The Companies Bill, 2012, was passed last week. This put paid to overestimated renditions and credentials of lobbyists in the system. All the intelligence bandied in corporate India about how the legislation was doomed was rendered redundant.
Conspiracy theories flourished - many believed the Bill would never become a law before this Lok Sabha (which had already passed it) got dissolved; others spoke of how different MPs would rush to create a furore if it were ever taken up and ensure there would be no debate; and yet others simply kept the faith that the Indian corporate world was just too powerful and could ensure that it would never become a law.
The fanciest conspiracy theory was that elections would be called before the winter session, and Parliament would be dissolved, and the Bill would lapse. That no minister referred to the Companies Bill when he spoke of important legislation remaining pending was pointed as evidence of such firm intelligence being accurate.
Although vanquished, this segment of society argues still. Now, the reports are about how the President would not sign it in a hurry and how the government would take its time to notify the provisions coming into effect. But the truth is, the political system quietly got together to pilot legislation that would most fundamentally affect corporate India, through both Houses of Parliament. The political system indeed has won the support of the general public by overplaying one of most innocuous provisions (Section 135) that purports to do good for the society by imposing an obligation on every company to spend two per cent of the past three years' average net profits towards objects to be formulated in the company's corporate social responsibility policy. This is the single-biggest point of what the government would like the law to seem to stand for, and it was easy to get even the intractable opposition to agree that companies should spend.
Even ahead of this law becoming a reality, dilutions to what constitutes corporate social responsibility have been announced. The finance minister announced in his Budget speech earlier this year that investments in incubators of new businesses set up in institutes like the Indian Institute of Technology would be considered to be social spending. This provision would justify the creation of a large pool of funds (akin to the education cess under tax law) that would be legitimately put away, ostensibly for corporate social responsibility, and could get routed to local political interests where a company has operations.
While the new law has enabled a framework to create a pool for social spending, it has also quietly given the political system an official leg-up. One provision that is not much talked about is the provision enabling political donations (Section 182), which permits any company to freely donate 7.5 per cent of the past three years' average net profits by passing a board resolution - increasing the limit from the current limit of five per cent.
Besides, the regulatory race has just formally been flagged off. For listed companies, the new company law has incorporated a number of provisions on corporate governance that the securities regulator had put into place. In doing so, in some instances, it would represent raising the bar to above what is specified by the securities regulator, and in other instances, it would represent lowering the bar. For example, securities law requires at least one half of the board to comprise independent directors if the company has a promoter as a chairman (one-third if the chairman is not a promoter), while the new company law places this requirement at a uniform one-third of the board strength for all companies. There is no limit on the number of times an independent director may be re-appointed under securities laws while the new company law imposes a restraint of two re-appointments with a relenting feature of enabling re-appointment for the third time, after a three-year break.
In short, one has to prepare for multiplicity of regulatory requirements. In January this year, the securities regulator had published a discussion paper on corporate governance, portions of which would take some aspects of corporate governance norms even ahead of what the new company law would entail, for listed companies. The new company law, too, empowers the central government to prescribe further requirements on a number of issues (for example, notify types of companies that would have to appoint at least one woman director). Those who administer company law and those who administer securities laws would engage in regulatory competition.
The new law does not come into effect immediately. The government may bring different provisions into effect on different dates. This is important to ensure that the transition from the current law is smooth. Meanwhile, corporate India needs to sit up and prepare to deal with the new law. There is time to get ready.
(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.)
somasekhar@jsalaw.com
