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The government on Friday approved the introduction of a new single, comprehensive law to govern the Indian corporate sector. The Bill is expected to be tabled in Parliament during the upcoming October session.
Among other things, the Companies Bill 2008 proposes to tighten the rules governing share sales by firms to their owners, to bar issuance of shares at a discount to owners, does away with shares that have differential voting rights and scraps the requirement of minimum paid-up capital.
The Bill proposes the requirement to appoint independent directors, where applicable, at a minimum of 33 per cent of the total number of directors. "However, any ruling by regulators like the Securities and Exchange Board of India will override the provisions of the Companies Bill," Corporate Affairs Minister Prem Chand Gupta told reporters.
Clause 49 of Sebi's listing agreement states that 50 per cent of the Board has to comprise independent directors if it is headed by an executive chairman and 33 per cent for a non-executive chairman. The Bill also mandates that every company needs to have at least one director resident in India.
The Bill recognises insider trading by company directors or key managerial personnel as an offence with criminal liability, while also identifying the company as a separate entity in cases where monetary penalties are imposed on executives.
It does away with restrictions on the number of subsidiaries that a company can have, envisages a single forum for mergers and approvals, a separate framework for enabling fair valuations and recognition of both accounting and auditing standards.
The proposed law has been five years in the making. In 2004, the Ministry of Corporate Affairs started a comprehensive revamp of the Companies Act, 1956.
Earlier, a Companies (Amendment) Bill, 2003 had been introduced in the Rajya Sabha. In 2004, the ministry constituted a committee headed J J Irani to examine the proposals after opposition from sections of corporate India. In its present form, the Bill incorporates suggestions of the Irani committee including those aimed at simplifying the compliance regime.
Talking to reporters after the Union Cabinet approved the Bill today, science and technology minister Kapil Sibal said the existing Act was not in tune with the times. "Wholesale refurbishment was needed. This is a far-reaching Bill," he said. Officials added the new bill "replaces the government's intervention with shareholders' control and demands greater disclosure".
On his part, Gupta said the proposed law is based on global best practices and would be unmatched worldwide. "The Bill empowers the government to make future amendments through notifications without going to Parliament," he said.
The Bill proposes to drop clauses like Section 211 in the existing law that requires companies to disclose the break-up of inputs used.
"Henceforth, companies will just have to mention the total amount spent on operations in their balance sheet," Gupta said, adding that a new clause has been introduced to stop promoters from buying shares at a discount from minority shareholders.
In addition, the Bill recognises the chief financial officer, chartered accountant, company secretary as well as the chief executive as "key managerial personnel" and makes them liable for defaults by the company. "This clause will save other directors who were earlier prosecuted, even if they were ignorant of defaults," Gupta said.
The Bill proposes to increase the number of partners allowed in a company from the current 20 to 100.
"Professions like chartered accountancy, regulated by special Acts, will have no ceiling on the number of partners," the minister added. The proposed law recognises board meetings held through vikdeo conferencing and voting through e-mail. It also provides for a single forum for mergers and acquisitions through the Competition Commission of India.
Leading corporate lawyer, Kumkum Sen, partner, Rajinder Narain & Co, said: "I look forward to the proposed law streamlining consolidating the scattered provisions in other laws and parts of the existing Act to make it a far more concise law on the FEMA model, with the regulatory powers inserted in the schedules of the Act."
