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Two steps forward, one back

New Companies Bill is ambitious, but reconsider CSR norms

Business Standard  |  New Delhi 

Few laws can claim to be as comprehensive and far-reaching in their sweep as the revised Companies Bill, 2011, which the Union Cabinet approved last week. It is supposed to be tabled during the winter session; if Parliament manages to find time to consider and approve it, then India Inc’s long wait – almost 18 years – for a new law governing companies should finally be over. Many would, no doubt, like to believe that this inordinately long wait has been worth it. To say that the Bill is ambitious would perhaps be an understatement. Consider this: two regulatory bodies are to be created for ensuring better governance. The first is a national company law tribunal which, with a separate appellate body, will take over the high courts’ adjudicatory functions pertaining to the enforcement of the companies law. The high courts are overburdened with civil and criminal proceedings; the proposed tribunal should ensure the expeditious settlement of corporate-law cases. This would reduce the burden on the high courts as well. That the terms of composition and constitution of the tribunal have been modified in keeping with the Supreme Court’s order in May 2010 is a relief, because there now should be no fear of any further legal complications in the tribunal’s formation.

The second proposed regulatory body is a national financial reporting authority, endowed with quasi-judicial powers to monitor, and ensure compliance with, accounting and auditing standards. Hopefully, with such a body in place, cases like the Satyam accounting scandal will be a thing of the past. The regulatory side of the legislation displays similar ambition in conferring statutory status on the Serious Fraud Investigation Office, giving it powers to arrest and prosecute offenders. Offences involving fraud have been defined and made cognisable under the law. These provisions certainly plug the many gaps that rendered the existing companies law largely ineffective in terms of ensuring governance and compliance with rules. However, it needs to be ensured that these new regulatory bodies are staffed with competent people, and avoid being easy targets for regulatory capture — the fate of many other sector regulators.

While most new provisions – such as allowing companies to issue equity shares with differential voting rights, and making the consolidation of accounts mandatory for companies with subsidiaries – are progressive steps, at least one aspect of the revised Bill will cause concern: the provision that obliges companies to spend at least two per cent of their average net profit on activities that are part of their corporate social responsibility programmes. It is true that this stipulation is only for companies with a net worth of over Rs 500 crore, or a turnover of more than Rs 1,000 crore, or a net profit of over Rs 5 crore in a year — and also that an escape clause exists, as companies can get away by merely disclosing the reasons for a failure to comply with the provision in their boards’ report. But the idea of such an arbitrary stipulation is nevertheless problematic, in that it attacks the idea of allowing a corporate enterprise do what it knows best — giving the best possible returns to its shareholders.

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First Published: Fri, December 02 2011. 00:11 IST