to provide minimum number of persons who may apply for such suits. Safeguards against misuse of these provisions have also been included.
Unlike SICA, under the new law, determination of the sickness shall be made on a demand by the secured creditors of a company representing fifty per cent or more of its outstanding amount of debt. The company that has failed to pay the debt within a period of thirty days of the service of the notice of demand or to secure or compound it to the reasonable satisfaction of the creditors, any secured creditor may file an application to the Tribunal in the prescribed manner along with the relevant evidence for such default, non-repayment or failure to offer security or compound it, for a determination that the company be declared as a sick company. Besides, action under SARFAESI is given precedence over the ‘sickness’ provisions under the new law. Besides a contributory fund, Rehabilitation and Insolvency Fund has also been conceived for the purposes of rehabilitation, revival and liquidation of the sick companies which will be created from the contribution of the central government and companies.
Fraud has specifically defined under the new law and punishment has been prescribed under Section 447. Statutory status to Serious Fraud Investigation Office (SFIO) has been granted. It is provided that the investigation report of SFIO filed with the court for framing of charges shall be treated as a report filed by a police officer. The SFIO shall also have power to arrest in certain offences under the Bill which attract the punishment for fraud. Fraud has also been made a cognizable offence and stringent penalty has been provided for related offences.
In addition of a National Company Law Tribunal and an Appellate Tribunal to hear appeals, special courts have been conceived under Section 435 of the new law to provide for speedy trial of offences. These courts shall be presided over by a single judge who shall be appointed by the central government with the concurrence of the Chief Justice of the High Court within whose jurisdiction the judge to be appointed will be working.
As per Section 442 of the Bill, the tribunal or the central government may refer any dispute to a panel constituted with the purpose to resolve an issue between the parties for mediation or conciliation. Such disputes will be resolved within three months from the date of such reference.
The report of the Parliamentary Standing Committee on the Bill contained an important criticism in the form of Note of Dissent from Leftist leader Gurudas Dasgupta. He raised concern about the increasing incidents of corporate delinquency and said the Bill must keep in mind the interests of all stakeholders of the corporate world. The leader noted that certain delinquent elements in the corporate world act in derogation of the spirit of good corporate practices and are found defaulting on loans and indulging in violation of labour laws or manipulation of balance sheets. To tackle these, Dasgupta sought a better monitoring mechanism to counter the menace and to provide for both civil and criminal liabilities to be fixed for acts of corporate delinquency. Whistleblowers, who expose such acts, should be protected by law, he suggested.
The urgent need to restore the faith of public in the representative institutions of the country whether companies funded largely through public money or our Parliament, cannot be ignored. In that light, the Dissenting Note comes across as a challenge to all to be sincere and adopt a sober approach towards public institutions.
Public institutions need not just be nurtured but also allowed to prosper. But that can happen only when laws are followed in letter and spirit.
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