Companies Bill 2011- assessments in the public domain indicate discord.
A decade ago, the 2002 amendments intended to replace India's existing
Company Law were aborted. Nonetheless editions of bare Acts and
Ramaiya's volumes carry these amendments till date, requiring
uncomfortable explanations to those not in the loop. Hopefully, the
controversies which immobilised several subsequent initiatives stand
resolved, and in this round such absurdities are not repeated. Even if
abortment is ruled out, there is discord on certain items, and from
the assessments in the public domain, the perception is that the
Government is in a "control" mode. The Bill appears to have been
cleared with a certain degree of trepidation, given the Satyam
experiences, and public outrage on accountability and other issues.
Internal systems have been beefed up by importing provisions from SEBI
regulations. Insider trading being one such, till date addressed under
Section 11 of the SEBI Act. This is intended to reinforce the
governance of grey areas between listed shares and other securities,
whether debentures or derivatives, under the Securities Contract
Regulation Act, an issue that surfaced in the recent dispute involving
Sahara India's private placement of Convertible Debentures. SAT's
decision that SEBI's permission was not warranted is now in appeal
before the Supreme Court. At last the protracted power struggle
between SEBI and the Ministry of Company Affairs (MCA) is over with
the clarification that in cases of jurisdictional conflicts, SEBI laws
will prevail.
Corporate Social Responsibility (CSR) is another governance related
inclusion, requiring companies to expend at least 2% of three years
average profit on CSR. The 2009 Draft Bill had linked the expenditure
to net profit. The current language suggests that companies should be
able to treat the cost as a deductible expense; shareholders however
may be prejudiced, as dividends could be impacted. A definition of CSR
is warranted. In July 2011, the MCA had released National Voluntary
Guidelines on Social Environment & Economic Responsibilities of
Business. Essentially this was a call to the Indian Corporate Sector
to evolve as assets of Society and not be regarded as unscrupulous
carpet baggers, but as architects of the nation's wealth. Both the
Government and the Corporate Sector need to strive to achieve this.
Providing appropriate provisions for accountability is absolutely
critical. The definition of "Key Managerial Personnel" (KMP) has
replaced the existing Section 5, which held 'Officers in default" to
include Directors and other officers such as the Company Secretary and
"any person in accordance with whose direction the Board is accustomed
to act". The italicised portion, which enabled fixing the liability on
the actual defaulters, has been removed from the KMP definition, which
has updated the identification of officers by inclusion of new
designees such as the Chief Executive Officer and the Chief Finance
Officer. Appropriate provisions, more stringent than Sections 297 and
299 of the existing Act have been introduced to regulate "Related
Party Transactions" in the context of KMP's related parties - the
definition is derived from the Income Tax Act and the offences carry
heavy fines and penal consequences.
The appointment of Independent Directors for public companies having a
specified paid-up capital threshold has been made mandatory, on the
lines of Clause 49 of the Listing Agreement, in constituting one third
of the total Board. It is proposed that independent Directors will
enjoy immunity from cases of fraud and other corporate crimes. It's
not clear whether this is a veil which can be pierced. Government has
also proposed setting up a dedicated data bank of persons who can act
as independent directors; presumably the selection will have to be
restricted to these panellists. This Hobson's choice may not be
palatable to many, particularly foreign companies.
A woman director is made mandatory for prescribed classes of
companies, reportedly those with five or more independent directors,
but with the maximum number of directors pegged at twelve, this could
be a potential gender bender.
Finally, there are two provisions which appear to be unduly draconian.
These are the establishment of two authorities: one is the Serious
Fraud Investigation Office (SFIO) in existence for sometime within the
MCA, and fairly toothless till date. SFIO has been vested with a
statutory status and powers of investigation into corporate crimes,
including that of arrest, seizure of asset and prosecution. Further,
the Government proposes to establish a National Finance Regulatory
Authority (NFRA) for improving oversight of corporate financial
management. NFRA is to be invested with powers which will include
scrutiny of compliances of accounting and auditing standards and
assessment of the quality of the services of professionals associated
with such compliances. Additionally, NFRA will be entitled to exercise
quasi-judicial powers to order investigation, levy penalties and bar
professionals from practice in case of misconduct. Are all the kings'
horses and men, from the Courts of Justice, the still elusive NCL
T, MCA, ROC, CAG, CBI, regulators ICAI, ICSI not adequate to deal with
such situations in their respective jurisdictions or in association?
