Introduction
Due to concerns that deficits in corporate freedom and stringent corporate enactments are hindering India’s economic boom, the Companies Act 1956 has been revised[1] to include more relaxed implications and business-friendly policies to foster healthy global competition. An attempt is made in this article to discuss the proposed Companies Bill, 2009 and its possible outcome and implications to India.
Background
The Ministry of Corporate Affairs took up a comprehensive revision of the Companies Act, 1956 in 2004 keeping in view that not only had the number of companies in India expanded from about 30,000 in 1956 to nearly 7 lakhs, Indian companies were also mobilizing resources at a scale unimaginable even a decade ago, continuously entering into and bringing new activities into the fold of the Indian economy. In doing so, they were emerging internationally as efficient providers of a wide range of goods and services while increasing employment opportunities at home. At the same time, the increasing number of options and avenues for international business, trade and capital flows had imposed a requirement not only for harnessing entrepreneurial and economic resources efficiently but also to be competitive in attracting investment for growth. These developments necessitated modernization of the regulatory structure for the corporate sector in a comprehensive manner[2]. In comparison to the existing statute, the proposed framework is more relaxed and has new standards of checks and balances for better commercial prospects. It provides the Indian corporate sector with the latitude it needs for growth in the global economy.
Highlights of the Bill
Together with the existing provisions for private and public limited companies, the new bill proposes a new entity called the ‘one-person company’[3], which will enable a single person to incorporate an entity. This will promote individual entrepreneurship and corporate growth, limiting the personal liability of the owner to the company’s liability. It will also open up better commercial opportunities to promote investments and commercial development in India.
The bill provides that one third of every company’s directors must be appointed as independent directors on the board[4] and at least one of the directors must be an Indian resident.[5] It provides the shareholders and investors with more power to take direct legal action against any fraudulent acts committed by the company and to take part in investor protection activities and class action suits.[6]
The new framework facilitates joint ventures and relaxes restrictions that limit the number of partners in entities (eg, partnership firms and banking companies) by allowing a maximum of 100 people, with no ceiling for professions regulated by special acts.[7]
The bill gives statutory recognition to audit, remuneration and stakeholder grievances committees[8] and recognizes the chief executive officer, the chief financial officer and the company secretary as key managerial personnel.
In the area of protection, the new framework provides that an investor’s claim over a dividend or security not claimed for more than a period of seven years will be transferred to a special government fund for the protection of investors called the Investor Education and Protection Fund, which will be administered by a statutory authority.[9]
The bill provides for a single forum for the approval of mergers and acquisitions, along with the concept of deemed approval in certain situations.[10]
The bill provides for a speedy and effective regime for the investigation of offences and imposes a minimum and maximum standard of levying penalties for any offences, with adequate deterrent provisions for repeating offences. A separate provision for penalty imposition in procedural non-compliances has also been laid down.[11] In addition, it specifically provides for special courts[12] to deal with offences under the bill. Company matters such as mergers and amalgamations, reduction of capital; insolvency (including rehabilitation, liquidation and winding up) will be addressed by the National Company Law Tribunal[13] or the National Company Law Appellate Tribunal[14].
Finally, the bill provides basic principles for all aspects of internal governance of corporate entities and a framework for their regulation, irrespective of their area of operation, from incorporation to liquidation and winding up, in a single, comprehensive legal framework administered by the government. In doing so, the bill harmonizes the company law framework with the imperative of specialized sectoral regulation.[15]
Additional Changes
Additional highlights of the new companies’ framework are as follows:
it lifts the limit on subsidiary lending, giving greater flexibility to structuring ownership;
it is a simpler and more concise piece of legislation;
it envisages shareholder and investor democracy in all aspects of commercialization; and
it acknowledges technological advancements by:
Ø proposing that board meetings be conducted via video conferencing;[16]
Ø recognizing votes cast through email[17]; and
Ø allowing companies to keep their accounting books in electronic form[18].
Checks and Balances
The new Companies Bill 2009 also provides certain checks and balances to govern the scope of its benefits.
