Company law panel proposes tighter norms
When it comes to employing former auditors and unbiased administrators for top posts, a high-level commission has ended its review of the Companies Act with recommendations for tighter restrictions and more transparency in how companies handle their business.
Raising the bar on corporate governance has also resulted in more transparency in how companies handle resignations of auditors or chief executives.
If the proposals are enacted into law, statutory auditors will be required to explain the impact of each qualification or negative comment on the financial statements they make in the audit report, and independent directors and auditors will be needed to observe a 12-month cooling-off period before taking on senior positions within the firm or any of its affiliates.
The committee, which submitted its report to the union finance and company affairs minister, recommended that the Companies Act be changed to ensure that the holding company’s auditor is assured the equity of audit of each of its subsidiary companies by their respective auditors.
According to the panel, the holding company’s auditor should be able to independently confirm the accounts or a portion of the accounts of any subsidiary.
This is critical because the guardian firm consolidates the group’s financial statements.
One of the essential recommendations is to increase openness in circumstances where an auditor resigns. The actual reason for the situation must be made known. The committee noted that the auditor should be under an express requirement to provide specific disclosures before the departure, highlighting whether or not the resignation is due to corporate non-cooperation, fraud or severe non-compliance, or fund diversion.
“If such information comes to light after an auditor’s resignation but is not reported in the resignation statement, action should be taken against that auditor,” the committee stated, adding that similar requirements of a retiring auditor might be borrowed from the UK Companies Act, 2006.
In addition, if an auditor provides a hostile comment or qualifies the financial statements in the audit report, the auditor’s impression must be stated. The panel said that the central authorities might prescribe a structure for something similar, noting that such adverse remarks currently do not fully detail the negative impact on the company’s financial well-being or operation.
The panel looked at the independence of the neutral administrators and auditors as a critical area. It was determined that an individual who has had a key managerial position or worked for the company or another organisation within the same group for the previous three years is presently barred from becoming an independent director.
However, nothing prohibits a current independent director from taking into a top position inside the company after leaving office as an independent director.
About Company Law
Corporate law (also known as business law, enterprise law, or company law) is the body of legislation that governs the rights, relationships, and actions of individuals, enterprises, and organisations. The phrase refers to the legal practice of corporate law and the philosophy of corporations. Corporate law refers to the area of law that deals with issues that arise directly from a corporation’s life cycle. As a result, it encompasses a corporation’s inception, funding, governance, and eventual demise.
While the minute form of corporate governance as embodied by share ownership, capital market, and business culture guidelines varies, many jurisdictions share similar legal traits – and legal issues. Corporate law governs the interactions between corporations, investors, shareholders, directors, employees, creditors, and other stakeholders like consumers, the community, and the environment.
While the terms company and business law are sometimes used interchangeably with corporate law, the phrase business law refers to a broader idea of commercial law, i.e., the law governing commercial and business purposes and activities. This could entail corporate governance or financial legislation issues in some circumstances. When used in place of corporate law, business law refers to the legal aspects of a business corporation, like acquiring capital, forming a firm, and registering with the government.
Companies Act 2013
The Companies Act of 2013 is an Act of the Indian Parliament on Indian company law that governs the formation of a company, its obligations, its directors, and its dissolution. The Companies Act of 1956 is divided into 658 sections and contains 7 schedules, whereas the Companies Act of 2013 is organised into 29 chapters with 470 sections. However, only 484 (470-43+57) parts of the Act are still in effect. After gaining the President of India’s assent on August 29, 2013, the Act partially superseded the Companies Act, 1956.
On August 30, 2013, section 1 of the Companies Act, 2013 went into effect. On September 12, 2013, 98 many sections of the Companies Act went into effect, with a few adjustments, like the maximum number of members for private companies increased from 50 to 200. This act includes a new phrase, “one-person company,” which will be a private firm with just 98 parts of the Act notified. From April 1, 2014, a total of 183 new sections went into effect.
Following that, the Ministry of Corporate Affairs issued a notification exempting private firms from various parts of the Companies Act.
The 2013 Act includes provisions for greater corporate executive duties in the IT sector, bolstering India’s defences against organised cybercrime by permitting CEOs and CTOs to be prosecuted for an IT failure.
The Companies (Amendment) Bill, 2020, was introduced by the Minister of Corporate Affairs. The parliament approved it in 2020.
The Indian Businesses Act 1956 was adopted by the Indian Parliament in 1956, allowing corporations to be founded through registration, defining the responsibilities of companies, their executive directors and secretaries, and laying out the procedures for winding them up.
