Companies Act 2013 & Corporate Governance in India.

This is a research paper in which I have tried to address some major points of amendments in Company Act 2013 and what will be the consequences of this on corporate governance.

Abstract

Purpose: After long stretch of 56 years, the (Indian) Companies Act 1956 is now in the process of being substituted by a new law of Companies Act 2013. The main purpose of this paper to highlight amendments made in the law and its direct/indirect importance for the stakeholders. The paper will cover on beneficiary factors of the Act which covers the stakeholders as well as emphasis conveyed in the Clause 49 of the corporate governance.

Method: Research covers a traditional approach for analyzing journals, papers, interpretation of scholars on the topic. It also analyzes the litigation part of act which deals with principles of law and legal institutions.

Result: Findings of this paper are elementary in nature as the focus of law has shifted from the growth of the company to the benefits of the stakeholders in the company. The government has emphasized more on increasing the foreign investment thus resulting in making a strong reputation of economy in the world’s eye.

Practical Implications: Stakeholders have always been the key focus area of any company. Thus the new law enacted on the companies, not only benefits the people involved at the higher managerial level but also pushes small scale companies in the market towards easy return and benefits.

Originality/Value: The paper attempts to encourage the entrepreneurs with lucid company policy and reaping benefits.

Introduction

Our society is ever changing and evolving with the period of time .We as a human need change in our behavior, style and food and so does our law. The Company Act was enacted in 1956 which enabled companies to be formed by registration, and set out the responsibilities of companies, their directors and secretaries. The Act, 1956 was administered by the Government of India through the Ministry of Corporate Affairs and the Offices of Registrar of Companies etc. Since the Act, 1956 was commenced, it was amended many times as per the need of the economy but the major amendments were made in 1988, 1990, 2000 and 2011.

The 2013 Act introduces some eminent changes in the provisions related to corporate governance, E-Management, Compliance and enforcement, Mergers and Acquisition. There are many new concepts which differentiate a current law from the previous one .The law enforced in 2013 enforces in the composition of board of directors and corporate governance. The need of the hour is to focus on the stakeholders because India is the growing economy. In order to cope up with the international economic scenario, the law needs to remain dynamic and adapt changes in business environment. The two major topics to be discussed is a) Corporate Governance and b) Board of Directors which is Clause 49.

What gets measured gets managed. Adequate disclosure thus ensures good governance. Corporate governance issues not only have its impact on the corporate sector, but are necessary condition for the long term sustainability of the development of the growing economy. The role of corporate governance mechanism in economic growth remained virtually invisible until the East Asian financial crisis (1997-1998). The global financial institution, corporations and global economies, brought with it an indisputable challenge to policy makers and thus called for development and prosecution of competent corporate governance instrument.

This paper attempts to highlight the key changes made in the Companies Act 2013 .We try to figure out the beneficial factors of the amendments along with keeping in mind the current business scenario in India.

THE JOURNEY OF COMPANIES ACT, 2013

2008: Companies Bill, 2008 was introduced on 23rd October 2008 in the Lok Sabha to replace existing Companies Act 1956.

2009: Companies Bill, 2009 was re introduced on 3rd August 2009 in the Lok Sabha. Bill was referred to the Standing Committee on Finance of the Parliament for examination and report.

2010: Report of the Standing Committee on Finance on Companies Bill, 2009 was introduced in the Lok Sabha on 31st August 2010.

2011: Companies Bill 2011 introduced in the Lok Sabha on 14th December 2011.

2012: The Companies Bill, 2012 was introduced and got its assent in the Lok Sabha on 18 December 2012.

2013: Companies Bill, 2012 was passed by the Rajya Sabha on 8th August, 2013. After having received the assent of the President of India on 29 August 2013, it has now become the much awaited Companies Act, 2013.

