CII Policy Watch on Companies Act 2013


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The Companies Act, 2013 has become the law of the land after being notified on 30 August, 2013. The law, which was in the making for more than a decade, ushers in a new era for corporate regulation in India. It introduces massive changes in the way companies govern themselves, raise money and interact with stakeholders. By laying stress on self-regulation and disclosure with minimal Government intervention, the law lays more responsibility on corporates. With 99 sections out of a total of 470 sections already in force, the legislation is amending the way companies operate and are regulated in the country.

CII has been instrumental in ensuring that industry voices were heeded to during each stage of evolution of the Act. Due to concerted efforts, the current form of the Act is a marked progression over the earlier versions which prescribed more rigorous and stringent provisions. Our advocacy still continues with formal submissions on subordinate legislation that forms part of over 70% provisions of the Act. With the Ministry of Corporate Affairs currently working on finalizing rules with views from stakeholders, CII recommendations to the first batch of draft rules have already been submitted on 10 October, 2013. Building up of industry views is currently underway, based on which detailed inputs would be submitted on the remaining sets of rules as well. Submission of formal representations is also being supplemented with industry interactions with the Minister for Corporate Affairs and others at the helm of affairs at the Ministry.

This issue of Policy Watch focuses on the highlights of the new law while intending to apprise members of challenges that corporate regulation now beholds. The issue is also aimed at updating members of CII views on specific provisions while seeking views on draft rules that amplify the requirements.

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CII Policy Watch on Companies Act 2013

  1. 1. Policy October 2013, Volume 2, Issue 5 Focus: The Companies Act 2013 T he Companies Act, 2013 was passed by the Parliament on 29 August 2013, after being in the making for more than a decade. The Act introduces several new concepts, empowers investors, outlines duties and liabilities of Directors, prescribes rotation of auditors, mandates new disclosure requirements and prescribes Corporate Social Responsibility (CSR) activities. While the entire law comprising 29 chapters - containing 470 sections and VII Schedules - has been enacted, currently only 99 sections have been notified. The remaining provisions of the Act would be notified separately by the Central Government specifying the dates on which the provisions would come into force. The new Act provides the broad framework, relying heavily on subordinate legislation to amplify the implementation procedures. These would be detailed in various sets of rules to be promulgated by the Central Government. Thus, the implementation of many substantive provisions of the Act is subject to the rules, and various provisions would become effective only once the rules are finalized. In this regard, flexibility forms an integral part of the new regulatory framework since the subordinate legislation may be changed from time to time based on the needs of the dynamic economic environment. Inside this Issue Message From the Director General........... 1 Chandrajit Banerjee, Director General, CII CII has contributed significantly to the evolution of the new Act. Many industry concerns were put forward during the finalization of the Companies Bill (2008, 2009 and 2012 versions) and sustained advocacy was undertaken by CII. As a result, the Act in its current form is a marked progression over the earlier versions which prescribed more rigorous and stringent versions. With the formulation of rules currently occupying center stage, CII is in the process of building up industry’s viewpoints on the suggested procedures and requirements. Various state-level and national platforms are being organized to deliberate on the Draft Rules as exposed by the Ministry of Corporate Affairs for consultation and based on a considered and consensual view emerging out of various deliberations, CII will be submitting its detailed inputs on the draft with the objective of making the process conducive to the business environment. Currently, the Ministry of Corporate Affairs has developed Draft Rules for the various chapters and posted them on the Ministry’s website for comments from stakeholders. The Ministry has provided a 30 day window for industry and other stakeholders to respond to the Draft Rules. While providing specific technical and legal inputs on the rules, CII shall underscore the need for ensuring that the new law aims at progression and development of business instead of impeding it. The law needs to contemplate and weigh the interests not just of stakeholders but also take forward the business objects of the corporates. Many new concepts are being introduced in the legislation for the first time, and practices with respect to these need to be allowed to evolve over time. Meanwhile, CII has also suggested that the Government consider establishing an institutionalized mechanism for finalization of the rules which has representation of all stakeholders. This will ensure that industry’s concerns are taken note of and addressed, to the extent possible, during the process of devising subordinate legislation under the Act. While presenting this issue of CII Policy Watch on the Companies Act, 2013, we have a twin-agenda in mind - one, to provide members with a detailed overview of what the new law entails and two, to stimulate and receive considered inputs from members on Draft Rules. This will help to ensure that the new corporate framework is pro-industry and one which allows enhanced and responsible selfregulation and reduced Government intervention, which has been the basis of the revision of the Act throughout. n Chandrajit Banerjee Director General Confederation of Indian Industry CEO Speak............................................................................................ 2 Policy Barometer.......... 6 S Gopalakrishnan, President, CII and Executive Vice Chairman, Infosys Limited Industry Voices.......... 11 . Adi Godrej, Immediate Past President, CII; Chairman, India@75 Foundation; Chairman, CII Special Task Force on Reforms and Chairman, Godrej Group Shailesh Haribhakti, Chairman, DH Consultants Pvt. Ltd. policy watch 1
