Companies Bill 2011 - The changing face of Company Law in India

Monday, January 16, 2012 | Posted by: Grant Thornton
Categories: India, India Watch Issue 15 | Tags: India, Corporate Governance, mergers, Budget, auditor, Budget 2012, incorporation, bill, companies bill 2011, auditor's rotation, companies act, investor portection, companies bill india,

A new Companies Act to amend the more than 50-year old Companies Act, 1956, is expected to be finally cleared in the Budget session in March 2012.

The proposed Bill gives the central government significant additional power by way of delegated legislation, as a result of which numerous additional provisions can be prescribed through rules that the government can notify from time to time.

The Bill has changes ranging from incorporation, fundraising and corporate governance through to mergers, auditor rotation and independence requirements.

Incorporation, funding and investor protection
The Companies Bill, while simplifying certain requirements for incorporation, has introduced new concepts of ‘One Person Companies’ and ‘Small Companies’ that enjoy relaxation in norms relating to reporting requirements, board meetings and other procedural compliances. Private companies can now also be incorporated with up to 200 members, which is higher than the limit of 50 in the existing Act.

For private companies, a review of the fundraising activities through private placement introduced stricter norms; offer documents with relevant details are required to be filed with regulators, subject to the number of persons to whom the offer is made or the investment size.

For public fundraising, the information required to be disclosed in the prospectus has been increased. Investor-friendly norms have been introduced, eg if money remains unutiliased, a special resolution (2/3rd majority) is to be passed for change in the company’s object clause, as well as other requirements of advertisement and exit opportunity to dissenting shareholders. Similarly, any variation in the terms of contract referred to in the prospectus or object invite restrictions on the use of money raised.

‘Class action suits’ make their debut in the Bill, where any class of members or depositors, in specified numbers, can initiate proceedings against the company if they are of the opinion that the affairs are being carried out in a manner prejudicial to the interests of the company, members or depositors. 

The financial year of all companies has been mandated to end on 31 March and only companies which are holding/subsidiary of a foreign entity can have a different financial year with prior approval.

Mergers regime
Mergers between holding companies and their wholly owned subsidiaries or between two or more small companies (as defined in the Bill) no longer require court/tribunal approval. Companies registered in India and those incorporated in foreign jurisdictions can also merge subject to rules as may be prescribed by the central government in consultation with the Reserve Bank of India.

If a listed company merges with an unlisted company, the transferee company has been given the option to remain unlisted with a payment of cash to shareholders of the listed company.

Finally, in a bid to eliminate unnecessary litigation that may occur due to dissenting shareholders or creditors, only persons holding at least 10% of the share capital or 5% of the total outstanding debt have the right to object to the scheme of arrangement. However, to prevent financial re-engineering through a scheme of arrangement, specific provisions have been made for the scheme to comply with accounting standards and for the report of an expert valuer to be disclosed to the shareholders.

Corporate governance
Public companies are now required to have independent directors. While the directive on the number of independent directors on the board does not differ too significantly from what was provided in Clause 49 of the Listing Agreement of Stock Exchanges in India, the Bill has also codified duties of such directors and has placed restrictions on remuneration, eg Independent Directors cannot be given any ESOPs.

Directors cannot exceed two five-year terms and are required to have a cooling off period of three years before they can be re-appointed. In addition, independent directors have to declare that they comply with the criteria as set in the Act. On the anvil is the establishment of a data bank of Independent Directors.

Provisions related to board meetings and their powers, and appointment and remuneration of managerial personnel have also undergone changes. Secretarial standards, as issued by the Institute of Chartered Company Secretaries (ICSI) and approved by the central government, are required to be adhered to, with every listed company also required to annex to its board report, a secretarial audit report.

Information disclosed in Annual Returns submitted to the Registrar of Companies and in board reports accompanying financial statements has been increased.

Auditor’s rotation and independence requirements
Proposals similar to those being considered by the European Commission to change audit regulation, which include audit firm rotation and the requirement for large audit firms to separate audit and non-audit activities, have also found resonance in the new Bill.

The proposed changes include auditor rotation for listed or other prescribed companies every 5 or 10 years depending on whether the auditor is an individual or a firm, respectively. There is a cooling off period of five years after completion of such a term during which the auditor cannot be re-appointed. To circumvent the possibility of appointment of an entity related to the auditor whose term has expired, the Bill provides that no such audit firm which has a common partner or partners to the retiring audit firm, shall be appointed as auditor of the same company for a period of five years.

An auditor of the company is also prohibited from providing, directly or indirectly, a number of specified non-audit services to the company, its holding company, subsidiaries, fellow subsidiaries or associate companies.

In the wake of recent accounting scams, duty has been cast on the auditor, to immediately report to the central government any offence involving fraud which is being or has been committed against the company by officers or employees.

In conclusion, while there are many changes, the Companies Bill should bring stronger legislation, greater transparency and better investor protection; how many of such changes finally make it to the Act enacted by the Parliament remains to be seen.

Saurabh Mathur
Manager, Assurance
Walker Chandiok & Co
India

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