Business

New India Co. Ltd.

Changing business norms warrant new laws. The new companies bill answers the call.

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New India Co. Ltd.
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Remapping Legal Genes

The replacement for the Companies Act, 1956, is finally ready. A look at the key changes proposed.

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Reclassification: Companies to be classified on the basis of size, number of shareholders and control. Single-person companies to be allowed.

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Disclosures:
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Corporate governance:
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Investor protection: Allows minority shareholders (in a block of 10%) to file class action suits, companies to be barred from accepting public deposits

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Liquidation:
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M&As:

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Debatable Points
  • The finance ministry wants the Investor Education and Protection Fund, now under the ministry of corporate affairs, to come under SEBI
  • Time-bound liquidation may involve exit policy debate, labour issues
  • Stringent requirements for independent directors mean finding suitable people may be difficult

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If that does happen—for some issues are still being thrashed out—the legislation will have a far-reaching impact on corporate India. Largely modelled on the recommendations of the J.J. Irani committee set up to look into the Companies Act, the big-ticket changes would include a reclassification of companies, including allowing single-person firms, stringent rules for disclosures, a relook into the role of independent directors, and norms to shut down companies.

The bill will influence company structures significantly. Indian companies are currently divided into two types, private limited and public limited. The new bill classifies them in terms of net worth, number of shareholders, or their control (holding, subsidiary or associate companies). Following the global practice, the bill recognises single-person companies, not yet allowed in India. This, say experts, will legalise sole proprietorship firms, which have always existed but are not currently required to file corporate tax returns. The bill also proposes to redefine small companies in terms of net worth, with a simpler compliance regime. Sources say the threshold limit for this could be around Rs 2 crore.

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Significantly, the bill stresses on a clearly defined structure for subsidiary and associated companies—where the holding firm has a partial or joint stake—to make corporate structures clearer. Traditionally, Indian companies are wrapped in a maze of subsidiary and associate firms. Senior corporate lawyer Hemant Batra says: "India is not ready to accept namesake companies thriving in tax havens. This move will make it easier to trace company ownership and will bring everything up front and make disclosures transparent and easy."

According to estimates, out of the 8.6 lakh registered companies, only 3.6 lakh, or about 40 per cent, are active—the remaining are used as shell or investment companies. But some experts feel the new structure could be an administrator’s nightmare. Says Virendra Ganda, former president of the Institute of Company Secretaries of India: "We are moving from a two-tier system to one where seven classes are provided. These are definitely relevant as these companies need to be treated separately, but to formulate harmonious regulations for these different categories and manage them is both complex and difficult."

India Inc has always asked for easier norms to shut down companies. Currently, liquidation of companies is administered by the high courts. But it takes nothing less than 10 years to complete and, barring land, most of the company’s assets depreciate. As there is pressure on India to have a proper exit policy, the Companies Bill is making a provision for a viable, time-bound exit policy. Under this, if an unsecured creditor or the company itself asks for liquidation, the government will stipulate a time-bound liquidation for it. The exact time limit, ministry officials say, is still under debate.

Corporate governance is a key focus area. The new bill prescribes that at least a third of the directors on a company’s board should beindependent, and there’s a stringent list of necessary qualifications. It also proposes to give companies a free hand in fixing directors’ remuneration which, at present, is regulated. A proposal to cover them against defaults by promoters or executives is also on. A ministry official says, "Presently, these directors do not have immunity from the company’s day-to-day work. The bill seeks to provide them with that to keep them fully independent."

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However, experts find a flaw in that logic. Says Ganda: "In the corporate sector, democracy and independence is hypocrisy. Independence of directors would be a misnomer when his appointment and removal, and now even his remuneration, would be at the hands of the promoter. What kind of corporate governance can you expect here?" He also feels that the qualifications rules will make it difficult to find really independent directors. "Even if they do, bringing a stranger into the company may lead to little value addition", he says.

A new regime of disclosures and compliance is another crucial clause. Companies would be required to present all their investments, advances, loans and shares in associate companies or subsidiaries in consolidated balance sheets rather than by separate accounts. There would be a stiff dose of penalties, including a compulsory minimum, for offenders. However, professionals feel the administrative machinery needs to be strengthened to handle the new data and information that will be thrown up.

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To push investor protection, the bill also recognises class action suits where minority shareholders can move court or the authorities to get their grievances addressed. This is relevant in situations where company decisions are passed by a majority vote ignoring minority interest. There is also a proposal to set up a national company law tribunal to look into specific corporate sector issues. However, there is a feeling that the minimum requirement of 10 per cent shareholders to form class action suits is too high. Stung by the high number of defaulters and loss of public money in public deposits, the bill also proposes to ban companies (barring companies registered with the RBI and NBFCS) from accepting them. However, the modalities for this are yet to be worked out.

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Another area which needs to be worked out is the rules governing mergers and acquisitions. The new bill makes a distinction in rules for publicly listed companies and private ones. While this is ostensibly to protect public and investor interest, experts feel that since many privately held companies have debt from public financial institutions, the bill should make provisions to address public interest in these cases as well.

While Union company affairs minister Prem Chand Gupta seems determined to get the bill tabled in Parliament’s budget session in February, he will have to get clarity on a lot of areas—the rules for liquidation and M&As, among others. There are also conflicts with the finance ministry, which wants the investor education and protection fund to come under the purview of SEBI and also has reservations about the compulsory provision of one-third independent directors in a company’s board.

In any case, after almost a decade, the bill is close to fruition. With both the corporate sector and the government upbeat, it may well usher in a new era of corporate governance for India in the globalised world. What is now needed is the political will to push it through.

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