| Hony.
Editor |
| Dr.
Bindi Mehta
Professor
& Chairperson (Research & Publications)
Narsee Monjee Institute of Management Studies
(Deemed University) |
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National
Events |
| Promoters
& Non-executive Directors
to be responsible for defaults |
| A
Company Law source has said that a new
clause in the proposed amendments to the
Companies Act will hold promoters and
those in control of a company’s affairs
responsible for corporate defaults and
violations under the Act. The concept
paper on the Proposed new bill also proposes
that specific non-executive directors,
who are suspected and found to be directly
or indirectly involved in default, will
be held responsible for it. Such directors
can’t be booked as officers in default
at present. Also, if liability for an
offence can’t be attached to any other
employee, then the entire board of directors,
including the non-executive members, are
proposed to be held liable. At present,
managing directors, managers, whole-time
directors, company secretaries and persons
under whose instructions corporate boards
function, can be held responsible as officers
in default.
In
some circles, it is felt that non-executive
directors are not responsible for the
day-to-day affairs of a company. They
also do not deal with matters relating
to compliance. Some company law experts,
however, are of the view that the proposal
aims to place greater responsibility with
such directors who will be expected to
play the whistle-blower’s role and alert
regulators and shareholders about doubtful
corporate decisions. Those opposing the
proposal however, cite the Naresh Chandra
Committee recommendation on exempting
non-executive and independent directors
from criminal and civil liabilities.
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Proposed
change in Companies act worry corporates |
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Buried in the fine print of the concept paper on the overhaul
of the Companies Act, 1956 is a small sub-section that is being
viewed in corporate circles as a dynamite. The sub-section seeks
to enhance current provisions of the Act to broaden the net in
which company’s top brass can be held responsible for defaults
and violations under the Act. Any employee earning a remuneration
greater than that of the managing director, and simultaneously,
holding jointly with his / her spouse and children more than 2
% stake in it, is proposed to be held responsible for any defaults.
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Companies'
Amendment Bill in Winter Session |
| The
new companies (Amendment) Bill might be introduced in forthcoming
Winter Session of the Parliament. The Department of Company Affairs
(DCA) is still prepared to further bring down the list of Clauses
from 289 as has been incorporated in the existing draft legislation.
Speaking at a national seminar on Company Law organised jointly
by Assocham and Institute of Company Secretaries of India (ICSI),
PC Gupta, Minister for Company Affairs said that consultation
process to incorporate suggestions from industry and trade bodies
has been continuing to arrive at a consensus on the issue. The
revised version will be sent to the Standing Committee of the
Parliament. Subsequently, it will be sent to the ministry of law
and justice for their appraisal.
Speaking
at the Seminar, Mr. Mahesh Athavale, President, ICSI, said that
the draft legislation is concise in its approach and aims to strengthen
the corporate sector interactions with the government to ensure
transparency in corporate documentation. He also suggested that
in the proposed draft legislation, there is still scope for further
flexibility, which should be brought about before the government
finalises the new Company Bill.
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The Institute
of Chartered Accountants of India (ICAI) is having second thoughts
on making rotation of audit firms (auditors) mandatory. The
idea was to usher in greater independence of auditors and boost
corporate governance. But the regulatory sphere today stands
transformed and is more stringent. In this environment, rotation
of audit firms does not make much sense. In fact, the Naresh
Chandra Committee, which heavily emphasized the need for independence
of directors, ruled out the concept of rotation of audit firms.
After examining the experience in several other countries, this
committee concluded that rotation, wherever adopted, had failed
to strengthen the investors’ cause.
There are
several downsides to rotation of audit firms. Primarily, it
undermines the auditors’ ability to develop cumulative knowledge
of a company’s business and the internal checks and balances
in place to mitigate risks. Second, India has only a handful
of large audit firms that have the infrastructure, especially
in terms of human resources, to take up time consuming audit
tasks, especially of large companies and global players. Rotation
of audit firms may not be practical at the ground level.
Audit committees
are no longer passive on lookers. Greater responsibility is
cast on the CEO and CFO, who have to personally certify that
they have verified the financial statements and internal control
systems in the company. With these regulations in place, the
Naresh Chandra committee suggestion makes sense: rotate not
the audit firm, but the audit partner, once in every five years.
