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The Companies Bill, 2012

Enhancing Corporate Governance Standards

Presented by

Vinay Singhania

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Table of Contents

Introduction and Background of the Study…………………………..………………03

Chapter 1: Enhancement of Corporate Governance…..…………………….………06

1.1 Mandatory Corporate Social Responsibility................................………….......06

1.2 Concept of Independent Directors......................................................................10

1.3 Board and Governance.......................................................................................14

1.4 Board Committees...........................................................................……...........17

1.5 Director‘s Responsibility Statement and Board Report.....................................19

1.6 Related Party transactions- Definition, Scope and Approval.............................21

Chapter 2: Changes in Provisions affecting Auditors………..………………………23

2.1 Appointment, Removal and Resignation of Auditors.........................................23

2.2 Eligibility and Remuneration of Auditors...........................................................25

2.3 Services that cannot be rendered by Auditors.....................................................26

2.4 Powers and Duties of Auditors............................................................................27

2.5 Increased Accountability of Auditors..................................................................29

2.6 Cost Audit and Internal Audit..............................................................................30

Chapter 3: New concepts in Companies Bill, 2012…………………...………………31

3.1 National Financial Reporting Authority..............................................................31

3.2 One Person Company..........................................................................................33

3.3 Registered Valuers...............................................................................................35

3.4 Secretarial Audit and Secretarial Standards.........................................................37

3.5 Class action suits..................................................................................................38

3.6 Serious Fraud Investigation Office......................................................................40

Chapter 4: Findings and Conclusion…………………………………………………..41

Bibliography………………………………………………………………………….…43

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Introduction & Background of the study

Indian corporate world woke up in the morning of 19th

December, 2012

with a fresh breeze, new hopes and exciting challenges. After much delay and

deliberations, the Companies Bill, 2012 which seeks to revise and modify the existing

Companies Act, 1956, in consonance with changes in national and international economic

environment, was passed by the Lok Sabha i.e. the lower house of Indian Parliament, on

Tuesday, December 18, 2012.

The step of introducing this bill marks the dawn of a new era i.e. an era of progressive

thinking, greater investor democracy and higher corporate growth with higher

responsibility.

The Bill is divided into 29 chapters, 470 clauses and 7 schedules. It has endeavoured to

achieve modernization and compactness by:-

o Deleting redundant provisions

o Regrouping related provisions and,

o Modifying various provisions of the Companies Act, 1956.

This will enable easy interpretation, delink procedural aspects from substantive law and

provide greater flexibility in rule making. The Bill has inter-alia, introduced enhanced

corporate governance standards particularly in relation to the independent directors, audit,

CSR, etc. However, the Bill is subject to subordinate legislation wherein the Central

Government is empowered to prescribe necessary rules in relation to a wide range of

provisions, in order to carry out the objectives of the Bill.

The introduction of the new provisions for better governance offers immense

opportunities for all professional also. India has suffered many corporate frauds and

scams in recent years and the new law proposes to plug the loopholes, smoothen out the

wrinkles and speed up the corporate laws reform process.

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A brief background to the introduction and status of the Companies Bill, 2012 is as

under:-

Companies (Amendment) Bill, 2003 had been introduced by Ministry of

Corporate Affairs (MCA) in the Rajya Sabha on May 7, 2003.

Later on, a large number of changes were found to be necessary in the Bill. The

Ministry of Corporate Affairs took up a comprehensive revision of the Companies

Act, 1956 (the Act) in 2004

A ‗Concept Paper on new Company Law‘ was placed on the website of the

Ministry on 4th August, 2004. The inputs received were put to a detailed

examination in the Ministry. The Government also constituted an Expert

Committee on Company Law under the Chairmanship of Dr. J.J. Irani on 2nd

December 2004 to advise on new Companies Bill. The Committee submitted its

report to the Government on 31st May 2005.

Companies Bill, 2008 was introduced by the Government in the Lok Sabha on

October 23, 2008.

Due to dissolution of the 14th Lok Sabha, the Companies Bill, 2008 lapsed. The

Government decided to re-introduce the Companies Bill, 2008 as the Companies

Bill, 2009, without any change except for the Bill year. The Ministry of Corporate

Affairs had introduced the Companies Bill, 2009 in the Lok Sabha on August 3,

2009.

The 2009 Bill was referred to Parliamentary Standing Committee on Finance on

9th September, 2009 which gave its report on 31st August, 2010.

The standing committee, headed by the then finance minister, Yashwant Sinha,

had given its recommendations on the Companies Bill, 2009, which has since

been withdrawn.

In view of numerous amendments to the Companies Bill 2009 arising out of the

recommendations of the Parliamentary Standing Committee on Finance and

suggestions of the stakeholders, the Central Government withdrew the Companies

Bill 2009 and introduced a fresh bill – The Companies Bill 2011.

The 2011 bill was introduced in Parliament on Wednesday, 14th December 2011.

The Companies Bill, 2011 was referred to the Standing Committee on Finance on

5th January, 2012 after an objection was raised against it in Parliament.

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In the meanwhile, a corrigendum to the Companies Bill, 2011 had been issued

that contained some changes of a substantive nature.

The Standing Committee Report came on 26 June 2012.

The Union Cabinet had issued a Press Release dated 04.10.2012 setting out

amendments to the Companies Bill, which had been approved and the final draft

of the Companies Bill 2011 was prepared after considering the recommendations

of the Parliamentary Standing Committee and taking the inputs from the finance

and law ministries as well as the Planning Commission.

Based on the Standing Committee‗s recommendations, the Bill was amended and

introduced as the Companies Bill 2012.

The Lok Sabha on 18th December, 2012 gave its approval for the Companies Bill

2012, paving the way for a new modern company law. The Companies Bill 2012

was passed by a voice vote in Lok Sabha in a marathon late night sitting.

The diagrammatic presentation of the background of Companies Bill, 2012 is given

below:-

2008

• Companies Bill, 2008 was introduced on 23rd Oct, 2008 in Lok Sabha to replace existing Companies Act, 1956. Due to dissolution of the 14th Lok Sabha, the Companies Bill, 2008 had lapsed.

2009

• Companies Bill, 2009 was reintroduced on 3rd Aug, 2009 in Lok Sabha to replace existing Companies Act, 1956 and referred to the Standing Committee on Finance(SCF) for examination

2010• Report of the SCF on Companies Bill, 2009 was introduced in the Lok

Sabha on 31st Aug, 2010

2011• Companies Bill, 2011 finally introduced in Lok Sabha on 14th December,

2011.

2012• Companies Bill 2012 passed in Lok Sabha on 18th December, 2012 at 10:46

pm.

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Chapter 1: Enhancement of Corporate Governance

1.1 Mandatory Corporate Social Responsibility

While moving the Companies Bill, 2012 in Lok Sabha on 18th

December, 2012, Shri

Sachin Pilot, Minister of Corporate Affairs said-

―Growth is important for country and to my mind, growth should be long term,

sustainable, equitable, but more importantly, growth should also be responsible.

Therefore, the responsibility of taking the country forward certainly lies with the

Government but increasingly so, I think the corporate entities in this country, private

players, the enterprises, the entrepreneurs also have an increasingly larger role to share in

making this country prosperous, functional forward looking nation. The issue of

corporate social responsibility has been taken up in the Bill‖.

Corporate Social Responsibility (CSR) Obligations have been introduced

under Clause 135 of the Companies Bill, 2012. With the passage of this Act, India would

become the first country to mandate corporate social responsibility (CSR) through a

statutory provision. Under the new law, the CSR spending would be the responsibility of

companies. The Bill seeks to make CSR spending compulsory for companies that meet

certain criteria. The companies will have to mandatorily spend 2% of their average net

profit for CSR activities. If companies are unable to meet the CSR norms, they will have

to give explanations. In case, the companies are not able to do the same, they have to

disclose reasons in their books.

CSR Provisions in Companies Bill, 2012

1. Every Company having

a) Net worth of Rs. 500 crores or more, or

b) Turnover of Rs.1000 crores or more, or

c) Net profit of Rs. 5 crores or more

during any financial year shall constitute a Corporate Social Responsibility Committee of

the Board consisting of 3 or more directors, out of which at least 1 director shall be an

independent director. The Board's report under clause 134(3) shall disclose the

composition of the Corporate Social Responsibility Committee.

