Companies Bill : A push for accountability

Duping thousands of investors of crores of rupees by artificially inflating share prices and falsifying company accounts for years under the garb of friendly management-auditor relationship — that was Satyam scam of 2009 in nutshell —, the country's biggest ever corporate fraud.

In more recent times, there was the multi-crore Saradha chit fund scam, which brought to the fore how a few individuals  cheated small-time depositors by taking advantage of loopholes in the existing corporate laws.

These scandals, along with many others, have no doubt, exposed the shortcomings of India’s legal and regulatory systems to tackle corporate wrongdoings, but also made lawmakers smarter and nudged the government into coming up with stringent laws to deal with fraudulent enterprises, individuals and fly-by-night operators who cheat unsuspecting investors. The Companies Bill of 2012, which became a law after being passed by the Rajya Sabha last Thursday is one of those measures.

 It seeks to incorporate global best practices in the corporate world, introducing for the first time, class action suits under which a specified number of members or depositors can file suits on grounds of oppression or mismanagement against a company, its directors, auditors, experts and even advisors. The Bill brings in the new concept of a ‘one-man company’. Another significant departure from the past is that it mandates corporate social responsibility (CSR) expenditure of two per cent, in line with the government’s focus on inclusive growth.

With 29 chapters, 470 clauses and seven schedules, the new law, which replaces the Companies Act of 1956, aims to bring in massive changes in the way companies govern themselves, raise money, interact with stakeholders and contribute to nation-building.

After more than 10 years of discussions, drafting and delays and five different ministers spearheading it, the government has been able to replace the 57-year-old law with new definitions of accounting and auditing, control, independent directors, key managerial personnel, promoters, turnover, small company, one-person company, voting rights and a host of other things. But, there are concerns over drafting of its fine print and the time it is going to take to become a reality.

Experts say the law now assumes importance and needs utmost care so that it leaves little room for litigation. They have also suggested that all chambers of commerce ensure flawless formation of rules and in a time-frame of, say six months. The Confederation of Indian Industry (CII) has already said it will continue to engage with the Corporate Affairs Ministry to work out the modalities of provisions that prescribe delegated legislation in the form of rules.

This article looks into shortcomings of the new law, but first the details of the Bill and how it is going to impact investors, especially the small ones:

The law makes it easy to raise capital for small and unlisted companies by explicitly laying down the rules. Earlier, rules governing capital raising by unlisted companies were vaguely defined. The number of members in a private limited company has been increased from 50 to 200, implying that a large pool of capital will now be available with the company and reduce the need for a public float.

The concept of one-man company allows an individual to adopt corporate structure for carrying out business, yet the rules governing the one-man company such as book-keeping, reporting and taxation have been simplified. This is expected to benefit small businesspersons like weavers, craftsmen, who work with limited resources. In another departure from the past, a certain class of companies will be required to have at least one woman on their boards.

Some changes in laws for cross-border merger of companies have also been incorporated. Earlier, only the merger of a foreign company with an Indian company was permitted; now, Indian companies can merge with foreign companies in specified jurisdictions yet to be notified. There can also be merger of a listed company with an unlisted one. Rationalisation of sickness laws for a company has also been spelt out in the new Bill. Earlier, these laws applied to only industrial undertakings, now they apply to any company. Damages can be claimed for unlawful or wrongful acts from or against the company, its directors, auditors, experts, advisors under the class action suit.

 According to experts, the clause which talks about consultants, advisors or any other person may be enlarged to include lawyers or investment bankers who have given wrong advice leading people to incur financial losses. The Bill has made rotation of auditors mandatory every five years. There will also be a yearly ratification and auditors cannot continue if shareholders do not ratify them at their annual general meetings. Under the current Act, auditors can continue working provided they keep getting yearly ratification up to a period of 10 years after which there will be a cooling-off period of five years before the same auditor comes back.

While the concept of CSR is not new in India, there has been little legislation to enforce this responsibility. The law imposes a compulsory measure, yet the liability of the company is only to make ‘best endeavour’ to comply with CSR and report.

However, the Bill does not empower the shareholders of a company to ask questions to the management and, which experts say, is a legitimate demand. Secondly, after the passage of the Bill in Parliament, the Ministry of Corporate Affairs will now make rules and prepare the roadmap for governance of companies.

However, experts differ on this, saying the rule making powers should be vested with Parliament and not the executive of the day as this will lead to more discretionary powers in the hands of executive, who may make or re-make rules at their will. But Company Affairs Minister Sachin Pilot counters this, saying, “We will not allow the rules to be framed behind closed doors and try to incorporate stakeholders’ views even while implementing the regulations.”