14 Dec 2011

The Companies Bill 2011 Tabled In Lok Sabha

Corporate laws in India require rejuvenation in the light of modern trends and market forces. The Indian Companies Act, 1956 is the main corporate law of India that was due for major amendments for long. From time to time efforts to streamline the companies act were initiative but they failed to make a holistic impact.

Finally, the Companies Bill 2011 was tabled in the Lok Sabha on Wednesday. The Bill was already cleared by the Cabinet on 24th November this year but it could not have been introduced in the parliament of India due to protests by opposition parties over issues like corruption, FDI approval in multi-brand retail, etc.

Of late corporate and financial frauds have shattered the confidence of shareholders and foreign direct investment makers. A stringent penal regime along with strict penal liability was long expected from Indian parliament. Corporate governance norms were largely confined to self regulatory mechanism with little regulatory interventions. Incidences like Satyam frauds have woken up Indian government to bring transparency and order in the corporate world of India.

 The Companies Bill 2011 has proposed some very significant improvements over its predecessor. It proposes to introduce the concept of class action suits for the first time in India. That would empower investors to sue a company for “oppression and mismanagement” and claim damages. Among other things, it also proposes to tighten the laws for raising money from the public. The Bill also seeks to prohibit insider trading by company directors or key managerial personnel by treating such activities as a criminal offence.

The Bill proposes that companies should earmark 2 per cent of the average profit of the preceding three years for corporate social responsibility (CSR) activities, and make a disclosure to shareholders about the policy adopted in the process.

The Bill is trying to harmonise the company law framework with sectoral regulations. It has also proposed to make it mandatory for listed companies to have 33 per cent independent directors. It also provides for formation of One Person Company, while empowering the government to provide a simpler compliance regime for small companies.

There will be a single forum for approval of mergers and acquisitions, whether domestic or with foreign entities. Also the procedure for merger of holding and wholly-owned subsidiaries would be shortened.

Under the proposed norms, every company director would be required to acquire a unique Director Identification Number, a provision which would check the menace of vanishing companies. The bill also provides for a framework for enabling fair valuations of companies for various purposes and strengthening Investor Education and Protection Fund. Also, the bill gives statutory recognition to the Serious Fraud Investigation Office (SFIO) that was expected to give wider powers to investigate corporate frauds and white color crimes.

The Bill was first introduced in August 2008, but had to be withdrawn because of the dissolution of Lok Sabha. It was again introduced in Parliament in 2009 and sent to the Standing Committee, which presented its report in August 2010. Industry has for long been opposing provisions for a mandatory CSR and rotation of audit firms.