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2. The Corporate Social Responsibility Committee shall —

a) Formulate and recommend to the Board, a Corporate Social Responsibility Policy

which shall indicate the activities to be undertaken by the company as specified in

Schedule VII to the Companies Bill, 2012.

b) Recommend the amount of expenditure to be incurred on the activities undertaken

by the company related to CSR, and

c) Monitor the CSR Policy of the company from time to time.

3. The Board shall approve the CSR Policy for the company and disclose contents of

such Policy in its report and also place it on the company's website, if any, in such

manner as may be prescribed; and ensure that the activities as are included in CSR

Policy of the company are undertaken by the company.

4. The Board has to ensure that the company spends, in every financial year, at least

2% of the average net profits of the company made during the 3 immediately

preceding financial years, in pursuance of its Corporate Social Responsibility Policy.

5. For the purposes of calculating average net profit, the provisions of clause 198 of the

Bill shall be applicable.

Schedule VII - Activities which may be included by companies in their CSR Policies

Activities relating to:—

Eradicating extreme hunger and poverty;

Promotion of education;

Promoting gender equality and empowering women;

Reducing child mortality and improving maternal health;

Combating human immunodeficiency virus, acquired immune deficiency

syndrome, malaria and other diseases;

Ensuring environmental sustainability;

Employment enhancing vocational skills;

Social business projects;

Contribution to the Prime Minister's National Relief Fund or any other fund set up

by the Central Government or the State Governments for socio-economic

development and relief and funds for the welfare of the Scheduled Castes, the

Scheduled Tribes, other backward classes, minorities and women;

Other matters as may be prescribed.

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Analysis of the CSR Clause

The concept of mandatory CSR spends, in the Indian context, according to analysts, it

would take some time to sink in. But as has been the experience in the West, consumers

and investors have become more socially aware, they are likely to prefer companies that

have a better track record on discharging their social commitments, including possibly

CSR activities, as compared to those who are found wanting on these fronts. This might

not work over a short-term horizon, but in the long run, those adhering to the norms are

likely to be preferred by investors, job seekers, advertisers, among others.

This is precisely the point that the government is banking on, by making it mandatory for

firms to spend a share of profits but stopping short of prescribing a penalty for those not

in compliance, but merely the need to mention this in their annual reports. Peer pressure,

as they say, is a big force multiplier.

The question is whether spending money towards these activities yield pays off in form

of a better valuation and perhaps high shareholder preference for stocks of such

companies. Kaushik Dutta, Director at Thought Arbitrage Research Institute (TARI) says

that there is no co-relation between the valuation of a company and the amount it spends

towards the society. All the same, he said, "There are certain social funds which invest

only in such companies which have ethical investments," that is, such companies avoid

investing in companies associated with alcohol, tobacco, gambling, violating

environmental laws and involved in child labour."

"So we can say that CSR is in a sense anti-shareholder move. In my view, if at all the

CSR activities have to be done, they should be carried out by the promoters and not the

company," Prithvi Haldia, CMD, Prime Database, said.

On the other hand, the promoters of CSR activities say that the more socially responsible

a company becomes, the more goodwill it earns, making it an obvious ethical choice for

some investors. CSR, as a definition, does impact the way a company is viewed, Bhaskar

Chatterjee, CEO of the Indian Institute of Corporate Affairs (IICA), said, "In the last 3-4

years, consumers and stakeholders have become far more conscious of products and the

services being offered to the community. The companies that are seen to have diluted

their commitments to society are not being viewed in a positive light,"

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Case Fact on Corporate Social Responsibility and Stakeholders’ response

According to a research paper by Caroline Flammer of the MIT Sloan School of

Management titled 'Corporate Social Responsibility and Stock Prices: The

Environmental Awareness of Shareholders' dated May 2012, anecdotal evidence in the

US suggests that "a company's environmental footprint can affect stock prices."

Taking the example of British Petroleum's (BP) oil spill incident in April 2010, the oil

spill that contaminated a large area of marine environment along the Gulf of Mexico,

affected BP's stock prices. While on the day of the incident, BP's stock price was $59.5.

In just two months the stock price had dropped to $28.9. On the other hand, 11 years

earlier, in the Exxon's oil spill case in March 1989, considered one of the most damaging

incidents to the environment, the company's stock price decreased only marginally. On

the day of the incident, Exxon stock price was $44.5. It went down to $41.75 in April,

quickly recovering to its pre-incident level by June 1989. Analysts point to the fact that

investor response to events such as the Exxon oil spill over two decades ago was much

more muted that the BP experience in 2010, reflecting the increase in investor

perceptiveness to such incidents.

Sanjay Mukherjee, professor of business ethics at IIM Shillong, said that with the

increasing awareness among investors, the trend of investment in companies with a

strong CSR record is likely to grow. The changing notion of CSR has prompted the

companies to carry such activities not only for common people but also for stakeholders,

he said. "Earlier, CSR was philanthropy but now it's more participative in nature," he

said.

Back then, the companies wanted to change their image from profit-hungry entities to

magnanimous philanthropists. The investors do buy shares based on company rating and

peer group suggestion, a shift in buying behaviour is bound to happen with changing

times, he said.

All in all, the concept of CSR as a core function of a company, is still in early stages. But

as companies that set the benchmarks by extending themselves beyond their narrow

commercial interests beginning to command greater respect, the mandatory CSR spend

declaration could spur thing on in the coming years.

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1.2 Concept of Independent Directors

An Independent Director is one:-

(a) who, in the opinion of the Board, is a person of integrity and possesses relevant

expertise and experience;

(b) who is or was not a promoter or related to the promoters or directors of the company

or its holding, subsidiary or associate company;

(c) who has or had no pecuniary relationship with the company, its holding, subsidiary or

associate company, or their promoters, or directors, during the two immediately

preceding financial years or during the current financial year;

(d) none of whose relatives has or had pecuniary relationship or transaction with the

company, its holding, subsidiary or associate company, or their promoters, or directors,

amounting to two per cent. or more of its gross turnover or total income or fifty lakh

rupees or such higher amount as may be prescribed, whichever is lower, during the two

immediately preceding financial years or during the current financial year;

(e) who, neither himself nor any of his relatives—

(i) holds or has held the position of a key managerial personnel or is or has been

employee of the company or its holding, subsidiary or associate company in any of the

three financial years immediately preceding the financial year in which he is proposed to

be appointed;

(ii) is or has been an employee or proprietor or a partner, in any of the three financial

years immediately preceding the year in which he is proposed to be appointed, of—

(A) a firm of auditors or company secretaries in practice or cost auditors of the company

or its holding, subsidiary or associate company; or

(B) any legal or a consulting firm that has or had any transaction with the company, its

holding, subsidiary or associate company amounting to ten per cent. or more of the gross

turnover of such firm;

(iii) holds together with his relatives two per cent. or more of the total voting power of

the company; or

(iv) is a Chief Executive or director, by whatever name called, of any non-profit

organisation that receives twenty-five per cent. or more of its receipts from the company,

any of its promoters, directors or its holding, subsidiary or associate company or that

holds two per cent. or more of the total voting power of the company; or

(f) who possesses such other qualifications as may be prescribed.

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Other Provisions relating to Independent Directors

Every independent director shall give a declaration that he meets the criteria of

Independence at the first meeting of the Board in which he participates as a director

and at the first meeting of the Board in every financial year or whenever there is any

change in the circumstances which may affect his status as an independent director.

The company and independent directors have to abide by the ‗Code for Independent

Directors‘ as specified in ‘Schedule IV’ which contains sections like Guidelines on

Professional Conduct, Roles and Functions, Duties, Manner of Appointment,

Reappointment, Resignation or Removal, Separate Meetings and Evaluation

Mechanism.

An independent director shall not be entitled to any Stock option, remuneration, other

than sitting fee, reimbursement of expenses for participation in the Board and other

meetings and profit related commission as may be approved by the members.

