Sunday, 21 November 2010

Companies Act, 1956 vs. Companies Bill, 2009: Real Departure?

For last few years Government is trying to amend the Companies Act, 1956 in order to make it more ‘friendly’ with the industry and corporate sectors and to go away with certain archaic provisions. Though, the Companies Bill, 2009 is ready, still it is yet to become an Act. Earlier it was decided, in this current winter session of the Parliament, this would be passed. But for some other ‘important’ bills, this has been reserved for the budget session.
The bill was introduced in Lok Sabha on 23rd October in 2008, but due to dissolution of the parliament the Companies Bill, 2008 lapsed. In between some corporate frauds (one of them was Satyam) took place which questioned certain clauses of existing company law provisions. It forced the government to re-introduce the Companies Bill, 2008 as the Companies Bill, 2009, without any change.

Let see, whether it’s an old wine in a new bottle or really it is offering something different.

Main Objectives of Companies Bill, 2009:-

 To revise and modify the Companies Act, 1956

 To make the Companies Act, 1956 compact by deleting provisions that had become redundant over a period of time.
 To re-write various provisions of the Act to enable easy interpretation
 To delink the procedural aspects from the substantive law and provide greater flexibility in rule making to enable adaptation to the changing economic and technical environment

There are certain provisions which have been introduced for the first time.

Independent Directors
Companies’ Act 1956 doesn’t have any direct reference of Independent directors. Whereas in the Bill, independent director is clearly defined and role and duties have been stated. Tenure of 6 years has been fixed for the independent directors. Appointment of one third of the total no. of directors as independent directors has been proposed for every listed public company having a prescribed paid up share capital. Other than sitting fee and reimbursement of expenses, independent directors are not entitled for remuneration. Though, with prior approval of the members he is entitled to stock option and profit-related commission.

Director identification number
Duties and liabilities of director specified in the bill. Non compliance of prescribed duties and violation of those would attract penal consequences. New clause for resignation of a director has been introduced. Every director needs to obtain Director Identification Number and has to notify concerned authority. Director will be disqualified if he doesn’t obtain the DIN. This is a new clause. Earlier no such provision was there. In the current Act, it is specified that in case of a public company, 11% of the net profit of the company as remuneration to the Company director is maximum permissible limit. No such limitations in the new bill. No limits have been laid down on quantum of sitting fees to be paid.

Key Managerial Person
Statutory recognition to audit, remuneration and stakeholders grievances committees of the Board and recognizes the Chief Executive Officer (CEO), the Chief Financial Officer (CFO) and the Company Secretary as Key Managerial Personnel (KMP)

Concept of small company
Nothing has been defined in the Companies’ Act 1956 about small company. Small company means other than a public company, whose paid-up capital must not exceed the prescribed amount or in any case Rs. 5 crore.

One Person Company
As the name suggests it has an only one person as a member. The memorandum of the company shall state OPC Ltd. Companies’ Act, 1956 doesn’t talk about this.

Participation in a board meeting through video conferencing
Barring some situations, using video-conferencing technology for participating in the board meeting has been agreed upon. In the current Act, there is no such provision.
The maximum gap between two Board meetings is proposed to be 120 days in place of once in a 3 months. Time-period for issuance of notice and secretarial standards have been clearly defined in the new Bill.

Registered Valuer
For the first time, the concept of registered valuers has been introduced. Under the new Bill, whenever a valuation is required, that has to be carried out by the registered valuer of the company.

Appointment as an administrator
Another new concept is of an administrator. Company Secretary should be in the government panel in order to be recognised as an administrator of a sick company.

Company Liquidator
Introduction of the concept of Company Liquidator. Tribunal will appoint the liquidator and company secretary will be the professional assistance to the appointed liquidator.

Adjudication of penalties
This provision has been introduced in the Bill. In respect to non compliance of procedural laws, a minimum and maximum quantum of penalties will be charged. The determination of quantum of penalties will be decided by the Adjudicating officers.

Establishment of Special Courts
For speeding up the trial, central government through a notification may establish Special Courts as per the necessity. The Special Court will consist of single Judge, appointed by the Central Govt. with the concurrence of the Chief Justice of the High Court within whose jurisdiction the Judge will be working. Only serious offences should go to Special court.
In respect of foreign members or debenture holders, the Bill proposes to set up a competent court outside India for rectification of the register. This is a new provision and recognizes the presence of foreign investors in India in corporate securities.

Report on general meeting
AGM report shall have to be prepared and have to be filed to RoC within 30 days! If not furnished, penalty will be levied minimum of 1 lakh rupees to maximum of 5 lakhs for a company and for an individual defaulter of the company will have to pay a minimum of rupees 25 thousand to maximum of 1 lakh as a fine.

Merger & Amalgamation
The bill proposes increased disclosure requirement during merger and acquisition, allowing cross border and contractual merger. National Company Law Tribunal will replace all the multiple High Court permissions. The new provision states ‘A foreign company may merge or amalgamate into a company registered under this Act or vice versa and the terms and conditions of the scheme of merger or amalgamation may provide, among other things, for the payment of consideration to the shareholders of the merging company in cash, or in Indian Depository Receipts, or partly in cash and partly in Indian Depository Receipts, as the case may be, as per the scheme to be drawn up for the purpose.’
The bill recommends the abolition of differential voting rights or DVR.

Subsidiary Company
In the current provision it is said that, only when the holding company holds more than half of the equity share capital of the other company, the other company would be the subsidiary of the company holding such equity share capital. The new bill recommends that ‘“subsidiary company” or “subsidiary”, in relation to any other company (holding company), means a company in which the holding company—
(i) controls the composition of the Board of Directors; or
(ii) exercises or controls more than one-half of the total voting power’
In other words, companies would be only able to have one level of subsidiary companies. A subsidiary company cannot have further subsidiaries

Insider Trading
Companies not to be allowed to raise deposits from the public except on the basis of permission available to them through other Special Acts. The Bill recognizes insider trading by company directors/KMPs as an offence with criminal liability.
Uniform Financial Year:
The new bill seeks to introduce a uniform financial year for all companies, which would be April- March every year. Though, Company Law Tribunal could allow different financial year if companies appeal for that.

There are certain provisions in the amended bill which would help Indian Companies to perform better in the competitive field. Though there are severe criticisms against some of the proposed change.
The inclusion of independent director is applicable to the listed companies only, whereas it would have been more welcoming if it were exercised in the case of unlisted companies too. Rotation of audit firms in every 5 years may cause problems for small companies. Fixed tenure for independent directors is not at par with the international standard. Generally, independent directors take more time to start working. So, 6 years could be very little time. No company can have more than one subsidiary company would definitely stop money laundering but it may create financial problems for certain JV and M&As. This proposal is not in accordance with the international standard.

This Amendment is often called Satyam Amendment. After Satyam Saga, so many recommendations have been made to strengthen the Corporate Governance Scenario. Due to certain provisions in the current Act, government couldn’t act upon Union Carbide after the Bhopal Gas Tragedy. Experts believe, Companies Bill, 2009 would bring welcoming change and would help the Indian companies to become more transparent, though few clauses are questionable.

Companies Act, 1956
Companies Bill, 2009
The Mint
The Economic Times

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