The Firm

Show Timings:

Friday: 10.30 pm, Saturday: 11.30 am

Sunday: 9:30am & 11.00pm


Companies Bill, 2012: Big Impact Areas!

Published on Sat, Jan 05,2013 | 12:56, Updated at Sat, Jan 05 at 15:49Source : CNBC-TV18 |   Watch Video :

On December 18, 2012, after 7 years of discussions, drafting and delays, 2 referrals to the parliamentary standing committee and 5 different ministers shepherding it - the Companies Bill finally kept its date with the Lok Sabha. But it ran out of time in Rajya Sabha and is now expected to come up for voting in the upper house in the Budget session.
Doshi: The Companies Bill is one step short of becoming law. Time then for companies, their directors and auditors and investors to start preparing for the regime change! It’s impossible to cover in detail all 29 chapters, 470 clauses and 7 schedules; so what we are going to do on the show today is identify the big impact areas. Over the next half hour you will hear from a CFO, a Group General Counsel, a Business Leader turned Activist Investor, an Auditor and an Independent Director.
At India’s largest infrastructure company, Larsen and Toubro (L&T), CFO, R Shankar Raman approves of the themes underlying the Companies Bill 2012. He describes them as simplicity, shareholder democracy and self-regulation. He says the Bill makes capital raising more precise by providing much needed clarity.

Companies Bill, 2012
Gives statutory recognition to CFO as ‘Key Managerial Personnel’

Raman: For first time there has been an attempt to make a comprehensive legislation surrounding capital raising. Earlier we use to have listed companies, which are raising capital, governed by the Securities and Exchange Board of India (SEBI) guidelines and the listing requirements and they were pretty explicit. But what was not so explicit was the rules governing capital raising by unlisted companies, private companies as we call them. Today, how capital needs to be raised both by public companies as well as private companies…(Interrupted)
Doshi: So public unlisted and private?
Raman: Yes, they are mentioned in this legislation which is a welcome thing. The other aspect of this legislation which makes it comprehensive is it covers all securities. Earlier the Companies Act use to talk about shares, it use to talk about debentures but with evolution of capital markets, there have been several instruments which fall between these two and today the new Bill does cover all form- for example convertible debentures or foreign currency convertible bonds, anything which has an underlying conversion, which is called securities in the securities market but not really recognized so in the Companies Act; it gets recognized in the Bill. So that is a good part on capital raising. It also talks about situation where a company needs to recurringly visit the capital market. Let‘s assume a company is in the mode of expansion and the expansion is happening in stages; so capital raising could happen in stages. We can today think under the new Bill filing what is known as Shelf Prospectus.

Companies Bill, 2012
Allows companies to file shelf prospectus with Registrar at the stage of the first offer of securities
SEBI to prescribe companies who can file shelf prospectus

Companies Act, 1956 
Allows only public financial institutions, Public Sector Banks & Scheduled Banks to issue Shelf Prospectus

Doshi: But if you are a listed company wouldn’t you have to comply with whatever SEBI’s regulations are and in which case you might have to file a fresh prospectus every time you go to the market to raise money?
Raman: I do expect at some point in time there could be some congruence.
Mr. Raman adds other significant changes to that list. The Companies Bill permits deviation from proclaimed end use of funds but only after shareholder approval and after providing dissenting shareholders an exit. It also recognises preference shares as a long-term fund raising tool.

Company can change object of fund raising after shareholder approval via special resolution
Dissenting shareholders to get exit opportunity
Preference shares can be issued for a period exceeding 20 years for infra projects

But his grouse is that the Bill permits a maximum of two layers of investment companies. Infrastructure companies usually have a sponsoring parent holding company and intermediary holding companies which in-turn undertake projects via separate subsidiaries. This new limitation removes structuring flexibility, he says.