An Independent director shall hold office for a term up to 5 consecutive years on the

Board of a company, and shall be eligible for reappointment on passing of a special

resolution by the company and disclosure of appointment in the Board's report.

Independent director shall not hold office for more than two consecutive terms. Such

director shall be eligible for appointment after a cooling period of three years,

provided that such director is not appointed in or associated with the company in any

other capacity, either directly or indirectly.

Any tenure of independent director on the date of commencement of this Act shall not

be counted as a term.

Provisions with respect to Retirement or rotation will not be applicable to

Independent Director.

An independent director or a non-executive director not being promoter or key

managerial personnel, shall be held liable, only in respect of such acts of omission or

commission by a company which had occurred with his knowledge and with his

consent or connivance or where he had not acted diligently.

Independent Director may be selected from a data bank maintained by any body,

institute or association, as notified by the Central Government. However, the

responsibility of exercising due diligence before selecting a person from the data

bank, as an independent director shall lie with the company.

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Analysis of the Concept of Independent Directors as introduced in the Bill

The definition of independence in the listing agreement is not as stringent as the

definition in the Companies Bill, 2012. Legally, the Companies Bill 2012, when passed,

will become the principal law and, therefore, be superior to any subordinate legislation or

rules. In such scenario, the higher standard prescribed in the Companies Bill will prevail

over the listing agreement. However, confusion may still exist on which definition of

independence should be adopted to comply with all rules and regulations. Companies

with promoter (and related parties) Chairman or an executive Chairman may adopt

stringent independence guidelines provided in the Companies Bill to meet the 33%

independence criteria as defined in the Companies Bill. However, they may fulfill the

remaining 17% independence criteria using the independence definition as in the listing

agreement. While technically such practices would not violate any rules/ regulations,

ethically such practices violate the spirit of corporate governance.

It is likely that more stringent definition should be used by companies to determine

directors‘ independence and necessary amendment to listing agreement must be carried

out to make the definition of independence similar to or more stringent than the definition

of independence in the Companies Bill, 2012.

The Companies Bill, while calculating the tenure of independent directors, does not

consider any term served on the Board till the time provisions comes into effect. This will

allow independent directors who have been on the Board for long tenures (and are,

therefore, no longer independent according to the Bill) to potentially serve 10 more years

as independent directors of the company. Therefore, the envisaged improvements in

independent functioning of the Board will not come into effect before 2023 (assuming the

Bill is passed in 2013).

There is an urgent need to address the lack of independence of ―independent directors.‖

While the companies should be given adequate time to replace independent directors with

long tenures, 10 years period is too long a period to do the same.

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Most companies in India are promoter run companies. Average promoter shareholding in

BSE 500 companies is over 50%. Therefore, it becomes very important to have

independent voice in the Boardroom. We believe that independent directors are on the

Board to safeguard the interests of non-controlling shareholders and other stakeholders in

the company. Therefore, in the Indian context, it becomes critically important to have

enough independent directors to block Board resolutions that may benefit the

promoters/management at the cost of other stakeholders.

Clause 149(8) of the Companies Bill, 2012 provides that an independent director shall not

be entitled to any stock options, but is entitled to get payment of fees and profit subject to

the specified limits as remuneration. Notably, there was no such requirement under the

Companies Act, 1956 while Clause 49 of the listing agreement applicable to all listed

companies allowed shareholders to fix the maximum number of stock options to be given

as remuneration to an independent director. Thus, at present, there is a conflict between

the applicable provisions of the Companies Bill, 2012 and the listing agreement. Such an

inconsistency in law will only create an avoidable yet disturbing confusion on the exact

regulatory prescription applicable to independent directors in listed companies.

The Table below shows the impact of new independence regulations on Board

Independence at Nifty 50 companies:-

Chairman Companies Non-

compliant

companies

Percent of non-

compliant

companies

Average

independence

Independence

range

Executive 18 12 66.67% 38.45% 22% to 57%

Promoter 17 15 88.23% 30.77% 7% to 50%

Non-executive 10 4 40.00% 37.60% 14% to 67%

Independent 5 1 20.00% 50.14% 27% to 67%

Overall 50 32 64.00% 37.52% 7% to 67%

Under the new regulations, 32 of the 50 companies (64%) on CNX Nifty 50 would be

non-compliant with the independence requirements. 12 of the 18 companies (67%) with

an executive Chairman would be non-compliant with the regulations while 15 of the 17

companies (87%) with promoter Chairman would be non-compliant.

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1.3 Board and Governance

Number of Directors

Number of maximum directors raised from 12 directors to 15 directors. However, a

company may appoint more than 15 directors by passing a special resolution. No Central

Government approval is required.

Composition of the Board

I. Woman Director

At least one woman director shall be on the Board of such class or classes of

companies as may be prescribed.

II. Resident Director

Every company shall have at least one director who has stayed in India for a total

period of not less than one hundred and eighty-two days in the previous calendar

year.

III. Minimum number of independent directors for listed companies

Every listed public company shall have at least one-third of the total number of

directors as independent directors and Central Government may prescribe the

minimum number of independent directors in case of any class or classes of public

company.

Maximum Number of Directorship

A person cannot become directors in more than 20 companies instead of 15 as

provided in the Companies Act 1956.

For the above limit of 20, alternate directorship is also included.

Maximum number of public companies in which person can hold directorship is

limited to 10 including private companies which are holding or subsidiary companies

Members, by passing special resolution can limit the number of companies in which

person can act as director.

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New Provisions regarding Key Managerial Personnel

Every company belonging to such class or classes of companies as may be

prescribed shall have the whole-time key managerial personnel. Mandatory

appointment of certain Key Managerial Personnel which includes MD, CEO, CS

and CFO has been prescribed who will also be considered an officer in default.

If a company does not appoint a Key Managerial Personnel, the penalty is-

a) On Company- One lakh rupees which may extend to 5 lakhs.

b) On every director and KMP who is in default – 50,000 rupees and 1,000

rupees per day if contravention continues.

Unless the articles of a company provide otherwise, an individual shall not be the

chairperson of the company as well as the managing director or Chief Executive

Officer of the company at the same time.

Appointment and Tenure of Alternate Director

Must not hold alternate directorship in any other company.

Absence of original director should be from India in order to appoint alternate

director.

Further, alternate director to be appointed for an independent director should also

be eligible to be appointed as an independent director.

Disqualifications for Appointment as Director

Any person shall not be eligible to be appointed as a director in any company if he

has been convicted of any offence and sentenced in respect thereof to

imprisonment for a period of seven years.

The director has been convicted of the offence dealing with related party

transactions under section 188 at any time during the last preceding five years-

(This clause has been added to the list of disqualifications of Director).

Disqualification of director on failure to file annual returns, repay deposits, etc.

{274(1)(g) of the Act, 1956} was applicable to such person who is a director of a

public company. This disqualification is now applicable to all the companies.

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Board Meetings

Every company shall hold the first meeting of the Board of Directors within 30

days of the date of its incorporation.

At least 4 meetings to be held every year and not more than 120 days to elapse

between two consecutive meetings. No requirement to hold the meeting every

quarter as provided under the Companies Act, 1956.

Participation in board meeting can be either in person or through video

conferencing or other audio visual mode as may be prescribed.

In case meeting of the Board is called at shorter notice to transact urgent business

then, at least one independent director shall be present at such meeting.

At least one meeting of the Board of Directors has been conducted in each half of

a calendar year and the gap between the 2 meetings is not less than 90 days then

the relevant provisions are complied with in case of One person company, Small

company and Dormant company.

Other provisions relating to Directors

In case of rotation of directors, the words ‗private company which is a subsidiary

of public company‘ is removed. Thus, provisions apply only to Public Company.

To be proposed to be appointed as a director of a company (not being a retiring

director), he must along with notice deposit Rs. 1 lakh which shall be refunded

only if person proposed gets elected or gets more than 25 per cent of total valid

votes cast. Earlier such deposit amount was only Rs. 500.

Resigning Director to send copy of resignation letter and detailed reasons for

resignation to Registrar within 30 days of resignation. The resignation of a

director shall take effect from the date on which notice is received by the

company or the date specified by the director in the notice, whichever is later.