Literature Review

Evolution

There has been a phenomenal rise among researchers and practitioners to study corporate governance over the past decade. The thought of corporate governance may seem unexplored to some people, yet its origin can be traced back to as early as the 1600’s. At that time, the Court of Directors was the executive body that ran the East India Company on behalf of the Court of Proprietors. This mirrors the modern era of corporate governance (Cadbury, 2002). On the other hand, Hann (2001) diagnosed four origins of corporate governance, which help people advance a better understanding of the terms. In the contemporary times when the corporate sector across the globe was hit by scandals and big companies like Enron, WorldCom bridled with debatable corporate policies collapsed. India too had its share of scam with Satyam being an incident thought to be the first of its kind. Though amendments in the area of corporate governance have been afoot since 1990’s, it was not until the Satyam scandal that exposed flagrant gaps in the governance structure and auditing practices in the country that acted as stimulation for a modern legislation. The Companies Act, 2013 is a move by the government to strengthen the corporate governance skeleton in a country where most of the businesses are characterized by robust shareholding and channeling of funds. The Act revitalizes good governance practices by placing the onus on independent directors to bring oversight in the functioning of the Board and protect the interest of minority shareholders.

We all know that the companies in India are monitored by the Companies Act 1956. This act is the most significant corporate legislation that entrusts the Central Government to standardize the following: Formation of the companies, Financing of the companies, Functioning of the companies, Winding up of companies. It was enacted in 1956. This act facilitates companies to be formed by registration, and arrange the responsibilities of companies, their directors and secretaries. Government of India oversees this act through the Ministry of Corporate Affairs and the Offices of Registrar of Companies, Official Liquidators, Public Trustee, Company Law Board, Director of Inspection, etc. The Registrar of Companies (ROC) stems the incorporation of new companies and the administration of running companies. The act is exercised to whole of India and to all types of companies, whether registered under this Act or an earlier Act.

Part One: Tight knitted Corporate Governance.

Corporate Governance is defined as the relationship between shareholders and their companies and the way in which shareholders act to encourage best practices”. There are certain key elements of corporate governance which we need to understand before understanding the difference between the Act 1956 and Act 2013.

  • Shareholders right and obligation.
  • Audit transparency and disclosure.
  • Role of Board of Directors.
  • Stakeholder’s role in Corporate Governance.
  • Shareholders equitable and treatment.

The corporate governance has different set of rules for every aspect of the business unit. It lays emphasis on safeguarding the interest of all those people who are concerned with the functioning of the business unit .The definition says that there has to be transparency in business for those who are investing in it.

The Company Act 2013 shares the same view of making the functioning if the business unit more translucent to the general public. There was a regulatory urge to control corporate governance often. As there was an increase in unethical and dishonest practices prevailing in the market and tremendous growth in the scams area. Thus the initiative taken by the Government to take some serious steps in the control of the audits and working of the company was actually a necessary step.

Part Two: Empowerment and Encouragement

Any company is run by the people who are involved in the decision making. The necessary changes as per the international standard are done as follows:

Concept of One Person Company: One person company is a company with only one person. It states that one person will be the shareholder of the company. It also avails the benefit of a private limited company such as separate legal entity, in fact protecting personal assets from business liability; the most important is perpetual succession. The benefit of this move is for the e commerce industries and for the startup companies who dream of starting their own company.

Board of Directors: Although there are many changes made in the structuring and the powers of the board of directors but the one who hold our attention is:

Woman director

The categories of companies which need to comply with the requirement of having at least of one woman director are as follows: [section 149(1) of 2013 Act]

(i) Every listed company, within one year from the commencement of second provision to sub-section (1) of section 149

(ii) Every other public company that has paid–up share capital of one hundred crore rupees or more, or a turnover of three hundred crore rupees or more within three years from the commencement of second proviso to sub-section (1) of section 149.

This is a mind boggling move from the Indian Government in order to remove gender diversity and enhance the position of women in the company.

Board Functioning

The Companies Act, 2013 provides that a public as well as a private company can have a maximum of fifteen directors on the Board and appointing more than fifteen directors would require approval of a study of corporate governance under the companies act, 2013 shareholders through a special resolution in the General Meeting.

A) It also provides for appointment of at least one woman director on the Board for such class or classes of companies as may be prescribed. The Act makes it mandatory for a company to have minimum one director who has stayed in the country for a period of 182 days in the previous calendar year

.

