New definition for promoters

Analysts express some unease at provisions on independent directors.

The Companies Bill, 2011, introduced in Parliament yesterday, says a person who controls a company, directly or indirectly, is to be considered its promoter, irrespective of the number of shares held in the entity.

The new definition says any person who has control over the affairs, directly or indirectly, whether as a shareholder, director or otherwise, or in accordance with whose advice, directions or instructions the board of directors is accustomed to act, will be considered its promoter.

It says these specifications won’t apply to chief executives running the company in their professional capacity. A person named as promoter in a prospectus or identified as one by the company in its annual return would also be considered a promoter. This is one of 33 new definitions in the Bill, of a total of 95. To bring more transparency in the ownership structure of corporate entities, it also defines ‘associate company’, as an entity owning 20 per cent of share capital in another company or one taking 20 per cent of the business decisions of the other firm.

The Bill has prescribed various requisites for an independent director, going beyond Clause 49 of the Listing Agreement mandated by the Securities and Exchanges Board of India. “The Bill has prescribed a very onerous code for the independent director, without matching obligation on the company to provide adequate resources and support,” said Shardul S Shroff, managing partner of Amarchand & Mangaldas. He said the government had ignored the earlier recommendations of a committee it had set up in this regard.

According to Pawan Kumar Vijay, managing director, Corporate Professionals, the ministry has also defined for the first time terms such as small company, employee stock option, related party, turnover, chief executive officer, chief financial officer and global depository receipt.