Companies Bill: The Final Cut!
Hello and welcome to this special mid-week presentation of The Firm. On this show we are going to bring you the final contours of the new Companies Bill. As you know, Indiaís existing Company Law was enacted in 1956. The global economy has changed dramatically since then, creating the need for a more modern law, one that has been in the making for almost a decade now. I am not exaggerating; work on the new Companies Bill started all the way back in 2004. And after 7 long years, a final version of the Bill was expected to be tabled this monsoon session of parliament but that was not to be. So I met Minister of Corporate Affairs Dr Veerappa Moily on his recent visit to Mumbai and asked him, why the companies Bill had missed its date with parliament.
Moily: The commitment is unequivocal that we should see that the Bill is presented and passed in this session. You know what has happened in the parliament, no Bill was allowed to be moved, processed.
Doshi: I am told 13 Bills were presented, 10 Bills were passed. Why was the Companies Bill not tabled?
Moily: Companies Bill was under circulation to the various ministries. When I took over, it came back and ultimately the last one to respond to us is finance ministry. After we received them, I again went through that because there were number of representations. I had an interaction with the CII. Then we fine tuned many things and ultimately it is through and 10 days back we have sent the Bill to the Cabinet and hopefully I wanted that Cabinet should clear it before the session closes but there was no possibility of presenting the Bill also; so Cabinet doesnít give that kind of a priority. May be, within next 15-20 days, Cabinet will clear it and hopefully next winter session, the first thing is I will introduce the Bill and would like to see that it is passed by the end of winter session.
Doshi: I donít mean to be impatient and donít take this in the incorrect fashion but I have heard this promise being made by the Minister for Corporate Affairs, your predecessors Ė two of them for the last year and a half. What worries me is this is the most important commercial legislation that corporate India depends on. We have been in consultation stage now for way too long. For instance, the Bill was first conceptualized in 2004- thatís the beginning of the first term of the UPA. We are half way through the second term of the UPA. The Parliamentary Standing Committee was given the Bill for scrutiny in September 2009. They returned it in August last year. For one year after that the ministry has not been able to move this Bill and table it in parliament. It is almost difficult to understand what is causing the delay. There have been continuous rounds of representations.
Moily: There are some historic reasons for that. The 1956 Bill, practically many of the provisions of that Bill, have become outdated and many of them will not respond to the present and future challenges. Thatís why we wanted to have a state of the art Bill. The standing committee gave 300 suggestions of amendment.
Doshi: Yes, I have been through the report; itís a very detailed report.
Moily: I know Ė very detailed report. Yes, the suggestions are very important, very unique and most of them are important for us. But ultimately when I was a law minister, I examined it and suggested to the union minister for government that unless you have a new Bill, there will not be any holistic approach to the old question. (Interrupted by Doshi)
Doshi: So the Bill has been entirely rewritten?
Moily: Entirely rewritten. (Interrupted by Doshi)
Doshi: Versus what was presented to the parliamentary standing committee?
Moily: Yes, parliament Ė it is now not 2009 Bill. It will be considered as a 2011 Bill. (Interrupted by Doshi)
Doshi: I know it started off as a 2008. That some how got dissolvedÖ (Interrupted by guest)
Moily: Then ultimately Ė now that it has taken a final stage of maturation that means it has gone to the Cabinet, must have after everything is over. Now I donít think there is any looking back.
Doshi: Is it just this reason that they were redrafting this as a whole new Bill that has caused this inordinate delay or can I also ask you whether there has been a degree of apathy by the leadership of this government. Sir, 3 ministers have changed in the last year and half while this ministry has been working on what is the most important commercial law in this country. This is the bedrock of how companies function. Three ministers have changed unfortunately - that means gaps in continuity and every minister who comes in then wants to re-familiarize himself, fairly enough, wants to hold another round of representations. So either there is serious apathy at the leadership level or there is too much corporate lobbying?
Moily: To be very frank with you, when I took over, I seized off the matter. We put a lot of pressure on the finance ministry and after that, I did not take more than 10 days with with all our official to finalize it. (Interrupted by Doshi)
Doshi: Has there been corporate lobbying to water down several aspects of the Bill?
Moily: No, definitely not.
Doshi: Because thatís been the other conspiracy theory doing the rounds?
Moily: I donít think thatís correct, but ultimately you should know the development. It has come to finality; it has gone to the Cabinet. That stage has never been reached by earlier.
Doshi: You understand the development of law so closely. You were with the law ministry till a few months ago. I have to ask you this question. Doesnít it reflect, to some degree, on central leadershipís apathy towards this law that you have had 3 ministers change in this ministry in the last year and half, while an important Bill is underway?
Moily: No, that has nothing to do with the change of ministry. But every minister has taken very keen and very honest decisions and in fact it has been finalized, not that it is lying out of apathy, but in fact every minister was passionate about it (interrupted by Doshi).
