India: Plugging The Gaps: New Company Law On The Anvil

Last Updated: 14 November 2008

The regulatory framework relating to corporate entities in India is set to be overhauled. The change in existing legislation governing companies is intended to enable the corporate sector in India to operate in a regulatory environment as close as possible to international best practices and foster increased entrepreneurship, investment and growth.

After much delay, new legislation aiming at a complete revamp of the existing regulatory framework relating to companies is finally underway. The Union Cabinet has given its approval to the Companies Bill, 2008 ("the Bill") that will replace the six decade old Companies Act, 1956. The Bill is slated to be introduced in the next session of Parliament in October 2008.

The Bill, inter alia, proposes to carry out the following changes:

The Bill seeks to harmonize company law with the host of existing specialized sectoral regulations and aims at providing a single, comprehensive framework to be administered by the Central Government.

The Bill proposes to do away with differential voting rights and valuation of non-cash considerations for allotment of shares through independent valuers.

The Bill offers a new corporate entity in the form of a One-Person Company (OPC) and aims at bringing about a simpler compliance regime for smaller companies. Restrictions on the number of subsidiary companies that a company may have, subject to disclosure in respect of their relationship and transactions/dealings between them, is expected to be removed.

The Bill intends to expedite the incorporation process, with stipulations of detailed declarations/disclosures about the promoters and directors at the time of incorporation itself. Requirements like the mandatory Directors Identification Number shall continue to remain in force.

The Bill is expected to relax restrictions limiting the number of partners in entities such as partnership firms, banking companies etc. to a maximum 100 with no ceiling as to professions regulated by Special Acts.

The Bill proposes to mandate at least one director be resident in India. The Bill also provides for boards to have a minimum of 33 per cent independent directors.

The Bill recognises the Chief Executive Officer (CEO), the Chief Financial Officer (CFO) and the Company Secretary as Key Managerial Personnel (KMP).

The Bill proposes to bar companies from raising deposits from the public except on the basis of permission available to them through other special laws. It proposes to prescribe criminal liability to offences like insider trading by company directors or key managerial personnel.

The Bill moots a single forum for approval of mergers and acquisitions, along with concept of deemed approval in certain situations. It also proposes a separate framework for enabling fair valuations in companies for various purposes.

The Bill proposes to enable shareholders associations/group of shareholders to take legal action in case of any fraudulent action on the part of company and to take part in investor protection activities and 'Class Action Suits'.

The Bill proposes to create a revised framework for regulation of insolvency, including rehabilitation, winding up and liquidation of companies with the process to be completed in a time bound manner based on the international best practices as set out by the United Nations Commission on International Trade Law (UNCITRAL).

The Bill intends to consolidate the fora for dealing with rehabilitation of companies, their liquidation and winding up by providing for a single forum - the National Company Law Tribunal with appeal to National Company Law Appellate Tribunal. The nature of the Rehabilitation and Revival Fund proposed in the Companies (Second Amendment) Act, 2002 to be replaced by Insolvency Fund with voluntary contributions linked to entitlements to draw money in a situation of insolvency.

The Bill aims at a more effective regime for inspections and investigations of companies while laying down the maximum as well as minimum quantum of penalty for each offence with suitable deterrence for repeat offences. It also proposes stricter penalties for company law related offences and has made several offences non-compoundable. Under the Bill, the company is to be identified as a separate entity for imposition of monetary penalties from the officers in default. In case of fraudulent activities/actions, provisions for recovery and disgorgement have been included in the Bill.

The Bill proposes to set up special courts to deal with offences under the Bill. Company matters such as mergers and amalgamations, reduction of capital, insolvency including rehabilitation, liquidations and winding up are proposed to be addressed by the National Company Law Tribunal/National Company Law Appellate Tribunal.

The Bill seeks to levy additional fee in a non-discretionary manner for procedural offences, such as late filing of statutory documents by framing rules. Defaults of procedural nature are expected to be penalized by levy of monetary penalties by the Registrars of Companies. The appeals against such orders of Registrars of Companies may lie with suitably designated higher authorities.

The Bill aims at recognizing both accounting and auditing standards. The role, rights and duties of the auditors shall be defined under the Bill with towards maintaining integrity and independence of the audit process. Consolidation of financial statements of subsidiaries with those of holding companies is proposed to be made mandatory.

The Bill also proposes to further strengthen the E-governance initiative by the Ministry of Corporate Affairs (MCA-21) and bring more compliance processes within its fold. Accordingly, under the revamped E-governance regime more ease of operation will be provided to stakeholders and corporate data shall be more easily accessible. It remains to be seen what shape the new law will eventually take and when will it get the legislative sanction. It also remains to be seen whether and to what extent existing companies will be effected by the new law and have to ensure compliance with the new legislation.

The provisions of the Companies Act, 1956 will remain in force until the new law is enacted and notified.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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