God lies in the detail
Source: By Allwyn Noronha: The Financial Express
With the passage of the Companies Bill, 2012, by Parliament on August 8, 2013, the good news is that finally the country is getting a new company law—something which has been in the making for the past decade or more. The UPA-1 government had initiated steps to overhaul the outdated and complex Companies Act, 1956, way back in its first year in office by constituting an expert committee under the chairmanship of JJ Irani on December 2, 2004. While the eponymous committee undertook its task in earnest in January 2005 and completed its deliberations quickly and submitted its final report to the government on May 31, 2005, it has taken over eight years to translate many of its recommendations into a final legislation. It is probably fitting that the UPA-2 government can claim some credit for getting the new law passed despite several hiccups during the past few years until the Lok Sabha approved the Bill on December 18, 2012.
As most observers and students of law would be aware, the current Company Law dates back to 1956, which, in turn, replaced a much earlier law of 1913. Over the past 60-odd years, though this law has been amended several times, these amendments could at best be considered as minor, sporadic and without a substantive change being made to keep pace with the modern corporate environment within the country and to match the changes on the global level. The recent efforts have been limited to issuance of a plethora of circulars by the government to effectively “amend” certain provisions of the law, which could at best be a backdoor attempt to change the law without bringing about changes in the substantive provisions.
In the current national and international context, there has never been a greater need for a simpler legislation and the mandate of the Irani committee was to review the existing legislation and provide suggestions to simplify the current law, while at the same time bring it abreast with the needs of corporate India. The current new law, though belated, seeks to achieve many of these objectives and a few of the new provisions under the proposed Companies Act, 2013 (new Act) are discussed below. These new provisions seek to break fresh ground and could have a far-reaching impact over the coming years provided they are implemented in the right spirit and intent:
One-person company: This new concept permits an individual to organise his/h 1er business by setting up of a private company with only one shareholder. This form of a company is entirely new to India, though prevalent in other jurisdictions, and would facilitate small entrepreneurs to join the organised sector with such one-person companies.
Subsidiaries: The government intends to specify a class of holding companies which would have limited layers of subsidiaries. This provision could be restrictive for Indian corporates considering that a large number of groups in India have significant number of step-down and special purpose subsidiaries including many outside India.
Transfer of securities: While securities of public companies are to be freely transferable (as in the erstwhile law), the new Act seeks to recognise that a contract or arrangement between two or more persons in respect of transfer of securities shall be enforceable as a contract. This is an extremely welcome provision that seeks to recognise inter se arrangements between shareholders in public companies that have been in vogue for several years in India and would also give considerable comfort to foreign investors, who typically seek rights vis-à-vis their investments.
National Financial Reporting Authority: The new Act proposes to have an apex authority to formulate accounting/auditing policies and standards and their enforcement and also to regulate the relevant accounting professions. This is a welcome provision; however, it is to be seen whether the setting up of such an authority would be effective in enhancing the overall disclosure standards by corporate India.
Governance: The new Act proposes to codify the requirements for appointment of independent directors, much beyond the current requirements stipulated for listed companies. Further, the role of the audit committee has been enlarged and duly codified as has the role of directors in companies. Concepts such as nomination committee (which currently is being done on a voluntary basis by few companies) have been introduced for the first time through this new Act. It is also proposed to permit holding board meetings through electronic means—a long overdue requirement in the current global context. All these new provisions are positive and would help enhance governance standards across India Inc. But, on the flipside, while the government seeks to enhance government standards, it also seeks to restrict compensation payable to independent directors by prohibiting issuance of ESOPs to such independent directors.
Mergers: Greater disclosures have been mandated for schemes of merger/arrangement and the process also requires specified government authorities to be notified of such mergers, etc, with a requirement for a response from such authorities within a specified period. Further, the right to object to such mergers, etc, has been enabled only for stakeholders with a significant stake, thereby reducing the ability of frivolous claims that often seek to arm-twist managements or delay such mergers. There are also separate provisions for fast-track mergers between small companies or for intra-group mergers.
It would now also be possible to effect a merger of an Indian company with a foreign company (currently not permitted under extant law) and vice-versa. Mergers with foreign companies, however, would be permitted only if they are situated in notified jurisdictions and subject to RBI consent. All these new provisions are extremely positive and would enable corporate India to reorganise their structures and companies, including enabling global structuring in a more efficacious manner.
Corporate social responsibility (CSR): This much-debated new provision mandates that companies with a certain size or with a certain minimum profit should constitute a specific committee of the board (with at least one independent director) to undertake CSR activities on a mandatory basis. Local areas where the company operates need to be given preference for such CSR spend. While the rationale of the government to encourage India Inc to increase their CSR activities is laudable, the mandatory requirement for CSR spending would appear to make this provision akin to a tax. Considering that past experience has shown that the government’s own social spending has suggested enormous leakages, it is yet to be seen whether corporate CSR spending will succeed and reach the ultimate intended beneficiaries.
Class-action suits: The new Act seeks to institute a new provision for class-action suits by a specified number of shareholders/depositors against the company/its directors on account of mismanagement, fraud, etc. This is an important provision that would enable such stakeholders to seek suitable protective action against a company/directors and also include claims for damages.
Special courts: It is proposed to now have special courts to deal with all violations under the new Act. This provision could be an effective mechanism to fast-track addressing violations under the new Act provided such special courts are set up in and, importantly, appropriately staffed to decide matters effectively.
As they say the devil is in the detail, and while the new Act has 470 sections as compared to over 650 sections in the erstwhile law, it would seem that there has been an attempt to “shrink wrap” the entire law into fewer provisions. The fact, however, is that in addition to the 470 sections, there is a considerable part of the new law (over 390 provisions), where the government would need to prescribe requirements or notify rules. The full import of the new law, therefore, can only be known once such requirements or rules are published and, after public debate, duly notified by the government.
We will shortly have a new law when the President gives his assent; however, with the process of rulemaking and the process of setting up various bodies including the critical National Company Law Tribunal yet to begin, it may well take a few more months, if not more, for us to truly get our new Act.
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