THE COMPANIES BILL, 2012

ENHANCING CORPORATE GOVERNANCE STANDARDS

Presented ByVinay Singhania

CONTENTS

Introduction and Background Objectives of the Study Enhancement of Corporate Governance Changes in Provisions affecting Auditors New Concepts in Companies Bill, 2012 Findings and Conclusion

INTRODUCTION The Bill is divided into 29 chapters, 470 clauses and 7 schedules.

It was passed in Lok Sabha on 18th December, 2012.

It has moved towards modernization and compactness by: Deleting redundant provisions, Regrouping related provisions and, Modifying various provisions of the Companies Act,

1956.

The Companies Bill, 2012 marks the dawn of new era i.e. an era of progressive thinking, greater investor democracy and higher corporate growth with higher responsibility.

2008

•Companies Bill, 2008 was introduced on 23rd Oct, 2008 in Lok Sabha to replace existing Companies Act, 1956. Due to dissolution of the 14th Lok Sabha, the Companies Bill, 2008 had lapsed.

2009

•Companies Bill, 2009 was reintroduced on 3rd Aug, 2009 in Lok Sabha to replace existing Companies Act, 1956 and referred to the Standing Committee on Finance(SCF) for examination

2010

•Report of the SCF on Companies Bill, 2009 was introduced in the Lok Sabha on 31st Aug, 2010

2011

•Companies Bill, 2011 finally introduced in Lok Sabha on 14th December, 2011.

2012

•Companies Bill 2012 passed in Lok Sabha on 18th December, 2012 at 10:46 pm.

BACKGROUND

OBJECTIVES OF STUDY

The Objectives of carrying out this study are mentioned below:-

To understand the improvement in Corporate Governance Standards by looking into various aspects like Mandatory CSR clause, independent directors, Board Reporting, etc

To analyze the changes in role of company auditors and their increased liability under the modern company law.

To identify and highlight the new concepts introduced like National Financial Reporting Authority, Registered Valuer, Class action suits, etc

CHAPTER 1

ENHANCEMENT OF CORPORATE GOVERNANCE

CORPORATE SOCIAL RESPONSIBILITY

Mandatory spending of 2% of average net profit of last three years for companies fulfilling any of the one conditions:-1. Net worth of Rs. 500 crores or more, or2. Turnover of Rs. 1000 crores or more, or3. Net Profit of Rs. 5 crores or more.Certain suggested activities mentioned in Schedule VII.Corporate Social Responsibility Committee to be constituted.

Due to increased investor perceptiveness to BP’s Oil spill in 2010, stock prices fell down from $59.5 to $28.9. It proves that a company’s environmental footprint can affect stock prices.

More socially responsible a company becomes, more goodwill it earns, making it an obvious ethical choice for investors.

INDEPENDENT DIRECTORS

• Definition of Independent directors provided.• Code of Independent Directors given in Schedule IV.• Term of office: Maximum two consecutive terms.• A data bank of Independent directors to be maintained by Central Government.•Every Public listed company must have at least one-third of total number as independent directors,

Definition in Companies Bill, 2012 is more stringent than the listing agreement of stock exchanges.The term already served is not considered. Thus, this will allow to serve 10 more years to independent directors who have already served for long tenures.32 out of 50 companies (i.e. 64%) on CNX Nifty would be non-compliant if new regulations come into force.

BOARD AND GOVERNANCE• Number of Maximum directors raised from 12 to 15.• At least one woman director shall be on the Board for prescribed companies.• Every company shall have at least one resident director.• Maximum no. of directorship raised from 15 to 20.• Mandatory appointment of Key Managerial Personnel like MD, CEO, CS for prescribed companies. Penalty on non-appointment.• Disqualification u/s 274(1)(g) now applicable to all companies.• First Board meeting to be held within 30 days of incorporation.• Video Conferencing mode of participation allowed in BM.• In case of meeting at shorter notice, at least one independent director shall be present at such meeting.•Rs. 1 lakhs to be deposited when proposed to be a director.• New section inserted for ‘Duties of Directors’.• Non-holding of qualification shares, non-attendance in 3 consecutive meetings no longer results in vacation of office.

