The Companies (Amendment) Bill 2003, introduced in the Rajya Sabha on Wednesday, seeks to curtail the powers of a company's board on crucial issues like sale or disposal of its subsidiaries' assets and delegation of powers to make investments.

The Bill, which was introduced in Parliament on Wednesday, proposes to amend Section 293 of the Companies Act, 1956, which at present empowers the board to sell, lease or dispose of a subsidiary with the consent of the shareholders in a general meeting.

The amendment, once enacted, will restrict the board from selling, leasing or disposing more than 20 per cent of the subsidiary's total assets or 10 per cent of the company's total assets in a given financial year.

"It curtails the powers of the board and is a retrograde step," says Mukesh Butani, Partner, Ernst&Young. A company's investments in a subsidiary should be over 5 per cent of its net worth.

The amendment, however, allows the company to create a charge or mortgage of the entire subsidiary in favour of a financial institution or a scheduled bank for raising funds.

In another similar measure, the Companies Bill has sought to curb the delegation powers of the board of directors. Section 292 of the Act allows the board to delegate powers for taking funding decisions on its behalf without any limits.

The proposed amendment caps the power to invest at 20 per cent of the paid-up capital and free reserves of the company in a financial year.

The Bill has also proposed that a company wishing to declare dividends by dipping into their reserves have to necessarily get a go-ahead from financial institutions that have extended term loans to it.

Besides, all the directors have to consent to the proposal which has to be endorsed by the shareholders at the annual general meeting.

"This will be a check on companies, particularly those who default on their loan repayments citing losses," said VP Singh, chairman and managing director, IFCI Ltd.

Though a clause is inserted in some loan documents stipulating prior approval from lenders for declaring dividends beyond a certain limit, the provision will ensure that companies do not disburse cash without fulfilling their obligations to lenders, an IDBI executive added.