Tenure of Additional Director - till the last date that the Annual General Meeting

should have been held instead of the date of Annual General meeting.

New section inserted with respect to Duties of Directors to act in accordance

with the articles, contravention of which shall result in fine of Rs. 1 lakh which

may extend to Rs. 5 lakhs.

Non- holding of Qualification Shares, non-attendance of 3 consecutive meeting

are no longer a criteria for vacation of office by directors.

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1.4 Board Committees

Audit Committee

Every listed company and such other class of companies as may be prescribed

shall have an audit committee.

Audit committee to have a minimum of three directors, with independent

directors forming majority. Majority of members of audit committee including its

Chairperson should have the ability to read and understand the financial

statements.

The auditors of a company and the key managerial personnel shall have a right to

be heard in the meetings of the Audit Committee when it considers the auditor‘s

report but shall not have the right to vote.

A vigil mechanism in the prescribed manner is to be established by every listed

company or such class of companies. Such mechanism shall provide for adequate

safeguards against victimization of persons who use such mechanism and make

provision for direct access to the chairperson of the Audit Committee in

appropriate or exceptional cases.

Vigil mechanism to be disclosed on the Company‘s website and board report.

Stakeholder Relationship Committee

Every company with more than 1,000 shareholders, debenture-holders, deposit-

holders and any other security holders at any time during a financial year shall

constitute a Stakeholders Relationship Committee consisting of a chairperson who

is a non-executive director and such other members as may be decided by the

Board.

Shall consider and resolve the grievances of security holders of the company.

Any regulation made by the company in general meeting shall not invalidate any

prior act of the Board which would have been valid if that regulation had not been

made.

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Nomination and Remuneration Committee

Every listed company and prescribed class of companies shall constitute a

nomination and remuneration committee consisting of three or more non-

executive directors, of which at least half shall be independent directors.

The Nomination and Remuneration Committee shall;

a) Identify persons who are qualified to become directors and who may be

appointed in senior management in accordance with the criteria laid down.

b) Recommend to the Board their appointment and removal and shall carry out

evaluation of every director‘s performance.

c) Shall formulate the criteria for determining qualifications, positive attributes

and independence of a director and recommend to the Board a policy, relating

to the remuneration for the directors, key managerial personnel and other

employees.

d) while formulating the policy ensure that—

i. the level and composition of remuneration is reasonable and sufficient

to attract, retain and motivate directors of the quality required to run

the company successfully;

ii. relationship of remuneration to performance is clear and meets

appropriate performance benchmarks; and

iii. remuneration to directors, key managerial personnel and senior

management involves a balance between fixed and incentive pay

reflecting short and long-term performance objectives appropriate to

the working of the company and its goals:

The policy shall be disclosed in the Board's report.

Nomination Committee and Remuneration Committees play vital role in corporate

governance. By mandating that the Remuneration & Nomination Committee must

comprise of non-executive directors only, the Companies Bill has sought to reduce the

influence of executive directors and management over Board remuneration and Board

nomination. Since executive directors will not be on the Committee, they will not decide

the remuneration payable to executives of the company thereby removing any conflict of

interest that may have risen. Further, since executive directors will not be present on the

Committee, they will not be able to influence the Committee in nominating management

friendly directors on the Board.

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1.5 Director’s Responsibility Statement and Board’s Report

Director’s Responsibility Statement

It is the duty of the directors to protect the interests of the shareholders and other

stakeholders in accordance with the definition of the corporate governance. This

relationship has really become complex with lot of corporate scams happening around,

global economic crisis and business dynamics.

The Company Bill 2012, over and above the present requirements of the Directors‘

Responsibility Statement has added two important requirements.

A) The requirement relating to laying down internal financial controls and their

adequacy and effectiveness would be applicable to the listed companies only.

The explanation given to the clause 134 (5) (e) defines the term ‗internal financial

controls‘ as the policies and procedures adopted by the company for ensuring the orderly

and efficient conduct of its business, including adherence to company‘s policies,

safeguarding its assets, prevention and detection of frauds and errors, the accuracy and

completeness of the accounting records, and the timely preparation of reliable financial

information. A plain reading of the clause indicates that directors will be responsible for

everything under the sun as far the company‘s operations, finance, compliance reporting

is concerned.

The words ―for ensuring the orderly and efficient conduct of its business‖ are very

subjective and a lot of judgment will be required in evaluating the existing policies and

procedures of the companies. Second, it makes reference to policies and procedures for

―the prevention and detection of frauds and errors‖. This would be the challenge for the

companies and directors as the controls to prevent and detect fraud and errors include

much more than the transaction level controls. It will include a mechanism to identify the

fraud, carry out the investigations and a revisit to preventive controls – system and

manual both.

B) Clause 134 (5) (f) requires the directors to device proper systems to ensure compliance

with the provisions of all applicable laws and that such systems were adequate and

operating effectively.

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This clause would be creating a two-fold challenge for the directors. First, ensuing

completeness of compliance with provisions of all applicable statutes and second –

evaluation of these systems for adequacy and operating effectiveness. Directors will have

to get this assurance from the management of the company by modifying the way they

currently receive information and would have to ask more questions to the management.

In many areas they will have to engage independent experts to get such an assurance.

To take care of the additional responsibilities, the directors will have to increase their

involvement in the entire governance process of the companies. Since these requirements

are going beyond financial reporting, it appears that the companies would have to identify

and evaluate areas involving non-financial areas also such as human resource, propriety

of significant purchases.

Board’s Report

Board‘s report has been made more informative and includes extensive disclosures like-

i. Extract of annual return in the prescribed form.

ii. Company‘s policy on director's appointment and remuneration including the

criteria for determining qualifications, positive attributes, etc.

iii. A statement of declaration by independent directors.

iv. Explanations or comments by the Board on every qualification, reservation or

adverse remark or disclaimer made by the auditor in his report and by the

company secretary in practice in his secretarial audit report;

v. Particulars of loans, guarantees, or investments made;

vi. Particulars of contracts or arrangements entered into;

vii. The conservation of energy, technology absorption, foreign exchange earnings

and outgo in the prescribed manner;

viii. Statement indicating development and implementation of a risk management

policy for the company including identification therein of elements of risk, if any,

which in the opinion of the Board may threaten the existence of the company;

ix. The details about the policy developed and implemented by the company on

corporate social responsibility initiatives taken during the year.

x. In case of listed companies and other prescribed class of companies, a statement

indicating the manner in which formal annual evaluation has been made by the

Board of its own performance and that of committees and individual directors.

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1.6 Related Party Transactions- Definition, Scope and Approval

Definition

Related Parties with reference to a company means-

a director or his relative;

a key managerial personnel or his relative;

a firm, in which a director, manager or his relative is a partner;

a private company in which a director or manager is a member or director;

a public company in which a director or manager is a director or holds long with

his relatives, more than two per cent. of its paid-up share capital;

any body corporate whose Board of Directors, managing director or manager is

accustomed to act in accordance with the advice, directions or instructions of a

director or manager;

any person on whose advice, directions or instructions a director or manager is

accustomed to act:

Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice,

directions or instructions given in a professional capacity;

any company which is—

o a holding, subsidiary or an associate company of such company; or

o a subsidiary of a holding company to which it is also a subsidiary;

such other person as may be prescribed:

The coverage in The Companies Bill, 2012 is more compared to the Companies Act,

1956 (Section 297) where specified persons were-

director of the company;

relative of such director;

a firm in which such director or relative is a partner;

any other partner of such firm in which director or relative is a partner;

private company in which such director is a director or member.

Thus, the parties who will be considered as ―Related Party‖ have been widened with the

new definition of related party.

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Scope of Related Party Transactions

The scope of the Clause 188 dealing with Related Party Transaction has been widened.