BOARD COMMITTEES

• Every listed company and prescribed companies shall have an audit committee comprising of minimum three directors.• Every company with more than 1,000 shareholders and other security holders shall constitute a Stakeholders Relationship Committee with chairperson as non-executive director• Every listed company and prescribed companies shall constitute a nomination and remuneration committee.

By mandating that the Remuneration & Nomination Committee must comprise of non-executive directors only, the Companies Bill has sought to reduce the influence of executive directors and management over Board remuneration and Board nomination.

Since executive directors will not be on the Committee, they will not decide the remuneration payable to executives of the company thereby removing any conflict of interest that may have risen.

DIRECTOR’S RESPONSIBILITY STATEMENT

• The requirement relating to laying down internal controls and their adequacy and effectiveness would be applicable to the listed companies only.

This clause indicates that directors will be responsible for everything under the sun as far the company‘s operations, finance, compliance reporting is concerned. This would be the challenge for the companies and directors as the controls to prevent and detect fraud and errors include much more than the transaction level controls. It will include a mechanism to identify the fraud, carry out the investigations and a revisit to preventive controls – system and manual both.

DIRECTOR’S RESPONSIBILITY STATEMENT

To take care of the additional responsibilities, the directors will have to increase their involvement in the entire governance process of the companies. Since these requirements are going beyond financial reporting, it appears that the companies would have to identify and evaluate areas involving non-financial areas also such as human resource, propriety of significant purchases.

•It is also required that directors device proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively.

BOARD REPORT

Board Report has been made more informative and includes extensive disclosures like:-•Details about policy developed and implemented regarding CSR.• Statement regarding development and implementation of risk management policy for the company.• The Conservation of energy, technology absorption, foreign exchange earnings and outgo.• Explanation or comments by Board on every qualification, reservation or adverse remark or disclaimer made in statutory audit/secretarial audit report.

RELATED PARTY TRANSACTIONS

• Definition and Scope of Related party transactions widened with introduction of The Companies Bill, 2012.• Approval of shareholders required instead of Regional Director.

CHAPTER 2

CHANGES IN PROVISIONS AFFECTING AUDITORS

APPOINTMENT OF AUDITORS

• Every company shall appoint an individual or a firm as an auditor at the first annual general meeting of the company.

•Such person or firm shall hold office from the conclusion of that meeting in which he is appointed till the conclusion of its sixth annual general meeting.

The Bill provides for every listed company and prescribed companies, rotation of individual auditors ( not more than one term of five consecutive years) and of audit firm (not more than two terms of five consecutive years) shall be compulsory.

This step of increasing the tenure of auditors to five years and rotation of auditors have been welcomed by all professionals and experts. With the view to reduce dependency on the company, such tenure will help auditors give a fair and unbiased opinion about the affairs of the company.

DISQUALIFICATION AS AN AUDITORFollowing additional criteria for persons not eligible for appointment as an auditor is inserted:- • A person or a firm who, whether directly or indirectly, has business relationship with the company or its subsidiary, or its holding or associate company or subsidiary of such holding company or associate company of such nature as may be prescribed. • A person who has been convicted by a court of an offence involving fraud and a period of 10 years has not elapsed from the date of such conviction. • Any person whose subsidiary or associate company or any other form of entity, is engaged as on the date of appointment in consulting and specialized services.

• A person who is in full time employment elsewhere or a person or a partner of a firm holding appointment as its auditor, if such persons or partner is at the date of such appointment or reappointment holding appointment as auditor of more than twenty companies.

REMOVAL AND RESIGNATION

• Additional requirement of a special resolution for removal of auditor from his office before the expiry of his term has been introduced.• In case of resignation, the auditor must file a statement within 30 days to registrar and in case of Government company, to C&AG.

REMUNERATION

• Exclusions and inclusions for audit remuneration defined in comparison with the earlier Act. Remuneration shall not include any amount paid for any other service rendered by him at request of the company.