Companies Bill, 2012
Modifies definition of ‘subsidiary’
Company to qualify as a ‘subsidiary’ of another company if latter controls more than half of the total share capital

Raman: Two things; one is we will have to re-evaluate sectoral capital raising issues to see how we could package for example if you are thinking of holding company for road as different from holding company for other forms of transportation. Maybe we could look at transportation infrastructure at an apex level. So we might have to realign some of these strategies. The other thing that we take heart from is there has been a sort of an exemption that’s been provided. If for compliance with laws and regulations, if companies need to seek exemption for additional layers of subsidiaries, the government is appearing to be open to look at it.
Companies Bill, 2012
Companies can make investment through 2 layers of investment companies
Companies Bill, 2012
Provides for exemption in case of foreign acquisitions & requirement of multi-layered structure as per any law

This going back to the government for approval is a reduced feature in Companies Bill 2012; down to some 28 instances. But it has been replaced by multiple instances of shareholder approval.
Not far from L&T is Bombay House, the headquarters of the Tata Group, which runs over 100 companies. Group General Counsel, Bharat Vasani has been closely tracking the Companies Bill this last decade. He says the Bill has some 35 clauses that require companies to seek shareholder approval; far too many.
Vasani: Currently we have a complete gamut of transactions, which do not need to go back to shareholders and they are like, anything which a holding company does for its wholly- owned subsidiary- whether it gives loans, whether it gives guarantees or makes further investments and large chunk of cross border transactions, which have happened in India and even domestic merger and acquisition (M&A) transactions have happened through such route of wholly owned subsidiaries. Many of these transactions are done on very tough timelines, very strict timelines and we do not have the luxury of time because you are only one of the bidders in a competitive bidding situation and you have to adhere to the timelines dictated by the investment bankers or the sellers and here you have that you need 45 days timeline because you need a special resolution to be passed either by postal ballot or even by calling shareholders meeting and this entire gamut of transactions in cross border M&A space is generally done through layers of wholly owned subsidiaries. So that exemption is withdrawn.

Companies Bill, 2012
Inter-corporate loans & investments above certain limit need approval via special resolution
Companies Bill, 2012
Approval needed if loan/investments >60% of company’s paid-up capital, free reserves & securities premium account
100% of its free reserves and securities premium account

Doshi: What will companies do;  not to get around this but to be able to deal with this especially in time sensitive M&A kind of situations that you have spoken about?
Vasani: My sense is that they may take a general omnibus approval in anticipation of a transaction in advance so that they do not have to rush to the shareholders when the time for submitting shareholders resolution or seeking their approval comes.
Doshi: And they do such general approvals in advance?
Vasani: The way the current Clause 186 is worded, you need to kind of specify so many details which you may not have at this stage. I suppose by way of rules the government may try to give some amount of flexibility to corporate particularly to be it in corporate cross border M&A situation.
Doshi: Capital raising, structuring inflexibility, too many instances of shareholder approval required. Add to that changes in financial reporting and substantial changes to auditing. The Companies Bill, 2012 will change how large audit firms work. Audit firm rotation after two consecutive terms of five years each, prohibition on providing non-audit services to an audit client and the creation of the National Financial Reporting Authority (NFRA). Deloitte Chairman PR Ramesh says, combined, these measures will enhance vigilance on and of auditors.
Ramesh: For the first time we will have a body which sets standards, which will monitor and enforce compliance with standards - both accounting and auditing and above all it will have an oversight on audit firms by way of inspecting audit firms and the power to punish. Earlier this was with different bodies and different forms, we had the Quality Review Board.
Doshi: Predominantly run by The Institute of Chartered Accountants of India (ICAI)
Ramesh: So here is an independent body, one really doesn't know what shape it will take but my guess is that it will change the landscape so far as audit firms are concerned and it will lead to a situation where it is the auditor's way or the highway.

Companies Bill, 2012
National Financial Reporting Authority
To recommend formulation of accounting and auditing policies
To monitor and enforce compliance with accounting standards
To oversee quality of service by audit firms
Can investigate members & firms registered under Chartered Accountants Act, 1949
To have powers available to civil court under CPC

In an attempt to improve audit quality, the Companies Bill 2012 also disallows an audit partner from auditing more than 20 companies.

Companies Bill, 2012
Mandates compulsory rotation of individual auditors every 5 years
Mandates audit firm rotation every 10 years
Ramesh: The large firms may become smaller.
Doshi: How can they get around this?
Ramesh: No they can't get around if the limit is 20 which includes all companies and therefore you can only add on partners. You may have situations where a partner is doing the same audit all through the year of one client just because it's large.