No company shall enter into any contract or arrangement with a related party with respect

to-

a) sale, purchase or supply of any goods or materials;

b) selling or otherwise disposing of, or buying, property of any kind;

c) leasing of property of any kind;

d) availing or rendering of any services;

e) appointment of any agent for purchase or sale of goods, materials, services or

property;

f) such related party's appointment to any office or place of profit in the company,

its subsidiary company or associate company; and

g) underwriting the subscription of any securities or derivatives thereof, of the

company:

Approval Required

In order to enter into the above transactions, following approvals are required:-

i. Prior consent of Board of Directors passed by resolution at Board Meeting.

ii. Prior approval of the Shareholders, in case the paid-up capital of company or

transaction amounts exceeds prescribed limit

However, in case of Companies Act, 1956, instead of prior approval of the shareholders,

approval of Regional Director was sought, in case of the paid-up capital of company is

exceeding Rs 1 crore.

Note: Any transaction entered by company in its ordinary course of business other than

transactions which are not an arm‘s length basis is exempted and nothing in this section

shall apply to such transaction.

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Chapter 2: Changes in Provisions affecting Auditors

2.1 Appointment, Removal and Resignation of Auditors

Appointment of Auditors

Under Clause 139(1), every company shall appoint an individual or a firm as an

auditor at the first annual general meeting of the company. Such person or firm

shall hold office from the conclusion of that meeting in which he is appointed till

the conclusion of its sixth annual general meeting and thereafter till the

conclusion of every sixth meeting and the manner and procedure of selection of

auditors by the members of the company at such meeting shall be prescribed.

Written consent & a certificate are to be obtained from the auditor that the

appointment is in accordance with the conditions prescribed and it satisfies

criteria provided in clause 141.

The company shall inform the auditor concerned of his or its appointment, and

also file a notice of such appointment with the Registrar within fifteen days of the

meeting in which the auditor is appointed.

Appointment of first auditors for five years shall be subject to ratification by

members at every Annual General Meeting.

Where at any annual general meeting, no auditor is appointed or re-appointed, the

existing auditor shall continue to be the auditor of the company.

The Bill provides for compulsory rotation of individual auditors and of audit firm.

No listed company or a company belonging to such class or classes of companies

as may be prescribed, shall appoint or re-appoint—

a) an individual as auditor for more than one term of five consecutive years;

and

b) an audit firm as auditor for more than two terms of five consecutive years.

Also, enabling provisions for members to resolve rotation of audit partners and his

team are provided in the Bill.

As per Clause 139(3), members of a company may resolve to provide that—

a) in the audit firm appointed by it, the auditing partner and his team shall be

rotated every year;

b) the audit shall be conducted by more than one auditor.

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Removal and Resignation of Auditors

Additional requirement of a special resolution for removal of auditor from his

office before the expiry of his term has been introduced.

The auditor has resigned from the company, within a period of thirty days from

the date of resignation, he shall file a statement in the prescribed form with the

company and the registrar and in case of Government company also with C&AG.

Special notice shall not be required where retiring auditor has completed a

consecutive tenure of five years or ten years as provided under clause 139(2)

If representation is not sent to the members of the company as required under

clause 140(4) (iii) then a copy of same shall be filed with the Registrar.

The ―Central government‖ is substituted by ―tribunal‖ under this clause.

Bill provides powers to tribunal to change auditors of a company on the basis of

application made by Central Government or by any person concerned, if the

tribunal is satisfied that the auditor of a company has, whether directly or

indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or

in relation to, the company or its directors or officers.

If the application is made by Central Government the tribunal shall within 15 days

of receipt of the application make an order that he shall not function as an auditor.

In case where such an order is passed against an auditor (individual or firm) he

should not be eligible for appointment as an auditor of any company for a period

of 5 years from the date of order and also liable under section 447.

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2.2 Eligibility and Remuneration of Auditors

Eligibility, qualifications and disqualifications

Following additional criteria for persons not being eligible for appointment as an auditor

of a company is inserted-

a. a person or a firm who, whether directly or indirectly, has Business relationship

with the company or its subsidiary, or its holding or associate company or

subsidiary of such holding company or associate company of such nature as may

be prescribed.

b. a person who has been convicted by a court of an offence involving fraud and a

period of ten years has not elapsed from the date of such conviction.

c. any person whose subsidiary or associate company or any other form of entity, is

engaged as on the date of appointment in consulting and specialized services.

d. a person who is in full time employment elsewhere or a person or a partner of a

firm holding appointment as its auditor, if such persons or partner is at the date of

such appointment or reappointment holding appointment as auditor of more than

twenty companies.

Disqualification in case of person indebted to the company, the amount specifying the

limit has been deleted.

Remuneration of Auditors

Exclusions and inclusions for audit remuneration are clearly defined in

comparison with earlier Act. In addition to the fee payable to an auditor, include

the expenses, if any, incurred by the auditor in connection with the audit of the

company and any facility extended to him but does not include any remuneration

paid to him for any other service rendered by him at the request of the company.

Board may fix remuneration of the first auditor appointed by it.

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2.3 Services that cannot be rendered by Auditors

An auditor shall provide to the company only such other services as are approved by the

Board of Directors or the audit committee, as the case may be, but which shall not

include any of the following services (whether such services are rendered directly or

indirectly to the company or its holding company or subsidiary company or associate

company), namely:—

a) Accounting and book keeping services;

b) Internal audit;

c) Design and implementation of any financial information system;

d) Actuarial services;

e) Investment advisory services;

f) Investment banking services;

g) Rendering of outsourced financial services;

h) Management services; and

i) Any other kind of services as may be prescribed.

Services other than the above may be provided by the Auditor to the company only if the

services are approved by the Board of Directors or the audit committee, as the case may

be.

Earlier, companies with fewer transactions used to appoint such auditors who used to

maintain their books of accounts, prepare their financial statements and ultimately frame

a true and fair opinion on such financial statements.

With the inclusion of such clause, the level of independence of auditors has been

increased tremendously. After the implementation of this clause, the auditors can

concentrate purely on the core area of audit.

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2.4 Powers and Duties of Auditors

Powers and Duties of Auditors

1. Every auditor of a company shall have a right of access at all times to the books of

account and vouchers of the company, whether kept at the registered office of the

company or at any other place and shall be entitled to require from the officers of the

company such information and explanation as he may consider necessary for the

performance of his duties as auditor. The auditor of a company which is a holding

company shall also have the right of access to the records of all its subsidiaries in so

far as it relates to the consolidation of its financial statements with that of its

subsidiaries.

2. The auditor shall make a report to the members of the company on the accounts

examined by him and on every financial statement which are required to be laid

before the company in general meeting. The report shall state whether the said

accounts, financial statements give a true and fair view of the state of the company‗s

affairs as at the end of its financial year and profit or loss and cash flow for the year

and such other matters as may be prescribed.

3. Every auditor shall comply with the auditing standards.

4. If an auditor of a company, in the course of the performance of his duties as auditor,

has reason to believe that an offence involving fraud is being or has been committed

against the company by officers or employees of the company, he shall immediately

report the matter to the Central Government within such time and in such manner as

may be prescribed.

5. Auditor of the company shall sign the auditor‗s report or sign or certify any other

document of the company, and the qualifications, observations or comments on

financial transactions or matters, which have any adverse effect on the functioning of

the company mentioned in the auditor‗s report shall be read before the company in

general meeting and shall be open to inspection by any member of the company

6. All notices of, and other communications relating to, any general meeting shall be

forwarded to the auditor of the company, and the auditor shall, unless otherwise

exempted by the company, attend either by himself or through his authorized

representative, who shall also be qualified to be an auditor, any general meeting and

shall have right to be heard at such meeting on any part of the business which

concerns him as the auditor.

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7. The Auditor‗s Report shall also state:

a. whether he has sought and obtained all the information and explanations which to

the best of his knowledge and belief were necessary for the purpose of his audit

and if not, the details thereof and the effect of such information on the financial

statements;

b. whether, in his opinion, proper books of account as required by law have been

kept by the company so far as appears from his examination of those books and

proper returns adequate for the purposes of his audit have been received from

branches not visited by him;

c. whether the report on the accounts of any branch office of the company audited

by a person other than the company‗s auditor has been sent to him and the manner

in which he has dealt with it in preparing his report;

d. whether the company‗s balance sheet and profit and loss account dealt with in the

report are in agreement with the books of account and returns;

e. whether, in his opinion, the financial statements comply with the accounting

standards;

f. the observations or comments of the auditors on financial transactions or matters

which have any adverse effect on the functioning of the company;

g. whether any director is disqualified from being appointed as a director;

h. any qualification, reservation or adverse remark relating to the maintenance of

accounts and other matters connected therewith;

i. whether the company has adequate internal financial controls system in place and

the operating effectiveness of such controls;

j. such other matters as may be prescribed.

