The new Companies Act has made many sweeping changes regarding governance, transparency, disclosures, responsibilities of directors, class action suits and a more powerful Serious Fraud Office. On the face of it, the new company law has fewer provisions—with only 470 sections compared to the present Companies Act, 1956 which has nearly 700 sections. However, the new law has many more provisions by way of rules. Separately, amendments to the SEBI Act have made it one of the most powerful market regulators in the world, given it the power to search, seize and freeze accounts and assets, with very little oversight on its actions. Will these changes lead to better governance and more investment opportunities? At an exclusive Moneylife Foundation event, two very knowledgeable and independent-minded people in the business— Savithri Parekh, Head of Legal & Secretarial, Pidilite Industries and Jayant Thakur, Chartered Accountant, shared their views on these two momentous legal changes.
Ms Parekh discussed the highlights of the Companies Bill 2012. Given the recent corporate scandals there has been a greater focus on corporate governance and transparency. There have been substantial changes in the restructuring provisions with greater focus on disclosure and compliances. The Director’s Report will contain enhanced disclosures such as number of meetings of the board, policy on Directors’ appointment, remuneration including qualification, positive attributes, independence and other matters, particulars of loans guarantee and investments and details about CSR policy and initiatives.
While the earlier Act had no provisions on insider trading, under the new Act insider trading is prohibited and penal provisions under the corporate laws will also be applicable. This would mean the guilty would be subject to imprisonment up to 5 years or fine of minimum Rs. 5 lakhs and maximum Rs. 25 crores or three times amount of profits or both. It is not uncommon to find companies taking their minority shareholders for granted; some even go to the extent of virtually short-changing investors who put their faith in the company. Knowing the limitation of individual investors to fight against a company’s might, many a company has taken them for granted. To overcome this weakness in the law, the Companies Bill has now proposed a new Clause 37 that provides for action by a group of shareholders.
Mr Thakur, who has advised listed and non listed companies and intermediaries on SEBI laws, other corporate laws, etc, spoke on the new provision for independent directors. The new provision states that a listed company should have at least one-third independent directors and no stock options can be given to independent directors. This move ensures that rotation of independent directors is envisaged. It ensured improved transparency in the conduct of business.
Speaking on related party transactions, Mr Thakur said, there was limited scope for transactions and persons covered under the earlier Companies’ Act. The new provisions have an enhanced scope of reporting transactions. ‘Related parties’ would include relative, directors with certain shareholding, persons in advisory capacity to the board. This ensures greater transparency in operations with key persons.
While the existing law has no provision for the tenure of auditors, the maximum tenure of auditors under the new provision individual auditors to be rotated every five years and audit firms every 10 years. The auditors would need to comply with the auditing standards. There are also restrictions on the auditors which is inline with global audit norms. The provisions also introduce an increased liability of auditors if found involved in fraud or has abetted or colluded in any fraud. Auditors can also act as whistleblowers.
For the first time, a provision has been made for class action suits. It is provided that specified number of members, depositors or any class of them, may, if they are of the opinion that the management or control of the affairs of the company are being conducted in a manner prejudicial to the interests of the company or its members or depositors, file an application before the Tribunal on behalf of the members or depositors. Knowing the limitation of individual investors to fight against a company’s might, many a company has taken them for granted. To overcome this weakness in the law, the Companies Bill has now proposed a new Clause 37 that provides for action by a group of shareholders.