  2. 2. CEOSpeak Two and a Half Cheers for the Companies Act ! Acid Test Yet to Come The Companies Act, 2013, passed by the Parliament on 29 August 2013 provides the framework for the regulatory environment for business in India and will change the way companies are governed. The Act establishes stricter standards in governance, auditing and accounting, investor protection, disclosures, shareholders’ rights, selfregulation, etc. It defines duties and liabilities of Directors, placing greater responsibility and accountability on the Board and strengthens the role of Independent Directors. In many ways, the Act is commensurate with global standards of management, governance, transparency and accountability. The role, rights and duties of auditors have been clearly outlined while recognizing both accounting and auditing standards. To strengthen investor protection, it allows shareholders to take legal action as class action suits and provides for Special Courts for speedy trial. Recognizing cross-border mergers, it allows amalgamation of an Indian company with a foreign company. It introduces the concept of One Person Company entrusted with a simpler compliance regime and multiple exemptions to encourage corporatization of business and entrepreneurship. CII has been engaged with the Government in the evolution of the Act and several concerns highlighted by CII have been addressed to the satisfaction of industry. These include removal of blanket restriction on step-down subsidiaries, increasing the number of investment companies through which investments could be made from one to two, extending immunity from liability under provisions of the Act to all Non-Executive Directors instead of only to Independent Directors, etc. Relief has also been provided to promoters, who would not be categorized en masse as ‘Officers in Default’ for non-compliances by the company. Further, in case companies find it advantageous to have the Chairman as MD/CEO also, it will be possible through an amendment of the Articles specifically 2 policy watch S Gopalakrishnan President, CII and Executive Vice Chairman, Infosys Limited providing for such a clause. However, the Act also introduces certain new provisions which are of concern to the industry. With the passage of the new law, India would become the first country in the world to prescribe spend on Corporate Social responsibility (CSR) activities in its company law. CII has all along advocated that CSR initiatives should be allowed to evolve naturally and should not be imposed on industry. Indian companies are anyways recognized for their voluntary CSR initiatives. Provisions specifying the manner, etc might be restrictive and could stifle the innovative strategies that companies are developing. The Act also provides that companies holding public deposits must return all such deposits within one year of the commencement of the new Act. This would be rather onerous and is uncalled for. Existing deposits should be allowed to run till maturity and stricter provisions, that are proposed to be prescribed, should apply to deposits mobilized after the passage of the new law. Going forward, in an instance where a Director has been convicted for an offence against which he has filed an appeal, he would still have to mandatorily vacate his office. Further, companies have been restricted from giving loans to Directors, their relatives, partners, etc. Some checks and balances should have been resorted to instead of imposing blanket bans. A wide range of provisions of the Act would be implemented through subordinate legislation, which would be prescribed by the Central Government. Many new concepts such as CSR, appointment of Independent Directors, cross border mergers have been introduced in the Act. Industry has expressed concerns vis-à-vis various such provisions and has also recommended how they need to be dealt within the regulatory framework. The rules need to be facilitative and provide an enabling framework rather than a narrow and prescriptive one. For example, rules being drafted for implementation of the provisions relating to CSR should allow meaningful CSR initiatives to be undertaken in a selfregulating manner. In fact, industry bodies like CII should be encouraged to prepare voluntary guidelines, suggesting ways in which social responsibility could be integrated into business persuasion by companies. Another focus area relates to the role of promoters/majority shareholders who provide the initial investment. Given that a majority of companies in the country are driven by families or promoters, the new law should be able to achieve fine balancing of power between ownership and management. The true test of the new statute would be when the subordinate legislation under the new law is finalized. Since a large part of this legislation would be implemented through delegated legislation, it is important that the rules are adopted and implemented after a thorough debate in public space. It is heartening to note that the rules have been exposed for public comments before adoption. It is only when the process is consultative and transparent, against the backdrop of enhanced shareholders’ democracy and the Government chooses to exercise selective controls by stepping in only when it is necessary to do so in public interest, that industry can ring in the new statute with three cheers! n This is an updated version of the article that appeared in the Hindustan Times, 29  August  2013.
