Editorial: Transparency Inc

Apr 01 2014, 21:13 IST
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SummaryNew Companies Act, in force now, is a welcome step

Companies Act, 2013, is a vastly improved version of the earlier legislation in that it forces companies to be more transparent in their operations and compels them to improve governance. Indeed, the changes are long overdue because corporate law in India has been extremely lenient despite which companies have, more often than not, used the courts to stall rather than resolve matters. Managements have pretty much had a free run of the place; most businesses houses are a complex maze of intermediate holding companies so that it is almost impossible to figure out where the funds are originating and where they’re flowing. That has been taken care of with the Act restricting the number of intermediate holding companies to two, with some exceptions; it is to the government’s credit the new rule is in place because corporate India had campaigned vigorously against it. Moreover, the norms for inter-corporate loans have been made more meaningful. While companies are free to give loans to wholly-owned subsidiaries, they cannot give them to non-wholly-owned subsidiaries. That auditors can no longer be vetting a firm’s accounts perennially is also a big and welcome change. A tenure of ten years—five initially and five if re-appointed—will now be the norm. The spirit behind the change is that auditors can't get cosy with the management, and to ensure a fresh pair of eyes looks at company accounts from time to time. Again, the government can take credit for ushering in a major change—the rule will also apply to unlisted companies.

India Inc has also got away with ignoring the views of minority shareholders where related party transactions are concerned—Maruti Suzuki for instance was not intending to get shareholders to vote on its move to house the Gujarat plant in Suzuki Motor Corporation until investors raised a hue and cry. The new Act requires related party transactions to be run past small shareholders if they are not at ‘arms length’ and not ‘in the ordinary course of business’.

That small shareholders will now have a bigger say in corporate action is a positive, though it is very important they act responsibly; there are enough instances of minority shareholders making a nuisance of themselves. The new Act will also make life less cushy for independent directors who are no longer entitled to esops and will be held more accountable than they have been in the past; while they will continue to head

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