After several years and numerous committees, the government?s success in getting the new Companies Bill cleared by the Cabinet is a welcome move, though the real test is Parliament passing it. The Bill moves in the right direction by increasing disclosure norms for India Inc, protecting rights of minority shareholders and bringing about stricter penal provisions. What?s worrying, however, is that the government retains the provision that mandates all companies earmark 2% of the their profits (average of the last three years) for corporate social responsibility (CSR)?if they can?t, they have to explain why. CSR is supposed to be voluntary, but it is now being converted into a cess?that?s encouraging sham CSR-spend and also bringing in another form of inspector-raj.
Mandating that companies rotate their auditors every four years is meant to prevent companies from getting into a cosy relationship with auditors, to prevent the re-occurrence of a Satyam kind of scam, but it doesn?t really address the core issue of taking penal action against auditors who help fudge books?after a large number of such instances, no big audit firm has paid a price for its role in a scam. In any case, given that creative firms will always be a few steps ahead of regulators, the eventual solution has to be in upgrading the surveillance mechanism at the company affairs ministry end.
Bringing in the concept of a class action suit is a welcome move since this means minority investors can sue the company in the light of losses faced by them due to scams in which the management had a role. Provisions on insolvency have been strengthened, which is a good thing?insolvency proceedings can be initiated earlier on, when there is a default in payments of interest or part of the principal. Pity then that the government had to go and spoil it all with the mandatory CSR?if the government is collecting taxes, it is its job to provide schools or whatever, not the company?s.