Three reforms for investors

 BL Research Bureau | Updated on October 06, 2012 Published on October 06, 2012

Investors can look forward to better corporate governance practices ifthe new Companies Bill becomes law. — P.V. Sivakumar

It is raining reforms, with the Government announcing a clutch of new measures towards the weekend. Here is our take on what some of these measures could mean for you — the investor.

Push for pensions

Tucked away in the latest reform measures is the amended PFRDA (Pension Funds Regulatory and Development Authority) Bill 2011, which will now be put to Parliament for vote. This Bill, which has been hanging fire since 2005 when the New Pension System was first operationalised, seeks to vest the pensions regulator — PFRDA — with statutory powers.

It is also the passage of this Bill which will provide legal sanction to the New Pension System (NPS) which has managed the pension contributions of new government employees and voluntary private contributors since 2004. This is good news for 37.4 lakh NPS subscribers who have invested Rs 20,535 crore.

If the Bill goes through, the NPS, which has been in a sort of limbo since its introduction, may gain greater traction, with more options, more fund managers and some serious marketing effort. The NPS is supposed to be the answer to the problem of severely under-funded pensions in India.

Open to all, the NPS offers to actively manage sums contributed by employees to generate a market-linked return on their corpus, to be used at the time of retirement. It currently offers three different equity:debt combinations to choose from. The amended Bill proposes to include an ‘assured return’ option too. The pension fund managers are today a mix of public and private sector asset managers. If 26 per cent FDI is allowed, more joint ventures featuring Indian and foreign players may join the fray.

options in commodities

Another regulator who may get more teeth is the Forward Markets Commission. The commodities market, which has been attracting a lot of retail interest, is eagerly awaiting the passage of the amended Forwards Contract (Regulations) Amendment (FCRA) Bill.

The Bill proposes to make the FMC an autonomous body which can collect fees for funding its operations, penalise wrong-doers in offences such as insider trading and have the power to call for documents and records to aid its investigations. As a check on FMC, it is provided that its decisions can be appealed against in the Securities Appellate Tribunal.

The Bill also proposes the introduction of option contracts in commodities, complementing futures. This will give participants a relatively low-risk instrument for hedging their positions. Past experience shows that in India as well as overseas, options are preferred over futures by the trading fraternity. The volumes in commodity exchanges are likely to get a boost through this.

For minority rights

Investors can look forward to better corporate governance practices and a boost to their rights as minority shareholders if the new Companies Bill becomes law.

To prevent an encore of the Satyam scam and to have a fresh pair of eyes scrutinise the financials, the Bill mandates rotation of individual auditors every five years, and audit firms, every ten years. Companies can also voluntarily resolve to rotate the auditing partner of the firm at regular intervals.

The amendments now limit the maximum number of companies in which a person can be appointed as auditor as twenty. This apart, the amendments bring in greater clarity on provisions on criminal liability and payment of damages by auditors in case of fraud.

Secondly, the Bill addresses the issue of objectivity of independent directors who have been serving on the boards for dozens of years. They now have to be appointed every five years, cannot have more than two consecutive terms and thereafter will be eligible for re-appointment only after a three-year break.

Some amendments to make the provisions relating to independent directors clearer have been approved.

Published on October 06, 2012
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