Where any of the matters required to be included in the audit report is answered in the

negative or with a qualification, the report shall state the reasons therefore.

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2.5 Increased Accountability of Auditors

Where an auditor of a company contravenes any of the provisions of Clause 139 to

146 of the bill, the company shall be punishable with fine which shall not be less than

Rs. 25000/- but which may extend to Rs. 500000/- and every officer of the company

who is in default shall be punishable with imprisonment for a term which may extend

to one year or with fine which shall not be less than Rs. 10000/- but which may

extend to Rs. 100000/-, or with both.

If an auditor of a company contravenes any of the provisions of Clause 143- 145, the

auditor shall be punishable with fine which shall not be less than Rs. 25000/- but

which may extend to Rs. 500000/-. If an auditor has contravened such provisions with

intention to deceive the company or its shareholders or creditors or any other person

concerned or interested in the company, he shall be punishable with imprisonment for

a term extending to one year and with fine which shall not be less than one lakh

rupees but which may extend to twenty-five lakh rupees.

Where an auditor has been convicted of an offence as above, he shall be liable to—

i. refund the remuneration received by him to the company; and

ii. pay for damages to the company or to any other persons for loss arising out

of incorrect or misleading statements of particulars made in his audit report.

Where, in case of audit of a company being conducted by an audit firm, it is proved

that the partner or partners of the audit firm has or have acted in a fraudulent manner

or abetted or colluded in any fraud by, or in relation to or by, the company or its

directors or officers, the liability, whether civil or criminal as provided in this Act or

in any other law for the time being in force, for such act shall be of the partner or

partners of the audit firm and of the firm jointly and severally and such partner or

partners of the audit firm shall also be punishable in the manner as provided in Clause

447 of the Companies Bill 2012, which lays down the punishment for fraud.

Under Clause 447, any person who is found to be guilty of fraud, shall be punishable

with imprisonment for a term which shall not be less than six months but which may

extend to ten years and shall also be liable to fine which shall not be less than the

amount involved in the fraud, but which may extend to three times the amount

involved in the fraud. Provided that where the fraud in question involves public

interest, the term of imprisonment shall not be less than three years.

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2.6 Cost Audit and Internal Audit

Cost Audit

‘Cost Auditing standards’ have been mandated.

The Central Government after consultation with regulatory body may direct class

of companies engaged in production of such goods or providing such services as

may be prescribed to include in the books of accounts particulars relating to

utilization of material or labour or to such other items of cost.

If the Central Government is of the opinion, that it is necessary to do so, it may,

direct that the audit of cost records of class of companies, which are required to

maintain cost records and which have a net worth of such amount as may be

prescribed or a turnover of such amount as may be prescribed, shall be conducted

in the manner specified in the order.

Internal Audit

Such class or classes of companies as may be prescribed shall be required to appoint an

internal auditor, who shall either be a chartered accountant or a cost accountant, or such

other professional as may be decided by the Board to conduct internal audit of the

functions and activities of the company.

The Central Government may, by rules, prescribe the manner and the intervals in which

the internal audit shall be conducted and reported to the Board.

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Chapter 3: New concepts in Companies Bill, 2012

3.1 National Financial Reporting Authority

Clause 132 of the Companies Bill 2012 contains provisions with respect to constitution of

National Financial Reporting Authority (NFRA). The NFRA shall consist of a

chairperson, who shall be a person of eminence and having expertise in accountancy,

auditing, finance, business administration, business law, economics or similar disciplines,

to be nominated by the Central Government and such other members not exceeding 15

consisting of part-time and full-time members, as may be prescribed.

The chairperson and members, who are in full-time employment with National Financial

Reporting Authority, shall not be associated with any audit firm during the course of their

appointment and two years after ceasing to hold such appointment.

Powers of National Financial Reporting Authority

The National Financial Reporting Authority-

1. Shall have the power to investigate, either suo moto or on a reference made to it by

the Central Government, for such class of bodies corporate or persons, in such

manner as may be prescribed into the matters of professional or other misconduct

committed by any member or firm of chartered accountants, registered under the

Chartered Accountants Act, 1949:

Provided that no other institute or body shall initiate or continue any proceedings in such

matters of misconduct where the NFRA has initiated an investigation under this section;

2. Shall have the same powers as are vested in a civil court under the Code of Civil

Procedure, 1908, while trying a suit.

3. Shall where professional or other misconduct is proved, have power to make order for

A. imposing penalty of –

I. not less than one lakh rupees, but which may extend to five times of the fees

received, in case of individuals; and

II. not less than ten lakh rupees, but which my extend to ten times of the fees

received, in case of firms;

B. debarring the member or the firm from engaging himself or itself from practice as

member of the institute for a minimum period of six months or for such higher period

not exceeding ten years as may be decided by the NFRA.

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Functions of National Financial Reporting Authority

1. Make recommendations to the Central Government on the formulation and laying

down of accounting and auditing policies and standards for adoption by companies or

class of companies or their auditors, as the case may be;

2. Monitor and enforce the compliance with accounting and auditing standards

recommended by it in such manner as may be prescribed;

3. Oversee the quality of service of the professions associated with ensuring compliance

with such standards, and suggest measures required for improvement in quality of

services and such other related matters as may be prescribed; and

4. Perform such other functions as may be prescribed.

Analysis of the concept of NFRA

The reading of the Accounting Professionals is that the NFRA will supersede ICAI and

ICAI is surely not happy with about the government encroaching on its territory.

However, Shri Sachin Pilot, Minister of Corporate Affairs drew up by stating that ―ICAI

and NFRA will co-exist. NFRA will be an overarching authority, with a larger canvas to

operate. NFRA will be a nodal agency for financial reporting with quasi-judicial powers

and the powers to suspend auditors.‖

Stating his view on this new concept, a professional said ―My fear is that we are over

regulating the profession. The question is whether a third-party regulator will be fair and

fearless. There is some consternation among accounting professionals over the

government having a greater say in directing and regulating their profession. The new

provisions would raise a number of practical issues apart from questioning the validity of

the concept that a professional should be judged by his peers,‖

The most famous multimillion accounting fraud of Satyam Computer highlighted that the

power of ICAI to take a disciplinary action is limited just to individual auditors and

doesn‘t extended to audit firms. NFRA if comes into force, will have the power to act

against audit firms is well.

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3.2 One Person Company

The concept of a ―one-person company‖, or OPC, has been introduced in the Bill, and the

intent is apparently to permit entrepreneurship of a single individual to obtain the benefit

of a corporate form of organization.

According to Clause 2(62) of the Companies Bill, 2012 ―One Person Company” means a

company which has only one person as a member. It is a one shareholder corporate entity,

where legal and financial liability is limited to the company only.

Some important features of the Bill in this regard are-

One Person Company may be formed for any lawful purpose as a private Company

with one member and shall have a minimum of 1 director.

The words ―One Person Company‖ shall be mentioned in brackets below the name of

such company, wherever its name is printed, affixed or engraved.

The memorandum of a One Person Company has to prescribe the name of the person

who in the event of death of the subscriber shall become the member of the company.

Annual return of a One Person Company should be signed by the Company Secretary,

or where there is no Company Secretary, by one director of the company.

Provision of Annual General Meeting is not applicable for a One Person Company.

Applicability of Chapter VII on Management and Administration - The provisions of

section 98 and sections 100 to 111 (both inclusive) shall not apply to a One Person

Company.

In case of a One Person Company an individual being member shall be deemed to be

its first director until the director or directors are duly appointed by the member in

accordance with the provisions of this section.

Where One person Company enters into a contract with the sole member of the

company who is also a director (excluding contracts entered into by the company in

the ordinary course of business), the company should, unless the contract is in writing,

ensure that the terms of the contract or offer are contained in the memorandum or are

recorded in the minutes of the first Board meeting held after entering into the contract.

