Corporate India overwhelmed – Upper House clears the bill

Corporate law in India has finally taken a sigh of relief as the much awaited Company bill has been passed (press release available here) in the Rajya Sabha on Thursday, the 8th of August, 2013. The new company bill will come into effect immediately after the assent from the President. The press release by the government rightly calls it ˜historic™ as the company law is being amended for the second time after 56 years.

The new Company law brings a comprehensive revision to the 1956 legislation by not only facilitating business friendly corporate regulation but also improving the corporate governance norms making it more transparent and investor friendly. One of the unique features of this bill is that it protects the interest of shareholders and now they have a mechanism to take legal action against fraud. Some of the key changes are discussed below:

  • The step to allow Indian companies to merge into the foreign companies is welcomed by the stakeholders as it would promote foreign investment and thereby boosting cross-border M&A.
  • Independent Directors are to be rotated under the new bill so that the directors are not to close to the management, thereby ensuring the rights of the minority shareholders. Also the term ˜auditor™ has been narrowed down in order to prevent them from being close to the board.
  • The concept of One person company makes it easy for small businessmen and entrepreneurs to comply with the disclosure of financial statements and other procedures.
  • The western concept of class action suits have now become a reality in India through this bill. The stakeholders have now got an institutional mechanism for dealing with oppression and mismanagement.   Not only directors, but auditors, expert advisors and consultants can also be sued.
  • The mandatory filing in the name of Corporate Social Responsibilities brings in a comply or explain clause through the bill. This bill mandates the corporate to pay 2% of the company™s annual profit which gives the bill a social and developmental colour.
  • Never the less, the new company law tries to bring in gender equality by reserving adequate women representation in the corporate management.
  • The establishment of the National Company Law Tribunal (NCLT) will also make litigation process of companies more easy and channelized.

Criticism:  the bill, besides being a blessing for the stakeholders, also could be subject to criticism, in my view. Firstly, the bill, rather than being a detailed piece of legislation, is actually quite short in length. There are various areas not touched upon or not elaborated and thus it runs a risk of ambiguity that may arise in the future.

Further, the bill is a subordinate legislation where in the law making power is in the hands of the Executive. This is not only going against the principle of separation of powers but also in such a case, the law would become too flexible as the executive would change it according to its whims and fancies.

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