Companies Bill, 2012
An auditor cannot audit more than 20 companies
In case of a firm, limit is applicable to each Partner

Doshi: Tell me how companies are going to get around this?

Ramesh: Companies won't be able to get around this. There will be disbursal of orders. The issue is of consolidated financial statements not being audited by the same auditor across; that will be the challenge. So one will have to rely on work done by others.

Doshi: Its interesting you bring that up because that takes me to the second point that you wanted to make as well that the liabilities facing auditors have increased because of a variety of different Clauses or Sections in the Bill. Take me through what the impact of this is going to be?
Ramesh: Dramatic. Just by way of illustration, the Bill has a provision where an auditor is expected to blow the whistle. It states that if he comes across any fraud or fraud about to be committed and the definition of fraud is so wide, he is expected to report. Now the definition of fraud is so wide it goes beyond the auditor's duty, beyond his scope and this applies to the auditor under the Companies Act doing an audit of financial statements, it applies to cost auditors, it applies to a secretarial audit done by practicing company secretary. So this single provision itself is far reaching. Add to that, you have clawback of fees, you have class action suits then you have the NFRA with its punishments. So you can look at the auditor's life and start imagining will we be able to attract people to the auditing profession?

Companies Bill, 2012
Auditor to report any offence involving fraud to the Central government
Penalty of Rs 1 lakh-25 lakh in case of non-compliance 
Vasani: We are heading for a regime of much tougher auditors.
Doshi: But that's a good thing the fact that auditors will be less friendly.
Vasani: Yes; I would say they would be less friendly than today and it's a good thing for corporate India, and it is bound to happen with some of the corporate scams which have come out in the recent years.
This focus on corporate governance has Anil Singhvi's approval - the business leader turned activist investor says auditor vigilance coupled with the empowering of independent directors will boost India Inc's governance standards.
Singhvi: The first time we are seeing the term of ‘independent directors’ and secondly they have very clearly defined the roles and responsibilities. You will be surprised that most companies when they appoint directors, there is only two line letter saying that the board is pleased to appoint an independent director and that's the end of it.

Now the companies will really have to work out and this is mandated, the roles and responsibilities have to be given. There performance has to be evaluated based on the roles and responsibilities given and since the class action suit is also there, the independent directors will be very clear in their mind that they cannot just open their mouth to pop a cashewnut. They have to really open their mouth to see that debates are there in the boardroom and many times they have to put their foot down that XYZ things cannot be done.

Second issue which is very important factor which has to be borne in mind that now the appointment is to be done for a term of five years. And secondly independent directors are not liable to retire by rotation. In fact retirement by rotation- independent directors are excluded from that. So you won’t have a scenario that if you don't like an independent director because he is making lot of noises, by rotation his term will come and then you just express your inability that he can't be reelected because reappointment is always left with the board. After five years if you want to again retain him, it can be done by special resolution. So there are enough checks and balances which are available and first time I feel that independent directors should take their job seriously.

Companies Bill, 2012
Role of Independent Director
Independent judgment on issues of strategy, performance, risk management, resources, key appointments & standards of conduct
Scrutinize management’s performance
Satisfy themselves on the integrity of financial information
Determine appropriate levels of remuneration of executive directors

Nawshir Mirza, Independent Director: The promoters of companies will make sure that it is eventually their decisions that are carried and while they might do lip service to listening to the independent directors, they may nevertheless force through what they consider best for their interest or maybe for their company’s interest. So it is not necessarily that because now the law captures what are the responsibilities of independent directors, they would necessarily have a greater voice in the board.
To defined duties and fixed terms, add stricter eligibility criteria, no stock options and compensation, one separate board meeting every year, performance evaluation and limited liability. But Former Auditor and now Independent Director on many boards, Nawshir Mirza is not quite celebrating. He is concerned about Independent Director’s Code of Conduct in Schedule IV of the Bill.

