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Protecting the small shareholder

India’s long wait for a modern and contemporary company law ended last week with Parliament finally passing the Companies Bill. HT takes a look at the fine print. Gaurav Choudhury reports.

business Updated: Aug 14, 2013 00:12 IST
Gaurav Choudhury

India’s long wait for a modern and contemporary company law ended last week with Parliament finally passing the Companies Bill. HT takes a look at the fine print

When did Parliament pass the new Companies Bill?
The Rajya Sabha last week passed the Companies Bill enacting a new framework that will redefine India’s corporate governance norms, grant shareholders greater powers to defend their rights and lay down rules for companies to spend on welfare activities under the broad head of corporate social responsibility (CSR). The Lok Sabha had already passed the Bill last year.

How will the new legislation prevent corporate frauds?
The Bill imposes checks and balances to prevent frauds, make corporate boardroom decisions transparent and hold auditors and directors more accountable. Companies will have to rotate auditors after every four years similar to public sector enterprises and banks.

Mandatory rotation of auditors would prevent promoters and auditors to unite to doctor books of accounts. In addition, there is a cap of five years for any person to serve as independent director on a company’s board. An independent director cannot serve on the board of the same company for more than two consecutive terms.

This will prevent influencing of independent directors to push through promoters’ interests. At least a third of a company’s board should consist of independent directors and at least one of the board members should be a woman, according to the new law.

The Bill also contains provisions defining rules for inter-corporate loans and norms for creation of a web of step-down sister companies or subsidiaries.

The legislation, which has been in the works for several years and was passed by the Lok Sabha in December last year, will allow creation of special courts for speedy trials-- an assurance to investors that cases will not linger on.

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What does the Bill say about corporate social responsibility (CSR)?
For the first time in India, norms for spends on corporate philantrophy has been defined by law. Every company with a net worth of at least Rs. 500 crore, or minimum turnover of Rs. 1,000 crore or net profit of at least Rs. 5 crore in a year, will have to spend 2% of it average profits of three years on CSR.

These companies shall constitute a Corporate Social Responsibility Committee of the board consisting of three or more directors. This committee shall formulate and recommend to the board, a Corporate Social Responsibility Policy that will mention the activities to be undertaken by the company.

The committee will also recommend the amount of expenditure to be incurred on CSR activities and monitor the Corporate Social Responsibility Policy of the company from time to time.

The board will have to spell out the reasons if a company fails to spend the specified amount on CSR. The industry, however, is not happy with the provision on CSR spends and may push for flexible norms during framing of rules.

What does the new law stipulate about SFIO?
The proposed legislation, which will replace the 57-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 impose punitive measures and in specific instances, even arrest persons found guilty of corporate crimes.

What specific measures are there to empower small shareholders?
The law will allow shareholders’ associations to take legal action against promoters and management through ‘class action suits’.

A class action suit is a lawsuit where a large group of people collectively bring a claim to court. This acts as a deterrent for carrying out fraud.(see De-Coded). Minority shareholders of up to 10% will have the dissenters’ right and can ask the management to buy them out completely.

How will the new law promote self-regulation?
It will aid self-regulation with greater disclosure levels as opposed to the existing “government-approval-based regime”, which is seen as restrictive, limiting entrepreneurial growth.

New forms of organisation such as a ‘one-person company’ and ‘small company’ concepts would get appropriate legal recognition making India’s business law environment more contemporary.

What does the new law specify about financial accounting?
All companies will have to move to a uniform financial year ending March 31. Only companies, which are holding or subsidiary arms of a foreign entity requiring consolidation outside India, can have a different financial year with the approval of a tribunal.

What next?
Both Houses of Parliament have passed the Bill. The government will now frame rules for the law, defining details that may take up to six months.