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Makeover for corporate law

Remember Sarb Ox in the US that came after corporate America saw tumult over fraud and crony capitalism?

india Updated: May 08, 2006 01:24 IST

Remember Sarb Ox in the US that came after corporate America saw tumult over fraud and crony capitalism? Now the government, after many false starts and incessant confabulations with all stakeholders, wants to rejig Companies Bill 2006 in right earnest to reform the legal framework for the corporate sector.

Once it is ratified by the Parliament,  Companies Act 1956 will be repealed. The proposals seek to bring about changes in various aspects relating to start and registration of companies, their management and governance, rights of stakeholders, raising and management of capital, requirements as to compilation of financial information relating to the company, its audit and disclosure, mergers and amalgamations, insolvency issues including rehabilitation, liquidation/winding up of companies, inspections/investigations into the affairs of companies and treatment of corporate offences and penalties.

One of the key changes in the new bill relates to a modified comprehensive regime for investigation involving inspection, special audits and investigations by specialised agencies.

Investigations will be carried out by a competent person to be appointed by the Central government that may include private experts in addition to government officials. Maybe that’s why penalties under the Act will be classified in the form of two self-contained schedules — one for monetary penalties and the other involving imprisonment.

It is here that the difference comes in as the law will have to lay down the maximum as well as minimum quantum of penalty for each offence. The law is to provide for suitable deliverance in respect of repeat offences.

Similarly, in case of fraudulent activities, provisions for recovery and disgorgement will be suitably provided for. Most importantly, the new law states that an in-house structure needs to be set up for levying non-discretionary monetary penalties only. Interestingly, the transfer of proceedings pending in court has been mandated to the proposed in-house structure dealing with the first schedule offences.

Parallely, there is a move to recast the provisions regulating insolvency in a manner that expedites the process while enabling resolution amongst stakeholders in a manner that not only incorporates best international practices, but is also timebound and efficient in preserving the value of the assets. With the provisions relating to the National Company Law Tribunal facing a legal challenge in the SC, the government wants to pursue the resolution of the legal issues involved.

Simultaneously, a more effective regime has been proposed to enable proper disclosure and approval of related party transactions involving directors of the company.  Transactions/contracts in which the directors or their relatives are interested will be regulated through a shareholder approval and disclosure-based regime, rather than a government approval-based regime.

Other pertinent issues like the role, rights and duties of auditors have also been revisited so that the integrity and independence of the audit process is maintained.

Consolidation of financial statements of subsidiaries with those of holding companies is to be made mandatory, in addition to the mandatory presentation of individual financial statements of companies. Another important facet is a single forum for approval of mergers and acquisitions in a timebound manner along with deemed approval for various regulatory agencies. Valuation of shares of companies involved in schemes of mergers and acquisitions will be done by independent registered valuers.

There is also a provision to provide for a more intensive registration process with companies required to make detailed declarations/disclosures about the promoters, directors, company at the time of incorporation. Directors/promoters will be required to establish identity through a unique electronic identifier and to carry out filings of documents secured through electronic digital signatures.