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Decoding the Companies Bill

Decoding the Companies Bill

The Bill is expected to be passed by Parliament during the coming winter session. Here's a look at its broad contours.

What was proposed
The Companies Bill 2009 will replace the existing Companies Act of 1956 with radical changes, in tune with the best corporate governance practices globally. Insider trading by company directors or key managerial personnel would be made an offence with criminal liability. There would be mandatory consolidation of financial statements of subsidiaries with holding companies, recognition of cross-border mergers and clear definition of an independent director's role. Special courts would be set up to take action against offences under the Companies Act. The courts will have the power to fine a company and the errant executives and even hand down prison terms ranging from six months to five years.

What has changed
(New words in business)

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Usage: Organising a flash mob in one of those members-only golf clubs should be fun.
The Parliamentary Standing Committee on Finance, chaired by Yashwant Sinha, has suggested some changes in the Companies Bill. The committee has restricted the tenure of independent directors to six years. Companies must also rotate audit firms after every five years. The committee has also recommended that companies would be able to have only one level of subsidiary companies. This means a subsidiary company cannot have subsidiaries. The Ministry of Corporate Affairs is reviewing the committee's report and is likely to incorporate most of the suggestions in the proposed Bill.

The implications
The new Companies Act promises greater shareholder democracy and tighter governance norms for companies. It will empower investors by allowing them to initiate class action suits against promoters. At the same time, limiting the number of subsidiaries would prevent money laundering and siphoning off of funds.

Its shortcomings
Industry experts think that the subsidiary clause will hurt the flexibility of the companies to make investments in India and abroad. Rotation of audit firms or audit partners will also be tough given the limited options for India Inc. Besides, some of the proposals on insider trading and independent directors have already been notified by the SEBI.

-Manu Kaushik