SERVICES CANNOT BE RENDERED

Auditor shall not provide the following services indirectly or directly to holding, subsidiary or associate company:- •Accounting and book keeping services •Internal audit; •Design and implementation of any financial information system; •Actuarial services; •Investment advisory services; •Investment banking services; •Rendering of outsourced financial services; •Management services; and •Any other kind of services as may be prescribed.

Earlier, companies with fewer transactions used to appoint such auditors who used to maintain their books of accounts, prepare their financial statements and ultimately frame a true and fair opinion on such financial statements. By this step, level of independence of auditors has been increased tremendously.

POWERS AND DUTIES OF DIRECTORS

• Right to access books of accounts.• Duty to make report to the members of the company regarding accounts examined.• Duty to comply with auditing standards.• In case of fraud, auditor has the duty to report the matter to Central Government.• Right to receive notices and other communications issued by the company,

Auditor’s report shall state:-• Whether, in his opinion, the financial statements comply with the accounting standards.• Whether the company has adequate internal financial controls system in place and the operating effectiveness of such controls.• such other matters as may be prescribed .

INCREASED ACCOUNTABILITY

• Contravention of Clause 143 to 145 of the bill, fine not less than Rs. 25,000 which may extend to Rs. 5,00,000.

• Intention to deceive company or shareholders, fine not less than Rs 1 lakhs which may extend to Rs 25 lakhs and one year imprisonment.

• In case partner/partners of the audit firm is found to acted in fraudulent manner, then under Clause 447, he shall be sent for imprisonment for not less than 6 months which may extend to 10 years. Also, he shall be liable to fine of amount equal to fraud which may extend to three times the amount of fraud.

COST AUDIT

• Cost Auditing standards have been mandated.• Cost audit to be done for those class of companies if it is in the opinion of the Central Government that these companies need to include particulars relating to utilisation of material or labour or such other items of cost.

INTERNAL AUDIT

• Such class or class of companies as may be prescribed shall be required to appoint an internal auditor to conduct internal audit of the functions and activities of the company.• Central Government may, by rules, prescribe the manner and the intervals in which the internal audit shall be conducted and reported to the Board.

CHAPTER 3

NEW CONCEPTS IN COMPANIES BILL, 2012

National F

inancial

Reporting A

uthorit

y

One person

Company

Registered Valuers

Secretarial

audit

Secre

taria

l

standard

s

Class actions

suits

Serio

us Fra

ud

Inve

stig

atio

n

Office

NATIONAL FINANCIAL REPORTING AUTHORITY

Clause 132 contains provisions with respect to constitution of NFRA.

• It shall make recommendations to the Central Government on the formulation and laying down of accounting and auditing policies and standards for adoption by companies or class of companies or their auditors.

• It shall also monitor and enforce the compliance with accounting and auditing standards as well as oversee the quality of service of the professions associated with ensuring compliance with such standards .

The reading of the Accounting Professionals is that the NFRA will supersede ICAI and ICAI is surely not happy with about the government encroaching on its territory. The most famous multimillion accounting fraud of Satyam Computer highlighted that the power of ICAI to take a disciplinary action is limited just to individual auditors and doesn‘t extended to audit firms. NFRA if comes into force, will have the power to act against audit firms is well.

ONE PERSON COMPANY

• It shall be a private company with one member and shall have a minimum of 1 director. • The words ‘One Person Company’ shall be mentioned in brackets below the name of such company, wherever its name is printed or affixed.•The memorandum of a One Person Company has to prescribe the name of the person who in the event of death of the subscriber shall become the member of the company •Annual return of a One Person Company should be signed by the Company Secretary, or where there is no Company Secretary, by one director of the company.

One Person Companies are imperative because they would give entrepreneurial capabilities of people an outlet for participation in economic activity and such economic activity may take place through the creation of an economic person in the form of a company. It involves very little paper work, no quorum requirements, proxies, maintaining various registers, etc

REGISTERED VALUERS

• Valuation is required to be made in respect of any property, stocks, shares, debentures, etc by a person registered as a valuer.

• The valuer should have requisite qualifications and experience.

• He shall make impartial, true and fair valuation by exercising due diligence.

