The New Company law finally in action
The notification of latest Companies Bill 2013 signals a major step towards refinement of corporate law in India. The New Law has been put on fast track with MCA issuing Notification for Commencement of 98 Sections (out of 470 sections) of the New Act on 12th September, 2013. The substantial part of the new act of 2013 is in the form of rules. Daft rules have been released for public comments before their final notification. The rest of the sections would be enforced in a phased manner and until the remaining sections are notified, one will need to refer two sets of Companies Acts for structuring of transactions and day to day compliances. MCA looks to quickly conclude and finalize the remaining provisions (and relevant rules) so that the entire new law takes effect soon.
Over the past six decades during which the Companies Act, 1956 (“1956 Act”) has been in existence, the corporate and business environment has evolved significantly and hence there was a need to revamp the legislation governing companies. The 1956 Act has gone through many amendments from time to time yet it was still marred with complexity, redundancies and more importantly weak on corporate governance. The Companies Bill 2013 is a significant step in strengthening Corporate Governance, accountability and transparency with introduction of key provisions around duties and liabilities of Directors / Independent directors, Auditor rotation, more disclosures, establishment of Serious Fraud Investigation Office (SFIO), constitution of National Financial Reporting Authority (NFRA), Class action suit, mandatory Corporate Social Responsibility (CSR) etc.
India’s new Companies law attempts to improve corporate governance by mandating that at least one third of the directors on a firm’s board should be independent and by capping the tenure of a company’s external auditor to a maximum of 10 years. The older law had no such caveats.
The auditing fraternity is facing regulatory heat with the draft rules on the new company law looking to implement mandatory auditor rotation on a retrospective basis. The change is expected to enhance auditor independence and audit quality. The auditing role had, in recent years, come under a cloud after a spate of accounting scandals, such as Satyam Computers and Reebok India. This prompted the Government to mandate auditor rotation.
Taking cognizance of rapid globalization, provisions for cross-border mergers have been introduced. But the potential benefits of such M&A activity will require changes in other related laws, such as the Income Tax Act and Foreign Exchange Management Act. Merger between small companies, holding – subsidiaries and specified entities is simplified and can now be done on a fast-track route. Other features are the valuation of shares; business and properties by registered valuer, restrictions on multi-level subsidiaries, transactions with 'related party’ which are not at an arm's length, and uniform financial year.
Apart from same, the draft rules now under consideration talk about a mandatory transfer of 2% of average net profit by companies of preceding three years for corporate social responsibility (CSR). Companies with a net worth of over Rs 500 crore, or revenue of at least Rs 1000 crore or past three years average net profits exceeding Rs 5 crore are due to full in the ambit of mandatory CSR of first transferring the funds to a corpus, before taking it out of same for social purpose only. Although the law does not stipulate penalties for non-compliance, companies are required to justify any shortcoming in this regard.
Other significant aspects are the removal of many of the privileges which ‘private companies’ enjoyed under the 1956 Act and the new definition of ‘subsidiary’ to include the component of preference share capital which would mean creation of several unintended subsidiaries overnight requiring various compliances like consolidation of financial statements by the resultant ‘holding companies’. This aspect will be very significant for corporates and for PE investors who choose to invest through preference share capital.
The Act of 2013 intends to promote self-regulation and has also introduced some progressive concepts like One- Person Company, Small Company, Dormant Company, E-governance, etc.
Further, the Act of 2013 aims to fortify investor protection & transparency by introducing terms like Insider Trading, Price Sensitive Information, Class Action Suits and other additional disclosures. It also intends to give greater responsibility to the auditors and to widen their role.
A National Company Law Tribunal will also be a reality now and therefore the matters which used to linger in courts for years will be speedily handled by this dedicated tribunal.
Lastly, the success of the new law would largely depend on the implementation machinery - the regulator and the stakeholders evolving to the changes such that India will have in place a business-friendly corporate regulation with high standards of corporate governance norms, accountability on the part of corporates and auditors, transparency and protection of investors’ interests.
Rajive Bansal is a senior corporate professional who has more than 20 years working experience with top Corporates/MNC in the areas of Corporate laws, Finance, M&A , Taxation and Transaction structuring. He is a fellow ICWA and a law graduate and can be reached at firstname.lastname@example.org