Recommendations of the report of the Standing Committee on Finance, on the Companies Bill, 2009 

 

Nidhi Bothra nidhi@vinodkothari.com  

The 21st Report of the Standing Committee on Finance, on the Companies Bill, 2009, presented in Fifteenth Lok Sabha session on 31st August, 2010 had much to offer. Chaired by Sri Yashwant Sinha the Committee gave several recommendations on the Bill with its 28 Chapters and 426 Clauses in light of the suggestions, memorandums received by various regulatory bodies and institutions like SEBI, RBI, ICAI, ICSI, ICWAI, FICCI and so on.

The Bill seeks to codify a new law to regulate companies and other corporate entities in the country and repeal the existing Companies Act, 1956. The need for the change was felt in the light of the changes in the economic scenario both domestically and internationally in the past couple of decades. The tone of the Bill and the focus of the Committee was to bring about such changes that would be in consonance with the national and international economic changes and to remove the redundant provisions making the act more compact, easing out the procedural requirements and regrouping the scattered provisions; yet remaining stringent on grounds of good corporate governance and protection of the interest of the investors and public at large.

Few of the recommendations of the standing committee’ report are:

1. The voluntary Corporate Governance Guidelines 2009, issued by the Ministry of Corporate Affairs should be made mandatory for the listed companies and to be appropriately included in the Bill keeping it voluntary for unlisted companies.

2. The recommendations of the two Joint Parliamentary Committee reports that were incorporated in the Companies (Amendment) Act, 2000 also find place in the Companies Bill, 2009. This means that the penalties with regard to inter-corporate loans and investments would increase, Ministry to frame necessary rules for inter corporate loans and investments, serious offences would be non-compoundable and to be adjudicated by Special Courts. Central Government can order investigation against a company directly without the inquiry and the report of the Registrar u/s 234 as is required, Special provision for freezing of assets of a company under investigation, Audit Committee to be mandatory, statutory fillings become more stringent.

3. The Committee recommends that IFRS convergence to find place appropriately in the Bill to harmonize the accounting standards.

4. Investor Education and Protection Fund is to be administered by a statutory body and the Committee recommends that the fund should be utilized for providing immediate relief to the small investors, who have suffered losses due to corporate defaults. Recognised Investors Associations should also be empowered to file class action suits and also complaints to Central Government/Tribunal on behalf of a prescribed number of shareholders. The procedure prescribed for immediate relief / compensation to small investors should also be made simpler and quicker. IEPF to refund the dividend claims of the investors even after 7 years. This claim does not get extinguished however company’s obligation to transfer to IEPF remains.

5. Concept of Independent Directors came under scanner after the Satyam scam and after a lot of deliberation the Committee recommended that as the institution of Independent Directors is critical instrument for ensuring good corporate governance the appointment of Independent Directors should be done with utmost care and that the government should lay down rules for the appointment, qualification, extent of independence, role, responsibilities and liabilities. The Ministry is also contemplating on keeping the appointment of Independent Directors should be independent of the management of the Company.

6. As the Bill, sought to reduce the jurisdiction of SEBI, the Committee considered the view that the designated jurisdiction of the regulators like SEBI, RBI should be articulately appropriated in the Bill and the Ministry is to ensure that there is no conflict or overlap of jurisdiction in the governing statutes and the rules framed thereunder. The Bill should be articulate and explicit about the overriding effect the special statues whenever there is conflict with the provisions of the Bill and in respect of the matters where the Special Act is silent, the provisions of the Bill to be applicable.

7. National Advisory Committee on Accounting Standards (NACAS) role to be expanded in the Companies Bill, 2009 and to make recommendations to the Central Government for both accounting and auditing standards. The Committee recommends sufficient mandate to be given to oversee the accounting and the auditing standards and to review the quality of the audits undertaken.

8. The instrument of public deposits as a source of capital for companies should not be discouraged in law, while deterrent provisions should be brought against defaulting companies.

9. To bring Corporate Social Responsibility (CSR) in the statute itself, the Committee feel that separate disclosures required to be made by Companies in their Annual Report by way of CSR statement indicating the company policy as well as the specific steps taken thereunder will be a sufficient check on non-compliance.

10. In the light of availability of postal and electronic ballot, the Committee suggests that the existing concept of proxies may be done away with and there should be a requirement for higher quorum for meetings than five members personally present to a reasonable percentage.

Other recommendations are:

• Key Managerial Personnel to include Whole Time Directors even if the company has a managing director or manager.

• Promoters to form a part of officers in default and persons advising the board in professional capacity to be excluded.

• The amount capitalized on issue of bonus shares and shares against consideration other than cash and other arrangements to also form a part of paid up capital under the definition.

• As the Companies Bill proposes for introduction of small companies and One Person Companies the capitalization threshold limit to be higher than existing for private and public companies.

• Director and Key Managerial Personnel to be included in the definition of ‘related party.’

• With the view to prevention of diversion of funds and to keep the rules for inter corporate investments stringent, it is being proposed that the definition of subsidiary company to include subsidiary company to be company in which the holding company holds voting power through two or more subsidiary companies and also provide for circumstances wherein a company shall be deemed to control the composition of the Board of Directors of another company

• To ensure greater accountability, the Committee recommends that the compliance certificate to be given both by the professional as well as by Director/Manager/Secretary of the Company.

• Process of conversion of company from one form to the other to be made easier.

• Statutory filings become stringent with regard to annual returns, directors changes, registered office address change etc.

• Disclosures in the prospectus at the time of public issue is provided for in the Bill

• Statutory Auditors: Auditing standards to be notified in the Bill. Auditors report on the Internal financial controls of listed companies, Non compliance by auditor may result in Civil and Criminal liability, Compliance with AS made mandatory.

• Directors: Appointment of Independent Director to remain independent of the company’s management, Insider Trading a criminal offence, Restrictions on non cash transactions involving Directors, Non executive director finds definition in the Bill, Bill explicitly to mention the duties of the Directors.

• Incorporating a company would be made easier, insider trading would be a criminal offence, transition of companies from one form to another, new one person company with simpler compliance regime.

In the light of the recommendations of the Committee, we are yet to see how the recommendations are reviewed by the Ministry.