Changing The Power Equation
Once the Parliament passes the Companies Bill 2008, there will be many changes in the way companies function. The bill seeks to transfer of power from the government to the shareholders and partners. Also, even a single person will now be able to start a firm, says Amit Bhanot
Finally, after a long passage of more than four years, the Cabinet has given its green signal to the Companies Bill, 2008. The bill has introduced many historic provisions in the Partnership Act which will change the way companies are governed in our country. These changes are a result of the UPA government’s initiative taken in 2004 to revamp the six-decade-old Company Law, executed with the formation of the 3 3 Irani Committee, which had on board many experts from professional organisations like the ICAI and ICSI. With these amendments, the companies will have more freedom since government control will now be drastically reduced. For instance, partnership firms will have the flexibility of having 100 partners, in place of the maximum limit of 20 partners as was dictated by the earlier law. The new law also allows the formation of a single person company which will help entrepreneurs enjoy a hassle-free existence.
According to the proposed amendments, the biggest change. has been carried out in the matter of mdcpendent directors, offering relaxation by reducing the strength of members of the board to 33 per cent as independent directors from the earlier requirement of 50 per cent. In this respect, Corporate Affairs Minister, Prem Chand Gupta, has clearly asserted that any sectoral regulator is free to prescribe any higher limits. The implication is that in the case of a listed company, the limit remains at the existing level of 50 per cent as prescribed by SEBI’s Clause 49. On the other hand, in the matter of an unlisted company, the relaxation will come into force after the passage of the Bill. The Bill will be placed before the Parliament during the forthcoming winter session. In the same way, an individual entrepreneur has been given the freedom to float a one-man company in place of the existing requirement of two shareholders. Experts are of the view that this proposal would prove to be a great boost to promote entrepreneurship since an individual need not be forced into forming a partnership with the burden of unlimited liabilities.
Regarding the proposed changes, the government is of the opinion that these modifications will user in a sea change in the existing laws and help bring about updates to match the requirement of current times. Further, the flexibility of inducting up to 100 partners will help entrepreneurs bring into the fold a higher number of experts who can contribute to the progress of the company. This change has been proposed for banking companies too. Additionally, limited liability partnership firms have also proposed in the Bill.
Meanwhile on account of increasing incidents of insider trading, the Bill is harsh about the modus operandi of company officials. In this regard it has been proposed that if any official of the level of CEO, CFO or company secretary indulges in any such offence, it will be treated as a criminal liability. Financial penalties levied on such officials will be treated separately without being enmeshed with the working of a company. The Bill also proposes streamlining the merger and acquisition process by having a single forum for the approval of such transactions.
Granting Freedom
The main proposal in the Bill with regard to the control factor is indicanyc of the government wishing to grant more freedom to the companies In order to fulfil this objective, the Bill proposes to set free the company in the matter of internal control of its affairs, For instance there a proposal stating that the appointment of managing director anti control of internal af&irs of a company should be left to the shoe- holders rather than the government The interesting point is that the managing director could also be a foreigner The proposed provision includes matters like remuneration directors, related transactions etc.
Another important recommendation is that promoters cannot buy shares at a discount from minority shareholders. In another respite to the companies, the Bill proposes to
away with Section 211 of the Company Act, which directs a company to disclose the break-up of inputs used. Therefore, once the Bill comes into force> companies have to just disclose the total amount they spend on the operational activities. Central government officials are of the opinion that this Bill will do away with many cumbersome regimes in the existing company laws, What is important is that many provisions of the current Act are not, fact, relevant to the present context. Therefore, the Bill has curtailed the number of provisions existing in the Company Law froto around 800 almost half that number. On the other band, the propos4 Bill envisages transferring control from the government to the shareholders but with larger accountability factor threaded in.
Also, it proposes to do away with the restriction of the number of subsidiaries a company can have. In another important proposal, the procedure to convert a private company into a public company and vise versa become easier as compared to what exists now. In the same way, in the case of liquidation of a company, the framework has been completely revised. To speed up the process of resolving business conflicts, it has been proposed that special courts should be set up to deal with various offences.
One of the most important proposals in the Bill includes vested power given to the government to make amendments in the Act in the future without going to the Parliament through notification. In the matter of legal overlaps in the matter of the operation of a company, it is clearly proposed that the Company Law is applicable to all the companies but any sectoral binding such as the SEBI Act is applicable to all listed companies in the matter of issue and trading of shares, dividend etc and it has an overriding power over the Company Act in that regard. In addition to this, the Company Bill includes proposals like more checks on the not-for-profit firms, mandatory consolidation of subsidiary companies with holding company, and prohibiting companies to receive deposits from the public except through Special Act.
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