Given the recent corporate scandals there has been a greater focus on better corporate governance and transparency in the new Companies Bill with stricter punitive action. However, its effectiveness would be known only when the provisions come into force
 

“The new Companies Bill has brought in a lot of transparency by making companies disseminate information in a clear and transparent manner,” says Savithri Parekh, Head of Legal & Secretarial, Pidilite Industries at a Moneylife Foundation event. There have been substantial changes in the restructuring provisions with greater focus on disclosure and compliances. The Bill provides for greater autonomy for the companies to function, more of self-regulation, greater responsibility of the board and directors, and focus on compliance. “Many of the new provisions in the new version of the Companies Bill 2012 have been made because of two major incidents, one is the Satyam scam and the other is that of Sahara,” said Jayant Thakur, Chartered Accountant, who advises listed and non listed companies and intermediaries on SEBI laws. “These two incidents raised many questions with the provisions of the existing law such as that of independent directors, voting powers etc. and how could the shareholders be compensated for the losses. All this has led to new provisions such as that of class action suits,” explained Mr Thakur speaking at the same event.
 

But much depends on the timing of the Bill when it would come into force. “In the last 10-15 years, many of the laws relating to corporate bodies have a provision that they will come into effect partly or wholly on notification. Therefore, the whole act may not come into effect immediately. For example, going eleven years back, the Companies Amendment Act 2002, has still not come into effect wholly, because there are certain provisions that have come into effect and certain provisions that have not come into effect. Much this is because of litigation or the way the laws have been framed. Here again, in the present Bill, some of the sections may come into force on a phased basis,” said Mr Thakur
 

In terms of disclosures, says Ms Parekh, “the annual return filed by the company would need to contain details of the remuneration of the directors and key management personnel, penalty or punishment imposed, certification of compliances and other details like shares held by foreign investors etc.” The Directors Report would contain enhanced disclosures such as number of meetings of the board, policy on Directors’ appointment, remuneration including qualification, positive attributes, independence and other matters, particulars of loans guarantee and investments and details about CSR policy and initiatives. Though some of the disclosures were available in other parts of the Company’s Annual Report, now, the shareholders would find this information in only one place.
 

While the earlier Act had no provisions on insider trading, under the new Act insider trading is prohibited and penal provisions under the corporate laws will also be applicable. The guilty would be subject to imprisonment up to 5 years or fine of minimum Rs. 5 lakhs and maximum Rs25 crores or three times amount of profits or both. However, the issue in this provision as pointed out by Ms Parekh is ‘price sensitive information’ is not clearly defined. There are only examples of price sensitive information that is given in clause 36 of the Listing Agreement.
 

One of the important introductions in the Companies Bill is that of Corporate Social Responsibility (CSR) which has been mandated for all companies. “Well managed companies like the Tata’s, Nestle etc. spend anywhere between 1.2% and 3.5% of their profits on CSR activities,” explained Ms Parekh. The new bill mandates a compulsory expenditure of 2% of average net profit of the last three years. Activities cannot be conducted in remote areas, but in the local areas where the company operates. Details of the activities and the location need to be disclosed as well.
 

Under the Companies Bill, if anyone (officers, directors, independent Directors, auditors) commits a fraud, they would go for a minimum imprisonment of six months and up to 10 years. And if the public interest is affected in the fraud, the minimum imprisonment is three years. “Fraud is very widely defined,” said Mr Thakur. Statements under oath, mis-statements in prospectus, mis-statements in share sale/purchase agreements, mis-statements in projections, etc. for obtaining bank credit, making multiple share applications and fraudulently issuing duplicate shares are some violations treated as fraud.
 

For the first time, a provision has been made for class action suits. It is provided that specified number of members, depositors or any class of them, may, if they are of the opinion that the management or control of the affairs of the company are being conducted in a manner prejudicial to the interests of the company or its members or depositors, file an application before the Tribunal on behalf of the members or depositors. Knowing the limitation of individual investors to fight against a company’s might, many a company has taken them for granted. To overcome this weakness in the law, the Companies Bill has now proposed a new Clause 37 that provides for action by a group of shareholders. The session ended with some searching questions from the audience.