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Companies Act 2013 : A push for accountability Prof HS Mishra

The companies Act 2013 has been recently passed by both the houses of Parliament. Major changes have been incorporated in the act and once implemented will bring more accountability and transparency in Indian business houses. The article will try to cover the salient changes and how it is going to change the business scenario.
Duping thousands of investors of crores of rupees by artificially inflating share prices and falsifying company accounts for years under the garb of friendly management-auditor relationship that was Satyam scam of 2009 in nutshell , the country’s biggest ever corporate fraud. In more recent times, there was the multi-crore Saradha chit fund scam, which brought to the fore how a few individuals  cheated small-time depositors by taking advantage of loopholes in the existing corporate laws.

These scandals, along with many others, have no doubt, exposed the shortcomings of India’s legal and regulatory systems to tackle corporate wrongdoings, but also made lawmakers smarter and nudged the government into coming up with stringent laws to deal with fraudulent enterprises, individuals and fly-by-night operators who cheat unsuspecting investors. The Companies Act  of 2013, which became a law after it received assent from President Of India on 29th August 13  is one of those measures. With 29 chapters, 470 clauses and seven schedules, the new law, which replaces the Companies Act of 1956, aims to bring in massive changes in the way companies govern themselves, raise money, interact with stakeholders and contribute to nation-building. The corporate ministry is now in the process of making the rules for the new legislation. The draft rules would be put on ministry’s website in about 2 weeks. After this stakeholders and general public, among others would have up to 60 days to provide their comments.

After more than 10 years of discussions, drafting and delays and five different ministers spearheading it, the government has been able to replace the 57-year-old law with new definitions of accounting and auditing, control, independent directors, key managerial personnel, promoters, turnover, small company, one-person company, voting rights and a host of other things.

Features : Companies Act, 2013
– To help in curbing a major source of corporate delinquency, introduces punishment for falsely inducing a person to enter into any agreement with bank or financial institution, with a view to obtaining credit facilities.
– Independent directors’ shall be excluded for the purpose of computing ‘one third of retiring directors’.
– ‘Whole-time director’ has been included in the definition of the term ‘key managerial personnel’. The employees stock option (ESOP) could not be given to independent directors, as that was given to employees. A third of the board had to be filled with independent directors.

-The government has also made provisions regarding incorporation of companies. According to the new law, even one person can form a company, as against the earlier requirement of at least two people.

-Safeguarding workmen in the legislation, the new law mandates payment of two years’ salary to employees in companies that wind up operations. This liability would be overriding.

-Maximum number of directors in a private company increased from 12 to 15 which can be increased further by special resolution.
-Financial Year of any company can end only on March 31 and only exception is for companies, which are holding / subsidiary of a foreign entity requiring consolidation outside India, can have a different financial year with the approval of Tribunal.
-Establish Serious Fraud Investigation Office ( SFIO ) for companies.
sion of use Of Electronic media for submitting returns, voting etc.

 It seeks to incorporate global best practices in the corporate world, introducing for the first time, class action suits under which a specified number of members or depositors can file suits on grounds of oppression or mismanagement against a company, its directors, auditors, experts and even ad visors

Experts say the law now assumes importance and needs utmost care so that it leaves little room for litigation. They have also suggested that all chambers of commerce ensure flawless formation of rules and in a time-frame of, say six months. The Confederation of Indian Industry (CII) has already said it will continue to engage with the Corporate Affairs Ministry to work out the modalities of provisions that prescribe delegated legislation in the form of rules.

This article looks into shortcomings of the new law, but first the details of the Act and how it is going to impact investors, especially the small ones.

The law makes it easy to raise capital for small and unlisted companies by explicitly laying down the rules. Earlier, rules governing capital raising by unlisted companies were vaguely defined. The number of members in a private limited company has been increased from 50 to 200, implying that a large pool of capital will now be available with the company and reduce the need for a public float.

The concept of one-man company allows an individual to adopt corporate structure for carrying out business, yet the rules governing the one-man company such as book-keeping, reporting and taxation have been simplified. This is expected to benefit small businesspersons like weavers, craftsmen, who work with limited resources. In another departure from the past, a certain class of companies will be required to have at least one woman on their boards.

Some changes in laws for cross-border merger of companies have also been incorporated. Earlier, only the merger of a foreign company with an Indian company was permitted, now, Indian companies can merge with foreign companies in specified jurisdictions yet to be notified. There can also be merger of a listed company with an unlisted one. Rationalization of sickness laws for a company has also been spelt out in the new act. Earlier, these laws applied to only industrial undertakings, now they apply to any company. Damages can be claimed for unlawful or wrongful acts from or against the company, its directors, auditors, experts, advisors under the class action suit.