  3. 3. CEOSpeak The Companies Act, 2013 and the Acceptance of Deposits from Public The newly legislated Companies Act, 2013 contains detailed provisions dealing with acceptance of deposits by companies. The provisions will have a far reaching impact since the old provisions have been completely overhauled to provide for more stringent measures for companies to accept deposit henceforth. The provisions may pose some practical problems, especially for companies which presently hold deposits under the Companies Act, 1956. Provisions Under the New Companies Act, 2013 Section 73 of the new Act corresponds to section 58A of the Companies Act, 1956 and seeks to provide that no company shall invite, accept or renew deposits from public. It can do so only from members of the company subject to fulfillment of certain conditions. Only public companies having net worth and turnover of the amount to be prescribed are allowed to accept deposits from persons other than its members as per Section 76. Section 74 is a new provision which seeks to provide that all deposits or any interest due thereon shall be repaid within one year of the commencement of the new Act. Extension of time for repayment may be granted by the Tribunal on an application. Focussing on eradication of fraud, Section 75 seeks to provide that in case the company fails to pay the deposit or any interest thereon and it is proved that the deposits had been accepted with intent to defraud the depositors, every officer who was responsible for acceptance of deposits shall be personally responsible, without any limitation of liability for all losses or damages incurred by the depositors. Interpretation and Applicability to Companies Which May Have Existing 3-year Deposits Section 76(1) overrides only the provisions of Section 73 that restricts deposits to Issues and Practical Difficulties to Companies and Depositors Adi Godrej Immediate Past President, CII; Chairman, India@75 Foundation; Chairman, CII Special Task Force on Reforms and Chairman, Godrej Group those from members only. However, it does not supersede Section 74 which mandates compulsory premature repayment of existing deposits, within one year of the commencement of the relevant provision of the new Act. This means that even if a company is eligible to issue public deposits under new Section 76, its existing 3-year deposits would still be subject to mandatory premature repayment as per Section 74. As drafted, the only course of action currently available to a company with existing deposits if it wishes to continue holding / accepting deposits is: • Stop accepting new deposits from the public immediately on the commencement of the relevant provision of the new Companies Act, 2013. • File details of such outstanding public deposits with the Registrar of Companies (ROC) within 3 months. • Refund all such public deposits on due date or within one year of the commencement of the Act, whichever is earlier. • Take steps prescribed in Section 76 to commence accepting unsecured deposits from public viz resolution in general meeting, compliance with rules, credit rating, ROC filing, maintenance of liquid deposits, etc. Given its current form, the provisions imply that companies shall have to immediately stop accepting and renewing deposits upon the commencement of the relevant provision of the Act. This would pose practical difficulties since a company usually sends out renewal notices well in advance of the due date. Since many investors place deposits through brokers, there is the possibility of money or renewal notices being processed prior to the commencement of the relevant provisions of the Act, in advance, in terms of deposits maturing after such commencement. It would be a challenge to ensure full compliance, and would necessitate refunds and refusals to existing deposit holders. Compulsory repayment within one year would inconvenience depositors, and deprive a large section of investors of the interest income which they are earning from the existing deposits, leading to financial loss. A large number of depositors are senior citizens, and this would cause unnecessary inconvenience to them. The financial burden imposed on the companies to prematurely refund the deposits as well as the administrative inconvenience, time and work involved in this exercise would be enormous, with no clear benefit to either the depositors or the companies. Premature repayment would also tantamount to companies being forced to renege the terms of the original deposits related to tenor, as well as financial loss to depositors since it would attract a mandatory reduction in interest as per the existing rules, which would need to be unfavourably adjusted in the premature refund. Suggestions Towards Achieving a Fair Balance Between Investor Protection and Corporate Convenience Given the challenges explained above, it is suggested that companies with nil default policy watch 3
  4. 4. CEOSpeak track record be permitted to continue the existing deposits to their maturity, whereas any fresh deposits should be allowed to be accepted following the stipulated conditions post commencement of the relevant provisions of the new Act. This will ensure that the companies have a maximum three year transition period where they will have the public deposits both under the old Act and the new Act, and the Tribunal will not be required to handle requests from hundreds of companies to allow repayment of their existing deposits within one year or on maturity, whichever is later. This will also safeguard the interest of all the depositors and the sanctity of their earlier deposit contracts with the company will be fully observed. seamlessly to the requirement of the new Act, whereas otherwise it would put pressure on companies to augment their resources for pre-payment plus write off the cost incurred on sourcing these deposits. For depositors, this will prevent any financial loss to them in the event of fall in the interest rates. n This would help companies to transit Taking Board Independence and Role of Independent Directors to the Next Level Transparency and accountability, two of the most salient objectives of the Companies Act, 2013, will not be achieved without Independent Directors, whose responsibilities have gone up multiple times under the new legislation. Though the concept of Independent Directors is not alien to India Inc., its formal introduction in the Act establishes the growing importance of their need and role in corporate governance in general and in listed and unlisted large companies in particular. Considering the high stakes and the growing expectations of all stakeholders, not just amongst the listed entities, the introduction of the concept of Independent Directors is a major milestone in the history of our corporate laws. Independent Directors are considered to be the conscious-keepers of the Board of Directors, and in that sense their presence on the Board is in the best interest of the company and all its