Companies Bill, 2012
Independent Director
Not entitled to stock options
Not entitled to any remuneration other than sitting fees, profit-related commission, reimbursement
To hold separate meeting once a year without the presence of non-independent directors & management
To be evaluated by the entire Board of Directors
Labile only for those acts of omission or commission which occurred with his knowledge & where he didn’t act diligently

Mirza: There are two important aspects of Schedule IV that need to be appreciated; one is Schedule IV makes responsible independent directors alone, not the rest of the Board for certain very important governance issues. The other matter of concern is a specific provision there which requires independent directors to balance the interest of all stakeholders. In other words to treat fairly and equally, not only the shareholders but employees, customers, vendors, the taxman. Indeed let me give you an example. Recently we had the whole controversy about Vodafone’s withholding tax responsibility for the taxes it paid when it bought Hutchison’s share. Now had this Companies Act been in force, the taxman could have sued the independent directors of Vodafone saying (1) the taxman is a stakeholder in Vodafone (2) as independent directors, you did not balance my interest, you were so eager to payoff Hutchison and perhaps get the company at a better price perhaps that you didn’t think of my interest and so this claim of so many billion dollar I will also put upon you.

Companies Bill, 2012
Schedule IV lays down Code for Independent Directors

Companies Bill, 2012
Role of Independent Director
Safeguard the interests of all stakeholders, particularly the minority shareholders
Balance conflicting interest of the stakeholders

Vasani: They will have to be much more vigilant and I would expect them to be far more cautious, taking more legal opinions before they decide on a particular issue and we are moving more towards what the regime is in US and UK on this issue.
Bharat Vasani also points out that the Bill lays out that Rules will prescribe a minimum number of independent directors on board, certain classes of unlisted companies as well. 

Vasani: They will come by way of Rules as to which class of companies but whatever it is if you look at the statistics, we have about ten and a half lakh registered companies in India out of which eight and a half lakh are active companies. Assuming you take a bulk of private companies, still there will be about 50,000 or 100,000 of public companies which are listed public companies and I can tell you for a fact that none of those companies today have independent directors. Assuming even 10 percent of it meet those thresholds which are going to be defined by rules, imagine how many independent directors India would need and best part of it is that many of these companies are run like a family managed companies; they are not used to outsiders being on their Boards and this is going to be a profound change in the way some of the closely held companies are going to be managed going forward.    

Doshi: Capital raising, shareholder approvals, auditor vigilance, independent director empowerment and shareholder action. The Companies Bill 2012 introduces class action lawsuits, a specified number of members or depositors can file a class action suit on grounds of oppression or mismanagement against a company, its directors, auditors, experts and even advisors.

Companies Bill, 2012
Specified number of members/depositors of a company entitled to file a class action suit before the NCLT
Damages can be claimed for unlawful or wrongful acts from or against the company, its directors, auditors, experts, advisors etc.
Singhvi: Class action suit is including the company, the directors, the auditors, not only the audit firm, the auditor himself in his personal capacity and I am very happy to see that there is a clause which talks about consultants, advisors or any other person which may include a lawyer who has given a wrong advice or an investment banker who has given a wrong advice and people have lost money. It is just a beginning; you can argue that a case will go into the court and take ten years. But I think somewhere we have to make a beginning and it’s a good beginning. Like today when we are seeing so much of judicial activism, I think the day is not far when you will have a company which if has ripped apart all investors, I think the court will come down heavily. So I will not be surprised if cases are taken up on priority basis. Secondly, there will be specialized courts.
Doshi: That brings us to the National Company Law Tribunal, the NCLT, the creation of which could be a game changer.
Vasani: For several matters which were hitherto, they were required to approach the High Court or the Company Law Board or the Board for Industrial and Financial Reconstruction (BIFR). Now there will be a one single body called National Company Law Tribunal, which will be regulating everything and to a very large extent, I would say the success of this new legislation would depend on how efficiently they are able to run the National Company Law Tribunal because some of the very vital matters like corporate restructuring, mergers, demergers, complex corporate commercial insolvencies which were handled by BIFR, capital reduction, everything will have to be handled by the National Company Law Tribunal. So how are they going to manage, what kind of infrastructure they are going to provide. Unfortunately the experience of tribunals in India has not been very great under other laws. So there is some amount of skepticism in the corporate world as to whether the NCLT would be able to deliver.

