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Regulatory framework: Tighter regulation on the cards
With two significant pieces of legislation - the Competition (Amendment) Act and the Companies Bill - finding their way forward, 2013 could well bring along a tighter regulatory regime for India Inc.
Whether the implementation of these laws would promote good corporate governance and empower some agencies to monitor anti-competitive practices, financial irregularities and fraud would be the key.
While the Competition (Amendment) Act was introduced in the winter session, the Companies Bill was recently cleared by the Lok Sabha. Industry experts feel strengthening the regulatory regime through the proposed laws is the first step towards a modern corporate law.
"Tightening the regulatory regime and promoting competition would certainly help the industry and the Indian economy in the long term," says Pradeep S Mehta, secretary general, Consumer Unity & Trust Society.
The amended Companies Bill, which has 470 clauses, provides for various innovative steps to protect investors and prescribes stringent laws on corporate social responsibility (CSR) and disclosure. It also tightens the regulatory mechanism for financial auditors.
For instance, one of the norms under the amended Companies Bill prescribes a mandatory annual spend of two per cent of their average net profits on CSR activities for most companies; those that fail to do so would have to state why. The Bill also caps the number of companies an auditor can serve at 20 and prescribes additional stringent norms for them.
The proposed Competition (Amendment) Act is aimed at putting in place stringent checks, especially for mergers and acquisitions. Once the Act is cleared by Parliament, mergers and acquisitions, barring a few exceptions, would have to be approved by anti-competition watchdog Competition Commission of India (CCI). The proposed pieces of legislation would also provide greater powers to regulatory agencies such as CCI and the Serious Fraud Investigation Office.
However, experts feel legislation alone wouldn't help; effective implementation is vital. "Changing laws without empowering the watchdogs would not work in public interest... To strengthen public confidence, the transparency and swiftness of justice needs to be visible," says Deloitte Haskins & Sells managing partner (audit) N Venkatram.
He adds the fundamentals of good governance lie in the system and, therefore, it is important to have a clean environment in place. "Good governance starts with the government. Corruption increases the risk of fraud. We need to address corruption in public positions to promote an environment for business in which good people are not compelled to do bad things," he says.
According to Harinderjit Singh, partner, Price Waterhouse, the devil would lie in the rules, to be spelt out next year. "Almost every clause in the Companies Bill has a rule attached to it. As of now, we only have the law; the implementation and the monitoring would only unfold with the rules," he says.
Kaushal Kumar Sharma, founder of KKS Law Offices, says the new legislation, expected to be implemented next year, would make the regulatory regime more effective and lead to better corporate governance.