stakeholders. More than their presence, the experience they bring to the table is invaluable and brings huge credence to the decisions of the Board in the course of managing the affairs of a company. As regards listed companies, so far, Clause 49 of the Listing Agreement dealt with corporate governance issues through composition, compensation, code of conduct and various other provisions related to the Board of Directors, audit committee and Independent Directors. However, with the new Act, Independent Directors will now be required to play a far more inclusive and 4 policy watch functioning. With the proposed ‘Code for Independent Directors’, it is expected that there will be far more consistency and uniformity in their functioning across companies. Shailesh Haribhakti Chairman DH Consultants Pvt. Ltd. proactive role in running the company. They are now required to step into the shoes of management and go into the details rather than just act as a guest of the company. However, the most pertinent question is whether companies will be able to find enough good quality people to fill the Board positions given the stringent eligibility criteria, or rather will there be enough people with mettle interested enough to wear the hat of Independent Director. Aligning Expectations The new law has introduced various sections related to Independent Directors. To start with, it outlines that the appointment of Independent Directors will be independent of the company management and also prescribes stringent eligibility criteria for them with a view to avoid any possibility of ‘threat to independence’ of their The Act also provides for creating a data bank on Independent Directors so that there is better transparency in the information about them. The proposed data bank will be maintained by an independent institute or association that will be notified by the Central Government, thus ensuring neutrality to the data made public. It is expected that such a thirdparty data pool about quality talent in the industry, which is a must for Independent Directors, will bring about better credence to the whole process of selecting and appointing them. However, the new law prescribes that ultimately, it is the responsibility of the Board to evaluate the skills, experience and knowledge of Independent Directors. The Act also requires that appointment of Independent Directors shall be through a letter of appointment, which shall set out, among others, the terms of the appointment, expectation of the Board, remuneration, code of business ethics etc. This practice will establish far more clarity on the expectations front on either side. To ensure that Independent Directors would not and should not misuse their position but offer quality time to each of the companies
  5. 5. CEOSpeak Focus they represent, the Act restricts a person from being a Director of not more than 20 companies, out of which up to 10 could be public companies. Another quality-control feature of the Act is that the members can restrict the number of Independent Directors as well. This will help in ensuring that an Independent Director is able to devote quality time to the companies which he may serve. Further, to ensure that the desired level of independence is maintained at all times by them, the Act states that an Independent Director cannot be appointed for more than two consecutive terms of five years each. The Act also sets a three-year cooling period after the 10-year term to take up the job afresh. The Act provides that an Independent Director can be an ‘officer in default’ under specified situations and is liable to be penalised or punished or imprisoned or face any other punitive measures. However, the Act stipulates that an Independent Director shall be held liable only if he/she did not act diligently or was a willing and knowing party to the acts of omissions or commissions of the company. Again his consent to the misdeeds/connivance/ lack of diligence should be attributable through Board processes. These provisions will help in ensuring a fine balancing act between ‘the roles and responsibilities’ of Independent Directors. Further, the fact that performance evaluation of Independent Directors shall be done by the entire Board, there could either be dilution of performance evaluations at both ends or there could be some extreme situations. Directors, to embrace the changes and take on the challenges. Companies and the fraternity of Independent Directors will have to get the basic rules of the game right to ensure fair play on both sides. In a broader sense, the very purport of the Act is to promote ‘good governance’ but considering the onerous clauses, there is every possibility that the most soughtafter Independent Directors will only take up offers from already well-governed companies, thereby denying the services of ‘good Independent Directors’ to those companies which are aspiring to improve their corporate governance record. Such polarisation could be contrary to the overall objective of having more and more ‘wellgoverned companies’. With a view to ensure that a fine balance is maintained at all times, there will be a need for professional firms to come forward and impart high-level training to Independent Directors and also Non-Independent Directors and key management personnel to avoid any conflicting situations. The fact that the Act requires compliance with all the clauses within a year of its coming into force is also expected to create a lot of pressure on companies. Last, but not the least, considering that most companies are family-owned and managed, acceptance of and alignment with the concept and the provisions related to Independent Directors will be a major challenge for the owner promoters. Way Forward Lots of thoughts and actions and realignments will be required to be done, both by companies as well as Independent Further, with a view to ensure that there is adequate motivation for deserving persons to act as Independent Directors, the reward will have to be commensurate with the underlying risks and the onerous tasks they will have to perform. Even the regulators will have to act as facilitators till the time the changes are fully accepted and stabilized or else the whole purpose of bringing in the new law will be defeated. Various regulators will also have to work towards ensuring that there are no conflicting provisions, if any, around the Independent Directors to avoid unwarranted confusion in compliance. Unless all the three stakeholders – the companies, the Independent Directors and the regulators – act in tandem, the desired objectives may not be achieved, and instead, the new law will only be counterproductive for India Inc. n Skepticism and Challenges There is no gainsaying that the Act is clearly fraught with a lot of skepticism and there are perceived challenges around the onerous clauses which may deter deserving and desiring persons from taking up the role of Independent Directors. On the other hand, there are also apprehensions that these stringent clauses may lead to ‘heightened activism, involvement and interference’ by Independent Directors. Moreover, the Act provides for a yearly ‘separate meeting without attendance of Non-Independent Directors and members of the management’ for evaluating the performance of Non-Independent Directors, the Board as a whole and the chairperson and also assessing the quality, quantity and timeliness of flow of information between the management and the Board. policy watch 5