Doshi: There was a secretary who was very passionate. He has been moved to the finance ministry now. He was very familiar with the Bill, I couldnít understand (interrupted by guest)
Moily: Now it is a thing of the past. I think why you dig the (interrupted by Doshi).
Doshi: Will this be the Companyís Bill 2011 or will it be the Companyís Bill 2012?
Moily: It will be a Bill of 2011; take it from me.
Doshi: The previous drafts of the companies Bill were accused of being too Satyam reactive i.e. is more focused on governance and less on introducing newer ways for companies to raise funds, for example amalgamation and such. So when I asked Mr Moily if the focus continues to be governance he said, yes and used the SFIO example. SFIO- thatís Serious Frauds Investigation Office.
Moily: So far as the SFIO is concerned, serious fraud offence is concerned, that organization was created in response to the scandal of Satyam and now we are giving it a statutory backing for that in the Companies Bill of 2011. So we are going to build a very strong organization. Ultimately the cases which have been investigated from here, it will go to a special court which will be duly established under the Companies Law.
Doshi: So the SFIO is going to suo moto take cognizance of several frauds or someone will make complaints to the SFIO. Can you give me a sense of when you say we are creating a more stronger, more empowered structure for the SFIO, what does that include?
Moily: Normally even for the CBI, they will not take it up suo moto, it has to be referred by the department, the ministry or various other agencies- so there are several facets of all that. It is a multi-level agency. There are people from the income tax department, the police department, the administrative IAS and all these things.
Doshi: So someone has to refer a complaint to the SFIO?
Moily: Someone has to lodge a complaint or someone has to make a reference- then only they will initiate enquiry or investigation into the matter. All the defects of the CBI will be corrected here and this will be an institution which will be definitely self sufficient, independent and with lot of autonomous powers to deal with any investigation which is initiated or entrusted to them.
Doshi: Le me move to the second aspect of governance and that has been the issue of independent directors. Several aspects of the new Bill are fully accepted by industry. One issue that has become a thorn in the side of industry is that are you going to mandate fixed tenures for independent directors? I am told, based on the version of the Bill from a few months ago, that you all were looking at roughly a five year fixed term for independent directors. The second term was possible only if the company passed it through a special resolution and that there would have to be a three year cooling off period thereafter before the independent director is appointed again. Are you going in for fixed terms?
Moily: We are going in for fixed tenure and the transition is just like what you have said.
Doshi: What is the transition period?
Moily: The question is finding the independent directors in real terms, they are very rare commodity. Getting them from the market is not that easy. They should have the domain expertise, the professionalism and they will have to work as real independent directors; not as directors who are nominated by them just to fill in the post. Thatís why we need to give lot of powers to them and also give some level of immunity for some actions.
Doshi: So you have limited their liability as well to some degree, is it? Is that liability limited because often the issues that independent directors face are issues under the Shops and Establishments act, which will be a local law or issues under environment pollution, somebody will go to them and say one pipe burst in a ÖÖ (Interrupted by guest)
Moily: I think it should give an immunity; we have provided that kind of provision.
Doshi: So you have provided umbrella immunity to independent directors?
Moily: No, we have accepted that they are only responsible for whatever decision the board takes. Whatever the advice which is given by them, we have confined to that.
Doshi: But there are several other state laws and other laws that hold independent directors or directors on board responsible or liable for other offenses, outside of company law offenses. So that is the biggest bone of contention for independent directors.
Moily: No we need to protect them.
Doshi: This does protect them from that, does it?
Moily: This will protect them, we have provided for it.
Doshi: How will you sort of supersede all the other laws?
Moily: No, this is a standalone law which will take the entire corporate governance in its issue. So this alone will apply and rest of them will not apply to this.
Doshi: You have decided on fixed terms for independent directors?
Moily: Yes correct.
Doshi: Is that the case for auditors as well because this was the other contentious issue for audit firms?
Moily: Yes audit firms also there will be fixed term.
Doshi: I was told that the fixed term was of 4 years. So audit firm could do two fixed terms of 4 years each with a 4 year cooling off period in between. That is exactly the clause that you have gone with in the Bill?
Moily: Yes correct, that is exactly the clause.
Doshi: There was a lot of hullabaloo around CSR as well and from what I understood of the recommendations made by the Parliamentary Standing Committee, they had suggested, donít make this mandatory, make this comply or explain and I am told that you are in agreement with that as well that it should be comply or explain?
Moily: Yes, it is not exactly, I have pursued that it is mandatory. It is not like that compliance is more important. They will have to report the compliance in their report. If there is any problem for reporting it or implementing that, they will have to come out with justifiable reasons.
Doshi: That is how governments in many countries like the UK runs entirely on a comply and explain process?
Moily: Yes but of course the perception is that we have made it mandatory.
