1. The positive fallout: Better laws to govern corporates

The positive fallout: Better laws to govern corporates

The Satyam scam may have jolted both India Inc and the regulatory authorities by its sheer scale and brazenness but over the years it has led to major changes in the country’s corporate law...

By: | New Delhi | Updated: April 10, 2015 4:20 AM

The Satyam scam may have jolted both India Inc and the regulatory authorities by its sheer scale and brazenness but over the years it has led to major changes in the country’s corporate law framework towards protection of shareholder rights, greater transparency in decision making and independence of statutory audits, reports Gireesh Chandra Prasad in New Delhi. It has also resulted in putting higher compliance burden on small businesses.

With the implementation of Companies Act, 2013, shareholders for the first time got the right to initiate class action suits against promoters and auditors of a company guilty of wrong doing. This brings Indian and the US shareholders of an Indian group at par in their ability to seek damages for any wrongful action or omission besides giving them the ability to restrain the management from taking certain steps that are not in their interest. After the Satyam scandal came to light, its US shareholders were able to sue the company and its auditors for damages, but their Indian counterparts could not do so for want of a provision in the domestic law.

The new law that replaced the Companies Act of 1956 also introduced rotation of auditors to prevent the statutory auditors of a company and the management getting into a cosy relationship that might come in the way of an independent audit. As per the new norms, an individual can be a company’s statutory auditor only for five years and a firm 10 years.

Higher penalties for various violations, larger role for independent directors in audit and remuneration committees of companies, tighter norms to disqualify related parties from being on the board and reserving one-third of the board in large unlisted public companies for independent directors are among the other changes brought in by the new Companies Act in response to the R7,000-crore accounting scandal. Also, auditors face restrictions on the kind of other services they can render to a company.

According to Sumant Batra, chairman of law firm Kessar Das B & Associates, who worked closely with the government in framing of the Companies Act, 2013, the new law increased the levels of transparency and corporate governance and introduced a more stringent definition of an independent director. As per the new norms, independent directors should not receive any remuneration, other than a sitting fee or reimbursement of expenses. They may, however, receive profit-related commission or stock options if approved by the members.

The new law requires that at least a third of the board is independent, within the definitions set in the law and that independent directors make up the majority of the audit committee. Besides, the chair of the audit committee must be independent and at least one member of the remuneration committee is independent, explained Batra. This brings the membership of the board of directors in India in line with regulations required by other international markets, he said.

However, some of the provisions in the new regime have put onerous compliance burden on small businesses. “Companies Act, 2013 has failed to achieve a balance between introducing effective safeguards and ensuring ease of doing business,” said Kamlesh Vikamsey, former president of the Institute of Chartered Accountants of India.

One of the area where small businesses face hardship is the restrictions on companies accepting deposits from its members. Also, it is not clear if tax representation by a company’s statutory auditor is allowed under the new regime. Vikamsey said that many small and medium-sized businesses are seeking a tax-neutral exit scheme so that they could reorganise their businesses in the form of limited liability partnerships.

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