What was Companies Bill, 2008, became Companies Bill, 2009. Now, Companies Bill, 2009, seems to become Companies Bill, 2011. Is it just chronology or pathology? The truth lies in between. What went wrong was a mindless obsession with smaller company legislation and a lack of honest big ideas. What with a number of big national scams inexorably winding its way to the corporate sector, it would be highly irresponsible, if the new company legislation does not keep pace with this sordid development. Experience has shown that it is not a change of law alone which matters, it is the effective administration of law which matters more. It is but natural to expect the new company legislation to be better than the existing one in all respects. If this is to happen, let us engage in a constructive and introspective discourse how the new company legislation should address the challenges of a rising India.
Measures to address corporate frauds and corruption: The biggest challenge before us is to tackle corporate corruption and frauds without hurting the legendary Indian enterprise. This can be ensured only if there is a level-playing field in almost all business sectors. This can be achieved by enshrining in the law a prohibition against corrupt practices as they exist in developed countries and providing stringent punishment for violation. In addition to a statute-backed Serious Fraud Office (SFO), the SFO should also be empowered to investigate into serious corrupt practices by companies on a fast track basis and prosecute effectively. In the investigation by SFO, reputational agents such as forensic accountants and corporate lawyers should be involved for necessary value addition.
Judicial system for company law: The Companies Bill, 2009, provides for National Company Law Tribunal(s) (NCLTs) and an Appellate Company Law Tribunal. While this may seem to be a pragmatic approach in the context of the docket explosion in the judiciary, given the track record of tribunals in this country, such a measure would not be desirable. It would be wise to constitute permanent Company Benches in High Courts on the lines of the Chancery Division of English Courts with judges specialised in corporate laws manning them. The existing Company Law Board could be expanded to take up all quasi judicial matters, including company liquidation, with the assistance of private liquidators. Since the growth of the country would be mainly driven by the corporate sector, an independent and credible judicial system like the one suggested above should alone be sustainable in the long-term.
In case, the above is not possible, NCLTs may be established strictly according to the spirit of the decision of the Supreme Court in the NCLT matter on an experimental basis.
Derivative action: While the Companies Bill, 2009, provides for some level of class action to provide for a vibrant and effective corporate governance model in Indian companies, an effective mechanism for derivative action by shareholder groups should be provided in the law. Effective checks and balances could be provided in the law so as to prevent frivolous cases of derivative action. This would also empower shareholders against wrong doing by companies at the expense of such companies. Class action suits are a poor substitute for derivative action and would not be effective in such a large country like ours.
Reinforcing the audit function: For effective corporate governance, a strong audit function is necessary. In the Indian context, to prevent corporate frauds and corruption, the importance of the audit function need not be over-emphasised. In order to bring about greater objectivity and independence to the audit function, statutory auditors should be rotated every three years and only on the recommendation of the Audit Committee new statutory auditors should be appointed by the shareholders at the end of every three years.
Additionally, it should be made mandatory in law to appoint independent internal auditors for all companies of a certain size. Such internal auditors should also be appointed by the shareholders on the recommendation of the Audit Committee and should be rotated every three years.
The Audit Committee of the Board should consist of only independent directors and the chairman of the Audit Committee should be an eminent chartered accountant. The Audit Committee should specifically approve the statutory directors' responsibility statement in the context of company before the same is approved by the Board.
Strengthening the institution of independent directors: The clause contained in the Companies Bill, 2009, regarding the definition of an independent director, is extremely flawed. The independent director in law should not have any pecuniary interests with the company or its associates other than his entitlement for remuneration in law. The independent director should not be a relative of the promoter. The appointment of an independent director should be through a transparent process under the guidance of the remuneration and nomination committee of the board of directors of the company. The promoters of the company should give in writing their relationship with the independent director to be appointed to the Remuneration and Nomination Committee. On the recommendation of the Remuneration and Nomination Committee, an independent director should be appointed by the shareholders only through a postal ballot.
An independent director should not have a tenure of more than two terms of three years each in the company. The qualifications of an independent director should be prescribed by law. An independent director should not be an independent director for more than five listed companies. A limited immunity should be by law made available to an independent director against arrests and prosecution unless the same is authorised in writing by a magistrate not below the rank of a district judge. It should be made obligatory in law that any dissenting note of an independent director on any matter in a board meeting or a committee meeting should be recorded correctly in the record of the proceedings of such a meeting.
Whistle blower mechanism: By law it should be made obligatory for all companies of a certain size to have a contemporary whistle blower mechanism. Legal protection in a sustainable manner should be provided to the whistle blowers. Even informal whistle blowing with the chairman of the audit committee should be provided by law. To avoid frivolous whistle blowing appropriate checks and balances should be provided in law.
Corporate social responsibility (CSR): While corporate social responsibility should be encouraged by law, it should not be made mandatory so as not to deprive it of its legitimacy. It should be provided in law that CSR initiatives of the company should be stated in the directors' report of the company.
Poor drafting has been a recurring feature in most of the earlier Companies Bills. Such pitfalls should be avoided. The Companies Bill, 2009, provides for excessive rule making powers to the executive. This is not at all desirable in the context of the deplorable levels of national governance. This should be corrected. It would be wise to refer the Companies Bill, 2011, to a select committee of experts with a mandate to vet and clear the same within a definitive timeframe of four to six months. Thereafter, Parliament may enact the law in the budget session next year.
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