  6. 6. Policy Barometer Highlights of the Companies Act, 2013 The Companies Act, 2013 was notified by the Government on 30 August 2013. While the law has been enacted in its entirety, currently, only 99 sections have come into force. The Government is empowered to notify different dates when the remaining provisions of this Act shall come into force. While the Act provides the broad framework, a substantial part of the details of the new regime will be governed by various sets of rules to be promulgated by the Central Government. The implementation of the Act will be subject to finalization of the rules, and hence various substantive provisions will become effective once the respective rules are promulgated and the sections are notified. Corporate Social Responsibility The Act provides that every company, which has a net worth of Rs. 500 crore or more, or turnover of Rs.1,000 crore or more or a net profit of Rs. 5 crore or more during any financial year, shall spend at least 2 per cent of its average net profits made during the three immediately preceding financial years, towards CSR activities. The company shall give preference for spending the amount earmarked for CSR initiatives to local areas where it operates. Such a company would also be required to constitute a CSR Committee of the Board consisting of three or more Directors, of which at least one should be an independent Director. The Committee shall formulate and recommend to the Board a CSR policy indicating the activities to be undertaken by the company, as specified in Schedule VII of the Act. The Board shall – i) disclose the contents of the Policy in its report and also place it on the company’s website; ii) ensure that activities as included in the CSR policy are undertaken by the company; This provision would be implemented on ‘comply-or-explain’ basis i.e. in case the company is unable to spend at least 2 per 6 policy watch cent of its average net profit in any year, it would have to cite reasons for not spending the amount in its Annual Report. Rotation of Auditors The Act provides for compulsory rotation of auditors every 5 years in listed companies and certain other classes of companies, as may be prescribed. In case the auditor is an audit firm, it shall be allowed two terms of five years each. Appointment of auditors for five years shall be subject to ratification by members at every Annual General Meeting. An auditor appointed may be removed from his office before the expiry of his term only by a special resolution passed by the company. Further, members may voluntarily resolve to rotate the audit partner (and his team) at such interval as may be decided. A transition periods of three years from the commencement of the Act would be provided to comply with the provision of rotation of auditors. Constitution of National Financial Reporting Authority The Act prescribes the constitution of the National Financial Reporting Authority (NFRA) which shall make recommendations to the Central Government on formulation of accounting and auditing policies and standards. The Authority shall monitor and enforce compliance with accounting and auditing standards by corporates; oversee the quality of service of the professionals associated with ensuring compliance with such standards, and suggest measures required for improvement in quality of services etc. The chairperson and members, who would be in full-time employment with NFRA shall not be associated with any audit firm (including related consultancy firms) during the course of their appointment and two years after ceasing to hold such office. Subsidiary Company Such class or classes of holding companies as may be prescribed would be restricted from having layers of subsidiaries beyond such number as may be prescribed. Investment Companies A company shall not make investments through more than two layers of investment
  7. 7. Policy Barometer companies. However the restriction will not apply in case of acquisition of a company incorporated outside India if the company being acquired has investment subsidiaries beyond two layers as per the laws of such country. Exemption from this provision would also be available to a subsidiary company which has an investment subsidiary for the purposes of meeting the requirements under any law or under any rule or regulation framed under any law for the time being in force. Loans and Investments The Act provides the manner in which and limits up to which a company shall give any loan or give any guarantee or provide security in connection with a loan to any other body corporate or person and acquire by way of subscription, purchase or otherwise, the securities of any other body corporate. The provision does not apply to banking companies, insurance companies, housing finance companies, companies engaged in the business of financing of companies or of providing infrastructural facilities; and acquisition made by a RBI registered NBFC whose principal business is acquisition of securities; a company whose principal business is the acquisition of securities and shares allotted in pursuance of Section 62 (1) (a) i.e. rights issue. Wholly owned subsidiaries are not granted exemption from the provisions governing loans and investment by a company, as is exempted under the Companies Act, 1956. Cost Records The Central Government may, after consultation with a regulatory body (in this case, the Institute of Cost Accountants of India), direct a class of companies engaged in production of such goods or providing such services as may be prescribed to maintain cost accounts i.e. include in the books of accounts particulars relating to utilisation of material or labour or to such other items of cost. The Central Government may also direct the audit of cost records of the company by a cost accountant in practice. The cost auditor shall be appointed by the Board and comply with the cost auditing standards while conducting the audit. Number of Directors on a Board The minimum number of Directors shall be three in the case of a public company, two in the case of a private company, and one Director in the case of a One Person Company. The maximum number of Directors has been fixed at 15, which can be increased by passing a special resolution. Certain class or classes of companies, as may be prescribed, would be required to have at least one woman Director. Number of Directorships an Individual can Hold A person would not be allowed to hold the office of Director in more than 20 companies at the same