Companies law: Need for clarity

Written by Ashish Sinha | New Delhi | Updated: Aug 12 2013, 19:23pm hrs
Experts and corporate lawyers have listed over two dozen crucial clauses in the companies Bill, 2012, which require careful handling. After the Bill was pased last week, the corporate affairs ministry is now finalising the rules to implement the new Companies law that replaces 57-year old Companies Act of 1956.

The contentious clauses include those on corporate governance, restriction on layers of subsidiaries, constitution of National Financial Reporting Authority, its oversight, appointment of auditors including mandatory firm rotation, eligibility, qualifications and disqualifications of auditors, limits on the number of audits, clauses on independent directors and the manner of their selection, power to compromise or make arrangements with creditors and members, merger and amalgamation of companies and valuation by registered valuers.

While some of the provisions seem ideal on paper, it will be interesting to see the implementation of a few conditions such as the mandatory appointment of independent directors. In my experience, the availability of suitable and capable independent directors remains a challenge. The new Act requires them to follow a fairly strict code of conduct. These obligations are likely to cause anxiety in minds of directors and, therefore, may result in augmenting the current dearth of capable talent, said Shardul Shroff, the managing partner of Amarchand Mangaldas, a leading law firm.

On the contentious provisions dealing with the restriction on layers of subsidiaries, Inder Mohan Singh, partner in Amarchand Mangaldas said each sector has its own nuances and it is essential that separate entities be formed to manage complex businesses and protect shareholder interests. This restriction could undesirably place domestic companies at a disadvantage vis--vis international competitors, by restricting corporate structuring and impeding mergers and acquisitions, formation of joint ventures, special purpose vehicles and other corporate restructuring routes in India, Singh said.

A senior executive in consulting firm Pricewaterhouse (PW) said Clause 247 on valuation by registered valuers needs to be qualified with the fine print on qualification and experience of who these registered valuers will be. One of the important things the Bill does is to take away the power of high courts to approve mergers and acquisitions and bestow it on the National Company Law Tribunal. But the composition of this tribunal and how it would work can be known only once the rules are made, said the expert.

On the issue of related party transaction, the new Act proposes to prescribe strict impediments on companies entering into transactions with related entities (including those between holding and subsidiary companies). This, in our view, could possibly result in undesirable shareholder groups mushrooming in the market, which may use these provisions towards their vested interests, Shroff said.

Experts have also hailed clauses which puts India in-sync with global standards. Clause 132 on constitution of National Financial Reporting Authority would open door for India to become member of International Forum of Independent Audit Regulators (IFIAR), a global body that sets standards. Brazil, Singapore, Sri Lanka, the US, the European Union and the UK are members and are setting global standards. India needs to be on that high table today, rather than 20 years later, said a senior executive in consultancy firm PW. However, on Clause 139 dealing with the appointment of auditors and the mandatory firm rotation, experts say even the US has done away with this provision through a Bill passed by the House of Representative. The new law needs a fresh thinking in this regard. Further, there is no clarity if the mandatory firm rotation will be applicable prospectively as in the case of independent directors. Even capping the number of audit per partner to 20 companies is not a good idea," said a corporate lawyer.

However, company secretaries are happy with the new law. According to SN Ananthasubramanian, the president, Council of ICSI, the new law will further accelerate the transformation of company secretaries to corporate governance professionals by recognising them as 'Key Managerial Persons' in a company along with the chief executive officer, managing director, manager, whole-time director and chief financial officer. "The company secretary is expected to become the chief governance officer of the company and lead the governance initiatives. Further, it envisages a much larger role for company secretaries in areas of secretarial audit, restructuring, liquidation, valuation and much more," said Ananthasubramanian.

Welcoming the new law, CII said: In a country where 75-80% of businesses are family-run or promoter-driven, CII hopes the law will balance the ownership and management, crucial for success of any enterprise and fostering the spirit of entrepreneurship.