India finally enacts a modern company law

The Parliament today cleared the long-awaited Companies Bill 2012, with the Rajya Sabha passing sweeping measures to replace a 57-year-old predecessor.

The Parliament on Thursday cleared the long-awaited Companies Bill 2012, with the Rajya Sabha passing sweeping measures to replace a 57-year-old predecessor.

The new law will empower small shareholders, smoothen corporate governance and compell large companies to spend more on social welfare under the broad head of corporate social responsibility (CSR).

The Bill imposes checks and balances to prevent frauds, make corporate board room decisions transparent and hold auditors and directors more accountable.

Replying to a debate before the bill was passed by a voice vote, corporate affairs minister Sachin Pilot said the new legislation will bring India's corporate governance framework in line with the changing business environment of the 21st century.

"For the next two or three decades, this (new legislation) will bring positivity in the economy," Pilot said, adding that the views of all stakeholders, including industry chambers, have been taken into consideration.

The legislation, which has been in the works for several years and was passed by the Lok

Sabha in December last year, will allow the creation of special courts for speedy trials — an assurance to investors that cases will not linger.

"The Bill passage will give impetus to the growth momentum," Pilot said. "The focus of the bill is to enhance transparency and ensure fewer regulations, self reporting and disclosure...It will outline the positivity in the economy".

At least a third of a company's board should comprise of independent directors and at least one of the board members should be a woman, according to the new law.

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 Tribunal.

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. This acts as a deterrent to carry out a fraud by tailoring and influencing board decisions only to suit promoter and management interests.

It also makes it mandatory for firms to rotate auditors within a stipulated time-frame --- a practice which public sector enterprises and banks currently adopt.

Besides, 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 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.

"Now that the law is ready, it is time to focus and work on the practical aspects of complying with its provisions. One such vital provision is surely the clause dealing with CSR spend," said Chandrajit Banerjee, director-general of CII.