The long awaited re-codification of company law has taken a concrete shape in the introduction of Companies BILL, 2008 (the Bill) in parliament recently by the Govt. of India and the same has been referred to the Select Committee. The Bill seeks to establish a new benchmark for corporate governance when compared to the existing framework in the Companies Act, 1956 (the Act).
The Act is a voluminous piece of legislation which is in force since 1956 consisting of 658 sections, 6 Tables, 14 Schedules and it has become both complex and complicated due to successive amendments numbering about 24, over a period of little more than half a century. During this period a lot of changes have taken place in the economic milieu, both in India and abroad. The business in India has been freed from diverse, complex regulatory framework.
The Re-codification of company law was given a definite shape when the Govt. of India put on its website a draft Companies Bill as a concept paper and invited comments and suggestions for fine tuning from the professionals and trade and industry organisations. These inputs were handed over to an expert committee constituted by the Govt. of India and headed by Dr. J. J. Irani. Recommendations of the committee have been suitably incorporated in the Bill.
FOCUS OF THE BILL
The New Bill aims at simplification of Company law by (i) segregating and deleting the procedural laws from the substantive law, (ii) procedural laws to be prescribed by the Central Govt in the form of Rules, (iii) clubbing of existing provisions, (iv) retaining some of the provisions of the Act which are considered relevant and useful, and (v) harmonisation of company law with some of the provisions of SEBI governance norms.
The new Bill lays down, inter alia, new bench mark for corporate governance in the context of emergence of corporate form of business as a preferred vehicle for undertaking business activity. Some of these issues are discussed in this Article.
(a) Duties of Director
The Act does not define the duties of Directors and it has to be gathered from some of the provisions of the Act. However, over a period of time, the judiciary has attempted to define their duties as fiduciary in nature emanating from the position they occupy as special trustees and agents of a company. One of the important duties of a director is the obligation to act with care, skill and diligence in relation to the affairs of a company and the degree of care expected of them is that of a person of ordinary prudence and avoid conflict of interest with the company. This is essential as the Company, being a legal entity has no physical existence of its own and it cannot act for itself.
The Bill by Clause 147 now seeks to define duties of Directors. They are (a) to act in accordance with the articles of the company, (b) act in good faith in order to promote the objects of the company for the benefit of its members, (c) exercise his duties with due and reasonable care, skill and diligence,(d) not to act in conflict situation either direct or indirect with the interest of the company, (e) not to achieve or attempt to achieve any undue gain or advantage to himself or to his relatives, partners or associates (f) not to assign his office and assignment so made is void Contravention of any of the duties is punishable with fine. The Clause also provides that if any director is found guilty of making any undue gain as aforesaid, he shall be liable to pay an amount equal to that gain, to the company.
What is stated above is a codification of duties of directors and any deviant behaviour will attract penal consequences.
(b) Board Meeting by Video Conferencing
The directors are required to be present physically in Board meetings. This is pursuant to section 285 of the Act which mandates holding of board meetings at least once in every three months and four such meetings are to be held in for deliberating and deciding on major policy matters of the company.
There has been persistent demand from trade and industry organisations, to permit the companies to hold their board meetings through video conferencing making use of latest technology available in our country. The Companies (Amendment) Bill, 2003 recognised, for the first time, the facility of holding board meeting by video conferencing but the Bill having been withdrawn by the Govt of India, the new provision could not be given effect to.
The Companies Bill, 2008 by clause 154 provides that the participation of directors in a board meeting may be in person or through video conferencing or other electronic means as may be prescribed. Such a system should be capable of recording and recognising the participation of directors and storing the proceedings of such meetings. However, the Central Govt has reserved to itself the power to specify by notification the matters which should not be dealt with in a meeting through video conferencing or other electronic means i.e. the matters which will have to be transacted only at a physical meeting of the board. The items of business listed in Section 292 of the Act (clause 159 of the Bill) will come in handy for exclusion from video conferencing.
(c) Registered Valuer
This is a new concept proposed to be introduced by the Bill. If valuation is required by any of the provisions of the Act in respect of any property, stocks, assets, it should be done by a registered valuer appointed by the audit committee or the Board, in terms of clause 218 of the Bill. Any Chartered Accountant, Cost & Works Accountant, Company Secretary or such other persons possessing such qualification as may be prescribed may apply to the Central Govt for being registered as a valuer.
Clause 56 of the Bill which deals with further issue of capital by private placement provides that the price of such an issue should be determined by a registered valuer. Similarly clause 201 of the Bill which deals with compromises or arrangements with creditors and members (corresponds to sections 391 to 394 of the Act) also provides for valuation of shares and the property etc of a transferor company by a registered valuer.
(d) Setting up of Special Court outside India
Register of Members is one of the statutory registers prescribed by the Act and serves as prima facie evidence of ownership of shares held by a member. The corresponding provision is contained in clause 78 of the Bill and specifically recognises the holders of shares and debentures residing in India and outside.
Clause 53 of the Bill provides for "Rectification of Register of Members." If the name of any person is entered in the Register without sufficient cause or after having been entered in the Register is, without sufficient cause, omitted there from, the person aggrieved or the company may appeal to the Tribunal (now CLB) for rectification of the register. In respect of foreign members or debenture holders, the Bill proposes to set up a competent court outside India for rectification of the register. This is a new provision and recognises the foreign investment in India.