time. Any alternate directorship held would be included in this number. Within this overall limit, the number of directorships in public companies shall not exceed 10. For reckoning the limit of public companies, directorship in private companies that are either holding or subsidiary companies of a public company shall be included. Duties of Directors The Act defines duties of Directors. A Director of a company shall: • act in accordance with the articles of the company. • act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment. • exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment. • not be involved in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company. • not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates and if such Director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain to the company. • not assign his office and any assignment so made shall be void. Independent Directors The Act introduces the concept of Independent Directors. All listed companies would be required to appoint Independent Directors. At least one-third of the Board of such companies should comprise Independent Directors. Such other public companies as may be prescribed by the Central Government shall also be required to appoint Independent Directors. Nominee Director appointed by any institution, or in pursuance of any agreement, or appointed by any Government to represent its policy watch 7
  8. 8. Policy Barometer for safeguards against victimization of whistle blowers and makes provision for direct access to the chairperson of the Audit Committee in appropriate or exceptional cases. Establishment of such a mechanism would need to be disclosed in the Board’s report and on the company’s website. Nomination and Remuneration Committee and Stakeholders Relationship Committee shareholding shall not be deemed to be an Independent Director. Term of Independent Directors and Maintenance of Databank of Independent Directors Independent Directors shall not be subject to retirement by rotation and would be appointed for a term of five years, subject to a maximum of two such terms. Thereafter, the director shall be eligible for appointment only after the expiration of three years’ cooling-off period. An Independent Director may optionally be selected from a data bank containing names, addresses, and qualifications of persons who are eligible and willing to act as Independent Directors. This data bank may be maintained by a body, institute or association, as may be notified by the Central Government. Liability of Independent Directors The Act limits the liability of Independent Directors and other Non-Executive Directors, not being promoters or key managerial personnel. Such Director shall be held liable, only in respect of such acts of omission or commission by a company, which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently. The application of knowledge test before holding Non-Executive Directors liable for offences etc by companies would provide relief to such Directors who are not involved 8 policy watch in day-to-day management or discharge of executive functions. Devolution from liability in respect of acts which occur without their consent and connivance has been a longtime demand of Non-Executive Directors and would encourage competent individuals to come forward and take up Independent Directorships. Promoter Definition of ‘promoter’ is included in the Act along with his liability in appropriate cases. Key Managerial Personnel Whole-Time Director and CFO have been included in the definition of the term 'key managerial personnel' along with Managing Director / Chief Executive Officer / Manager / Whole-Time Director and Company Secretary. Audit Committee and Whistle Blowing Policy Every listed company and such class of companies as may be prescribed shall constitute an Audit Committee which shall consist of a minimum of three Directors, with Independent Directors forming a majority. Further, the majority of members of the Committee including its chairperson shall be persons with the ability to read and understand financial statements. Such companies shall also establish a vigil mechanism for Directors and employees to report genuine concerns. The Act provides The constitution of a Nomination and Remuneration Committee has been made mandatory in the case of listed companies and such other class or description of companies as may be prescribed. This Committee shall consist of three or more Non-Executive Directors, with at least onehalf being independent. The chairperson of the company (whether executive or nonexecutive) may be appointed as a member of this committee but may not chair the Committee. The Committee shall formulate the criteria for determining qualifications, positive attributes and independence of a Director and recommend to the Board a policy, relating to the remuneration for the Directors, key managerial personnel and other employees. The Nomination and Remuneration Committee shall identify persons who are qualified to become Directors and who may be appointed in senior management in accordance with the criteria laid down, recommend to the Board their appointment and removal and shall carry out evaluation of every Director’s performance. A Stakeholders’ Relationship Committee to consider and resolve the grievances of security holders of the company shall be constituted where the combined membership of the shareholders, debenture holders, deposit holders and other security holders is more than 1000 at any time during the financial year. The Chairman of the Committee shall be a Non-Executive Director. Liability of Auditors The Act provides for liability of auditors in case of conviction for contravention of the provisions applicable to them. In case of a firm, the liability shall be of the firm
  9. 9. Policy Barometer and that of the partner or partners who acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its Directors. Non-Audit Services Auditors are prohibited from rendering specified services to the company/its holding company / subsidiary company including: (a) accounting and book keeping services (b) internal audit (c) design and implementation of any financial information system (d) actuarial services (e) investment advisory services (f) investment banking services (g) rendering of outsourced financial services (h) management services and (i) any other kind of services as may be prescribed The provisions relating to restrictions on nonaudit services shall not apply to associate companies. An auditor or audit-firm, who or which has been performing non-audit services on or before the commencement of the proposed Act shall comply with these provisions before the closure of the first financial year after the date of such commencement. Related Party Transactions In case of companies with the prescribed share capital, no contract or arrangement or transactions exceeding prescribed amount, shall be entered into with its related party, unless the same has been approved by