The new framework makes it difficult to raise public deposits[19] (except under permission provisions in other special statutes) and treats insider trading between directors as a criminal offence[20]. Any misstatements or misleading facts in offer documents[21] or acts to induce the public into making investments through celebrity endorsements will be treated as non-compoundable offences[22]. Moreover, it also proposes banning issuing shares at discounts.[23]
The new bill proposes detailed disclosure of all company information, including information about directors at the time of incorporation and thereafter through an application for a compulsory director’s identification number issued by the Ministry of Corporate Affairs.[24]
The new bill proposes a strict check on any misuse related to not-for-profit organizations and adherence to all procedural disclosures and compliances, thereby limiting the scope for tax evasion and black money transactions.
The new framework recognizes audit and accounting standards[25] and specifically defines the role, rights and duties of auditors[26] in order to maintain the integrity and independence of the auditing process.
The new framework also proposes to incorporate international best practices based on models prescribed by the United Nations Commission on International Trade Law, for the efficient regulation of companies undergoing insolvency, rehabilitation, winding-up and liquidation proceedings.
Finally, the bill proposes establishing an insolvency fund[27] from which companies can draw money and a National Company Law Tribunal[28] for resolution of issues related to the rehabilitation, winding up and liquidation of companies.
Impact of Bill
As the bill is yet to come into force, its impact on India’s corporate stability can only be assumed. Major business players are eagerly awaiting its enactment as it will relax the stringent investment scenario established by the existing act and facilitate economic opportunities such as mergers and acquisitions, joint ventures and amalgamations. On the one hand, it will empower investors to keep an eye on a company’s operations through class action suits and the Investor Education and Protection Fund, making the process more transparent. On the other hand, it will simplify the lengthy incorporation process, dispute resolution policies and approval requirements for management, with a positive inclination towards better internal company operations. The bill also stresses the level of quality of corporate governance, while maintaining quantitative development. It regulates better audit standards and also provides for appointing valuers for raising quality control.
By allowing one-person companies to be incorporated, India will attract a new breed of democratic investors and a wave of entrepreneurs, which may have been previously afraid of taking such investment risks due to concern over the extent of personal liability in a proprietorship.[29]
However, there is concern among small and medium-sized companies about the strict compliances and heavy penalties likely to be imposed on any ambiguous propaganda. According to the proposed provisions, the offence of inducing the public to invest through the use of celebrity names or making misleading statements about the functioning or financial status of the company will attract a penalty of Rs5 million, in comparison to the existing penalty of Rs100,000. The celebrities endorsing the wrongful commitments may also be imprisoned for up to three years. It is hoped that this will reduce the number of immoral marketing agendas employed by ‘get-rich-quick’ companies.
With an eye on non-profit organizations, there is also less scope for companies to commit tax evasion and escape end consumer liabilities. This will provide leverage for investors and stakeholders.
Establishing special courts to decide purely company law cases, including compliances, permissions and approvals, will promote a speedy and justifiable disposal of investor grievances. In addition, a single forum for approval in merger and acquisition cases with a provision for deemed approval in certain cases will prove to be an economically productive step.[30]
Conclusion
It is hoped that the new Companies Bill 2009 will be enacted soon and bring about a number of key changes to the existing Companies Act 1956, satisfying major stakeholders and start-up entrepreneurs by proposing investor awareness initiatives as a mandatory provision. It will definitely create a solid platform for a democratic growth in investments in the market.[31]
[1] The Companies Act, 1956, was amended 25 times before the government decided to have an altogether new Bill.
[2] http://pib.nic.in/release/release.asp?relid=42061 visited on 30-11-08
[3] Clause 3© of the Bill
[4] Section 132(3) in case of listed companies
[5] Section 132(2)
[6] See Statement of Object and reason, Para 6, XV.
[7] See Clause 422
[8] Clause 158
[9] Sections 111 and 112.
[10] The provisions relating to merger and amalgamation have been provided in Chapter XV from section 201 to 211.
[11] Section 413(3)
[12] Section 396
[13] under section 369
[14] section 371.
[15] Adhiraj Suana, New Companies Bill, 2008, available at www.internationallawoffice.com
[16] Clause 154(2)
[17] Clause 97
[18] Clause 116
[19] Clause 66
[20] Clause 173.
[21] Clause 29 and 30
[22] Clause 31
[23] Clause 47(1)
[24] Clauses 132 to 135
[25] Clause 119
[26] Clause 126
[27] Clause 244
[28] Clause 369
[29] Adhiraj Suana, New Companies Bill, 2008, available at www.internationallawoffice.com
[30] Ibid.
[31] ibid
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