The Companies Act of 1956 has been amended several times. But it needs complete overhaul. There were abortive attempts in 1993, 1997 and 2003. After an Eradi Committee (2001), a Naresh Chandra Committee (2002) and an Irani Committee (2005), there is a version that is floating around, having been introduced in the Lok Sabha in August 2009.

The Standing Committee on Finance (SCF) presented its report on this Bill on August 31. After these recommendations get incorporated, there is some prospect of new legislation during the winter session, especially because the ministry of corporate affairs has accepted several of the recommendations of SCF. First, there is the concept of one person company (OPC), that with a single promoter, and there is a difference with sole proprietorships in the way liabilities are treated. There is a point here about the way Indian companies are classified. Historically, they have been classified as public limited and private limited. The classification will now be through the number of shareholders, net worth and type of company (holding, subsidiary, etc). SCF legitimately wants precision about different types of companies, their exemptions/concessions and synchronisation with Limited Liability Partnership Act. Second, restrictions on payment of managerial personnel were removed in the Bill and shareholders could take decisions, on recommendations by the Board.

The SCF curbed this and a quote is illustrative. ?The Committee are of the view that an overall outer ceiling on managerial remuneration may be prescribed. The ministry may evolve a rational formula for this purpose, keeping in view the growth in corporate profits and other related factors. The remuneration payable within this overall ceiling may be decided by the remuneration Committee of Board or shareholders as already proposed in the Bill. With regard to situations of absence of profits, the existing stipulation for central government approval may be retained.? This rolls back reforms. Third, procedures have been simplified for commencement of business, alteration of memorandum, alteration of articles, issuing of global depository receipts, maintenance of accounts in electronic form, mergers and amalgamations of some types of companies and revival and rehabilitation of sick companies.

Fourth, quality of information disclosure will improve. Fifth, penalties have become stiffer and include criminal provisions. On procedures, quality of disclosure and penalties, nothing specifically needs to be flagged from the SCF. That?s a matter of nitty-gritty detail. Sixth, insider trading will become a criminal offence and SCF?s comments are about defining this precisely, conformity with Sebi and prevention of regulatory overlap. Seventh, there is a provision for class action. SCF wants banking sector to be excluded from class action suits, safeguards against frivolous suits and ?studying the cross country experience on class action and the provisions proposed re-visited and reviewed so as to ensure that the measure of class action works out to be truly beneficial.? Eighth, offences will be tried by special courts (National Company Law Tribunal) and powers have thus been transferred from high courts. There have been concerns over corporate mis-governance and fraud, especially after the Satyam scandal. The idea is the new Bill will reduce the probability of such frauds and improve corporate governance, though not eliminate it entirely. This will partially happen through better information disclosure and harsher civil and criminal punishments.

In addition, there are specific provisions for independent directors, boards and auditors. Perhaps the most important comments of SCF are on independent directors. ?The appointment of Independent Directors should not be a case of mere technical compliance reduced to the letter of the law. …The Government should, therefore, prescribe precisely their mode of appointment, their qualifications, extent of independence from promoters/management, their role and responsibilities as well as their liabilities. ?The Ministry of Corporate Affairs thus needs to revisit the Institution of Independent Directors and make amendments in the Bill accordingly. A code for Independent Directors may be considered for this purpose. The appointment process of Independent Directors may also be made independent of the company management by constituting a panel or a data bank to be maintained by the Ministry of Corporate Affairs, out of which companies may choose their requirement of Independent Directors.? One should remember that there aren?t too many people floating around with requisite skills to become independent directors.

Finally, there are secretarial and auditing standards and restrictions on auditors. The ministry of corporate affairs has some voluntary guidelines on corporate governance, formulated in 2009, and SCF wants these to be mandatory. In March 2008, there were almost 8,00,000 registered companies. If procedural costs are reduced and the OPC idea takes off, there will be many more registered companies and enterprises will move from the unregistered/informal to the registered/formal sector. With that kind of number, is it reasonable to expect that another corporate scandal won?t happen? That is impossible. Will the new Companies Bill make it a little bit more difficult to commit fraud? That is undoubtedly true. But India hasn?t solved the problem of independent directors and very few countries in the world have. The new Bill doesn?t solve it either, even when SCF recommendations are incorporated.

The author is a noted economist