Business Today

The new Companies Bill demystified

Critics believe that the Indian Companies Act 1956 is unwieldy and too complex. A new Act to replace the archaic law governing India Inc. will become a reality once the new Companies Bill, which has been approved by the Union Cabinet, is passed by Parliament. Rishi Joshi brings you the key points in the Bill.

Rishi Joshi | Print Edition: October 5, 2008

If you have an entrepreneurial bent of mind and want to go it alone, you could soon be allowed to form your own One-Person Company. Or, you may soon be able to cast your vote as a shareholder at company AGMs through e-mail. There's more: very soon, you will be protected against the scourge of insider trading on the stock markets as it will become a criminal offence. Yes, all this will become a reality once the new Companies Bill, which has been approved by the Union Cabinet, is passed by Parliament.

Premchand Gupta, Company Affairs Minister
Premchand Gupta, Company Affairs Minister
Indian companies are now governed by the archaic Indian Companies Act, 1956, which, critics believe, is unwieldy and too complex. Indeed, it's felt that the Act, which is the longest Companies Act in the world, actually deters domestic companies from establishing and scaling up operations. The existing Act is based on its predecessors from the British Raj. Says Kunal Rajpal, Associate, J. Sagar Associates, a leading law firm: "Many antiquated British-era provisions continue to govern Indian companies. Ironically, these provisions have been repealed long ago in the UK." Adding to this troubled legacy is a bunch of ridiculous clauses added during India's long and economically fatal tryst with socialism. Result: the Companies Act has more than 800 provisions, many of which are no longer relevant. Says Company Affairs Minister Prem Chand Gupta: "We have reduced the number of provisions in the Bill to half. The idea is to have laws that are easy to understand and implement." The new Bill will also introduce far-reaching changes in the regulatory environment for the corporate sector, empower shareholders and limit the government's role in business.

The complete Bill will be available only after it is introduced in Parliament, but the ministry has shared with Business Today comprehensive details of the proposed legislation. Broadly, the Companies Bill, 2008 "seeks to enable the corporate sector in India to operate in a regulatory environment of best international practices that fosters entrepreneurship, investment and growth".
We take a look at the key proposals in the Bill:

Sundeep Dudeja, Partner, Luthra & Luthra
Sundeep Dudeja
To make starting and running business easier and simpler

Consider this: over 40,000 cases are pending in courts for minor offences where, in some cases, the penalty is a maximum of Rs 2,500. The biggest objective of the exercise to overhaul the Companies Act is to introduce simpler laws that will make compliance easy.The Bill promises:

  • To weed out redundant provisions. Most of the procedural aspects of the present Act have now been introduced as rules. Says Gupta: "This will ensure that when we want to make minor changes in the law, we don't have to approach Parliament for an amendment. The present Act has had to be amended 25 times."

  •  Provisions that allow for the setting up of a One-Person Company (OPC). This will help entrepreneurs start up as a company without facing the liabilities attached to a sole proprietorship or partnership firm. Says Rajpal: "This is an important proposal. It's unreasonable to expect that every entrepreneur should form a company through an association of persons."

  •  To allow partnership firms to acquire scale by permitting them to have up to 100 partners, compared to just 20 now.

  •  A simpler compliance regime for small companies. There will be no minimum floor for paid-up capital. Says Gupta: "This will allow entrepreneurs with limited resources to form a company."

  •  To broadbase the talent pool available to companies. Companies will be allowed to have a minimum of only one Director resident in India. This will replace the present stipulation that requires all Wholetime Directors and the Managing Director of a company to be Indian residents.

  •  Greater flexibility in structuring ownership. The restrictions on the number of subsidiaries that a company can have will be done away with, subject to disclosure of their relationships and transactions/dealings between them. Consolidation of accounts, though, will be mandatory.

  •  A revised framework for regulation of insolvency, and completion of rehabilitation, winding up and liquidation of companies in a time-bound manner. Analysts say this is a step in the right direction as presently, winding up or restructuring companies is a long-drawn process with excessive judicial intervention.

Kunal Rajpal, Associate, J. Sagar Associates
Kunal Rajpal
Towards greater transparency & autonomy

This is another focus area in the new Bill. Gupta says that the objective is to encourage "self-regulation with accountability". The objective is to minimise the role of the government in internal corporate matters.

  • The Bill stresses on self-regulation with disclosures and accountability and substitution of government control over internal corporate processes by empowering shareholders.

  •  It also proposes to scrap shares with differential voting rights. This will reverse the decision by the Department of Company Affairs in 2001 to allow Indian companies to issue shares with differential voting rights if it has distributable profits for the preceding three financial years. The government says the objective is to protect the interests of minority shareholders. This decision may not go down well with India Inc. Says Sundeep Dudeja, Partner, Luthra & Luthra, a leading law firm: "Shares with differential voting rights provide flexibility in structuring investments. They also provide promoters with a defence against hostile takeovers, as they can issue a small number of shares with differential voting rights to themselves but continue to control a larger share of votes."

  • Related party transactions will be controlled by shareholders instead of the government; there are, however, safeguards to ensure adequate disclosures.

  • Clauses on government controls over appointments and remuneration of Directors will be done away with. Says Gupta: "This was an outdated provision and repealing it will give more autonomy to companies."

To improve corporate governance standards

There are several key provisions in the Bill, which will improve the standard of governance in the country. The Bill stipulates:

  • Statutory recognition to audit, remuneration and stakeholders' grievance committees. The role, rights and duties of auditors will be clearly outlined.

  • That at least 33 per cent of Directors on a company's board should be independent. For listed companies, the minimum requirement will be 50 per cent as stipulated by the Securities and Exchange Board of India (SEBI). Experts say that the Bill will have to clearly define an Independent Director to make the law more effective. For instance, the position of Nominee Directors of institutional investors on the boards of companies is not clear. While SEBI felt that such Nominee Directors should be treated as Independent Directors, this view was rejected by the J.J. Irani Committee (set up to advise the government on the new Companies Bill). Says Dudeja: ?gNominee Directors represent specific interests of lenders or promoters and, to that extent, their discretion is not completely independent."

  • That companies can keep their books of accounts in electronic form as a legal document. It also allows board meetings to be conducted through video conferencing and recognises votes cast through e-mail. The Companies Act in its present form does not recognise participation in a board meeting by a Director by any electronic means.

  • That insider trading by Directors will be treated as a criminal offence.

  • That companies cannot issue shares at a discount to their promoters.

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