New Companies Bill takes ethics to a newer level

After over five decades, rules of the game are going to change for the Indian Inc, as the Companies Act, 1956, is set to be replaced by the Companies Act, 2011.

The Companies Act, 2011 comes as a welcome change for investors and other stakeholders as it promises to bring reforms in enforcement measures and mandates increased transparency and accountability. It also endeavours to strengthen corporate governance and provides for provisions to ensure ethical and vigilant activities of directors and other professionals in the company.

India has witnessed some major corporate scams. The new law proposes to bring in a paradigm shift by providing for more stringent norms and increased penalty.

The law has addressed the concerns caused by some of the scams like vanishing firms, the IPO imbroglio and Satyam case and features measures to prevent any such recurrence.

The provisions like mandatory internal audit for specific companies, provision for rotation of auditors, increased role of audit committee, restriction on providing certain specified services by auditors and restricting the financial year to April to March without any provision of extension, place more responsibilities and accountability on company management.

In order to ensure investor protection, powers have been given to courts and tribunals to re-open accounts and the Serious Fraud Investigation Office has been designated as the main investigating agency for frauds relating to companies.

Under the provisions of new Act, much emphasis has been laid on good governance practices and better disclosures. The new law has kept in mind the necessity of transparency in corporate functioning and has provided for provisions for better disclosure like statement of compliances of all laws in board reports, more disclosures in financial statements and includes associated companies and joint ventures in the ambit of consolidated accounts.

It also mandates applicability of postal ballot for private companies, introduces auditing and secretarial standards, envisages mandatory appointment of independent directors and further mandates the requirement of quorum of a general meeting based on number of members in the company.

The new Act, with an aim to strengthen the rights of minority stakeholders, has introduced the concept of class action suits, which are already well established in countries like the UK and the US.

Not only does it give more power to stakeholders, it also tends to enhance the sense of responsibility and diligence of companies. However, the benefit of class action suits has only been extended to members and deposit holders whereas for now, other stakeholders such as creditors, bankers, debenture holders are still not covered under its purview.

 Another step designed for investor protection under the new law is the provision of an exit opportunity for dissenting shareholders on variation in terms of contract or objects in a prospectus.
The new law envisages that whenever there is a change in the terms of contract or objects in a prospectus, dissenting shareholders shall be given an exit opportunity by the promoters or controlling shareholders at a definitive exit price. The manner and conditions for the exit opportunity shall be as per the stipulations specified by the Securities and Exchange Board of India in this regard. Since there were no provisions in this regard under the Sebi Act or regulations thereof until the enactment of appropriate regulations by Sebi, the clause on the exit opportunity for dissenting shareholders remains a bit of an ambiguity.

Furthermore, the new law introduces a revolutionary change by way of substituting the word ‘shares’ with the word ‘securities’. The meaning of the term ‘securities’ has been derived from the Securities Contract Regulation Act, which is a wider term including shares, stocks, bonds, debenture, derivatives and the like.

However, there are some grey areas in the Act. There has been a conscious attempt to avoid regulatory overlaps, though these have not been entirely eliminated. However, the new Act still promises to be a welcome change to plug the ambiguities, increase disclosures and compliances, promote better governance and responsibility and provides safeguards for all stakeholders. The Act has also proposed a few industry-friendly measures like one person companies, the dormant company and allowing a small company’s merger. More importantly, it offers immense opportunities for all professionals.

The writer is the founder & managing director of Corporate Professionals Group. He was president of ICSI in 2003