The Company shall inform the Registrar about every such contract within 15days of

the date of approval by the Board.

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Analysis of the concept of One Person Company

This new concept of One Person Company will-

Promote entrepreneurship across the country.

It will de-risk the business by transferring the promoter‘s liability to the

company.

It involves very little paper work.

The Articles of Association would be simple and short.

If same person is doubling as director and shareholder there would be no need for

board or shareholders‘ meetings.

Quorum requirements, proxies, maintaining of various registers of members,

filing of multiple e-forms fade away, leaving the single operator free from the

fetters of corporate governance, except that he has to maintain his books of

accounts, prepare and file annual audited balance sheet and profit and loss

accounts, without the Board‘s report.

Thus OPCs are imperative because they would give entrepreneurial capabilities of

people an outlet for participation in economic activity and such economic activity may

take place through the creation of an economic person in the form of a company.

However, there has been criticism in certain quarters against the formation of such a

company as it may give room for evasion of public funds and tax liability by an

individual. It also raises certain questions which are yet unanswered like-

Whether only an individual or even a legal person can form a one-person

company?

Whether a single member can form a company without any limit on the paid-up

capital or some ceiling?

Whether after crossing certain turnover/ Profit level, it has to transform into a

public company?

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3.3 Registered Valuers

A new concept of registered valuer has been introduced in chapter XVII of the

Companies Bill 2012.

Valuation is required to be made in respect of any property, stocks, shares,

debentures, securities or goodwill or any other assets (herein referred to as the

assets) or net worth of a company or its liabilities by a person registered as a

valuer.

The valuer shall be a person having such qualifications and experience and

registered as a valuer in such manner, on such terms and conditions as may be

prescribed

The valuer shall be appointed by the audit committee or in its absence by the

Board of Directors of that company.

The valuer appointed shall,—

a. make an impartial, true and fair valuation of any assets which may be

required to be valued;

b. exercise due diligence while performing the functions as valuer;

c. make the valuation in accordance with such rules as may be prescribed;

and

d. not undertake valuation of any assets in which he has a direct or indirect

interest or becomes so interested at any time during or after the valuation

of assets.

Analysis of the concept of Registered Valuers

For so long, Valuation has been debated in India as an Art or Science and substantial part

of the litigation in Mergers & Acquisitions (M&A) takes place on the issue of Valuation

as it involves an element of subjectivity that often gets challenged. More so, as in India,

there are no standards for business valuation specifically for unlisted and private

companies so in many cases the Valuation lacks the uniformity and generally accepted

global Valuation practices. Even limited judicial guidance is available over the subject in

India. Further, absence of any stringent course of action and Non Regulation under any

Statute is also leading to loose ends.

Page | 36

The introduction of concept of Registered Valuer in the Companies Bill, 2012 is thus a

welcome step in this direction as it is expected that this could now set the Indian

Valuation Standards leading to transparency and better governance.

The concept of registered Valuer is likely to have huge impact on the Industry,

Professionals, Shareholders and Government on the following grounds-

Firstly, depending upon who is held eligible to be registered as a Valuer, with

increase in the number of valuation requirements, Professional opportunities shall

emerge.

With the creation of personal liability on the Valuer towards payment of damages

for the loss arising out of misleading or incorrect information, it is most likely that

the Valuation reports would disclose a true, fair and complete view. Similarly,

Inducement of repercussions relating to fraud leading to imprisonment due to any

intentional default aimed to defraud the Company or its members is also likely to

induct much objectiveness in the valuation procedure.

Stakeholders‘ confidence would largely get boosted with the transparency and

fairness which the system of valuation indicates to offer.

Drain of Government revenue due to loopholes in valuations is also likely to be

regulated with this provision.

In view of above, it may be concluded that though the overall move for Regulating the

Valuation as a Code is in right direction, however it remains to be seen how the Rules

governing such Valuations are framed as it has been observed that different regulators in

India (RBI, Income Tax, SEBI, etc) have prescribed different and in some cases

conflicting valuation methodologies to be followed creating practical difficulties. It is

thereby suggested that the Rules for Registered Valuer should specify the manner of

Valuation under different circumstances and not prescribe any specific Methodologies

which should be rather be left open to the Valuer to be applied on a case to case basis.

Page | 37

3.4 Secretarial Audit and Secretarial Standards

Secretarial Audit

Every listed company and a company belonging to other class of companies as may

be prescribed shall annex with its Board‘s report a Secretarial Audit Report, given by

a Company Secretary in Practice, in such form as may be prescribed.

It shall be the duty of the company to give all assistance and facilities to the Company

Secretary in Practice, for auditing the secretarial and related records of the company.

The Board of Directors, in their report shall explain in full any qualification or

observation or other remarks made by the Company Secretary in Practice in his

report.

If a company or any officer of the company or the Company Secretary in Practice,

contravenes the provisions of this section, the company, every officer of the company

or the Company Secretary in Practice, who is in default, shall be punishable with fine

which shall not be less than one lakh rupees but which may extend to five lakh

rupees.

Secretarial Standards

For the first time, the Secretarial Standards has been introduced and provided statutory

recognition. Clause 118(10) reads as:

―Every company shall observe Secretarial Standards with respect General and Board

Meetings specified by the Institute of Company Secretaries of India constituted under

section 3 of the Company Secretaries Act, 1980 and approved by the Central

Government.‖

Analysis of the above two concepts

It is the beginning of a new era where non financial standards have been given

importance and statutory recognition besides Financial Standards. Importance of

Company Secretary has increased as Clause 205 casts duty on company secretary to

ensure that the company complies with the applicable Secretarial Standards. This is a step

towards better corporate governance as CS will be involved in higher responsibilities in

the functioning and review of the company. Introduction of Secretarial standards will

help in comparing the level of secretarial compliance between different corporate houses.

Page | 38

3.5 Class Action Suits

For the first time, a provision has been made for class action suits. It is provided that

specified number of member(s), depositor(s) or any class of them, may, if they are of the

opinion that the management or control of the affairs of the company are being conducted

in a manner prejudicial to the interests of the company or its members or depositors, file

an application before the Tribunal on behalf of the members or depositors.

Where the members or depositors seek any damages or compensation or demand any

other suitable action from or against an audit firm, the liability shall be of the firm as well

as of each partner who was involved in making any improper or misleading statement of

particulars in the audit report or who acted in a fraudulent, unlawful or wrongful manner.

The order passed by the Tribunal shall be binding on the company and all its members,

depositors and auditors including audit firm or expert or consultant or advisor or any

other person associated with the company.

Analysis of concept of Class Action suits

The biggest boost for the small investor comes in the form of the provision for class-

action lawsuits, which can allow a group of investors with common interest in a matter to

sue the management of a firm, its auditors or a section of shareholders in case of

suspected wrongdoing, a option not available under the current regulations.

Class actions are cost effective and increase judicial efficiency as they unite several

plaintiffs‘ under one cause giving it strength. As this strength comes from the sheer

numbers they have the power to pull up corporations for poor management, unethical

practices, and corporate governance failures. Claims which may seem insignificant at the

micro level attain importance at the macro level and hence compel justice to be in favour

of the victims. In cases of bankruptcy, while individual‘s law suits operate on first come

first serve basis, class actions ensure that payments are made across to all the parties.

They place fewer obligations on the class members than conventional lawsuits. Courts

would not like to litigate multiple cases based on a similar nature; In this context class

action is an effective tool over a conventional law suit because of its mutual benefits to

the Legal fraternity as well as the public.

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The investor base in the capital market in India is huge and investors are a heterogeneous

group. They may be Institutional investors, High net worth individuals, small or retail

investors or corporate entities. Not all investors need equal degree of protection. It is the

small investor or the minority shareholder who needs maximum protection. The reason

being he is gullible, easily swayed by the promises of post listing gains or quick market

appreciation. Their objectives of investing are safety, liquidity and return on investment.

Protection of Investors is of utmost importance as it is his faith in the stock market that is

the foundation stone for its future growth.