the shareholders of such company by way of passing a special resolution. A member who is a related party to any contract or arrangement shall not vote on the special resolution for approval of such contract or arrangement. However, this requirement shall apply to only such transactions which are not in the ordinary course of business or not on arm's length. One Person Company The concept of One Person Company (OPC Limited) has been introduced in the Act. OPCs can be formed as private limited companies and among other exemptions, have been given the option to dispense with the requirement of holding an AGM. Acceptance of Public Deposits A public company may accept deposits from persons other than its members subject to obtaining a rating from a recognised credit rating agency, providing such deposit insurance in such manner and to such extent as may be prescribed, etc. In case of secured loans, a charge would need to be created on the assets of the company which would not be less than the amount of the deposits accepted. The Act provides that companies would have to mandatorily return all public deposits within one year of commencement of the new Act. However, the Tribunal may, on an application made by the company, extend the time period. Declaration of Dividend Before the declaration of dividend in any financial year, a company may transfer such percentage of its profits for that financial year as it may consider appropriate to the reserves of the company. In any financial year, owing to inadequacy or absence of profits, dividend may be paid out of the accumulated profits earned by it in previous years and transferred to reserves only in accordance with rules as may be prescribed. companies or between a holding company and its wholly-owned subsidiary company or such other class or classes of companies as may be prescribed. This would require approvals of Registrar, Official Liquidators, members holding at least 90 per cent of the total number of shares of the respective companies; and majority representing ninetenths in value of creditors of respective companies. Each of the companies would have to file a declaration of solvency with the Registrar. Mergers and amalgamations between companies registered under this Act and companies incorporated in jurisdictions of such countries as may be notified from time to time by the Central Government has been provided for. Class Action Suits The concept of class action suits has been introduced in the Act, providing that specified number of members or specified number of depositors may file an application before the Tribunal on behalf of the members and depositors, if they are of the opinion that the management or conduct of the affairs of the company are being conducted in a manner prejudicial to the interests of the company or its members or depositors. The order passed by the Tribunal shall be binding on the company and all its members, depositors and auditors. Delegated Legislation Merger or Amalgamation A scheme of merger or amalgamation may be entered into between two or more small The Act provides for scope for delegated legislation through provisions that mandate rule making. n policy watch 9
  10. 10. Message Policy Barometer CII’s Key Recommendations on Draft Rules Under the Companies Act, 2013 substantial borrowings from banks or financial institutions should be exempted from certain provisions of the Act, e.g. rotation of auditors, provisions relating to loans and investments, sharing of unpublished price sensitive information, etc. Such companies cannot be treated at par with other public interest entities. • Allow Freedom to Undertake CSR : – Industry should be allowed adequate legroom to comply with the CSR provision in a self-responsible manner. Onerous provisions would hold back innovation, defeat legislative intent and shift the focus from ‘comply with conscience’ to ‘tick-box compliance.’ – The Draft Rules allow companies to implement CSR activities through Trusts or Section 8 Companies, or Societies or Foundations set up by them. Doing so, would make the companies liable to comply with provisions with respect to related party transactions. A clarification / carve-out may be considered to be provided exempting such transactions i.e. where companies undertake CSR through their own Trusts, etc. – A clarification should be provided to the effect that contribution to the corpus fund of the Trusts or Section 8 Companies, or Societies or Foundations, through which a company may choose to carry out its CSR activities would be eligible to be counted towards the company’s 2 per cent spend on CSR in that year. • Low Thresholds for Applicability of Provisions Pertaining to Related Party Transactions: The Rules provide for seeking general body approval for related parties’ transactions by companies having a paid-up share capital of rupees one crore or more. This threshold needs to be revised since the limit of rupees one crore was applicable since 1975 under Section 297 of the Companies Act, 1956. Growth in the corporate sector has been manifold since then in terms of paid-up capital etc. The limit is significant since this provision requires approval by a disinterested quorum at a general meeting i.e. a member who is a related party to any contract or arrangement shall not vote on the special resolution for approval of such contract or arrangement. • Definition of Share Capital: The proposed definition of ‘Total Share Capital’ for the purpose of determining associate company or subsidiary would include both paid-up equity share capital and paid-up preference share capital. This would have far-reaching impact on classification of companies. • Definition of Related Party Should be Pruned: The scope of related party has been widened to include a director or Key Managerial Personnel (KMP) of the holding, subsidiary or associate company of such company or his relative. It also includes senior management of the company or its holding, subsidiary or associate company including all members of management one level below the Executive Directors, including the functional heads. It is suggested that KMP and senior management not holding any equity should not be considered as related parties, particularly if they are not part of the Board of Directors. • Exemptions for Private Companies: Private companies which are neither subsidiaries of listed companies nor have • Balance Interests of Multiple Stakeholders: Legislation should balance interests of multiple stakeholders – At least a 100 per cent weighted deduction for tax purposes should be provided for the spent of companies in CSR. The Ministry of Corporate Affairs should take up this issue with the Ministry of Finance. 