Despite director Prakash Jha’s best efforts to keep the plot details of his latest political thriller Satyagraha under wraps, the Bollywood press has been awash with speculation this week in the run up to the film’s release on Friday. Subtitled “The Revolution has Begun!” the film is rumoured to deal in detail with the infamous 2G spectrum scam that came to light in 2010 and is estimated by the Comptroller and Auditor General to have cost the country more than a trillion rupees. Whatever the storyline turns out to be on opening night, the discussion surrounding the film is an apt reminder of how big a shadow the scandal and others like it have cast across India’s corporate and political culture, both domestically and internationally, in recent years: Transparency International’s most recent “Global Corruption Perceptions Index” ranks India 94th internationally, a fall of seven places since 2010.

A year before the 2G scam made headlines, the Indian corporate sector had front row seats to its own corruption drama. In January 2009, the chairman of software and outsourcing giant Satyam Ramalinga Raju confessed to overstating company assets by more than $1 billion despite regular company audits, leading the Economist to dub the scandal “India’s Enron”. Framed partly in response to the Satyam incident, India’s Companies Bill 2012 received approval from the Rajya Sabha (the upper house of parliament) on 8 August, having been passed by the lower house (Lok Sabha) in December 2012. The Bill, a sweeping and long-awaited reform of the 1956 Companies Act, now requires the assent of President Mukherjee before it becomes law, but is already being hailed by Minister of Corporate Affairs Shri Sachin Pilot as “historic”, ushering in a “new era” of corporate governance.

Root and branch reform, what the government terms “business friendly corporate regulation” characterised by “pro-business initiatives”, to encourage cross-border investment and improve the perception of the marketplace around the world appears to be a salient feature of the Bill. Such developments are similarly encouraging to domestic businesses eager to adopt regulatory measures that are more consistent with global norms as well as eliminating some of the uncertainties in the 1956 act.

“The Bill is a ‘makeover’ of the present Companies Act, not just an amendment,” says J Sagar’s Sandeep Mehta.

Less attractive to sceptics are the numerous new committees posited by the Bill, as well as the implementation of various new rules that have not yet been drafted. Mehta also points out that “In view of the general elections due in India in the new financial year beginning 1 April 2014, the effective date of various sections after the enactment of the Bill may be delayed.” While the market waits for the full extent of the Bill and the timeframe for its implementation to become clear, Indian Lawyer reached out to various leading corporate lawyers in the country to find out what they consider to be its key measures.

Corporate Governance

The Bill has made several provisions for the improvement of corporate governance among Indian businesses. The legislation requires all companies to have a board of directors, made up of at least three individuals in the case of a public company, two in the case of a private company, and one in the case of a newly-allowed one person company, and permits a maximum of fifteen directors. The appointment of at least one female director may be prescribed, and the appointment of at least one director who is resident in India will become mandatory. The Bill also introduces the concept of an independent director, and requires that at least one third of a public company’s directors should be independent. Companies will also be obliged to appoint and individual or firm as auditor during its first annual general meeting and to replace the auditors after five years.  

“While some of the provisions seem ideal on paper, it will be interesting to see the implementation of a few of these conditions such as the mandatory appointment of independent directors,” notes Amarchand’s Shardul Shroff: “In my experience, the availability of suitable and capable independent directors remains a challenge in India.”

Further to this, the Bill aims to increase regulatory vigilance of companies by imposing a strict code of conduct and expanding the scope of “officer in default” liability to include the CEO, CFO and every company director with an awareness of contraventions of the Bill. Independent directors will also be liable in respect of “omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently.” Auditors too are open to class action suits and their potential liability has been increased.

“These obligations are likely to cause anxiety in the minds of independent directors, and therefor may result in augmenting the current dearth of capable talent” says Shroff.

That public companies’ listing agreements already contain provisions relating to the appointment of independent directors also creates potential problems.

“There are provisions in the Bill which are at variance with existing provisions in the Listing Agreement. It remains to be seen whether such conflict will be resolved by prescription of rules, which will be framed by the Central Government” according to Haigreve Khaitan of Khaitan & Co.

Mehta argues that the introduction of the concept of a one person company, which may require only one member and one director for registration, is a positive step, offering a “much more flexible option for smaller businesses.” 

Corporate Social Responsibility

Under the Bill, companies are required to spend a minimum of 2 per cent of their average net profit of the past three years on corporate social responsibility (CSR) initiatives if they have a net worth of 5 billion rupees or more; a turnover of 10 billion rupees or more; or a net profit of 50 billion rupees or more. Companies will be required to establish a CSR committee consisting of three or more directors, one of whom must be an independent director, which must frame and publish a CSR policy, and explain any failure to satisfy the minimum spend.

This measure was perhaps the most divisive among the lawyers we consulted.

