Sunday, September 5, 2010

Parliamentary Standing Committee on Companies Bill, 2009

It has been reported that the Parliamentary Standing Committee on Finance has its made recommendations upon review of the provisions of the Companies Bill, 2009. Discussions reveal that in some areas the Standing Committee’s recommendations seek a reversal of the position stated in current version of the Companies Bill. On one hand, the standing committee calls for a more liberal regime by allowing companies to issue shares with differential voting rights (that was sought to be prohibited in the Bill). On the other, it calls for tighter provisions on matters such as formation of subsidiaries and intercorporate loans and deposits. While this review exercise is beneficial as it incorporates recent experience into the legislation-making process, a fundamental turnaround on certain key issues introduces the risk of further delay in the Bill actually turning into law.

A key development relates to the treatment of corporate governance norms. The Standing Committee has sought to address governance concerns by strengthening the regime for independent directors, auditors, managerial remuneration and the like. More importantly, the Ministry of Corporate Affairs has noted that the Standing Committee “has expressed the desire that all the significant and substantive matters included in the Corporate Governance Voluntary Guidelines 2009 and the Listing Agreement prescribed by SEBI may also be mandated for listed companies and considered for inclusion appropriately in the Bill. For unlisted companies, the Guidelines may remain voluntary ...”. If this recommendation is accepted, then the recent approach (analyzed here) of exhorting companies to enhance their governance practices through voluntary and persuasive measures rather than legal mandate will undergo a significant shift.

(Update – September 6, 2010: A full text of the Standing Committee’s report is available here)

No comments: