A 21st century corporate regime

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SummaryFinally it appears that the new Companies Bill will see the light of the day with the Lok Sabha having recently passed the new Bill.

By dealing with ambiguities & instituting mechanism for whistle-blowers, the recent Companies Bill is a great update for corporate governance

Finally it appears that the new Companies Bill will see the light of the day with the Lok Sabha having recently passed the new Bill. Some very significant provisions have immediately hit the news, such as provisions relating to CSR, additional powers to SFIO in dealing with corporate frauds, appointment and obligations of auditors, payment of 2 years’ salary to employees prior to secured creditors on company’s winding, auditor’s liability for fraudulent conduct, the mandatory inclusion of a woman director, one person-company, class action, concept of independent directors, setting of NCLT and many more. Although these are the changes that deserve most of the attention, the story of the new Bill does not really end here. There are certain very important provisions that will come into force once the Companies Bill is fully operational.

There is always uncertainty around the status of a private company that is a subsidiary of a public company. Should they be treated as private companies or public companies (since they are controlled or owned by public companies)? The problem of uncertainty is multiplied thanks to conflicting judicial decisions. But, the Companies Bill completely removes this ambiguity. Now private companies that are subsidiaries of public companies can retain the basic features of a private company in their articles of association. The most important feature being restrictions placed on the transferability of shares. In effect, such a private company will be treated as a public company for the purposes of the Companies Act but at the same time enjoy the basic features of a private company.

Another important change is that shareholders of a public limited company can contractually agree on restrictions they wish to place on transferability of securities held by them. One of the most important features of a public company is free transferability of its shares. Any kind of restriction on free transferability of its shares is void and unenforceable. However, a Bombay High Court decision has held that shareholders, in a public company, can among themselves contractually agree on restrictions that are to be placed on their shares and, should they do so, such agreements will bind them and be enforceable against them. Failure to honour the agreed restriction could make the defaulting shareholder liable for damages. This specific provision incorporated in the new Bill

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