Doshi: You have not made it mandatory? That I think was the Parliamentary Standing Committee recommendation?
Moily: Not exactly, we canít say that because at the same time we said desirability of 2% of profit they need to invest.
Doshi: Managerial remunerations- have you changed that because the first draft of the Bill had changed it, then the parliamentary standing committee said no. The first draft of the Bill of 2008 said we do not want to put any limits on managerial remunerations; we leave it up to companies and their shareholders to decide. The Parliamentary Standing Committee stepped in and said, no look at what happened to Satyam, please letís make sure that there are some limits but we will make it more liberal. I donít know what this final draft says.
Moily: We have made it more liberal with some limits, some constraints.
Doshi: Are the constraints similar to what the 1956 Act has? Are they broader than that?
Moily: They are broader than that.
Doshi: So, would you be at liberty to share?
Moily: Not now.
Doshi: Many of Indiaís leading companies have one thing in common. They have the same person occupying the positions of both Chairman and Managing Director or CEO. For instance Reliance or Bharti Airtel or L&T or Marico, but soon that is going to have to change. Veerappa Moily confirmed that the new Companies Bill makes it mandatory to separate the two positions of Chairman and Managing Director.
Moily: Ultimately that transition will have to take place. We have provided that kind of a graduation in the Bill.
Doshi: So you have made it very clear because several companies in India today have the same person as Chairman and Managing Director. Are you making it, here onwards, illegal to have the same person as Managing Director and Ö.. (Interrupted by guest)
Moily: Not exactly illegal.
Doshi: It will be a violation of Companies Law?
Moily: Naturally, ultimately it will be a violation but that transition we have provided some leave ways.
Doshi: What is the transition?
Moily: I donít remember exactly.
Doshi: Is it a time period transition or is it some other kind of transition?
Moily: Time period transition.
Doshi: So you have given the companies time to be able to finish the required Ö.. (Interrupted by guest)
Moily: Yes but it will be prospective.
Doshi: Outside of this Bill, there have been several issues in the recent past that have become issues fought in court because there is ambiguity around the interpretation of the law. Let me use, for an illustration, the right of first refusal or ROFRs as they are referred to. They are a pretty standard feature in most shareholder agreements across the world including in India. In the recent past 5-7 years, there have been views by benches of High Courts saying that ROFRs are in fact a violation of Section 111A of the Companies Act which says that there must be no encumbrance on the free transferability of shares. Now there is a mismatch in the interpretation and what ROFRs are set out to be done. The best way to resolve, this instead of waiting for a Supreme Court judgment, would be if the MCA decides to clarify saying, no the intent of the law was this and this is therefore the implication. Have some of these submissions come to you?
Moily: Those representations have been made, we deliberated on that also. Ultimately we thought it need not be put down in the Bill because there are certain areas where guidelines could be given, where the regulations can be formed. So we have left it to the regulations to be formed on that. We have not put down this thing in the law.
Doshi: Call and Put options including?
Moily: Yes correct. We have not put it in the Bill.
Doshi: The whole controversy over what the term Ďassociateí means?
Moily: Associate Ė this time we have provided for the Ďassociateí also.
Doshi: That definition of Ďassociateí?
Doshi: So by this definition of Ďassociateí do the Essar and Loop BPL become associates or not associates?
Moily: We canít apply this rule for that. Now that is prospective.
Doshi: Your ministry has changed its stance on the Sahara OFCD issue. Earlier it said that we did receive some representations from Sahara. Now the most recent representation in court has been that we believe that this is within SEBIís jurisdiction. My question to you is what is the final stance of the ministry- is Sahara in violation of law by issuing these OFCDs?
Moily: I canít pass a valid judgment here.
Doshi: You are the minister, you understand the law? Does Sahara come under the regulation of SEBI?
Moily: Matter is before the Supreme Court. I donít want o interpret Ö.. (Interrupted by Doshi)
Doshi: But in your opinion does Sahara come under the regulation of SEBI?
Moily: I donít want to give an opinion when the matter is subjudice.
Doshi: The minister was on a tight schedule on his trip to Mumbai. So I couldnít confirm all the other details I had on the new Companies Bill. But based on information from sources, I hear the final draft of this Bill maintains the definition of Ďcontrolí, puts no restrictions on the number of subsidiaries that a company can have except for companies in some sectors such as financial services. It allows the company to have up to two layers of investment companies but provides relaxations in certain conditions such as for overseas acquisitions. It permits companies of a certain size to accept public deposits for smaller companies though they can only accept deposits from their members. It provides for a squeeze out that is mandatory exit offer to minority shareholders after having acquired 90% or more.
Over the last 20 minutes we have given you a glimpse of the new Companies Bill and unless the Cabinet has different views or further corporate lobbying forces a change, this could very well be the final design of the new law i.e. the Companies Bill 2011.