Mergers and acquisitions deals involves valuation which is an element of subjectivity that often gets challenged. The current step could set the Indian Valuation standards leading to transparency and better governance.

Professional opportunities shall emerge. In case of creation of personal liability on the Valuer, Valuation reports shall disclose a true, fair and complete view.

Shareholders’ confidence would largely get boosted with the transparency and fairness of the system.

Drain of Government revenue due to loopholes in valuations is likely to be regulated.

SECRETARIAL AUDIT AND SECRETARIAL STANDARDS

• Every listed company and prescribed companies shall annex with its Board Report a Secretarial Audit Report given by Company Secretary in Practice.

• Every Company shall observe Secretarial Standards with respect to General and Board Meetings specified by the Institute of Company Secretaries of India.

It is the beginning of a new era where non financial standards have been given importance and statutory recognition besides Financial Standards. This is a step towards better corporate governance as CS will be involved in higher responsibilities in the functioning and review of the company.

Introduction of Secretarial standards will help in comparing the level of secretarial compliance between different corporate houses

CLASS ACTION SUITS

• It is provided that specified number of member(s), depositor(s) or any class of them, may, if they are of the opinion that the management or control of the affairs of the company are being conducted in a manner prejudicial to the interests of the company or its members or depositors, file an application before the Tribunal on behalf of the members or depositors.

The biggest boost for the small investor comes in the form of the provision for class-action lawsuits. Class actions are cost effective and increase judicial efficiency as they unite several plaintiffs‘ under one cause giving it strength. As this strength comes from the sheer numbers they have the power to pull up corporations for poor management, unethical practices, and corporate governance failures. Thus, it is an outstanding legal innovation, class action needs to be fine tuned to suit the requirements of the Indian framework. SEBI needs to take a proactive role not just in funding but encouraging investors to be a part of investor associations. Investors need to develop an equity culture to understand the corporate actions.

SERIOUS FRAUD INVESTIGATION OFFICE

• The Central Government shall, by notification will establish an office to be called the Serious Fraud Investigation Office to investigate frauds relating to a company. • The SFIO is a multi-disciplinary organization under Ministry of Corporate Affairs for detecting and prosecuting or recommending for prosecution white-collar crimes/frauds. • SFIO will have powers to arrest in respect of certain offences in the Bill which attract the punishment for fraud .

As per an article of Hindustan Times- The Serious Fraud Investigation Office (SFIO), under the Corporate Affairs Ministry, is currently probing 34 cases, the government said."Since its inception, SFIO has been entrusted with 133 cases by the Ministry of Corporate Affairs for investigation," Minister of Corporate Affairs Sachin Pilot informed the Lok Sabha in a written reply.

CHAPTER 4

FINDINGS AND CONCLUSION

FINDINGS AND CONCLUSION

Why it’s important: It‘s a comprehensive piece of legislation that seeks to overhaul how corporations‘ function– from how they raise funds, to how they set up subsidiaries, to how they register an enterprise in India. The Bill is an overhaul of an archaic legislation and will make companies an attractive business vehicle while safeguarding investor interests at the same time.

What changes: The biggest difference from the current law is that it would give more power to those responsible for investigating fraud and that it would make corporate social responsibility a legal obligation. It would make it tougher for smaller companies to raise funds by accepting deposits from the public.

Possible results: If implemented, it could boost community development projects across India, such as setting up schools, hospitals or improving drinking water supply to villages. It could also increase investors’ confidence and in turn put more money into the economy.

FINDINGS AND CONCLUSION

Reactions: The bill has elicited criticism from some corporations, tax advisers, lobby groups and management consultants. Many industry leaders have however welcomed aspects of the bill. ‘The new law would strengthen the concept of shareholders democracy and offer protection of the rights of minority stakeholders,’ said Chandrajit Banerjee, the director of the Confederation of Indian Industry, a lobby group. However, he said he was ‘concerned’ about the requirement to set aside 2% of profits for community projects.

Expectation: Hopefully, the President will approve it without any significant changes and the spirit of reform and advancement embodied in the Bill will be carried forward by the government into various regulatory and tax measures that are widely anticipated and more importantly required to give a boost to the Indian economy.

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