Tuesday, October 7, 2014

Survival of the Fittest: The Redesigning of the Indian Corporate Arena.

“It is not the strongest species that survive, nor the most intelligent, but the one which is most responsive to change.” - Charles Darwin.

There have been tremendous changes in the Indian corporate arena in the past few months since the passing of the New Companies Act, 2013 on 9th August, 2013 ("New Act)". 

The New Act focuses a lot on the lines of socio economic goals of our country and it is sure to bring about a positive result towards development of Indian Companies as time passes. The new act is intended to improve corporate governance, fight fraud, increase investor protection and simplify the process of creating and closing a business. Corporate lawyers said the new legislation recognizes the increased sophistication of business dealings and more clearly defines many aspects of corporate governance.

The New Act is even shorter than the Companies Act, 1956. It has 470 Sections separated in 29 Chapters and 7 Schedules compared to old Act which had 658 Sections divided in 13 Parts and 15 Schedules. Several new topics have been included by the New Act some of which are:
Small company
Associate Company
Auditing Standards
Global Depository Receipt
Independent Director
Key Managerial

Some key changes that will help strengthen our economy and reduce the problems faced by our corporate world on which the old 1956 Act proved to be ineffective are as follows:

1. Incorporation of a Company

The laws regarding incorporation have been made more stringent and for good reason. Section 447 of the New Act prosecutes any person who is responsible for furnishing false or incorrect information about the company either to the ROC during incorporation or in the prospectus in order to induce people to invest money in the company for fraud. It is a non-compoundable offence which can have either a civil or a criminal liability.

2. Democracy of Shareholders

The New Act has introduced a new concept of class action suits with a view of making shareholders and other stakeholders, more informed and knowledgeable about their rights

3. Management and meetings

It is a mandatory requirement for a company to appoint a Managing Director/CEO/Manager and in their absence, a Whole Time Director as well as a Company Secretary.
Some of the express duties of the Directors are; to bring accountability in the functioning of the management and finding out any cases of negligence if occurred. As per section 103 of the New Act the quorum required to be present in shareholders meetings has been increased, and hence, so has the level of participation and interaction amongst the shareholders and the Company.

4. Audit and Auditors

Appointment of individual auditors or auditor firms has been restricted to one term of 5 years and two terms of 5 years respectively. A gap of at least 5 years is required to pass before the same auditor can be reappointed by the company. Specific duties and powers of an auditor have been enumerated in section 143 whereas  Section 144 prohibits him from rendering certain services for e.g. accounting and book keeping, internal audit, investment banking services, management services, etc.

5. Fast track merger

The New Act provides a shorter route for merger of two small companies or a holding and its subsidiary company or other classes of companies. If no objections have been made for such schemes by the Official Liquidator or the Registrar, power is given to the Central Government to approve such schemes.
Mergers between Indian companies and foreign companies with prescribed jurisdictions are now allowed with the prior approval of RBI.

6. Sick Company

The designation of being a sick company can be given to any company; hence it is no longer restricted to an Industrial Unit. The only criteria involved is that the company should be unable to pay more than 50% of its debts resulting in application made either by the company itself or the creditors of more than 50% of secured debts, for the company to be declared a Sick Company.

7. One Person Company

The New Act introduces a new type of entity to the existing list i.e. apart from forming a public or a private limited company, the New Act enables the formation of a new entity a ‘one-person company’ (OPC). An OPC means a company with only one person as its member. The Companies Act 1956 requires minimum two shareholders and two directors in case of a private company

8. National Company Law Tribunal

The New Act, introduced National Company Law Tribunal and the National Company Law Appellate Tribunal to replace the Company Law Board and Board for Industrial and Financial Reconstruction. They would relieve the Courts of their burden while simultaneously providing specialized justice.

Many more minor changes have been made by the New Act which contribute to creating a better scenario for the Indian corporate arena. As mentioned by Charles Darwin, a system must be open to change if it needs to survive. Indian socio economic growth does not depend only upon survival, but it depends on thriving by optimizing the circumstances to bring out the best results; and the New Act is a big step towards achieving our goals.

No comments:

Post a Comment