(e) Kinds of share capital
Clause 37 of the Bill provides that the share capital of a company limited by shares shall consist of two kinds ie Equity share capital and Preference share capital. In relation to equity share capital, the clause further clarifies that it is that part of the issued share capital of the company which has no limits for participation, either with respect to dividend or with respect to capital, in distribution of profits or otherwise. This provision virtually amounts to doing away with the differential voting rights as to dividend, voting or otherwise recognised by section 86 o f the Act. What happens to the companies which have already amended their articles and issued equity capital with differential voting rights?
(f) Key Managerial Personnel
The Bill, for the first time, proposes to re-group in relation to a company "key managerial personnel" consisting of (i) the Managing Director, the Chief Executive Officer or the Manager, a whole-time director or directors, (ii) the Company Secretary, and (iii) the Chief Financial Officer as "key Managerial Personnel". This means that the Key Managerial Personnel will become liable for penal consequences by virtue o f the positions they hold. About 24 clauses in the Bill (excluding winding up provisions) recognise "Officer in Default" and this term includes Key Managerial Personnel for monetary penalties for non compliance of law.
(g) Independent Directors
The Act does not prescribe induction of independent directors on the board of companies. However this requirement is presently applicable to listed companies in terms of listing agreement. If the chairman of a company is a non-executive director, at least one-third of the Board should comprise of independent directors and if the chairman is executive chairman, then the Board should comprise of 50% independent directors. These directors are expected to professionalise corporate management and assist the Board in taking corporate decisions in an objective manner for the benefit of the company and its shareholders.
The Bill by clause 132 provides that every listed public company having such paid up capital as may be prescribed should have at least one-third of the total number of directors as Independent Directors. The Central Govt may prescribe the minimum number of independent directors in the case of other public companies and their subsidiaries. Such a director is a non-executive director of integrity and should possess relevant expertise and he or any of his relative should not have any pecuniary relationship with the company more fully described in the aforesaid clause.
In the context of Satyam fiasco, the role and responsibility of Independent directors has come in for critical review. While the concept is good, the observance of norms expected of an Independent director requires to be strengthened.
(h) One Person Company
The Bill, for the first time, seeks to introduce the concept of "One person Company" as one more form of business organisation. It is defined as a company which has only one person as a member. Clause 3 of the Bill provides for incorporation of "One Person Company" for any lawful purpose and it enjoys limited liability as applicable to other types of companies. However, the Memorandum of such a company should indicate the name of the person who shall, in the event of the subscribers' death, disability or otherwise becomes the member of the company. Any change in the name of such a person indicated in the Memorandum should be informed to the Registrar and any such change is considered as an alteration of the Memorandum.
One Person Company is not required to hold Annual General Meeting as envisaged in clause 85 of the Bill. All other provisions of the Bill relating to maintenance of books of accounts and audit of accounts etc will apply as these provisions are applicable to companies including One Person Company. More regulations in this behalf are expected to be prescribed by the Central Govt in the form of Rules.
(i) Adjudication proceedings
The Bill, for the first time, seeks to introduce the concept of adjudication of penalties in respect of non compliance of procedural laws. Heavy monetary penalties ranging from 5,000 to 50,000 rupees and in some cases the penalty extends from one to ten lakhs of rupees have been prescribed. In the case of failure to repay matured deposits or the interest thereon within agreed period or any extension thereof given by the Tribunal, the company is punishable with fine of not less than one crore of rupees and it may extend to ten crore of rupees and in addition the officer in default is also punishable with fine of not less than 25 lakhs of rupees and it may extend to two crore of rupees as provided in clause 67(3) of the Bill.
The determination of quantum of penalties will be decided by Adjudicating officers. The Central Govt will publish in the Official Gazette the status of Adjudicating officers, not below the rank of Registrar who will be empowered to impose penalty on the company and the officer who is in default, following the principles of natural justice. A person aggrieved by the decision of the Adjudicating officer may appeal to the Regional Director within 60 days. There are about 32 clauses in the Bill which refer to "Officer who is in default" for the purpose of penalties.
(j) Constitution of Special Courts
Another novel feature of the Bill relates to constitution of Special courts for speedy trial of offences punishable for non compliance of law as envisaged in Clauses 396 and 397 of the Bill. It is provided therein that Central Govt may by a notification establish as many Special Courts as may be necessary. The Special Court will consist of single Judge, appointed by the Central Govt with the concurrence of the Chief Justice of the High Court within whose jurisdiction the Judge will be working. The Judge of the Special Court, before appointment should be holding office of a Sessions Judge or an Additional Sessions Judge as he alone can impose punishment by way of imprisonment as authorised by law, as per section 28 of the Criminal Procedure Code,1973. There are many provisions in the Bill which imposes, in addition to fine on the company and the officer in default, imprisonment ranging from six months to three\five years.
The Bill seeks to reduce Govt intervention in the affairs of a company by removing controls and approvals but the companies and the directors are expected to function strictly in accordance with the regulatory framework. Failure to do so will attract heavy penalties in the form of fine on the company and a term of imprisonment and fine on the officer who is in default which includes key Managerial personnel. The need to induct Independent Directors in all public companies is intended to bring about professionalization of corporate management and providing outside expertise to the corporate boards. It remains to be seen how the Independent Directors will discharge their fiduciary responsibility in the context of Satyam fiasco.
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