After
the Companies Bill, 2011 was presented
in Parliament late last year, it was referred to the Standing Committee on
Finance chaired by Mr. Yashwant Sinha. The Standing Committee had previously
submitted a detailed
report on the Companies Bill, 2009, and most of its recommendations had found
their way into the 2011 version of the Bill.
the Companies Bill, 2011 was presented
in Parliament late last year, it was referred to the Standing Committee on
Finance chaired by Mr. Yashwant Sinha. The Standing Committee had previously
submitted a detailed
report on the Companies Bill, 2009, and most of its recommendations had found
their way into the 2011 version of the Bill.
The
Standing Committee has now issued its report
on this version of the Bill, narrowing its recommendations to some of the
remaining open and contentious issues. A summary/analysis of the
recommendations is available here.
Standing Committee has now issued its report
on this version of the Bill, narrowing its recommendations to some of the
remaining open and contentious issues. A summary/analysis of the
recommendations is available here.
In this
post, I discuss some of the key recommendations:
post, I discuss some of the key recommendations:
1. Corporate Social Responsibility (CSR)
This has
been a sticking point in the Companies Bill for the last couple of years now,
with the pendulum swinging between the voluntary and mandatory approaches to
CSR. The 2011 version of the Bill carries a compromise position in the form of
a “comply or explain” approach where companies are encouraged to make a CSR
spend, and any failure or deviation must be disclosed with appropriate
explanation. The idea is to let the various stakeholders judge for themselves
the company’s performance on the CSR front, which will operate as a significant
pressure on them to perform well.
been a sticking point in the Companies Bill for the last couple of years now,
with the pendulum swinging between the voluntary and mandatory approaches to
CSR. The 2011 version of the Bill carries a compromise position in the form of
a “comply or explain” approach where companies are encouraged to make a CSR
spend, and any failure or deviation must be disclosed with appropriate
explanation. The idea is to let the various stakeholders judge for themselves
the company’s performance on the CSR front, which will operate as a significant
pressure on them to perform well.
The
Standing Committee has sought to revert to its previous position, which is to
make the CSR spending mandatory, by including the words “shall ensure” in
clause 135(5) of the Bill that requires companies to spend 2% of the average
profits for the previous 3 years in pursuance of their CSR policy. Moreover,
the Standing Committee has narrowed the scope of the provision by stating that
“CSR activities of the companies are directed in and around the area they
operate”.
Standing Committee has sought to revert to its previous position, which is to
make the CSR spending mandatory, by including the words “shall ensure” in
clause 135(5) of the Bill that requires companies to spend 2% of the average
profits for the previous 3 years in pursuance of their CSR policy. Moreover,
the Standing Committee has narrowed the scope of the provision by stating that
“CSR activities of the companies are directed in and around the area they
operate”.
The
debate over mandatory-versus-voluntary CSR has been flogged to death, and the
various positions are only too well known. While the Ministry of Corporate
Affairs had proposed a via media that might have been potentially acceptable to
all stakeholders as a method of initiating a more formal CSR policy for
corporate India, the recent development leads to a further polarisation of
views.
debate over mandatory-versus-voluntary CSR has been flogged to death, and the
various positions are only too well known. While the Ministry of Corporate
Affairs had proposed a via media that might have been potentially acceptable to
all stakeholders as a method of initiating a more formal CSR policy for
corporate India, the recent development leads to a further polarisation of
views.
Although
CSR debate only forms a small part of a broader theme of company law reforms in
India, it had earlier been reported that the differences on this count were
sufficient to hold up the reforms in the previous round. It remains to be seen
whether the present episode will have the same effect. My guess is it will.
CSR debate only forms a small part of a broader theme of company law reforms in
India, it had earlier been reported that the differences on this count were
sufficient to hold up the reforms in the previous round. It remains to be seen
whether the present episode will have the same effect. My guess is it will.
2. Securities Offerings
The
Companies Bill, 2011 significantly tightened the process for offering
securities, particularly to a large number of investors. This was in substantial
part due to the dispute between SEBI and the Sahara group regarding the offer
of convertible instruments and hybrid securities to a large number of
investors. The Standing Committee’s effort appears to be to undo some of that
so as to make capital-raising easier for companies. This is somewhat surprising
given the increasing clamour for investor protection.
Companies Bill, 2011 significantly tightened the process for offering
securities, particularly to a large number of investors. This was in substantial
part due to the dispute between SEBI and the Sahara group regarding the offer
of convertible instruments and hybrid securities to a large number of
investors. The Standing Committee’s effort appears to be to undo some of that
so as to make capital-raising easier for companies. This is somewhat surprising
given the increasing clamour for investor protection.