Mandatory CSR contributions
Section 135 of the Companies Act requires major corporations to contribute to corporate social responsibility (CSR), making it the world’s first required CSR statute. According to the bill, all businesses with a net worth of more than 5 billion rupees or 5 billion (approximately $75 million), a turnover of more than 10 billion rupees or 10 billion (roughly $150 million), or a net profit of more than 50 million rupees or 50 million (approximately $750,000) must spend at least 2% of their previous year’s profits. All enterprises affected by the rule must form a CSR committee to manage the spending. Before this law, CSR regulations exclusively applied to public-sector firms.
The appointment of a company secretary is governed by Section 203 of the Companies Act 2013. The statute was the first time in Indian company law history that a company secretary was defined as a critical managerial professional.
Every Indian listed company and any other organisation with more than rupees ten crore (100 million) in paid-up capital are required by law to employ a full-time company secretary.
Major changes in Companies Act 2013
- Companies (1st amendment) Act 2015
- Companies (2nd amendment) Act 2017
- Companies ( 3rd amendment) Act 2019
- Companies (4th amendment) Bill 2020
Evolution of Company Law In India
The Companies Act of 1850 was enacted in 1850, following the Joint Stock Company Act of 1844. Because there was so much dispute over its execution in India, the Company Law was revised several times between 1852 and 1883. The leading cause of this conflict was the disparity in viewpoints among the residents of this town and their negative perceptions of English laws. At the period, India’s inhabitants were not technologically advanced, and their standard of living was inferior to that of the English.
This Joint Stock Companies Act of 1844 was the first to establish that an organisation might be formed by registering without first getting a charter or the approval of the registrar of this act. Still, it also denied the registrar the power of financial obligation. However, in 1955, the British Parliament established the indebtedness act, which imposes specific duties on the registered company members. The last statute of 1844 was suspended when the new act of 1856 took effect. This act aided many businesses in expanding their economic base.
Many businesses were founded during the time period, and there was a lot of economic progress, resulting in England’s economic strength. Essentially, this act created a smart method of creating company memorandums by bringing together many businesses.
Amendments in the Companies Act
This statute was later changed in 1862, with some of the provisions being added and the title “Companies Act” being given. Two new papers were established due to the recent amendments: the memorandum of association and the articles of an association. These two documents served as the foundation for the debtor’s firm. Not only that, but some other alterations were discovered, like the liability that is limited by a company’s guarantee. And if the organisation’s leader wishes to make changes to the memorandum’s object clause, he is banned from doing so.
Thus, we can deduce from these considerations that the firm’s basic structure was already constructed with the help of the new provision, and company law was indirectly forming its body components. The liability of the organisation’s administrators was established mandatory audit of the corporation in 1990. People only knew about public firms before 1908, but the concept of a private company was introduced in 1980.
Two continuous acts were passed in 1908 and 1929 to combine the preceding legislation.
The corporation’s act of 1948 was created with Lord Cohen’s assistance for the major act operating report and the committee for its correct working. This act introduced, among other things, a new type of company known as an exempt private company, and it was also significant for the broad public responsibility of a company.
Furthermore, the legislation of 1948 expanded the protection of the majority, as defined in section 210 of this act, giving the board of commerce the authority to order an investigation into corporate matters, as defined in section 64(a) of the Companies Act, up to Section 175 of the Companies Act.
For the first time, the company’s shareholders can remove the director before the company’s term expires. To combine and amend the provision laws, the Companies Act of 1956 was enacted. This act became effective on April 1, 1956. The Bhabha committee, also known as the corporate law committee, drafted this act and submitted a report on it in March 1952.
This act was the most comprehensive law ever passed by the Indian legislature. The revisions were made one by one, and there are 15 schedules and 658 sections in total. This act, which was a massive piece of legislation, established the legal framework for companies in India.
The primary cause for this was the ongoing expansion of the corporate sector and its implementation in our country. People were earlier unaware of the fundamentals of this conduct. But, as time passes, they recognise the importance of making changes to this act to ensure the company’s proper functioning and maintain the formal relationship between employees. We need to make certain changes to the amendments to provide the appropriate growth for our nation’s economy.
Importance of Companies Act, 2013
As we all know, company law has been revised several times, but the modifications made in 2013 to the company statute are particularly significant for the following reasons:
First, the number of shareholders in the private firm was expanded from fifty to two hundred. The concept of a One-Person Company was also introduced. In this case, the company is formed by a single person who also serves as the nominee for the firm. One of the most significant developments in this statute was the addition of provisions concerning renunciation rights. Finally, section 135 of this act, which deals with corporate social responsibility and the company law tribunal and the company law appellate tribunal, was revised.
