After the Companies Bill, 2011 was presented in Parliament late last year, it was referred to the Standing Committee on Finance chaired by Mr. Yashwant Sinha. The Standing Committee had previously submitted a detailed report on the Companies Bill, 2009, and most of its recommendations had found their way into the 2011 version of the Bill.
The Standing Committee has now issued its report on this version of the Bill, narrowing its recommendations to some of the remaining open and contentious issues. A summary/analysis of the recommendations is available here.
In this post, I discuss some of the key recommendations:
1. Corporate Social Responsibility (CSR)
This has been a sticking point in the Companies Bill for the last couple of years now, with the pendulum swinging between the voluntary and mandatory approaches to CSR. The 2011 version of the Bill carries a compromise position in the form of a “comply or explain” approach where companies are encouraged to make a CSR spend, and any failure or deviation must be disclosed with appropriate explanation. The idea is to let the various stakeholders judge for themselves the company’s performance on the CSR front, which will operate as a significant pressure on them to perform well.
The Standing Committee has sought to revert to its previous position, which is to make the CSR spending mandatory, by including the words “shall ensure” in clause 135(5) of the Bill that requires companies to spend 2% of the average profits for the previous 3 years in pursuance of their CSR policy. Moreover, the Standing Committee has narrowed the scope of the provision by stating that “CSR activities of the companies are directed in and around the area they operate”.
The debate over mandatory-versus-voluntary CSR has been flogged to death, and the various positions are only too well known. While the Ministry of Corporate Affairs had proposed a via media that might have been potentially acceptable to all stakeholders as a method of initiating a more formal CSR policy for corporate India, the recent development leads to a further polarisation of views.
Although CSR debate only forms a small part of a broader theme of company law reforms in India, it had earlier been reported that the differences on this count were sufficient to hold up the reforms in the previous round. It remains to be seen whether the present episode will have the same effect. My guess is it will.
2. Securities Offerings
The Companies Bill, 2011 significantly tightened the process for offering securities, particularly to a large number of investors. This was in substantial part due to the dispute between SEBI and the Sahara group regarding the offer of convertible instruments and hybrid securities to a large number of investors. The Standing Committee’s effort appears to be to undo some of that so as to make capital-raising easier for companies. This is somewhat surprising given the increasing clamour for investor protection.
Specifically, the Standing Committee has asked for a specific definition of “private placement”. Further, it has sought to limit the definition of a “listed company” and “securities”. The report states:
It has been suggested that with a view to accord some freedom and flexibility of operations to Companies, specially when public funds are not involved, the above definition may be amended to limit the applicability only to : (a) Companies where the equity shares or any security convertible into equity shares are listed; or (b) companies where the debt instruments are listed, having been issued to public at large. The Committee find merit in the argument from operational perspective that the scope of above definition of “Listed Company” may be confined to listed securities issued through the process of “Public offer” [as defined in clause 23(1)] only, so that the regulatory framework can focus on such instruments only without dissipating energy and resources on all kinds of instruments, since the unlisted instruments are already subject to scrutiny of Ministry of Corporate Affairs. The Ministry of Corporate Affairs may accordingly consider appropriate modification in the definition of “Listed Company” in consultation with Ministry of Finance.
Clearly, the preference seems to be economic efficiency for the corporate sector by providing to access to financing, which results in limited investor protection. Again, the Standing Committee seeks to redraw the lines placed by the Companies Bill, 2011.
3. Governance in Government Companies
This appears to be a new issue addressed by the Standing Committee, and the reason attributable to its introduction is the recent episode involving Coal India Limited (CIL), where an activist investor, The Children’s Investment Fund (TCIF) has sought greater protection for minority shareholding in a company that is owned 90% by the Government of India. The Government has defended its position on the basis that it (acting through the President of India) is entitled under company law and in the articles of association of the company to issue directions to the board of the company on specific matters.
The Standing Committee has called for a disclosure in the report of the board of directors of a government company “indicating the impact / implications of Government directives on the financial position” of such company. Although this proposal was resisted by the Ministry of Corporate Affairs on the grounds that this would overburden government companies that are subject to several other requirements and also that such impact may be incapable of quantification, the Committee feels strongly about the need for such a report.
This approach is welcome as it induces greater transparency in the functioning of government companies, and is an important step in the context of the government’s proposal to divest shares to the public in several other public sector companies.
Among the other recommendations, an effort has been made to streamline the liability of directors and officers. Whole-time directors are to be included in the definition of “key managerial personnel” irrespective of whether the company has a managing director. The Standing Committee has called for limiting criminal liability for mere technical infraction of the company law provisions. This may come as a relief to corporate personnel.
Other recommendations include the manner and method of appointment of auditors, the duration of appointment, rotation of audit firms and audit partners, and the like. Yet others include the constitution of the National Company Law Tribunal (and whether it should include members of the Company Law Board), exemptions to private companies from certain provisions of the Act, and consolidation and subdivision of capital.Overall, the recommendations are limited in number, but a few are contentious. Press reports indicate expectations that the Bill could be passed during the monsoon session of Parliament. If the past track record is anything to go by, that is far too optimistic.