10 policy watch and equity of shareholders must apply to both big and small shareholders to avoid ‘reverse oppression’ i.e. oppression of the majority. • Ensure Transparent Rule-Making Mechanism: Subordinate legislation should be finalized in a manner so as not to be too disruptive of existing business processes. • Devise Progressive Regulations : There is a need for ensuring balance between ownership and management to foster entrepreneurship and trade. India has to be seen as a jurisdiction with progressive regulations. • Introduce New Concepts Gradually : Ground-level challenges should be acceded to while finalizing the thresholds for applicability of provisions like appointment of Independent Directors, appointment of woman Directors, performance evaluation, etc. A staggered approach should be adopted. Some of the provisions which need precision in implementation are class action, code of conduct for Independent Directors, SFIO, etc. • Avoid Retrospective Applicability of Provisions: It would be way too excessive to implement any provision with retrospective effect. For example, rotation of auditors with retrospective effect will cause hardship to companies since most auditors may have already exhausted their maximum permissible tenure. Similarly, mandatory return of all public deposits within one year of commencement of the new Act will cause hardship to companies and depositors alike. • Minimize the Risk of Future Litigation : It is imperative to ensure that rules are prescribed keeping in mind the stated periphery of law. This, supplemented with absolute and clear rules, will enable unambiguous interpretation, ultimately ensuring minimal litigation for future. n
  11. 11. Industry Voices Now that the new law for companies has been passed, the focus has shifted to its implementation guidelines since more than 70 per cent of the new Companies Act, 2013 would be implemented through subordinate legislation. It is important that these guidelines are drafted in a manner that facilitates business instead of impeding it. The Law should not only protect the interests of stakeholders but also support the business objects of corporates. Adi Godrej Immediate Past President, CII; Chairman, India@75 Foundation; Chairman, CII Special Task Force on Reforms and Chairman, Godrej Group Many new concepts such as Independent Directors for unlisted public companies,  rotation of auditors, internal controls, CSR spending, Board’s performance appraisal   etc. are being introduced in the legislation for the first time. Practices with respect to these should be allowed to evolve over time. It needs to be ensured that the rigour for listed and unlisted companies should be commensurate with the level of public interest in those entities. Rahul Bajaj Past President, CII and Chairman, Bajaj Auto Limited On governance there has been a significant shift in favour of the minority, in favour of making sure that there is no formal or informal oppression of the minority by the majority. We need to balance that with the fact that entrepreneurship is an extremely important aspect of India and the balance between protection of the minority and, at the same time, retaining the drive of entrepreneurship, is the key spirit that should drive how we will evolve the rules as we go into the future. Uday Kotak Chairman, CII National Council on Financial Sector Development and Executive Vice Chairman & MD, Kotak Mahindra Bank Limited The new Act's special focus on social welfare, strengthening corporate governance, protection of investors against fraud and bringing in transparency in the working of the company is commendable. In many ways, the Act is commensurate with global standards of management, transparency and accountability and has introduced enhanced corporate governance standards. Rajiv Memani Chairman, CII National Committee on Indirect Taxes / GST and Country Managing Partner, Ernst & Young LLP policy watch 11
  12. 12. Industry Voices By replacing the six decade old Companies Act with the new crisp and compact Companies Act, 2013, the Ministry of Corporate Affairs has given form to its intention of creating an industry as well as an investor-friendly environment which will fuel the country's economic growth in this era of globalisation. This 21st century legislation sketches out a commendable set of guidelines for today’s dynamic and evolving corporate world. The Act has been built on the bedrock of the best corporate governance ideologies marking the beginning of a new era of self regulation, enhanced disclosures, accountability and investor democracy. Besides, the new legislation also encourages responsible entrepreneurship by mandating CSR activities to promote economic, environmental and social objectives. Nimesh Kampani Chairman & Managing Director, JM Financial Limited The Companies Act, 2013 is a sweeping and long-awaited reform of the existing Companies Act, 1956. The new Act is an effective makeover of the present Companies Act, and not just an amendment. It would appear that while the Act may have started off trying to make the law simpler and more innovative, in the backdrop of corporate frauds such as Satyam, the focus appears to have slowly shifted more towards better governance and transparency. While several innovative measures have been introduced, such as the concept of a small company, a one person company, cross border mergers, fast track mergers, class actions etc., in the endeavour to strengthen governance, the new Act does seem to have over-reached in some cases which may result in making the day-to-day functioning of companies more cumbersome. Apart from the content of the new law, which is significantly different from the existing position, the staggered manner in which the Act is being implemented is also leading to some confusion as to the status of matters that have been approved but not yet implemented. The Draft Rules have also caused some concerns, such as with regard to the retrospective application of auditor tenure provisions for instance. One will need to await further implementation of the Act and the rules, including in particular the establishment of the completely new NCLT enforcement mechanism to assess the true impact of the new law. Zia Mody Senior Partner, AZB & Partners For suggestions please contact Priya Shirali, Corporate Communications at Copyright © 2013 by Confederation of Indian Industry (CII), All rights reserved. No part of this publication may be reproduced, stored in, or introduced into a retrieval system, or transmitted in any form or by any means (electronic, mechanical, photocopying, recording or otherwise), without the prior written permission of the copyright owner. CII has made every effort to ensure the accuracy of information presented in this document. However, neither CII nor any of its office bearers or analysts or employees can be held responsible for any financial consequences arising out of the use of information provided herein. However, in case of any discrepancy, error, etc., same may please be brought to the notice of CII for appropriate corrections. Published by Confederation of Indian Industry (CII), The Mantosh Sondhi Centre; 23, Institutional Area, Lodi Road, New Delhi-110003 (INDIA) Tel: +91-11-24629994-7, Fax: +91-11-24626149; Email:; Web: 12 policy watch