Essentially, the Company Law Modernization Act of 2013 changed the entire concept of company law. As a result, the Companies Act of 2013 has just twenty-nine chapters and four hundred seventy sections, compared to six hundred fifty-eight parts and seven schedules in previous acts.
Companies Act, 2013: Recent Developments in This Pandemic The Ministry of Corporate Affairs is in charge of all Indian firms governed by the Companies Act of 2013. In the event of a pandemic, the Ministry of Corporate Affairs amended the 2013 act by 2020 act by inserting a provision rule 2(1) (e) of this act, which states that any company already engaged in research and development of vaccines required in Covid-19 and medical devices needed in their regular course of business must disclose their research activity to CSR separately in the annual report included in the board report.
In this critical and challenging time, the MCA has revised this act to assist and enable firm management to comply with its terms. This advertisement has been reported. Furthermore, MCA’s actions have shown to be helpful to both investors and businesses.
While the MCA has introduced board meetings as AGMs via electronic communications to ensure that the epidemic does not harm people. We can also safely predict that such approaches to organising meetings will become the new norms in the future.
Approach To New Company Law
Nature and Coverage of the Companies Act
1. The Committee assessed the Companies Act’s desirable scope and coverage during its deliberations. Many opinions were stated, including the suggestion that the legal framework for some types of organisations, such as listed firms, be de-linked from the Companies Act and given to specialised regulatory authorities, such as the capital market regulator.
It was also said that an enactment including universal governance principles would not be able to handle the unique requirements of companies operating in the new environment. After giving these viewpoints careful consideration, we believe that they fail to examine the nature and extent of corporate governance, which extends well beyond acts related to a single specialised activity, such as access to money.
Comparisons of the Indian scenario to practice in other jurisdictions are equally unjustified when presented out of context. For example, in some jurisdictions, the federating entities adopt their own separate Company Law.
In such a setting, the capital market regulator’s broad mission allows corporate organisations across the country to access capital based on similar standards. Similarly, new legislation in many countries cannot be considered in isolation from the judicial system and its processes. Another problem that would need to be addressed in light of the relevant context is the impact of such legislation on compliance expenses placed on corporations.
2. Because the Indian Companies Act is a national law, Indian corporations are not subject to the same regulations as those in other nations. It should stay that way for the time being. The “sovereign vacuum” created by the Central Government’s withdrawal from any area of corporate operation and entrustment of the same entirely to a regulator may lead to demands for State legislation on the subject in the Indian Federal system, which we believe will lead to duplication and confusion.
Furthermore, the regulatory need to oversee corporate governance frequently becomes intrusive, posing major regulatory dangers and impeding the decision-making freedom required for a corporate function.
3. Before any feature of the Indian framework is adopted, the extent to which models in use in other countries are relevant to the Indian scenario must be thoroughly analysed. While we recognise the importance of implementing international best practices, we believe that an Indian model tailored to the Indian context is required to effectively respond to the pressing challenges of corporate operations without jeopardising India’s efficiency or competitiveness.
4. Before they begin operations, corporate entities should be able to resort to a concise, clearly understandable, and complete compilation of legal requirements. It would be inappropriate to create different frameworks for business organisations based on their size, nature of operations, or method of capital raising, for example.
Business entities change their form and structure over time as they expand. They must also adapt to the changing business environment due to competition, technological change, and international operating needs. The presence of disparately controlled frameworks would hamper the change. Inter-agency overlaps, and jurisdictional conflicts would occur as a result of this.
Furthermore, each framework would have its own compliance structure, resulting in duplication of effort on one hand and uncertainty and risk regulation for businesses on the other. It would eventually make change adaptation slow and compliance costs.
5. We believe that, in the Indian context, it is critical that the fundamental principles governing the operation of corporate entities, from registration through winding up or liquidation, be available in a single, comprehensive, centrally regulated framework. This is critical for the law and practice of corporate law to evolve and for the framework’s application to undergo essential adjustments. We believe that this would not deprive sectoral regulators of the ability to regulate the behaviour of entities within their specified domains.
Instead, this would allow regulators to focus their attention more narrowly on the fundamental concerns that affect their respective industries.
