Centre Tightens Noose on Corporates By Kumkum Sen

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Kumkum Sen

kumkum senFinally, at the fag end of the winter session, the Companies Bill 2012 was passed by the Lok Sabha and now awaits clearance by the Rajya Sabha before it undertakes the complicated process of being notified and coming into effect as the applicable law. It’s been a long and painful gestation since 2002, when the first amendments were proposed, to completely overhaul the regulatory regime under the Act, by establishing the National Company Law Tribunal (“NCLT”) and merging the insolvency law under the Sick Companies Act (‘SICA”) in the same statute to provide a unified single window redressal forum by abolition of the Board for Industrial & Financial Reconstruction, the Appellate Authority for Industrial & Financial Reconstruction, the Company Law Board and the Company Benches in all High Courts Some of these issues were addressed in the legal battles on the creation of the NCLT.

That is history, but in going forward, the Bill that has been passed, has brought about several changes, redefined and reconciled many key definitions and concepts imported and consolidated provisions from the SEBI Listing Agreement and the laws to be repealed in the proposed text, thereby making referencing easier. But instead of the liberal self governing initiatives that were undertaken in the turn of the century, this Bill appears to be reactive in reassertion of controls.

The casting of the burden of mandatory responsibility for companies having a turnover of Rs 1000 crore or more, or a net worth of Rs 500 crore upwards, or an average net profit of Rs 5 crore to invest at least 2% of their net profits on Corporate Social Responsibility (“CSR”) is an instance in hand. The CSR initiatives are required to be mentioned in the financial statements of the Company. Section 135 of the Bill requires the constitution of a separate Committee of the Board. The Committee has to monitor the CSR Policy and recommend the items and expenditure of the activities to be undertaken. Surely a corporation of such size would have enough manpower and select one of their three Independent Directors to devote time to such activities? The requirement of a dedicated Board may be unwarranted. If the expenditure is not made, the Board of Directors has to provide a written explanation why this was not done.

Historically Indian Corporates have invested in CSR. The Institutions created by the Tatas and Birlas in the educational sector are of the highest standard, But all these initiatives have been voluntary.

The provision for CSR in the Bill was intended to be an enabling provision. The mandatory character is an intrusion into the Company’s Indoor management systems. By imposing CSR on Corporations it appears that the Government is trying to abdicate its responsibilities by imposing them on the successful corporations. The recurrent expenditure itself is likely to disrupt the business plans of many companies. Corporations will engage in CSR, but not at the cost of profits.

And in doing so, there is also the question whether CSR is conducive to good governance. In this context it’s important to recall that Siemens Ag, whose bribery Scandal is one of the biggest scams in corporate history, pleaded guilty on the forty charges under the US Foreign Corrupt Practices Act. In overhauling its top leadership, centralising its compliance controls and systems, Siemens’ corporate governance regime is rated as one of the best global models of Corporate Governance. Empirical studies indicate CSR has had limited nexus in reforming governance of companies take the case of Goldman Sachs.

The quest for Corporate Governance is also present in the provisions dealing with appointment of Independent Directors. The 1956 Act only provided for Independent Directors for the Remuneration Committee. The new provisions in the Act are a reproduction of Clause 49 of the Listing Agreement, but not restricted to that alone.

Independent directors may receive fee and profit linked commission subject to Central Government guidelines and rules. The Bill contains an elaborate process of appointment to ensure insulation. A promoter, a relation, a director / officer holder of an subsidiary associate organisation are some of the exclusions which are essential as some listed companies were flaunting these norms, Currently applicable only to listed companies, the Government is empowered to extend the requirement to all classes of companies. Schedule IV to the Bill, provides a standard Code of conduct – no quarrels with that. The Bill also provides under Section 49(12) that Independent Directors shall be liable, of an offence which occurred with his knowledge, attributable through Board process, consent, connivance or lack of diligence.

This may have to be further addressed as, such directors; in order that they can bring value addition to the Board will insist on for protection against witch-hunting – after what happened to Nimesh Kampani.

The Act marks the statutory recognition of the Serious Fraud Investigation Office (SFIO), which was set up by a Gazette Notification in 2005, at the time of investigation of the Satyam Scam. So far it has been a part of the Ministry of Company Affairs under the 1956 Act, and not very effective. Under the 1956 Act Inspectors appointed under Sections 235 / 237 thereof could on directions by the Government, investigate the affairs of a company, in cases of fraud, misfeasance or other misconduct and provide a report. They could not take further action. The SFIO has been vested powers but the ambit is much wider, such as including public interest, which can have a wide connotation, on requirement of any Department of the Central and State Government. They have also been vested with powers of detention/ arrest which so far was exercised only by the police. The procedure is encapsulated in section 212 as part of the Bill, One hopes that these powers exercised with care, and that there is no abuse as the more organisations are vested with such powers, scope of harassment rather than protection, increases which is an issue of concern.

There are many more concerns, such as the entrenchment provision in the Memorandum Object Clause, but that will have to wait for the next column.

Kumkum Sen is a partner at Bharucha & Partners Delhi Office and can be reached at kumkum.sen@bharucha.in  

(Dec 24, 2012, Business Standard)

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