 According to experts, the clause which talks about consultants, advisors or any other person may be enlarged to include lawyers or investment bankers who have given wrong advice leading people to incur financial losses.

Major Changes From  Previous Act

Independent Director-Anybody, institute or association which has been authorized in this behalf by the Central Government shall create and maintain a data bank of persons willing and eligible to be appointed as independent director and such data bank shall be placed on the website of the Ministry of Corporate Affairs or on any other website as may be approved or notified by the Central Government.
CSR- While the concept of CSR is not new in India, there has been little legislation to enforce this responsibility.  As far as the mandatory CSR clause is concerned, the stipulated 2% spend would be mandatory for companies with a net worth of more than Rs 500 crore or a turnover of more than Rs 1,000 crore or a net profit of more than Rs 5 crore. The law imposes a compulsory measure, yet the liability of the company is only to make ‘best endeavour’ to comply with CSR and report.
Auditors- The limit in respect of maximum number of companies in which a person may be appointed as auditor has been proposed as 20. The Act has made rotation of auditors mandatory every five years. There will also be a yearly ratification and auditors cannot continue if shareholders do not ratify them at their annual general meetings. Under the current Act, auditors can continue working provided they keep getting yearly ratification up to a period of 10 years after which there will be a cooling-off period of five years before the same auditor comes back.

 Key Proposals : Analysis
1.     The new law transits company secretaries to corporate governance professionals bracketing them in category of key managerial personnel. Along with honors comes more responsibility. They will now be considered as an officer in default, if something goes wrong with a company, say corporate observers. Punishments in such situations will include penalty and imprisonment.
2.     Hundr
ed or more shareholders can file a common suit against corporate fraud and claim damages. A suit can be filed on grounds of misrepresentation and omission of facts in the company’s offer document. Earlier only separate petitions were allowed. When satyam promoter admitted to falsifying account, Indian investors had a major loss as shares crashed from Rs 182 to Rs 40. But holders of satyam  ADRs in US fought and won damages of $125 million in a class action suit against the company. It also saves minority shareholders from high legal fees.
3.      If company has un-utilized funds from an IPO and plans to change the objects, it has to provide an exit opportunity to dissenting shareholders. The exit should be a price specified by SEBI. Cases unearthed by SEBI in 2011 IPO scam for example Bhartia Global –an IT solution provider used IPO money to settle an outstanding loan, instead of deploying it an expansion. RDB Rasayans transferred the money to Group Company that was in financial distress.
4.     New act mandates that minority investors should have at least one representative on the board. It can prevent large asset sales, royalty payment to parents, over the top managerial remuneration, merger proposals that benefit promoters but not small shareholders. Recent instances  of ACC, Ambuja cement, Hindustan Unilever, Nestle India and others increasing royalty payment to parents have led to lower profits being available to minority shareholders.
5.     The act requires the compliance officer to monitor acts of insider trading in the company. Prohibits directors from trading in shares both in the cash and futures market.  Inside trading to be punished with a cash fine or imprisonment or both. CMD of Polaris financial technology was investigated for insider trading for selling his personal shares ahead of a key announcement.
6.     Companies unable to pay over half their debt will be declared sick. Companies are generally referred to BIFR too late for meaningful revival measures. The creditors can now move in earlier and the employee may get early warning signs of trouble
Opinion : People
Dinesh Kanabar, deputy CEO of KPMG, listed the five radical shifts in the new act, Corporate governance, corporate social responsibility (CSR), accounting provisions, relationship of the directors and the auditors with the company, and finally, the merger and amalgamation provisions have improved transparency and broad-based accountability while protecting the minority interests in a company.
The act includes learning from the Satyam fiasco and hopes to protect the interests of minority shareholders while expanding the responsibility on auditors who will face criminal liability if they fail to report corporate fraud. It also seeks to strengthen the institution of independent directors.

The Bill also seeks to make mergers and acquisitions easier, clearer and speedier.”On the mergers and acquisitions front, the new Act permits both inbound and outbound merger. It would also help group re-organization, as it provides for direct merger as well as a more robust process for considering merger. Even deal-making would be smoothed as  shareholder rights have been specifically recognized as enforceable,” said Amrish Shah, partner & transaction tax leader at Ernst & Young.

The Companies Act  2013 represents a significant milestone in Indian corporate history.  The bill will also provide much needed teeth to proceed against fraudulent practices and will strive to put in place transparent and fair auditing practices. It will also make self reporting and disclosures less tedious. The new norms could usher in an era of best global practices and raise the level of corporate governance
1. Deccan Herald dated 12 August 13
2. Sify News dated 8 August
 3.The Economic Times dated 2 September 13
4. The Companies  Act, 2013