6. In addition, we believe that the legal structure for corporate governance and operations should allow for a fluid and seamless transition from one type of business entity to the next. As a result, we advocate for a single corporate law framework that applies to all businesses. A structure of exemptions could be used to address the needs of specific enterprises, such as small businesses.
7. Adaptation to changing conditions and the law- The Companies Act of 1956 is a long and winding text with 781 sections. It also includes clauses that deal with primarily procedural matters. It establishes quantitative restrictions in some areas that have become obsolete as a result of changes that have occurred throughout time. Because any modification necessitates amending the legislation through the parliamentary process, the law has become exceedingly rigid due to this format.
As a result, the law has failed to keep pace with national and international economic landscape developments. As a result, it is considered old-fashioned in some circles.
This does not have to be the case, as many important aspects of corporate governance that are currently acknowledged in the Companies Act of 1956 must be preserved and clarified further. What is required is that, in addition to changes in substantive law, when appropriate, a review of procedural issues be conducted to allow for improved self-regulation and compliance.
As a result, we propose that the Company Legislation be designed so that, although key principles remain in the substantive law, procedural and quantitative components are delegated to the regulations. This would allow the law to stay flexible and react to changing business conditions.
8. Growth of the corporate regulatory framework—We believe that a single set of legal rules cannot fully regulate the complex nature of business operations. It is evident that, in the future, a substantial corpus of regulatory pronouncements, governance rules, and standards will be used to supplement the legal principles. In this sense, regulatory and professional bodies play an enormously significant role.
Such declarations, however, must be by the underlying law. The smooth evolution of accounting standards in India to keep up with international advances and the ease with which the Companies Act, 1956 has aided this are examples. Such a system would have to work in tandem with the Companies Act to broaden its scope significantly while also allowing for incremental improvements.
9. Regulatory overlap- We’ve heard that some people believe that the Ministry of Company Affairs (MCA) and the Securities and Exchange Board of India (SEBI) should be separated. This perception, in our opinion, is incorrect. In terms of the legal framework, the Central Government is represented by a Ministry responsible for carrying out the sovereign function and discharging the State’s role in business regulation.
On the other hand, SEBI is a capital markets regulator with specific duties for overseeing the conduct of intermediaries in the capital market and interactions between companies seeking to raise and invest funds.
10. We do not believe that corporations seeking money should be freed from all other laws of the land and, as a result, from state inspection and instead be subjected to the sole authority and supervision of a single regulator. Corporates must operate as economic individuals within the Union of India, contributing to the country’s overall social and economic well-being. As such, they must abide by the laws enacted by Parliament for the welfare of its residents.
11. Corporate governance is much more than just getting money. Taking a restricted view of Corporate Governance as limited to public capital issues and the following processes would be detrimental to corporate entities. Similarly, the capital market regulator must play a major role in enterprises’ public access to capital and must have the required latitude to build appropriate rules that are in sync with the capital markets’ fluidity.
12. In our opinion, the Regulator could establish a framework of rules for its area consistent with the law if the substantive law is collected to reflect the essential guiding principles of company operations and the separation of procedural components. There would be no overlap or conflict of jurisdiction amongst regulatory agencies if such guidelines were implemented in addition to the legislative framework. As a result, we advocate a harmonic structure for the State’s and regulatory agencies’ operations.
13. Framework for small enterprises- The Committee acknowledged that India’s economy is still in its early stages of development. As new business opportunities emerge and new technology frontiers are scaled, the number of companies formed will grow over time. Many new businesses will begin as tiny businesses that will grow into large corporations in the future.
Indeed, small businesses would have a massive impact on the Indian economy. They cannot be subjected to the same level of compliance standards as, for example, large publicly traded firms due to their small. Small businesses must be able to make quick decisions and be adaptive and agile in an ever-changing economic climate while also being encouraged to comply with the law’s basic requirements through cheap compliance costs.
Through a system of exemptions, the government may impose a special regime for such businesses.
14. Institutional Structure- Corporate issues will also need to be resolved quickly. The amount of time spent in the current framework needs to be reconsidered. This is especially true for rehabilitation, liquidation, or winding up. Mergers and amalgamations must also be facilitated to allow for a faster procedure.
The Government envisaged the establishment of the National Company Law Tribunal and the National Company Law Appellate Tribunal through the Companies (Second Amendment) Act, 2002. This is something we applaud. It is past time for a specialised conference to address corporate concerns, bringing together experts from many fields. According to our sources, significant legal problems must be overcome before these organisations may be established. We hope that this process will be completed quickly to establish a single platform for an educated discussion on company matters.
edited and proofread by nikita sharma