Aug 5, 2013

Companies Act – A Boon or A Bane

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Will the new Companies Law be a boon or a bane for the stakeholders ? the businesses, shareholders, investors, creditors and the law enforcers among others?

Companies in India have been and are governed by a number of legislations and regulations. The Companies Act, 1956 has been governing the incorporation and functioning of companies in India for almost 60 years now. The Companies Act 2013 incorporates a number of new concepts, makes changes in others and removes some archaic concepts as well.

It is interesting to note that the Act liberalizes the provisions of the Companies Act and takes some cue from international laws. Some positive aspects of the Act include provisions for investor protection, improving corporate governance, class action suits, one person companies, and introduction of stringent penalties in cases of default, among others.

The introduction of provisions to improve corporate governance such as increased disclosures will make the companies more transparent and compliance conscious. The Bill casts the net wide on consolidation of accounts. And so, a company that has one or more subsidiaries shall, in addition to its financial statement, prepare a consolidated financial statement of the company and all its subsidiaries in the same form and manner as its own and shall lay it at its annual general meeting. Further,along with the financial statement, the company shall attach a separate statement containing the salient features of the financial statement of its subsidiary or subsidiaries in such form as may be prescribed.

Every listed company will also be required to file a return in a prescribed form with the Registrar of Companies whenever there is any change in the number of shares held by promoters and top ten shareholders of such company. The return should be filed within fifteen days of such change.

The procedure and disclosure with regard to related party transactions have been streamlined. As for provisions on mergers and amalgamations, a supplementary accounting statement is to be circulated if the last annual accounts of any of the merging company relate to a financial year ending more than six months prior to the first meeting of the company summoned for the purposes of approving the scheme.

Further every company in relation to which an order is made by the Tribunal, shall file a statement in such form and within such time as may be prescribed with the Registrar every year, until the completion of the scheme.  The statement shall be duly certified by a chartered accountant or a cost accountant or a company secretary in practice indicating whether the scheme is complying with the orders of the Tribunal.

Apart from the above corporate governance provisions, the Act provides for strengthening the framework of boards by detailing requirements concerning independent directors, resident directors, women director, duties of directors, audit committee, nomination and remuneration committee, stakeholders relationship committee, and key managerial personnel.

There are some noteworthy and welcome provisions in the Act to protect the interest of stakeholders. Some of these were incorporated in the Act after some corporate scams came to light.

For instance, class action. Class action or class suit is a lawsuit that allows a large number of people with a common interest in a matter to sue or be sued as a group. The Act provides that such suits may be filed by members or depositors or any class of them, if they are of the opinion that the management or the affairs of the company are being conducted in a manner prejudicial to the interest of the company, its members or depositors.

Varying the terms of contract or objects in prospectus will be subject to stringent procedure. Dissenting shareholders will have to be given an exit opportunity by the promoters.

Internal Audit is to be conducted in certain companies and all listed companies and certain class of companies, as prescribed, will have to compulsorily rotate their auditors. Further, where an auditor is party to a fraud, the individual as well as the audit firm will be subject to punishment.

Also noteworthy is the provision prohibiting forward dealings in securities of a company by key managerial personnel. The Act provides that no director of a company or any of its key managerial personnel shall buy – in the company, or in its holding, subsidiary or associate company – a right to call for delivery or make delivery at a specified price and within a specified time, of a specified number of relevant shares or a specified amount of relevant debentures; or a right, as he may elect, to call for delivery, or to make delivery at a specified price and within a specified time, of a specified number of relevant shares or a specified amount of relevant debentures.

The Act introduces several new concepts. One such being, one person company (OPC) that provides Indian entrepreneurs who run proprietorships an opportunity to corporatize without adding any family member just to have a minimum number of members. OPC is a company with just one person as a member.  Such a company may be formed for any lawful purpose as a private company. It is formed by subscribing the name of such one person to a memorandum and complying with the requirements of the law in respect of the registration. China, the USA and Singapore are among countries that have legal provisions relating to or concept similar to OPC.

Another positive is the prescription of more stringent penalties for contraventions. In many instances, the monetary punishment has been increased and grave defaults have been made non-compoundable.. 

The Act also provides for the establishment of the National Company Law Tribunal (NCLT). This Tribunal will deal with all issues or disputes under the Companies Act and also to expedite disposal of company-related cases. Existing powers of the Company Law Board will be transferred to the NCLT, as well as those exercised by high courts in respect of winding up of companies, amalgamation and merger, rehabilitation and revival of sick industrial companies, reduction of share capital, etc.

The Act is not without faults. For instance, the Act is expected to bring about many practical difficulties in implementing consolidation of accounts of associate companies and joint ventures. Also, the Act has not rationalized provisions for winding up of a company.

Another drawback of the Act is that it lacks in innovation ? it does not allow new types of structure to be created. Further, it has not provided for introduction of differentiated compliance levels, depending on the size and functioning of the company. Such differentiation would have aided more companies to become more compliant with the legal and statutory requirements

Lastly, as a significant part of the law will be prescribed through Rules, it gives the bureaucracy vast powers to amend the law.



Mr. Pavan Kumar Vijay

Founder, Corporate Professionals Group and Past President, ICSI


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