The government will introduce the Companies Bill in Parliament in the winter session, with the intention of overhauling corporate governance norms and granting shareholders greater power to defend their rights.
“Considering the enormous amount of companies operating in India, for whom the present bill was an outdated paper, we have come out with a bill that is designed for 21st Century,” said finance minister P Chidambaram.
The bill, once voted into law by Parliament, would mark the end of more than three years of debate over legislating a framework to put together checks and balances to prevent fraud, make corporate boardroom decisions transparent, and hold auditors as well as directors accountable. “We welcome the cabinet approval for changes in the bill…” said RV Kanoria, president of industry body FICCI.
The legislation is seen as a key reform initiative by the government, which is battling charges of policy paralysis. It will allow shareholders’ associations to take legal action against companies' promoters and management through ‘Class Action Suits’ — a form of lawsuit where a large group of people collectively bring a claim to court.
The proposed legislation, which will replace the 56-year-old Companies Act 1956, will empower the Serious Fraud Investigation Office (SFIO) — an agency mandated to investigate corporate scams — with a statutory status armed with the authority to file chargesheets, impose punitive measures and, in specific instances, even arrest persons found guilty of corporate crime.
The SFIO investigation report would be treated in a manner similar to a police report in the court of law. This would allow faster prosecution in SFIO-investigated issues.
The bill is also likely to impose a limit on the tenure of an independent director on the board of the company, besides making it mandatory for companies to rotate auditors within a stipulated time frame.
Besides this, the bill may contain provisions defining rules for inter-corporate loans and norms for the creation of a web of step-down sister companies or subsidiaries.