'I support the contents of the Companies Bill'

I wish to compliment the honourable minister for having taken the pains, of what I consider to be a historic regulation, to replace the Companies Act, 1956, in view of the altered economic and commercial sacrosances which now face India.

I have nine points to make for the minister's consideration.

First, I want to make a point that the Parliamentary Standing Committee has recommended, based on the Comptroller and Auditor General (CAG)'s Report, that the board of directors should consider the implications of government directors on the financial position of company. In my view, this is a very important suggestion that the CAG had made and which the Standing Committee has accepted. For instance, in the context of government directors for disinvestment, unless the financial impact of government's directives are really considered by the board of directors, this would be incomplete.

My second point really relates to the fact that the Bill provides, that members of the existing Law Board must be made eligible to become members of the National Company Law Tribunal (NCLT). However, the Parliamentary Standing Committee noted that the functioning of the company law board has been very unsatisfactory and, therefore, the membership of the NCLT should be considered afresh.

My third concern is about the excessively delegated powers that are contained in this Bill. There are nearly over 100 matters on which rules have to be made and here the subordinate legislation becomes necessary. The Standing Committee noted that, for instance, on rules to facilitate rotation of auditors, manner of selection of auditors, number of auditors and firms which can be undertaken, the definition of key management personnel, the qualification of independent directors, the contents of the prospectus should have been - Mr Minister - included in the Bill, instead of being left for subordinate legislation and rule-making.

My fourth point, sir, is that the Bill does not have any provision of what might be called a Sun-Set Clause in terms of companies that have really structured themselves in accordance with their own regulation and when they transit to the requirements of the new law, the Bill should have provided or, at least, we should provide for a sun-set clause to prevent dislocation of any transitional difficulties.

My fifth point relates to corporate social responsibility (CSR). I must compliment the fact that this has now been made mandatory. This is a very satisfactory provision. But, there is an escape clause in this provision. For instance, it says, "if company fails to meet the desired standards, it can provide reasons for it." This really could be an escape clause for companies not meeting the necessary CSR requirements. Also, for instance, since the requirement of the CSR is based on the net worth of turnover of a company, there is a risk that it could be reduced to an exercise of accounting.

Also, for instance, since the requirement of the CSR is based on the net worth or the turnover of a company, there is a risk that it could be reduced to an exercise of accounting, or, for instance, that the net worth of a company might change from year to year. It is unclear how this will affect the responsibility to make the CSR spending, or, for instance, that the CSR Committee, which is mandatory now, does not have any provision for external auditing of the CSR Committee, which is to be appointed, since this is only advisory in nature to the company concerned.

Finally, I think on the CSR, the minister might like to consider and clarify, the tax treatment to CSR spending by companies whether it is to be treated as non-deductible income since it is an allocation of profit, or, whether it is to be treated as an allowable expenditure under the Income Tax Act.

Sir, my sixth point is about regulatory overlaps and conflicts. There are several issues of regulatory overlaps and conflicts. For instance, on the prospectus of a company as prescribed under the Bill, Clause 26 says it is different from the listed requirements under the Securities and Exchange Board of India (Sebi) (Issue of Capital and Disclosure Requirements) regulations. There is also a difference in the interpretation and definition of what constitutes a "promoter".

Sir, my next point is on the impact of this Bill on auditors. Whereas I welcome the fact that the limit of 20 has been imposed on the number of firms which an auditor or a partnership firm can undertake, nonetheless, sir, issues like "investment advisory services", "investment banking services" and "management services" are not clearly defined and they impose limits on what an auditor firm can do.

My eighth point, sir, is about the issue of independent directors. The Bill should consider aligning the definition of "independent director" in the Bill with the definition in the Listing Agreement under Sebi. Notably, sir, the definition of an independent director in the listing requirement also specifies a disqualification if a person has any material pecuniary relationships or transactions. On this issue, sir, the definition, as contained in the Sebi is, perhaps, more rational and more comprehensive.

My next point, sir, is about the consequences that will come on the directors of companies and on independent directors, namely, that the fiduciary function of a director is not just to the company, but also to its employees, the shareholders and the community or the environment as a whole. This, sir, will be a serious handicap in companies being able to atract independent directors with this kind of debilitating restrictions and enlarging the fiduciary ambit of what independent directors should do.

Sir, my final point is about Clause 177, referred to as the whistleblower mechanism. It is pertinent for the minister to note that the whistleblowers Bill is on the anvil in the Parliament. How do we ensure that the provisions of the whistleblowers Bill, which is to be enacted by Parliament, would be enacted by the Companies Law Bill which we are just about to consider and hopefully approve?

With this, I support the contents of the Companies Bill, 2012.

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Edited version of the speech made by Janata Dal (United) MP N K Singh on the Companies Bill, 2012, in the Rajya Sabha, August 8, 2013