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New companies law is welcome but incomplete

August 12, 2013 12:24 IST

CalculationsIn an act years -- perhaps decades -- overdue, Parliament has finally given its assent to a new companies law.

On Thursday, the Bill was approved by the Rajya Sabha; once it receives the president’s assent and is notified, it will replace the legislation in force currently, which dates from 1956.

That law had been amended dozens of times -- 25, to be precise -- but still had a hard time keeping up with a post-liberalisation economy.

Various other drafts of a replacement legislation have been introduced over the past years, but have been held up and then expired with the term of their respective Lok Sabhas.

This one, too, took four years to pass, and it is to the government’s credit that it persevered.

The basic changes that the new law will bring into force are long overdue.

They include higher disclosure norms, including for directors and in financial statements; updated insider trading controls; and allowing for electronic participation in corporate governance.

There are also a host of new and necessary definitions.

However, alongside these workmanlike and essential changes to the law, there are other questionable aspects to it as well.

One major problem continues to be its insistence that companies worth more than Rs 500 crore (Rs 5 billion) spend two per cent of their net profit on corporate social responsibility activity.

True, this has been watered down from an original draft -- which made it compulsory -- to now requiring that all companies flouting this provision should provide a satisfactory explanation in their annual accounts as to why they have not, failing which penalties might apply.

However, this continues to be a wrong-headed requirement.

In the first place, the primary competence of companies is not in the areas of CSR, and the law should not pretend it is. In the second place, it will obviously lead to rampant redefinition of existent spending as CSR, and dilute the very point of CSR in the first place.

There is no reason to suppose, in addition, that promoters will not use CSR provisions to channel money that could be disbursed to minority shareholders to promoter-controlled ‘charities’ instead.

In addition, the new law has introduced various checks on the development of a nexus between a company and its auditors.

It limits the number of companies an auditor can serve to 20, and induces the change of auditors after five years.

The intent behind this provision is laudable. But it is far from clear whether India possesses the depth in the auditing profession required to make it a reality.

The fear is that it could lead to less competent auditing on average, not more.

Even the non-controversial and worthy provisions, such as the new disclosure norms for directors, the merger and acquisition guidelines, and making the closure of companies easier – not to mention the definition and redefinition of essential terms -- are not quite as straightforward as they could be.

In many cases, too much has been left to the yet-to-be-framed Rules.

The corporate affairs ministry is yet to frame relevant draft Rules.

It is to be hoped that when they do so, the Rules take forward the modernising spirit of the new companies law, and do not -- as some other such Rules-framing exercises have done in the past -- dilute its essential reforms.

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