In the highly reported, debated and analyzed Satyam Case, an entity that suffered silently

is the Company‘s small investors whose wealth has been eroded within a span of days

with no fault of theirs. Small investors in India awakened to the concept on Class action

when a suit was filed on behalf of the purchasers of the American Depository Receipts of

Satyam alleging violation of federal laws by issuing false financial statements. They

made the company agree to pay $125 million (over Rs 625 crore) in settlement due to a

strong class action framework in the US. A suit was also filed against its audit firm PwC

for recklessly disregarding the accounting fraud by Satyam.

More recently investors who invested on the Initial Public offering of Face book suffered

losses because of the price of the scrip falling drastically on listing. A Class action suit

was filed against its Co-founder Marc Zukerberg alleging that he had inside information

that the stock price was overvalued and hence had offloaded his shares prior to listing.

The concept of class which is a widely used consumer Redressal mechanism in the US

and the UK, has now found place in the Indian regulatory framework.

Thus, it is an outstanding legal innovation, class action needs to be fine tuned to suit the

requirements of the Indian framework. SEBI needs to take a proactive role not just in

funding but encouraging investors to be a part of investor associations. The benefits of

class action should be a part of the curriculum for Investor education.

Investor awareness programmes should not be promotional activities but should enlighten

the investors about their rights and obligations. Investors need to develop an equity

culture to understand the corporate actions and pull up companies for mismanagement

and fraud.

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3.6 Serious Fraud Investigation Office

The SFIO is a multi-disciplinary organization under Ministry of Corporate Affairs,

consisting of experts in the field of accountancy, forensic auditing, law, information

technology, investigation, company law, capital market and taxation for detecting and

prosecuting or recommending for prosecution white-collar crimes/frauds.

The Central Government shall, by notification will establish an office to be called the

Serious Fraud Investigation Office to investigate frauds relating to a company, provided

that until the Serious Fraud Investigation Office is established under the Bill, the Serious

Fraud Investigation Office set-up by the Central Government in terms of the Government

of India Resolution No. 45011/16/2003-Adm-I, dated the 2nd July, 2003 shall be deemed

to be the Serious Fraud Investigation Office for the purpose of this Bill.

Clause 211 provides Statutory Status to Serious Fraud Investigation Office (SFIO) has

been proposed in the Companies Bill, 2012. More powers are being given to the SFIO in

the Companies Bill 2012. Investigation Report of SFIO filed with the Court for framing

of charges will be treated as a report filed by a police officer. SFIO will have powers to

arrest in respect of certain offences in the Bill which attract the punishment for fraud.

Current Status of SFIO

As per an article of Hindustan Times- The Serious Fraud Investigation Office (SFIO),

under the Corporate Affairs Ministry, is currently probing 34 cases, the government said.

"Since its inception, SFIO has been entrusted with 133 cases by the Ministry of Corporate

Affairs for investigation," Minister of Corporate Affairs Sachin Pilot informed the Lok

Sabha in a written reply.

.Further to the query on status of the cases, the minister replied that SFIO has reported

many cases of violations of provisions of the Companies Act, 1956 and offences

involving criminal breach of trust, cheating and falsification among others under the

Indian Penal Code.

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Chapter 4: Findings and Conclusion

Aim: The bill seeks to update India‘s corporate laws to the realities of the 21st century,

where:

Social responsibility is a key area of a corporation‘s activities;

Fraud and money laundering have become more sophisticated and harder to

monitor; and

The accountability of executives and auditors has become a bigger priority.

Why it’s important: It‘s a comprehensive piece of legislation that seeks to overhaul how

corporations‘ function– from how they raise funds, to how they set up subsidiaries, to

how they register an enterprise in India.

Among the more-talked about provisions of this 372-page piece of legislation is a clause

that would make it mandatory for companies to allocate at least 2% of their average

annual profit to development initiatives.

The bill also aims to clamp down on money laundering by preventing companies from

having more than two layers of investment subsidiaries. If approved, it would give more

powers to the Serious Fraud Investigation Office, a federal body, including the ability to

arrest and submit investigation reports to courts. Currently, that‘s a power reserved to the

police. It also includes provisions to set up special courts for corporate crimes. The bill

also allows shareholders of a company to file a class action lawsuit against the

management.

What changes: The bill would replace the Companies Act, 1956. The biggest difference

from the current law is that it would give more power to those responsible for

investigating fraud and that it would make corporate social responsibility a legal

obligation. It would make it tougher for smaller companies to raise funds by accepting

deposits from the public. The proposed law will only allow companies with a minimum

net worth, an amount not specified in the bill, to raise deposits. Companies would be

compelled to set aside assets equivalent to the value of the deposits, so that depositors

may be paid their dues even if the company is in financial trouble.

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Who it would affect: It would affect every company in India, including single-person

outfits that have registered themselves as an enterprise. Within companies, the proposed

law would affect the senior management, directors, auditors and shareholders of

companies. If implemented, it could boost community development projects across India,

such as setting up schools, hospitals or improving drinking water supply to villages.

Reaction: The bill has elicited criticism from some corporations, tax advisers, lobby

groups and management consultants. The Confederation of Indian Industry said it is

―concerned‖ about the mandatory provision that 2% annual profit has to be set aside for

community projects, saying this should be a voluntary activity and India would be the

first country in the world to have such a provision.

But many industry leaders have welcomed aspects of the bill. ―The new law would

strengthen the concept of shareholders democracy and offer protection of the rights of

minority stakeholders,‖ said Chandrajit Banerjee, the director of the Confederation of

Indian Industry, a lobby group. However, he said he was ―concerned‖ about the

requirement to set aside 2% of profits for community projects.

The Bill is an overhaul of an archaic legislation and will make companies an attractive

business vehicle while safeguarding investor interests at the same time.

It demonstrates India‘s seriousness in providing a robust law which makes companies an

attractive business vehicle, while simultaneously safeguarding investor interests. While

the substantive law is adequately captured in the Bill, it contemplates a greater executive

role in prescribing rules for procedural matters which ensures an easier and efficient

administration. It also has been structured to give executive powers to prescribe

regulations on various matters, thereby demonstrating that this legislation can deliver

through changing economic scenarios.

The Bill is a welcome overhaul of the existing legislation. Hopefully, the President will

approve it without any significant changes and the spirit of reform and advancement

embodied in the Bill will be carried forward by the government into various regulatory

and tax measures that are widely anticipated and more importantly required to give a

boost to the Indian economy.

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Bibliography

Publications used:-

1) ―Companies Bill 2012- The Dawn of New Era‖ by S Dhanapal & Associates.

2) ―The Companies Bill, 2012- An Insight‖ by Amarchand & Mangaldas & Suresh

A.Shroff & Co.

3) ―Highlights of the Companies Bill, 2012‖ by KPMG India.

4) ―Broad analysis of changes between Companies Act, 1956 vis-à-vis Companies

Bill 2011‖ by Deloitte Touche Tohmatsu India Private limited.

5) ―One Person Company‖ by Reuben Perumal Mani.

6) ―Getting responsible for everything under the sun- Hemant M. Joshi & Nikhil

Kenjale‖- An article published in the Hindu Business Line print edition dated

March 18, 2013.

7) ―NFRA in Companies Bill, 2012‖ by CS Bilu Balakrishnan.

Websites used:-

1) http://blogs.wsj.com/indiarealtime/2012/11/21/fact-sheet-the-companies-bill/

2) http://thefirm.moneycontrol.com/story_page.php?autono=797650

3) http://www.legalera.in/news-deals/articles-of-week/item/6972-the-companies-bill-

2012-the-good-and-the-better

4) http://www.icsi.edu/portals/0/grapes/highlights_of_the-companies_bill

5) http://www.moneycontrol.com/news_html_files/news_attachment/2012/Frontiers

%20of%20Corporate%20Governance%20-%20Companies%20Bill%202012.pdf

6) http://taxguru.in/wp-content/uploads/2013/01/cobill2012new.pdf

7) http://www.theglobaljournals.com/ijar/file.php?val=ODgy

8) http://www.deccanherald.com/content/16049/class-action-suit-form-part.html

9) http://cpadvocates.in/Dynamicimages/260_1_826634656145078265000.pdf

10) http://www.hindustantimes.com/Search/search.aspx?q=Serious%20Fraud%20Inv

estigation%20Office