05 June 2014

Representation on Companies Act,2013

Companies Act Needs Comprehensive Review: CII President
Jun 04, 2014

CII has called for a comprehensive review of the Companies Act 2013 and Companies Rules, 2014 issued thereunder. "Due to the hurried pace in which the Companies Act, 2013 and the Companies Rules, 2014 were implemented, the industry barely got an opportunity to absorb and understand the provisions or their impact in their entirety. Many new concepts are being introduced in the legislation for the first time, and practices with respect to these need to be allowed to evolve over time. However, the rush to notify the Act has introduced disruptive features making it harder for corporates to ensure compliance", said Mr Ajay Shriram, President, CII, referring to the fact that the final set of Rules were released in the last week of March 2014 to be implemented from April 1, 2014.

Mr Shriram further added that "the Government needs to trust Industry. One or two incidence of corporate malfeasance should not lead to mistrust of the entire spectrum of corporate India and should not make normal business activities difficult. While the country is looking to improve its image after a series of setbacks like retrospective changes to tax laws, poor economic conditions, etc, an unclear and cumbersome Companies Act would make things worse. India already ranks very low in terms of ease of doing business and the new act will further add to the cost and complications of doing business".

In absence of any unambiguous clarifications from the Ministry of Corporate Affairs, companies are resorting to different interpretations of the provisions. There is no uniform interpretation of even items of ordinary business such as appointment of Independent Directors. CII has made detailed representation to the Government on the subject. Some of the key issues highlighted include:

One, clarity is required vis-à-vis transitional provisions. For example, while the Act provides transitional period of one year for the appointment of independent directors, constitution of Audit Committee and Nomination & Remuneration Committees is mandatory with effect from 1 April 2014. The two requirements need to be aligned.

Two, Directors of the Nomination and Remuneration Committee are expected to prescribe the criteria for evaluation of all directors; carry out evaluation of every director's performance and recommend the appointment and removal of directors. It is also required to lay down remuneration policies. Provisions such as this could make board's functioning difficult resulting in break-down of trust and too much caution. The Act should lay down specific and objective parameters in this regard.

Three, provisions pertaining to Related Party Transactions indirectly seeks to vest power in minority in most of cases which is against the fundamental principle of shareholders' democracy and majority rule. Legislation should balance interests of multiple stakeholders and equity must apply to both big and small shareholders to avoid misuse of the provisions by any class – majority or minority Further, the compliance requirement to obtain prior approval of audit committee for all related party transactions is too onerous and may result in Audit Committees not being able to give due focus to key items. .

Further, transactions between a holding company and its 100% subsidiary does not compromise interests of any stakeholders. However, it still has to comply with all procedural requirements as transactions with other parties.

Four, a careful review of the mandate of the Audit Committee is also required.  It is for the auditors to monitor and confirm the effectiveness of the systems, processes and controls to the Audit Committee. A reverse obligation on the Audit Committee is clearly unwarranted. Requiring the Audit Committee to evaluate risk management system is also unreasonable.

Five, corporates should be allowed adequate legroom to comply with the CSR provision in a self-responsible manner. Incidental and supplementary activities even if related to Company's business should be allowed as CSR so long as they fall in the activities specified in schedule VII. Onerous provisions would hold back innovation, defeat legislative intent and shift the focus from 'comply with conscience' to 'tick-box compliance.' Government had in fact assured that it will authorize the Boards to choose the scope of CSR activities as it deems fit – this power has not been given in the Act as of now.

Six, private companies which are neither subsidiaries of listed companies nor have substantial borrowings from banks or financial institutions should be exempted from certain provisions of the Act. Such companies should not be treated at par with other public interest entities.

Seven, applicability of the requirement of rotation of auditors for companies other than listed companies is also prescribed under the Act. CII strongly suggests that private companies and public companies which do not have substantial public funding be exempted from this requirement.

In addition to the above, there are several inconsistencies between the Act and Rules and at times within the Act itself. CII has highlighted these anomalies in its detailed representation.

CII has all along underscored the need for ensuring that the new law aims at progression and development of business instead of impeding it. Law needs to contemplate and weigh up the interests not just of stakeholders but also take forward the business objects of the corporates. At a time when the situation warrants decentralisation of decision making to lower levels, the new act is proposing more centralization at Board levels. 

CII hopes that the new government would take into consideration the difficulties being faced by corporates and take corrective steps in consultation with all 

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