The new Companies Act
The new Companies Act is modeled after modern laws given that the extant law outlived its importance in terms of size, relevance to India’s liberalization in past 20 years, and facilitates a framework to deal with modern concepts of corporate governance, dealing with situations of frauds, etc.
The new law has a few themes
1. It deals with a gamut of corporate governance issues with respect to appointment, reappointment and qualifications of independent directors, which were otherwise being dealt with under the SEBI’s clause 49 requirements. Though, I would have liked to see greater clarity with respect to protection of independent directors.
It has been challenging for listed companies to get quality independent board members due to risks associated in the current environment and it is therefore incumbent to provide that the mandate of independent directors to oversee interest of shareholders and address governance issues be distinguished from day to day operational or management issues. It would be interesting to see how they get addressed in the subordinate legislation.
Rotation of audit partners and firms is a step in the right direction and and would facilitate addressing the role and responsibility of auditors, particularly in situations where auditors are performing non-audit functions.
2. The new law shall address the issue of effectively dealing with corporate frauds and empower the serious frauds office to effectively deal with frauds. Recognition of class action suits will bring greater level of responsibility on promoters and boards. There is, however, a need for providing adequate check and balance to prevent any frivolous suits and harass managements and promoters.
3. On CSR, the subordinate legislation is likely to be flexible to provide a menu of initiatives that corporates can embark upon. India would rank amongst the first countries to have a legislative backed CSR. Though, the law is not in line with JJ Irani committee’s recommendations that left CSR discretionary, it is flexible in the sense that non-compliance would not result in penal action or any punitive measures by the regulator. In substance, CSR can be labelled more as moral obligation rather than a statutory compliance.