The Companies Act of 1956 will now be replaced by the Companies Bill of 2012, which can also be called The Companies Act 2012. Only the President’s assent is pending for this bill, been pending since 2011 to become a reality. The 309 page document tries to clear a lot of conflict points present in the Companies Act 1956 that have been a pain for companies over time and a reason for a lot of legal cases.
So how does it impact corporate India & in general, You? Of particular interest to us is how this Bill/Act will address issues of Governance, Responsibility, Transparency, Diversity, Community and Sustainability. Let me try to dissect a few key changes that this bill aims to bring out in the above areas. This might be a longish post so please pardon me for the lack of brevity.
Yes, Corporate Social Responsibility (CSR) is not mandatory but the new bill will make sure that companies have to work really hard to not do anything on CSR. Companies having Rs. 1000 crores of turnover or profit after tax (PAT) of Rs. 5 crores for the previous three years need to spend at least 2% of their PAT on CSR activities. The companies can choose their areas of CSR and their activity but they have to report on what they have done with this 2%. In case they do not spend that 2%, the companies have to explain in their annual reports why the amount was not spent. The government hopes that this might lead to shareholder pressure on the companies to spend this money on ‘good’ activities.
There has been a lot of debate in the corporate sector, NGO sector and general public that CSR & community governance is a public subject that needs to be handled by the Government. There were arguments that essentially the bill means to pass on the Government’s responsibility of development to the private sector. We think that the companies should also take responsibility to give back something to the society – whether mandated or not. This will pay rich dividends to these companies in terms of better brand equity, defining a purpose of existence for the companies and enhanced goodwill among communities they operate in.
We will cover this issue in greater detail in the next post on this topic. Meanwhile, please read Forbes Magazine’s comprehensive coverage of this topic where it calculates the market for CSR activities in India could be Rs. 63 billion here.
With over 130 mentions of ‘Fraud’ or ‘Fraudulent’ in the document, the bill clearly aims to define what companies should and should not do in order to comply with the laws of the land – in terms of economic governance and compliancea. There is no ambiguity in what companies can get away with and hopefully this makes it a lot easier for watchdog agencies to hold the stick against erring companies.
The Companies Bill asks 1/3rd of the boards to be constituted of Independent Directors. For large companies that are mostly family owned and listed, this provision will help protect minority shareholders’ interests. But ambiguity still extends on who is really an ‘Independent Director’?
For example, if the MD of a bank is the independent director of a manufacturing company and the manufacturing company holds all it’s salary accounts in that bank, wouldn’t the MD become a vendor dependent on the manufacturing company and also privy to information that is not truly independent? There are many permutations-combinations to this issue of what constitute real independence of Directors.
Also, Independent Directors have been given a fixed term of 5 years. This will help them set and execute an agenda to protect the interests of minority shareholders.
More power to Women! Companies Act asks companies to have at least 1 woman director in the Board of Director. This is a good move to break the proverbial Glass Ceiling but still questions are raised on this being a rule rather than a guidance. The issues point out to cases where companies might not have enough talent pool among the fairer sex to fill up the mandatory position. We feel that companies should still adhere to the spirit of the ruling and have capable women as Directors among the available resources rather than having ceremonial people from the promoters families to meet this requirement.
With the auditors’ role becoming paramount in preventing major meltdowns such as the Satyam scandal and their role also coming under scrutiny, the Companies act brings in two brave reforms in this area. A company cannot have an individual auditor for more than a single term of 5 years and/or an audit firm for more than 2 terms of 5 years each. Also, auditors cannot serve more than 20 companies at any given point of time. This brings more accountability for the auditors in their role to prevent corporate frauds and other deviations from happening.
The minority shareholders have been granted the ability to file collective class action suits against the management of the company if they feel that their interests are jeopardised. This gives them a powerful tool to act legally against company management for decisions that may impact them negatively.
So these are the main points which we feel are relevant. We would’ve also loved to see more inputs & clarity on how companies should report their financial and non-financial impacts to the shareholders. As more and more analysis from experts will start flowing in, we’ll get to know further impacts of this landmark bill.
Right now, we feel it is a good starting point for companies to put their house in order in terms of shareholder protection, transparency, community development and governance.
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