Companies Bill, 2012
Provides for constitution of National Company Law Tribunal & Appellate Tribunal
Companies Bill, 2012
To dispose off cases within 90 days
To consist of President, Judicial & Technical members
Technical Member may retain his lien with his parent cadre or Ministry for a period not more than 1 year
Doshi: The Companies Bill 2012 allows mergers of Indian companies with foreign companies, narrows the eligibility of those who can oppose a scheme of arrangement requires an auditor’s certificate to ensure that the scheme complies with accounting standards, disallows treasury stock, gives shareholders defined exits in M&A situations, makes delisting a tad easier and makes enforceable a contract between two or more persons regarding the transfer of shares. I am talking right of first refusal (ROFR) and such rights.
Amrish Shah, Partner and National Leader-Transaction Tax, EY
I think from enforceability of contract, the way it is drafted today, critical is against whom it is enforceable. Is it also the target company or is it only the shareholder group. I think that’s sort of an ambiguity which prevails today in the Companies Bill probably; just to be on the safer side companies may want to also use the entrenchment provisions and incorporate this in their Article so that it becomes all binding and doesn’t remain more ambiguous as it is looking today. Another important element from M&A or deal perspective is permission of outbound mergers, which was not there today. So that is an important forward looking step or a progressive step. We need to make appropriate changes in the Foreign Exchange Management Act (FEMA) regulations, we need to make appropriate changes to the tax law so that such mergers also remain tax neutral like an Indian merger today and those changes need to be incorporated. Inbound mergers also are very progressive from a Companies Bill perspective. I think the key change there is allowing more than shares to be issued, instruments like Indian depository receipt (IDR) to be issued or even cash is what the Companies Bill talks about. Obviously, this will again require changes to the FEMA regulations because today shares is okay but I do not think an IDR is okay and also the tax law.

Companies Bill, 2012
Contracts or arrangements between two or more persons as regards share transfers of a public company be enforceable as contracts

Companies Bill, 2012
Allows merger of Indian companies with foreign companies

Companies Bill, 2012
In case of merger of foreign company into Indian company, payment can be made in cash, Depository Receipts

Doshi: And finally, this show will be incomplete if I do not mention corporate social responsibility (CSR). The Companies Bill 2012 mandates certain classes of companies to invest at least 2 percent of average net profits towards corporate social responsibility initiatives.
Singhvi: This money has to be spent – I think it is the intent of the government- in and around your factories, in and around your workplaces. So finally we have seen this Land Acquisition Bill and land not being given for the factories and all other purposes. I think this tension will be reduced so long as the corporate take this that this 2 percent is in the long-term beneficial for the corporate and for their wellbeing. So, I, for one would think that it is very important for the Board to take this matter very seriously rather than just companies to put take this 2% and just put it as an accounting entry and see that this money is spent and I will go one step ahead that there should not only be a committee of board of directors as mandated in the Companies Bill but there should also be audit of CSR money.

Companies Bill, 2012
Companies with networth of Rs 500 cr or more; turnover of Rs 1000 cr or more; Rs 5 cr or more must constitute CSR Committee
Committee to consist of 3 or more Directors of which one should be independent
Committee to recommend CSR policy to Board
CSR amount should be preferably be spent in local areas where company operates
Board to ensure 2% of average net profit spent on CSR
Board to explain reasons for non-compliance in their report

Doshi: To conclude, the Companies Bill 2012 is going to change the way companies are incorporated, raise money, interact with a stakeholders, govern themselves and contribute to nation building. But you haven’t seen the half of it yet; a significant portion of this new company law- some 300 matters including private placements, corporate loans and investments, M&A- will be further administered via rules; rules that have yet to be notified and rules that could make this new law dynamic or maybe even ad hoc. This, then, is just the beginning.


Copyright © Ltd. All rights reserved. Reproduction of news articles, photos, videos or any other content in whole or in part in any form or medium without express written permission of is prohibited.