Specifically,
the Standing Committee has asked for a specific definition of “private
placement”. Further, it has sought to limit the definition of a “listed
company” and “securities”. The report states:
the Standing Committee has asked for a specific definition of “private
placement”. Further, it has sought to limit the definition of a “listed
company” and “securities”. The report states:
It
has been suggested that with a view to accord some freedom and flexibility of
operations to Companies, specially when public funds are not involved, the
above definition may be amended to limit the applicability only to : (a)
Companies where the equity shares or any security convertible into equity
shares are listed; or (b) companies where the debt instruments are listed,
having been issued to public at large. The Committee find merit in the argument
from operational perspective that the scope of above definition of “Listed
Company” may be confined to listed securities issued through the process of “Public
offer” [as defined in clause 23(1)] only, so that the regulatory framework can
focus on such instruments only without dissipating energy and resources on all
kinds of instruments, since the unlisted instruments are already subject to
scrutiny of Ministry of Corporate Affairs. The Ministry of Corporate Affairs
may accordingly consider appropriate modification in the definition of “Listed
Company” in consultation with Ministry of Finance.
has been suggested that with a view to accord some freedom and flexibility of
operations to Companies, specially when public funds are not involved, the
above definition may be amended to limit the applicability only to : (a)
Companies where the equity shares or any security convertible into equity
shares are listed; or (b) companies where the debt instruments are listed,
having been issued to public at large. The Committee find merit in the argument
from operational perspective that the scope of above definition of “Listed
Company” may be confined to listed securities issued through the process of “Public
offer” [as defined in clause 23(1)] only, so that the regulatory framework can
focus on such instruments only without dissipating energy and resources on all
kinds of instruments, since the unlisted instruments are already subject to
scrutiny of Ministry of Corporate Affairs. The Ministry of Corporate Affairs
may accordingly consider appropriate modification in the definition of “Listed
Company” in consultation with Ministry of Finance.
Clearly,
the preference seems to be economic efficiency for the corporate sector by
providing to access to financing, which results in limited investor protection.
Again, the Standing Committee seeks to redraw the lines placed by the Companies
Bill, 2011.
the preference seems to be economic efficiency for the corporate sector by
providing to access to financing, which results in limited investor protection.
Again, the Standing Committee seeks to redraw the lines placed by the Companies
Bill, 2011.
3. Governance in Government Companies
This
appears to be a new issue addressed by the Standing Committee, and the reason
attributable to its introduction is the recent episode involving Coal India
Limited (CIL), where an activist investor, The Children’s Investment Fund
(TCIF) has sought greater protection for minority shareholding in a company
that is owned 90% by the Government of India. The Government has defended its
position on the basis that it (acting through the President of India) is
entitled under company law and in the articles of association of the company to
issue directions to the board of the company on specific matters.
appears to be a new issue addressed by the Standing Committee, and the reason
attributable to its introduction is the recent episode involving Coal India
Limited (CIL), where an activist investor, The Children’s Investment Fund
(TCIF) has sought greater protection for minority shareholding in a company
that is owned 90% by the Government of India. The Government has defended its
position on the basis that it (acting through the President of India) is
entitled under company law and in the articles of association of the company to
issue directions to the board of the company on specific matters.
The
Standing Committee has called for a disclosure in the report of the board of
directors of a government company “indicating the impact / implications of
Government directives on the financial position” of such company. Although this
proposal was resisted by the Ministry of Corporate Affairs on the grounds that
this would overburden government companies that are subject to several other
requirements and also that such impact may be incapable of quantification, the
Committee feels strongly about the need for such a report.
Standing Committee has called for a disclosure in the report of the board of
directors of a government company “indicating the impact / implications of
Government directives on the financial position” of such company. Although this
proposal was resisted by the Ministry of Corporate Affairs on the grounds that
this would overburden government companies that are subject to several other
requirements and also that such impact may be incapable of quantification, the
Committee feels strongly about the need for such a report.
This
approach is welcome as it induces greater transparency in the functioning of
government companies, and is an important step in the context of the
government’s proposal to divest shares to the public in several other public
sector companies.
approach is welcome as it induces greater transparency in the functioning of
government companies, and is an important step in the context of the
government’s proposal to divest shares to the public in several other public
sector companies.
4. Miscellaneous
Among
the other recommendations, an effort has been made to streamline the liability
of directors and officers. Whole-time directors are to be included in the
definition of “key managerial personnel” irrespective of whether the company
has a managing director. The Standing Committee has called for limiting
criminal liability for mere technical infraction of the company law provisions.
This may come as a relief to corporate personnel.
the other recommendations, an effort has been made to streamline the liability
of directors and officers. Whole-time directors are to be included in the
definition of “key managerial personnel” irrespective of whether the company
has a managing director. The Standing Committee has called for limiting
criminal liability for mere technical infraction of the company law provisions.
This may come as a relief to corporate personnel.
Other
recommendations include the manner and method of appointment of auditors, the
duration of appointment, rotation of audit firms and audit partners, and the
like. Yet others include the constitution of the National Company Law Tribunal
(and whether it should include members of the Company Law Board), exemptions to
private companies from certain provisions of the Act, and consolidation and
subdivision of capital.
recommendations include the manner and method of appointment of auditors, the
duration of appointment, rotation of audit firms and audit partners, and the
like. Yet others include the constitution of the National Company Law Tribunal
(and whether it should include members of the Company Law Board), exemptions to
private companies from certain provisions of the Act, and consolidation and
subdivision of capital.
Overall, the recommendations are limited in
number, but a few are contentious. Press reports indicate expectations that the Bill could be passed
during the monsoon session of Parliament. If the past track record is anything to go by, that
is far too optimistic.
