The Indian Companies Act, 1956, provides the legal framework for corporate entities in India. Essentially based on UK company law, the Indian Companies Act, 1956, has seldom seen any far reaching changes since its adoption. With over 730,000 companies by the end of last year, the corporate sector has grown in pace, demanding a comprehensive revision of the act. The Indian government thus drew up a “Concept Paper on New Company Law” in 2004, inviting comments and suggestions from the public, which were evaluated by the JJ Irani Committee.
The committee submitted its report in May 2005. It was widely discussed by various governmental ministries, departments and regulators, resulting in the shape of the Companies Bill, 2008, which was approved by the Union Cabinet on 29 August and is expected to be introduced in parliament in October.
While reducing the number of clauses in the extant act to half, thereby making it less cumbersome and easier to understand, the proposed bill provides India’s corporate sector with the freedom it needs to grow in a globalized world. The bill proposes to incorporate simpler, faster and more efficient processes in relation to company matters: however, it retains the necessary checks and balances, ensuring the controlled liberalization of the Indian corporate sector.
The bill aims to provide a single, comprehensive, legal framework administered by the central government, to deal with matters from the incorporation of a company to its liquidation and winding-up. It also includes provisions for the easy transition of companies operating under the existing act, to the new framework, and allows conversions from one type of company to another.
Most importantly, the bill conceptualizes a “one-person company”, a new legal form of a company. A simpler compliance regime has been envisaged for small companies, however, the concept of producer companies has been retained and a more stringent regime for not-for-profit companies planned to prevent misuse.
The bill removes the restriction on the number of subsidiary companies that a company may have, subject to disclosure with respect to the relationships and dealings between them. It includes provisions which seek to facilitate joint ventures while relaxing restrictions limiting the number of partners in entities such as partnership firms and banking companies.
A faster and simpler mechanism for company-related procedures and compliances is intended by enabling the electronic filing and access of corporate data on the internet. At the same time, detailed declarations and disclosures relating to the promoters and directors of the company at the time of incorporation have been prescribed.
The bill requires that at least one director reside in India, and proposes a minimum of 33% of the total number of directors be appointed as independent. It also gives statutory recognition to audit, remuneration and stakeholder grievance committees of the board of directors.
The bill places much emphasis on shareholder democracy and control, allowing self-regulation to replace government control on internal corporate processes. This is balanced by providing increased protection for the rights of minority shareholders and by giving recognition to “class action suits” that enable an association or group of shareholders to take legal action against any fraudulent exploits by the company. A lack of detailed disclosures and accountability, and insider trading by key managerial personnel will be made an offence with criminal liability.
Once adopted, the bill will put restrictions on deposit-raising from the public except where permission is granted to companies through other special statutes. It will also secure the claim of an investor over a dividend or a security, if not claimed for more than seven years, and proposes that the Investor Education and Protection Fund be administered by a statutory authority.
Accounting and auditing standards are addressed, with definite roles, rights and duties of auditors outlined to maintain the integrity and independence of the audit process. The bill mandates the consolidation of financial statements of subsidiaries with those of holding companies for the ease of accounting.
Other recommendations include the consolidation of forums for dealing with company matters such as mergers and amalgamations, capital reductions, insolvencies, rehabilitation, liquidations and winding-up in the form of a single forum of a National Company Law Tribunal with appeal to a National Company Law Appellate Tribunal.
The bill also suggests stringent inspections and investigations of companies prescribing penalties for each offence with suitable deterrents for repeat offences.
The need for simplifying corporate laws to facilitate faster economic growth cannot be overstated.The bill is a progressive and dynamic representation of the framework required to regulate corporate entities, enable the protection of shareholder interests and facilitate the adoption of internationally accepted best practices in company law.
Shardul Shroff is the managing partner of Amarchand Mangaldas & Suresh A Shroff & Co. He specializes in mergers and acquisitions.
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