There are inconsistencies and doubtful provisions in Companies Bill.
The Companies Bill, 2011, cleared by the Lok Sabha on Tuesday, has many forward-looking provisions: the option to set up one-person companies, which will help bring the unorganised sector under the corporate umbrella; penalty for auditors found involved in frauds; class action; protection for whistleblowers; easy exit for minority shareholders if the articles of association are changed; and strengthening of the Serious Fraud Investigation Office. But several other provisions are doubtful.
Take, for instance, the requirement that companies with a turnover of Rs 1,000 crore (Rs 10 billion), or a net worth of Rs 500 crore (Rs 5 billion), or net profit of at least Rs 5 crore (Rs 50 million) in the last three years, will have to set aside 2 per cent of net profit for fulfilling corporate social responsibility.
That completely misunderstands what the purpose of companies is. They make money for their shareholders and owners - who can then, and should, spend it on charitable work.
In fact, charitable work done by companies in the West is now looked at with great suspicion: are they doing it to influence public opinion?
Then there is the escape clause. If a company is not able to spend the money, it can offer an explanation and get away with it. This is just the kind of discretionary powers that the government needs to give up if India is to become an easier place to do business.
Once the new norm is notified, the top 2,500 or so companies could end up spending anywhere between Rs 10,000 crore and Rs 15,000 crore (Rs 100 billion and Rs 150 billion) on corporate social responsibility every year. This is not a small amount.
Meanwhile, the Bill allows one person to hold 20 directorships at a time. This could aggravate the problem of absenteeism among board members and harm the cause of corporate governance.
Clause 49 of the listing agreement with the Securities and Exchange Board of India says that a company must hold at least four board meetings in a year; on an average, companies hold up to seven meetings.
If a person is on 20 boards, he may have up to 140 meetings to attend in a year - almost one meeting every third day. How can this person contribute to any meaningful discussion during board meetings?
Last, but not least, is the provision that if a company decides to close down, it will have to pay two years' salary to all employees. The employees will get priority over even the secured lenders.
This has been done to facilitate swift closure of unviable businesses. It will be interesting to see how it works out. Under the rules, a company can retrench employees by paying 15 days' salary for every year in service.
Even if its employees have served a full 20 years, it is cheaper for the company to retrench the people by paying them 300 days' salary and then close down.