The Impact Areas of the new Companies Bill: A Primer

Does law become redundant in fifty seven years? As far as corporate law is concerned, the Government of India has answered this question in the affirmative by phasing out the Companies Act 1956 and enacting a modern company law. Indeed, it is a wise move as the new legislation will finally bring India's corporate law in tune with the changing business environment of the 21st century. The Companies Act 1956 was passed at the time of the “license raj”. Since then, much has changed; the license era has been replaced by a liberalised era and the number of companies has increased from a few thousands to around a million now.The new Companies Bill proposes seminal changes in the manner in which companies are governed and regulated in India. Broadly speaking, the changes introduced in the Bill can be categorised as follows:INDUSTRY ORIENTED One Man Company (OPC)A one man company is an entity in which the entire shareholding is owned by a single person or entity. At present, a minimum two people are required to form a company.The introduction of OPC may change the traditional manner in which the individual or household business functions in the country at present. They will prefer to structure their business in the form of OPC rather than sole proprietorship. Further, it can be extended in respect of creation of wholly owned subsidiaries also. At present a nominal shareholding is allotted to nominees to hold it on behalf of parent company in order to fulfil the requirement of minimum shareholders.It is worth noting that with the recognition of OPC, the corporate veil between the company and the shareholder is further narrowing. One of the challenges will be to regulate the related party transactions and transparency in such companies. Dormant CompanyThe Bill allows creation of Dormant Company for future projects to hold an asset or intellectual property and has no significant accounting transaction. Certain liberal treatment has been extended to dormant company in respect of certain requirements. It has to be seen how the dormant company is going to evolve in future and whether we are going to have investors ready to purchase shelf companies as it is available in certain offshore tax havens.Merger and Restructuring One of the main problems for setting up a business in India is the restriction on merger of an Indian company with offshore companies. The Bill permits such cross border mergers with certain specified jurisdiction. The Bill also liberalises intergroup merger and restructuring. The corporate world has been demanding these changes for a long time as it expedites mergers and restructuring.Increase in number of membersThe maximum number of members in a private company has been increased from 50 to 200. This will definitely cheer up the corporate world as it enables the private companies to increase the number of members without becoming a public company which has to follow more stringent norms.Recognition of inter se agreement between shareholdersThe Bill recognises inter se arrangement between shareholders and transfer restrictions. This will help corporate transactions as uncertainty in this area is one of the major stumbling blocks for transactions. Having said that, changes in the security contract regulations are also essential in order to make these changes more effective.GOVERNANCE ORIENTEDNotably, the Bill incorporates the lessons learnt from the Satyam fiasco and aims to protect the interests of minority shareholders while expanding the responsibility on auditors who will face criminal liability if they fail to report corporate fraud.The Bill is equipped with various features to significantly improve the corporate governance of the companies. Following are some of the corporate governance highlights:At least 1/3 of the board of directors of the listed company shall be independent directors.Independent directors can serve 2 consecutive terms of five years each on the Board. Their liability shall be limited.Mandatory internal and secretarial auditing provisions.Mandatory rotation of auditors.Limitation of number of companies which can be audited by an auditor.Elaborate quorum requirements.Prohibition on insider trading and forward dealing by directors and key management persons.Uniform financial year from April to March for all companies.Higher disclosure requirements.Stringent accountability on directors, auditors and other professional associated with the company.Restriction on investment through more than two layers of investment companies.Mandatory disclosure of interest by directors.Streamlined procedure and disclosure in respect of related party transactions.Introduction of voting though electronic participation, meeting through video conferencing.Requirement that at least one director shall be stayed in India for a total period of not less than 182 days.INVESTOR PROTECTION ORIENTEDFor the investors, the Bill comes as good news for the new law substantially empowers the shareholders. Class...

The Impact Areas of the new Companies Bill: A Primer

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