New chapter on company law

In India's history, the year 1857 is a landmark one , remembered for India's first war for independence. However, a few know that the first Companies Act in India was legislated in the same year, which after multiple iterations resulted in the Companies Act, 1956. Is it any wonder then that change is due?

The Companies Bill, 2011 is a really positive step to modernise the law and make it relevant to match the current macroeconomic, microeconomic and corporate environment.

While India is an ancient land, it is also a land of the very young, IT savvy population; it is also the land of entrepreneurs as well as a growing economy which is demonstrating its might in the world. This India is in line with the current global trends and, therefore, we should focus on the change that the Companies Bill, 2011 brings to corporate governance.

Governance standards are being reviewed and revised across the world and the Companies Bill, 2011 is India's first attempt to lay down the benchmark for corporate governance standards in India.

It articulates shareholders' democracy and protection of minority shareholders, encourages responsible self regulation, disclosures and accountability. The Bill proposes major changes in areas such as board composition and accountability, independence and empowerment of independent directors, assurance and risk management, investor protection, corporate social responsibility (CSR) and audit accountability.

DUTIES OF DIRECTORS

To quote a view by the Dr J. J. Irani Committee, “no rule of universal application can be formulated as to the duties of the directors.

However, certain basic duties should be spelt out in the Act (Companies Act) itself.” Most would agree that good corporate governance requires at least basic director duties to be spelt out in the law and Clause 166 does justice to this view. This is just the first step.

Other provisions such as providing statutory recognition to nomination and remuneration committee, restricting maximum number of public company directorships of an individual to 10, mandating appointment of at least one woman director and board evaluation are definitely progressive.

Good governance also requires directors to spend quality time in overseeing their company's affairs and be accountable for utilisation of this time. Sir David Walker, in his 2009 review of corporate governance in UK financial institutions, defined this ‘quality oversight time' for non-executive directors as a minimum of 30 to 36 days a year.

In this context, the restriction on the number of public company directorships of an individual makes sense. It would enable directors, especially non-executive directors, to devote adequate time to their companies (there is scope for further reducing this limit to ‘7' as suggested in MCA's Corporate Governance Voluntary Guidelines).

INDEPENDENCE OF DIRECTORS

The second most important area the Bill addresses is ‘independence and empowerment of independent directors'. Recent corporate failures, especially Satyam, have called into question their role, independence and empowerment.

The Bill attempts to address these issues through provisions such as empowering an independent committee to oversee director appointments, limiting the tenure of independent directors to 10 years and mandating disclosure of justification for choosing an appointee as independent director. Satyam failure also re-iterated the fact that independent directors are as liable as executive directors even though they are not as involved in day-to-day affairs of the company. This resulted in mass exodus of independent directors – with nearly 265 independent directors resigning within four months of the failure. The Bill attempts to correct this inequality by proposing that independent directors be held liable only if any acts of omission or commission have occurred with their knowledge/consent or are attributable to the board process.

The Bill proposes progressive regulations in the area of ‘investor protection'. It introduces class action suits, mandates whistleblower mechanism for listed companies, makes regulations around accepting of deposits from public more stringent and provides an exit option to shareholders in case of dissent to change in IPO object. Class action suits act as good deterrents against any corporate malpractice owing to their financial and reputational impact on the company.

Additionally, they empower shareholders to seek compensation from the company in case of any wrongdoing. For instance, in case of Satyam, shareholders in the US were able to secure a compensation of $125 million owing to the country's strong class action framework, while Indian shareholders are still languishing.

There are however debatable provisions in the Bill in the areas of ‘CSR'. I am a strong proponent of CSR however making it mandatory may not necessary be the solution.

India today stands at the threshold of change in regulation. The Companies Bill, 2011, in particular, ushers in progressive ideas that are likely to enhance corporate governance standards in Indian companies — positively affecting their growth, sustenance and attractiveness to the global investment community. However, there needs to be a more extensive deliberation on inclusion of certain debatable provisions and clarity provided on certain unambiguous ones. As the new Bill replaces the archaic one, let us do it right this time to ensure that India can consolidate its economic position in the globe.

(The author is Head of Advisory, KPMG in India.)

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