Kumkum Sen: is a partner at Bharucha & Partners Delhi Officeand can be
reached at kumkum.sen@bharucha.in
--
CA Ramachandran Mahadevan,M.Com.,F.C.A.,
A decade ago, the 2002 amendments intended to replace India's existing
Company Law were aborted. Nonetheless editions of bare Acts and
Ramaiya's volumes carry these amendments till date, requiring
uncomfortable explanations to those not in the loop. Hopefully, the
controversies which immobilised several subsequent initiatives stand
resolved, and in this round such absurdities are not repeated. Even if
abortment is ruled out, there is discord on certain items, and from
the assessments in the public domain, the perception is that the
Government is in a "control" mode. The Bill appears to have been
cleared with a certain degree of trepidation, given the Satyam
experiences, and public outrage on accountability and other issues.
Internal systems have been beefed up by importing provisions from SEBI
regulations. Insider trading being one such, till date addressed under
Section 11 of the SEBI Act. This is intended to reinforce the
governance of grey areas between listed shares and other securities,
whether debentures or derivatives, under the Securities Contract
Regulation Act, an issue that surfaced in the recent dispute involving
Sahara India's private placement of Convertible Debentures. SAT's
decision that SEBI's permission was not warranted is now in appeal
before the Supreme Court. At last the protracted power struggle
between SEBI and the Ministry of Company Affairs (MCA) is over with
the clarification that in cases of jurisdictional conflicts, SEBI laws
will prevail.
Corporate Social Responsibility (CSR) is another governance related
inclusion, requiring companies to expend at least 2% of three years
average profit on CSR. The 2009 Draft Bill had linked the expenditure
to net profit. The current language suggests that companies should be
able to treat the cost as a deductible expense; shareholders however
may be prejudiced, as dividends could be impacted. A definition of CSR
is warranted. In July 2011, the MCA had released National Voluntary
Guidelines on Social Environment & Economic Responsibilities of
Business. Essentially this was a call to the Indian Corporate Sector
to evolve as assets of Society and not be regarded as unscrupulous
carpet baggers, but as architects of the nation's wealth. Both the
Government and the Corporate Sector need to strive to achieve this.
Providing appropriate provisions for accountability is absolutely
critical. The definition of "Key Managerial Personnel" (KMP) has
replaced the existing Section 5, which held 'Officers in default" to
include Directors and other officers such as the Company Secretary and
"any person in accordance with whose direction the Board is accustomed
to act". The italicised portion, which enabled fixing the liability on
the actual defaulters, has been removed from the KMP definition, which
has updated the identification of officers by inclusion of new
designees such as the Chief Executive Officer and the Chief Finance
Officer. Appropriate provisions, more stringent than Sections 297 and
299 of the existing Act have been introduced to regulate "Related
Party Transactions" in the context of KMP's related parties - the
definition is derived from the Income Tax Act and the offences carry
heavy fines and penal consequences.
The appointment of Independent Directors for public companies having a
specified paid-up capital threshold has been made mandatory, on the
lines of Clause 49 of the Listing Agreement, in constituting one third
of the total Board. It is proposed that independent Directors will
enjoy immunity from cases of fraud and other corporate crimes. It's
not clear whether this is a veil which can be pierced. Government has
also proposed setting up a dedicated data bank of persons who can act
as independent directors; presumably the selection will have to be
restricted to these panellists. This Hobson's choice may not be
palatable to many, particularly foreign companies.
A woman director is made mandatory for prescribed classes of
companies, reportedly those with five or more independent directors,
but with the maximum number of directors pegged at twelve, this could
be a potential gender bender.
Finally, there are two provisions which appear to be unduly draconian.
These are the establishment of two authorities: one is the Serious
Fraud Investigation Office (SFIO) in existence for sometime within the
MCA, and fairly toothless till date. SFIO has been vested with a
statutory status and powers of investigation into corporate crimes,
including that of arrest, seizure of asset and prosecution. Further,
the Government proposes to establish a National Finance Regulatory
Authority (NFRA) for improving oversight of corporate financial
management. NFRA is to be invested with powers which will include
scrutiny of compliances of accounting and auditing standards and
assessment of the quality of the services of professionals associated
with such compliances. Additionally, NFRA will be entitled to exercise
quasi-judicial powers to order investigation, levy penalties and bar
professionals from practice in case of misconduct. Are all the kings'
horses and men, from the Courts of Justice, the still elusive NCL
T, MCA, ROC, CAG, CBI, regulators ICAI, ICSI not adequate to deal with
such situations in their respective jurisdictions or in association?
Kumkum Sen: is a partner at Bharucha & Partners Delhi Officeand can be
reached at kumkum.sen@bharucha.in
--
CA Ramachandran Mahadevan,M.Com.,F.C.A.,
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