The govt in a control mode

Filed under Corporate Governance |

By Kumkum Sen

Companies Bill 2011- assessments in the public domain indicate discord.

A decade ago, the 2002 amendments intended to replace India’s existing Company Law were aborted. Nonetheless editions of bare Acts and Ramaiya’s volumes carry these amendments till date, requiring uncomfortable explanations to those not in the loop.

Hopefully, the controversies which immobilised several subsequent initiatives stand resolved, and in this round such absurdities are not repeated. Even if abortment is ruled out, there is discord on certain items, and from the assessments in the public domain, the perception is that the Government is in a “control” mode. The Bill appears to have been cleared with a certain degree of trepidation, given the Satyam experiences, and public outrage on accountability and other issues.

Internal systems have been beefed up by importing provisions from SEBI regulations. Insider trading being one such, till date addressed under Section 11 of the SEBI Act. This is intended to reinforce the governance of grey areas between listed shares and other securities, whether debentures or derivatives, under the Securities Contract Regulation Act, an issue that surfaced in the recent dispute involving Sahara India’s private placement of Convertible Debentures. SAT’s decision that SEBI’s permission was not warranted is now in appeal before the Supreme Court. At last the protracted power struggle between SEBI and the Ministry of Company Affairs (MCA) is over with the clarification that in cases of jurisdictional conflicts, SEBI laws will prevail.

Corporate Social Responsibility (CSR) is another governance related inclusion, requiring companies to expend at least 2% of three years average profit on CSR. The 2009 Draft Bill had linked the expenditure to net profit. The current language suggests that companies should be able to treat the cost as a deductible expense; shareholders however may be prejudiced, as dividends could be impacted.

A definition of CSR is warranted. In July 2011, the MCA had released National Voluntary Guidelines on Social Environment & Economic Responsibilities of Business. Essentially this was a call to the Indian Corporate Sector to evolve as assets of Society and not be regarded as unscrupulous carpet baggers, but as architects of the nation’s wealth. Both the Government and the Corporate Sector need to strive to achieve this.

Providing appropriate provisions for accountability is absolutely critical. The definition of “Key Managerial Personnel” (KMP) has replaced the existing Section 5, which held ‘Officers in default” to include Directors and other officers such as the Company Secretary and “any person in accordance with whose direction the Board is accustomed to act”.

The italicised portion, which enabled fixing the liability on the actual defaulters, has been removed from the KMP definition, which has updated the identification of officers by inclusion of new designees such as the Chief Executive Officer and the Chief Finance Officer. Appropriate provisions, more stringent than Sections 297 and 299 of the existing Act have been introduced to regulate “Related Party Transactions” in the context of KMP’s related parties – the definition is derived from the Income Tax Act and the offences carry heavy fines and penal consequences.

The appointment of Independent Directors for public companies having a specified paid-up capital threshold has been made mandatory, on the lines of Clause 49 of the Listing Agreement, in constituting one third of the total Board. It is proposed that independent Directors will enjoy immunity from cases of fraud and other corporate crimes. It’s not clear whether this is a veil which can be pierced. Government has also proposed setting up a dedicated data bank of persons who can act as independent directors; presumably the selection will have to be restricted to these panellists. This Hobson’s choice may not be palatable to many, particularly foreign companies.

A woman director is made mandatory for prescribed classes of companies, reportedly those with five or more independent directors, but with the maximum number of directors pegged at twelve, this could be a potential gender bender.

Finally, there are two provisions which appear to be unduly draconian. These are the establishment of two authorities: one is the Serious Fraud Investigation Office (SFIO) in existence for sometime within the MCA, and fairly toothless till date. SFIO has been vested with a statutory status and powers of investigation into corporate crimes, including that of arrest, seizure of asset and prosecution. Further, the Government proposes to establish a National Finance Regulatory Authority (NFRA) for improving oversight of corporate financial management.

NFRA is to be invested with powers which will include scrutiny of compliances of accounting and auditing standards and assessment of the quality of the services of professionals associated with such compliances. Additionally, NFRA will be entitled to exercise quasi-judicial powers to order investigation, levy penalties and bar professionals from practice in case of misconduct. Are all the kings’ horses and men, from the Courts of Justice, the still elusive NCL

T, MCA, ROC, CAG, CBI, regulators ICAI, ICSI not adequate to deal with such situations in their respective jurisdictions or in association?

Kumkum Sen: is a partner at Bharucha & Partners Delhi Officeand can be reached at kumkum.sen@bharucha.in

(Business Standard)

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Posted by on Dec 5 2011. Filed under Corporate Governance. You can follow any responses to this entry through the RSS 2.0. Both comments and pings are currently closed.

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