Companies Bill 2011, towards a higher level of transparency & accountability

Vishal Saraogi

Introduction:

Companies Bill 2011, if passed, will take the place of nearly 55 years old yet significant law Companies Act 1956. This act came into force when our fore fathers use to do the business but the things have changed now the number of companies in India in 1956 was 30,000 which is more than 7laks now. Although the companies act has gone nearly 24 amendments since its enactment, in order to adapt itself with the changing requirement it has not been able to been able to satisfy India Inc. It may be said that though there are many accolades but there are some brickbats too.

The most significant amendment of 2002 in the companies act is still waiting to get itself notified. The idea about the New Companies bill emerged in 2004 however since then it has gone through several changes finally the bill has been presented in the parliament as Companies Bill 2011. The new law was considered inevitable especially after the Satyam scam where the transparency and accountability of the management and auditor was greatly questioned. This law promises to bring more transparency and accountability.

Step towards transparency and accountability:

Companies Bill 2011 is designed on the principles of accountability and transparency. Thus almost all the provision aims towards achieving higher level of transparency and accountability. But the bigger question is how far these provisions can be practically implemented. Some of the major provisions of new bill which brings about more transparency and accountability are –

Independent Director

The new bill broadens the roles and responsibility of independent directors. The responsibility of independent director has been significantly increased. The appointment of an independent director should be through a transparent process under the guidance of the remuneration and nomination committee of the BOD of the company. Schedule IV of the Bill contains a code that sets out the role, functions and duties of IDs and incidental provisions relating to their appointment, resignation and evaluation. It seems that they want independent director to be a magician the roles and responsibility that they have chalked out is supposed to be umpire, mediator, The independent directors shall be appointed for a period of 5 years and can be reappointed for another 5 years only after a cooling period of 3 years.

Role of NFRA

The bill provides for the reconstitution of National Advisory Committee on Accounting and Auditing Standards (NACAAS) as National Financial Reporting Authority (NFRA). ICAI wings seem to be clipped with the constitution of NFRA and it will act as a big daddy of ICAI. Till date ICAI was the sole authority to regulate auditing matters from the past 60 years and NACAAS was responsible to recommend accounting and auditing standards but now the things would reverse.  NFRA will be a 15 members committee to be formed by the central government.

Scope of officer in default

The scope of “officer who is in default” has been broadened. The share transfer agents, registrars and merchant bankers to the issue or transfer related to issue of shares & Chief Financial Officer are also brought under its ambit. Directors who are aware of the default by way of participation in board meeting or receiving the minutes without objecting to the same will also be included in this category even if company has Managing Director /Whole Time Director / other Key Managerial Personnel’s.

Role of Auditors and Audit firms

One of the vested interest group who will not be happy with the new companies bill are the auditors, the primary reason being that the responsibility and accountability of the auditors has been extended to a great extent. Audit firms are to be appointed for a period of a term of 5 years and can be reappointed for a further period of 5 years. In case of individuals being the auditor it can be appointed for a term of 5 years. The major drawback of this is that it is difficult to maintain the audit panel. Provisions relating to prohibiting auditor from performing non-audit services revised to ensure independence and accountability of auditor. Thus only those services are to be performed which are approved by the board except the 8 services specifically provided

The new company’s bill provides a strict penalty for the default of the auditor. It provides for 3 times the amount of fraud and up to 10 years of imprisonment. This will act as a big hammer on the audit profession as the risk involved will increase to a large extent. Moreover the bill does not differentiate between the auditor and the firm thus the other partners of the firm will be equally liable for the default of the other partner. Another important aspect is that now the multinational audit firms can audit under its own brand name.

Apart from increasing the transparency and accountability on the part of auditors, directors, management there are various other provision that brings about more accountability on the management like –

• There can be a maximum of two layers of subsidiary, these has been widely criticized by the India Inc as the layers of subsidiary should depend upon the nature of business
• Accounts of foreign subsidiary should also be attached with the annual accounts of the company
• There should be at least one independent director on board.
• The judicial function of company law which is handed by High court will be transferred to a new body known as NCLT and NCALT. This will help to judge the matters relating to company law by a more specialized body
• Every third party communication should contain the companies registration number
• The bill also provides for Whistle Blower Policy

Conclusion:

Thus new companies bill 2011 indeed is a step towards a higher level of transparency and accountability however the biggest drawback of this bill is that a major portion of the law is yet to be covered by the rules thus until the rules comes into picture the entire law cannot be critically interpreted. Another hurdle for the new bill is that with DTC, GST, IFRS, etc already in the pipeline without knowing the length of the pipeline the position of this bill is uncertain. As per the statement by the govt this bill will be presented in winter session but even if everything goes well with the presidential election the UPA 2 has another big hurdle waiting in winter session relating to constitutional amendment bill in relation to Indo Bangladesh Agreement.