Companies law: Need for clarity

Aug 12 2013, 13:53 IST
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SummaryContentious clauses include those on corporate governance, financial reporting body

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-à-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

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