B) Disqualification of directors

The Companies Act, 2013 makes directors’ disqualification more stringent, includes more scrutiny around related party transactions. The 2013 Act includes the following additional grounds of disqualification:

(i) A person who has been convicted of an offence dealing with related party transactions at any time during the past five years.

(ii) The directorship in private companies has also been brought under the ambit of disqualification on ground for non-filing of annual financial statements or annual returns for any continuous period of three years, or failure to repay deposits for more than a year.

C) Number of Directorships

As per the provisions of the Companies Act, 2013, a person cannot become a director in more than 20 companies instead of 15 as provided in the Companies Act 1956 and out of this 20, he cannot be director of more than 10 public companies.

Part Three: (Clause 49)

To make parallel the company law with Clause 49 of Equity Listing Agreement (Clause 49), 2013 Act has popularized the concept of Independent Directors. In this respect, few of the general observations are as follows:

(a) The term independent director has been defined with certain prescribed qualification and disqualification. [Section 149(6)]

(b) Every listed company is required to have at-least one-third of the total number of directors as independent directors. Independent directors shall be entitled to sitting fees, commission from the profit and reimbursement of expenses. However, they will not be entitled to stock options. [Section 149(9)]

(c) The appointment of the independent director shall be approved by the members in a general meeting and they will not be required to retire by rotation. [Section 149(13)]

(d) An independent director can hold the office for consecutive two terms of five years each following which there should be three years break before he or she is reappointed as an independent director. [Section 149(11)]

(e) Nominee director shall not be considered as an independent director. [Section 149(6)]

(f) While the motive of 2013 Act is to coordinate itself with Clause 49, there is little countenance which is different. All listed companies will now have to comply with Clause 49 and 2013 Act which might make the compliance process more cumbersome.

(g) Independent director shall only be liable for such act of omission, commission by a company which had occurred with his or her knowledge, attributable through Board processes, and with his/ her consent or connivance or where he or she had not acted diligently. [Section 149(12)]

Conclusion

The committee has well analyzed the international business standards. Newton’s third law explains that every action has equal and opposite reaction. The Act 1956 was a voluminous document with 781 sections whereas the Company Act 2013 is divided into 29 chapters containing 470 sections. The conceptual paper based on finding the benefits from the Companies Act 2013 has stressed on few basic changes which were made keeping in mind the international standards. Government has stressed on transparency of the business and making the companies self responsible for their course of action. The Companies Act, 2013 is landmark legislation with far reaching consequences on all companies incorporated in India. The Act, 2013 is more outward looking and attempts to align with international requirements. It is expected to set the tone for a more modern legislation which enables growth and greater regulation of the corporate sector in India.

The 2013 Act has been developed with a view to enhance self–regulation, improve corporate governance norms, enhance accountability on the part of corporate and auditors, raise levels of transparency and protect interests of investors, particularly small investors.

  • Corporate Governance will keep the strict watch over the working of the companies.
  • Corporate Social Responsibility under corporate governance has a new clause of constituting of Corporate Social Responsibility Committee of the board consisting of three or more directors. Thus an essential step to improve the infrastructure of the economy.
  • Corporate issues require quick resolution in terms of mergers and amalgamation .Transparency in accounts and audits through corporate governance will lead to fluid transactions.
  • Capital market regulator has an eminent role to play in the public access to capital by the companies and must have the necessary space to develop suitable framework in tune with the fluidity of the capital markets.
  • Introduction of SFIO (Serious Fraud Investigating Office) is a commendable attempt. SFIO is in-charge for framing of the charges, arrest and filing of other documents.
  • India as a growing economy needed encouragement specifically in the small scale companies. The committee felt the need of changing the structure as it will be unfair to burden the small size company as large public listed companies.
  • Change in constitution of Board of Directors is the big step as the company has laid emphasis on the appointment of one Women director. This step clears the vision of government that women holds equal position to men. Also a big move in the area of empowerment and gender biasness.
  • The recession of 2008 has seen the worst phase of unemployment in private sector and thus opening the door of small scale companies or the world of E-commerce. The Act 2013 is favorable for the young entrepreneurs in every manner.
          1. Concept of Independent director.
          2. Concept of One Person Company.
          3. Fast track mergers.
          4. Listing and de-listing of the companies.

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