“It is no surprise that the imposition of such obligations has no been received well by a large section of the corporates,” says Amarchand’s Inder Mohan Singh: “most companies fear the obligation will eventually snowball into becoming a mandatory provision.”

In its current form, the Bill allows some leeway to companies that can prove themselves to unable to make such a contribution, and no penalty has been prescribed in cases of default. However, as Nilanjana Singh of AZB Partners notes: “This is one of the significant measures under the Bill largely because the world over, by their very nature, CSR activities are largely seen as voluntary and not legislated for.”

Other lawyers argue in favour of regulation that channels money from big business into social causes. Khaitan says: “Although this move may be termed as over-regulation by some, it is in line with the growing expectation that corporations contribute to society.” 

New Judicial Mechanism

Whereas company disputes were traditionally heard by the relevant High Courts or the Company Law Board (CLB), the Bill proposes to remove the jurisdiction of the High Courts in such matters and do away with the CLB altogether in favour of the creation of a single forum known as the National Company Law Tribunal, with subsequent appeals being heard by the National Company Law Appellate Tribunal. “While the aim behind this appears to be to provide for more efficient and speedy relief in corporate cases, the actual working will depend on the number and experience of the members and the backlog of cases,” says Singh. Several lawyers pointed out that both tribunals are entirely new and that it is difficult to predict how long it will take before they become fully functional; the legislature can stagger its enactment of the Bill’s provisions and many expect the tribunals to be brought in only in the long term.    

M&A

As Aseem Chawla wrote in an article for Indian Lawyer 250 earlier this month,  the Bill states that an Indian business can function either as a transferee or a transferor company, thus allowing global integration and cross-border mergers on the part of Indian companies, whereas the Act only allowed foreign companies to enter India. The foreign company with which the merger is proposed must be incorporated in a jurisdiction that is approved by the central government in consultation with the Reserve Bank of India (RBI). The Bill also proposes a fast track procedure for M&A involving certain classes of companies, such as between a holding company and its wholly owned subsidiary, for which court approval will no longer be required, thereby reducing the compliance requirements for certain deals. Exits will also become easier, as the Bill allows the merger considerations to be settled in the form of cash or depository receipts.

“In relation to M&A and PE transactions, the new Bill offers a mixed bag of opportunities and restrictions,” says Mehta. Lawyers welcomed the promotion of cross-border investments and the freeing up of Indian companies to integrate themselves globally. Some noted that the code of conduct and prior approval agreed by the government and RBI will help to enhance the transparency of such deals, while others felt that such centralised control was still too prescriptive and had the potential to delay deals due to political point-scoring on the part of the authorities. The abovementioned mandate that at least one of a listed company’s directors should be a full-time resident in India was also viewed by some as over-regulation and a disincentive for certain international companies to enter the market.

“One of the concerns under PE and M&A deals is whether or not restrictions on transfer of securities of public companies are enforceable; we have seen a series of litigations in the past on this issue” adds Mehta.

And the new Bill attempts to put and end to such disputes by stating that any contract or arrangement in respect of transfer of securities of a public company shall be enforceable among the shareholders.

A long wait till opening night?

Despite misgivings, our respondents and their clients seem optimistic about the impact of the Bill.

“Largely, clients are happy with the Bill and are looking forward to its effective implementation,” according to one Rajiv Luthra of Luthra & Luthra.

For the most part, lawyers agreed that the Bill succeeded in its stated aims of providing for growth and greater transparency in the market, simplifying various regulatory approvals and compliance processes, and clearing up several of the uncertainties in the current Companies Act. Others were critical of certain more stringent measures, such as the requirements for CSR contributions and the rotation of directors, “which may result in making the day to day functioning of companies more cumbersome rather than less so,” according to Singh.

One consensus among the lawyers we spoke to however was just how long it will take for the Bill to really begin shaking up the market after its enactment.

“The new rules and regulations which are the backbone of the Bill are yet to be framed,” notes Luthra: “And there is very little clarity on how the entire transition process will pan out for corporate India.”

The Bill has already been redrafted and discussed for several years, throughout which it has undergone repeated changes in emphasis, as Singh notes: “While the Bill started off trying to make the law simpler and more innovative, in the backdrop of corporate frauds such as Satyam, the focus slowly shifted more towards better governance and transparency.”

The approval of both houses would seem to have locked down the majority of the measures in the Bill, but its various unframed provisions and requirements are still to be decided by the central government, and with the general election looming, making predictions about the directions these policies will take is far from an exact science.

For now, legal analysis, like the Bollywood fan pages, must content itself with discussion and speculation. As with the plot of Satyagraha, audiences will only be able to make a thorough evaluation of the Bill when the lights go down, the curtain rises, and the results are projected on the big screen.