A Step Forward | Value Research Notwithstanding the CSR provision, the new companies bill is a step forward to empowering shareholders and increasing transparency...
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A Step Forward

Notwithstanding the CSR provision, the new companies bill is a step forward to empowering shareholders and increasing transparency...

The Companies Bill has been a decade in coming but that's not much of an eyebrow raiser nowadays. The Direct Taxes Code, the Real Estate Regulation Bill or the GST amendment could easily break this record of delays. However, now that the bill is law--or will be as soon as the President signs it--it's time to look ahead to the impact it will have. The Companies Bill is a large and complex document that will affect practically every aspect of how businesses are organised and operated. Many effects and side-effects of the new laws will become evident only slowly as businesses (and their lawyers and accountants) deal with the countless edge cases that will turn up. No doubt there will also be a great deal of activity of finding workarounds for the more onerous measures that are now incorporated in the law.

There's also some puzzling disconnects between what is being said about the bill and what is actually there. Take the much discussed Corporate Social Responsibility provision. Everyone says that the CSR spend section of the bill is voluntary. However, the language of the law lays down no choice. It clearly says that if a company has more than a certain net profit or revenue or net worth, it 'shall constitute a Corporate Social Responsibility Committee of the Board'. And then it goes on to say that the board 'shall ensure that the company spends, in every financial year, at least two per cent of the average net profits' etc. It says 'shall ensure', not something like 'shall endeavour to'. Anyhow, no one seems to be losing much sleep over the 2 per cent CSR. Basically, it's a license for management to take out 2 per cent of the profits that belong to shareholders and give it away to someone for something. Depending on the management, this could be something useful, or merely something convenient.

On balance, compared to the earlier law the new one is a positive step forward. While much will depend on the actual working rules that are formulated under the act, the general thrust is on more transparency and better information flow. This is bound to be beneficial for shareholders while not causing too much trouble for companies that are not actively trying to hide something from shareholders. Of special interest is the provision for class action suites. There are plenty of promoters whose actions harm shareholders. Up till now, each of these shareholders had to fight a legal battle individually. The most high-profile example of this unfairness was the Satyam scandal. If there ever was a case where shareholders were defrauded by the actions of promoters, executives and auditors, then it was Satyam. While US shareholders were able to get a class action settlement from Satyam, Indian shareholders couldn't. The new law allows for class action suits and yet keeps things balanced by requiring a minimum of a hundred shareholders to participate. More than actual cases, one would expect the mere existence of this provision to provide a check on egregious behaviour.

There are a number of such changes in the bill which may not have a huge impact individually, but in concert should make it that much more difficult to intentionally circumvent good corporate governance. The limitation on terms of auditors and independent directors, the new norms for independent directors as well as the heightened liability of independent directors will all increase the friction for straying from the straight and narrow. It's not the kind of thing that would have stopped a Raju but would curtail casual violations. Of course, finally it's the implementation and the enforcement that matters. Even in Satyam--the worst of scandals--B. Ramalinga Raju is out on bail because the CBI failed to file a chargesheet in time. Not just that, he has recently been observed moving around in powerful political circles!

An important part of the act is the beginning of the overhaul of accounting in the country. The creation of the National Financial Reporting Authority means the beginning of the end of the self-regulatory nature of the accounting profession in India. Hopefully, this will eventually mean that Indian investors will be able to trust annual reports a lot more than they do now.

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