NEW COMPANY LAW EAGERLY AWAITED

[Dr. Sanjiv Agarwal]

India Inc will soon usher into a new era of more liberal, growth oriented and competitive regulatory frame work. Presently corporate entities are governed by a nearly six decade old enactment - Companies Act, 1956 which will get replaced by the Companies Act, 2013 which has been last week passed by Rajya Sabha.  It was earlier passed by Lok Sabha in December 2012. It is hoped that the new provisions may be made applicable in more than one installment as the process of framing the rules is under way but in any case the new law will be in force by the current fiscal end.

The new law shall comprehensively replace the existing law comprising of 658 plus sections which also makes it the longest piece of law in the country. It aims at business friendly corporate regulation, pro- business initiative, good corporate governance, e-governance and enhanced accountability of management & disclosure norms, audit responsibility, protection of investors and shareholders, better framework for insolvency regulation and participation and contribution of corporates in corporate social responsibilities.

The new Act shall, inter alia provide for the following –

a)   e governance

b)   good corporate governance

c)   CSR initiatives

d)   enhanced disclosure norms

e)   enhanced management accountability / transparency

f)    audit accountability

g)   investor protection and activism

h)   protection of minority shareholders

i)    framework for insolvency regulation

j)    stricter enforcement

k)   facilitating mergers / acquisitions

l)    key managerial persons

m)  one person company

n)   role of independent directors

o)   functions of company secretary

p)   secretarial standards

q)   constitution of national financial reporting authority  

r)    class action suits

s)    constitution of national company law tribunal, etc.

Various new concepts have been introduced in the new company law such as independent directors and their term. One person company, e-voting in general meetings by shareholders, class action suits, enhanced role of independent directors, mandatory women director on company boards, rotation of auditors, mandatory spends by companies on social responsibilities and setting up of national company law tribunals are some of them.

For the first time, company law talks of independent directors, their tenure and liability. While there will be data bank of directors maintained for being appointed, the law also prescribes the code of conduct for independent directors.

Learning from Satyam fiasco, now audit firms and auditors shall be subject to rotation to have checks and balances in place and avoid so called friendly nexus between the auditor and  auditee. The focus is on ensuring independence and accountability of auditor. A new regulatory body called National Financial Reporting Authority (NFRA) will be set up to ensure monitoring and compliance of accounting and auditing standards and to oversee quality of service of professionals associated with compliance.

The new law also empowers employees as vigil mechanism through whistle blowing has been made to evolve a process to encourage ethical corporate behavior and reward employees.

The focus is also or Corporate Social Responsibilities (CSR) as companies (both public and private) shall be required to spend certain percentage of net profits (upto two percent ) on various specified CSR activities as taken  up by the companies as per their CSR policy.  Each company will have to have a board level CSR committee to formulate CSR policy and monitor  such activities.

For implementation of provisions, the Central Government shall notify the dates from which different provisions shall be applicable. The machinery provisions in the form of Rules are under drafting stage and it is expected that the draft rules shall be soon released by Ministry of Corporate Affairs for public comments. It is hoped that the new Companies Act, 2013 may become operational by this fiscal end.

While the new law will have far reaching impact on corporate India, professionals and upliftment  of social  activities, it would also be tough for corporates to comply or else explain or get punished. Corporate governance and enabling environment are the basic tenets of new law. If complied in true spirit, it will transform corporate culture for the good.