The government on Friday approved a total overhaul of the omnibus Companies Act, 1956, making it far easier for boards of Indian companies to change their corporate structures without having to seek government approval. The Cabinet on Friday approved the Companies Bill, 2008, which proposes to limit the government?s role in India Inc. The Bill will now be introduced in the upcoming session of Parliament in October.
The changes to be ushered in include: a single forum for mergers & acquisitions, single-shareholder entities, annulling the government?s role in the appointment of managing directors and whole-time directors, and in setting their remuneration. The proposed legislation will also make it almost impossible for companies to raise public deposits and treats insider trading by directors as a criminal offence.
The Bill proposes to bar the issue of shares at a discount to owners of a company. It will eliminate the limit on the number of subsidiaries a company can have and recognises the chief executive officer, chief financial officer and company secretary as ?key managerial personnel?. The Bill also retains a clause that makes it mandatory for company boards to have at least 33% independent directors. For listed companies, markets regulator Sebi, however, has set a minimum requirement of 50%.
The new Bill almost halves the number of clauses in the Companies Act, from the current 543. Most of the operative provisions have been shifted to the rules, making their amendment less clumsy for the ministry of corporate affairs. Said Premchand Gupta, minister of corporate affairs, ?I am sure that this is the best corporate law anywhere in the world. We need to have a corporate law which is transparent, easy to comply with and at the same time easy to regulate.?
The single-shareholder concept included in the Bill stipulates that even a sole shareholder can form a company, instead of the current requirement of at least two shareholders. The minister said this would help entrepreneurs set up businesses with limited liability, mimicking the practice in most developed countries. The proposed legislation also enables board meetings to be conducted via video conferencing. The Bill recognises votes cast through email and companies will be allowed to keep their books-of-accounts in electronic forms as a legal document.
The Bill provides for special courts to deal with company related disputes. Among the other changes sought to be brought in are doing away with the right of an investor over a dividend or security not claimed for more than seven years. It also mandates a statutory authority to administer the investor education and protection fund.
The Bill was several years in the making. The government had appointed the JJ Irani committee to examine changes to be brought in. The committee submitted its report to the government on May 31, 2005. Detailed consultations were also undertaken with various ministries, departments and government regulators. The Bill was thereafter drafted in consultation with the legislative department of the central government.
As a ministry of company affairs release states that the increasing number of options and avenues for international business, trade and capital flows had imposed a need not only to harness entrepreneurial and economic resources efficiently, but also to make the environment competitive enough to attract investment. The ministry took up the review and redraft of the Companies Act in 2004. A concept paper was also posted on the ministry?s website on August 4, 2004.
According to Som Mandal, partner at corporate law firm Fox, Mandal & Little, ?These (changes) will help boardrooms take much faster decisions. It makes it easier for companies planning M&As.? Adds Ved Jain, president, Institute of Chartered Accountants of India, ?The Bill will make the Indian Companies Act truly global.?
