What the proposed corporate law changes mean for retail investors

The proposed corporate law framework is a mixed bag for retail investors. “It is positive for minority shareholders to the extent it didn’t relax any existing safeguards (for investors) provided in the law, while empowering them at the same time,” said Sai Venkateshwaran, Partner and Head, Accounting Advisory Services at KPMG.

The Company Law Committee has shot down the proposal to reduce penalties on loans advanced to directors (besides a ₹25 lakh penalty there is also a provision for six months imprisonment).

“The enhancement of punishment was undertaken to address the large number of violations of the said section (Sec 185 and 186) as well as the need to deter diversion of funds by companies,” states the report.

The private placement process has been substantially simplified under the new proposal by doing away with the need for a separate offer letter, while making available details on valuation to the public. “It would lead to greater public scrutiny and bring about greater transparency in the valuation process of private placements” said Venkateshwaran.

It could also be raining dividends all through the year for shareholders. Section 123 (3) of the Companies Act, 2013 currently allows interim dividend for a financial year to be declared only during the financial year and not later. The proposed amendment allows companies to declare interim dividend anytime up to the convening of the annual general meeting for the particular financial year. The 10-member Companies Law committee, which was set up in June 2015, came out with its draft report on Monday, suggesting 100 amendments to the existing law.

There are some proposals that may be open to misuse unless shareholders step up their activism.

For instance, Section 185 of the Companies Act, 2013 does not allow companies to advance a loan to any other person in whom the director is interested. Now they are allowed to do so provided they get shareholder approval.

Section 197 prescribes that the total managerial remuneration payable by a public company shall not exceed 11 per cent of the company’s net profit. And that its limits may be exceeded only with the approval of the shareholders and the Centre.

The new framework has done away with the government approval, leaving the ball in the shareholder’s court. Given the poor participation of retail investors in voting, there is a possibility of remunerations of key managerial personnel shooting up in some companies if these proposals are adopted.