This method would bring a fresh external perspective and at
the same time, not suffer from the pitfalls associated with
rotation of audit firms.
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SEBI
Eyes 'Primary Regulator's Role |
The Securities
and Exchange Board of India (SEBI) is keen to don the mantle
of a "primary regulator" of listed companies.
It is of the view that the regulatory overlap on listed companies
can be removed by making it the primary regulator of such companies.
"As a primary regulator, SEBI then would have a direct
jurisdiction to regulate those activities of listed companies
that generally affect shareholders' rights such as financial
reporting, continuous disclosures, corporate governance etc.",
Neelam Bhardwaj, Head, Listing, SEBI, said at a PHDCCI seminar
on `Strategies for effective listing compliance' here on Friday.
The SEBI official held that in such a situation the core company
matters like company formation, external administration, etc.,
would remain with the Ministry of Company Affairs (MCA) - a
view voiced by the Joint Parliamentary Committee (JPC).
Regulators such as the MCA and the Institute of Chartered Accountants
of India (ICAI) have jurisdiction over various facet of the
functioning of a corporate enterprise, including financial reporting,
corporate governance etc.
The norms spelt out by these regulators have sometimes come
in conflict with those prescribed by SEBI, thereby placing the
listed companies in a difficult situation. A case in point is
the accounting treatment and disclosure requirements of employee
stock options (ESOPs).
In her address, Bhardwaj highlighted that SEBI's current lack
of jurisdiction in important areas of listed company regulation
such as financial reporting and corporate governance has been
prompting it to use the listing agreement to impose requirements
that are more stringent than the one provided in the Companies
Act.
"SEBI is of the view that listed companies need to be treated
at a level far above than unlisted companies in view of the
involvement of public interest", the senior SEBI official
said.
She also suggested a more radical approach of combining securities
regulations and company administration in one agency that is
given responsibility and resources to carry out both the functions.
"This will make life simpler for everybody... " she
said.
At the same time, Bhardwaj also held that the SEBI is constantly
endeavouring in consultation with the MCA to harmonise various
provisions, without compromising on the quality of compliance
requirements.
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Concept
paper to provide broad framework for `slim' company law |
The Ministry
of Company Affairs, it appears, is following the footsteps of
regulators. In line with the trend adopted by regulatory bodies,
the Ministry in its concept paper for a new Companies Act is
proposing a slim legislation that would provide only a broad
legal framework, thereby, leaving its implementation through
rules.
The Companies Act, 1956 currently has more than 700 sections
that corporate India has to comply with.
Official sources told Business Line, "Our endeavour would
be to make the Companies Act a slim legislation. The larger
action could be done through the rules that are framed for the
Act."
In fact, the current trend among the regulators, especially
those in the financial sector, is to mould the legislations
in such a manner that most of the intended provisions are implemented
through rules. The main advantage of such a route is that the
regulatory response in certain instances need not wait for the
legislation to be amended through Parliament.
The concept paper is likely to incorporate the essential features
of the existing Companies Act, 1956, the salient features of
the controversial Companies (Amendment) Bill, 2003 (which was
withdrawn from Rajya Sabha) and the recommendations of the second
report of the Naresh Chandra Committee.
Though the concept of slim and trim company law finds favour
with India Inc, the Federation of Indian Chambers of Commerce
and Industry (FICCI) had taken a position that the law should
only provide broad framework and the details should be left
to the corporates themselves with the consent of shareholders.
"The concept paper would suggest a corporate-friendly and
practical company law. It would also try to plug the loopholes
for any manipulations or corporate frauds," Mr Prem Chand
Gupta, Minister for Company Affairs, told Business Line.
In fact, industry associations have concurred with the view
of the Government that the company law must provide adequate
protection to investors, shareholders, creditors, employees
and other persons concerned to ensure that corporate wrongs
are quickly and effectively addressed and those responsible
are punished.
On whether the small and medium companies would have separate
dispensation under the proposed law, sources hinted that the
concept paper would address this issue.
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© 2001 Academy of Corporate Governance |
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