Consentia on Multidisciplinary Research

THE COMPANIES ACT, 2013 OF INDIA, A REVOLUTIONARY LEGISLATION OR NOT

Abstract

For almost six decades now, India has been governed by the now obsolete Companies Act of 1956. Despite the repeated amendments over many years since its commencement, many felt a need to comprehensively bring about a new modern act and consolidate India’s Company law, so as to bring it in line with the new ideas, global trends and worldwide company law practice. Hence, the question before us, after the endless debates and passage of the new companies act by the parliament, is whether there has been a change in the way the companies have functioned after the enactment or has the new act, overcomplicated the situation and made it worse than before. Though it is not debated that the promulgation of the new law is a step towards globalization and it is a successful attempt to meet the changing environment, its fallacies are under scrutiny as there have been particular criticism of it, in so far as it creates complexity and confusion instead of simplification of the earlier act. The essay, pertains, in particular, not to the reformation of the law which the act seeks to bring about, rather it at the outset discusses the changes/reformation it brings about and then analyses the criticism it is subject to, as it is implemented and notified gradually.

With the aim of gradually changing the landscape of corporate law in India, the central government enacted the Companies Act 2013 – one of the few pieces of legislation which seeks to replace a former act completely and provide for an opportunity to make corporate regulations more contemporary. The new enactment has intertwined advanced practices, with magnetic characteristics, for example, those on setting up elements, raising capital from open, inviting guidelines, leveraging e-administration activities, and corporate social obligations upon companies. It also accommodates enhanced corporate legislation, upgraded transparency, additionally expanded responsibility of organization administrations and evaluators. In fact, it is intended to adjust the stakeholders’ interests, in relation to promoters, shareholders and the public at large. Interestingly, that there has been an increase in number of Companies from approximately 30,000 in the year 1956 to 11,00,000 in the year 2013. However, what the new act has certainly tried to achieve is the progressions and ideas which might disentangle regulations and bring more amazing clarity and transparency in overseeing organizations. We discuss few concepts of the Companies Act 2013 at present and then move on to the controversy surrounding the act in general before concluding.

Companies Act, 2013 and its departure from the act of 1956: Positives and limitations in the backdrop of theme.

The Companies Act, 2013 is an attempt to replace some of the definitions, provisions and anomalies, present in the Companies Act, 1956 (‘1956 Act’) which were rendered to be ambiguous and unclear. There has been introduction of some novel concepts in the act such as, class action suit: where an individual/ small shareholders are allowed to seek remedy/take collective action against the company by filing an application before the Tribunal on behalf of the members or depositors, if they are of the belief that there is mismanagement of the affairs of the company which is detrimental to the interest of its members or depositors.

It also introduces the concept of One Man Company where one individual can form a company as a member for any lawful purpose. It is a separate legal entity distinct from its promoters and proprietors, where the liability of the shareholders or the directors are limited.[1] This form of company is already hugely popular in some of the developed countries like China, Singapore, United States and many other European countries which unlocks the doors for an entrepreneur who has been looking to set up a company all by himself. Another much talked about feature of the act is the corporate social responsibility policy. [2] The policy necessitates the corporates to spend a prescribed percentage of their revenues on certain specified areas by way of making contribution to sustainable development to improve the livelihood of the employees, their families and the society at large in such a way that it will benefit it in two fold manner i.e., beneficial for the business as well as for their development, thereby discharging their social responsibilities. The new Act provides that all the companies having net worth rupees five hundred crore or more, or turnover of rupees one thousand crore or more during the financial year will have to spend 2% of their average profits in the corporate social responsibility during three preceding years.[3] This amount has to be spent on local areas around the company, particularly where it functions. The activities which will commence will be the activities which are dealt with in the VII schedule of the Companies Act, 2013. It also provides a residuary sub clause which gives authority to the government to expand the list. In case of failure to comply with the CSR norms, an explanation is demanded at the Annual General Meeting from the directors.[4] Because of the newly quasi-mandatory obligation of Corporate Social Responsibility, 1st April[5] would mark a new era in corporate governance in India an approach that is fairly unique in the global context. Further with the urge to overhaul the laws with the changing times, the act also brings a considerable measure of obligation on the directors to act with more intelligence and reasonability.[6] To guarantee, that they demonstrate to the greatest advantage of the organizations than simply being status heads of the company the act instils on the directors greater accountability and liability. For example, independent directors now need to be mindful of the choices taken by the organization in the meetings in which they go to and those which they don’t go to. To ensure compliance, the act has stringent penal provisions which were absent from the previous act. Other features the act introduces, are punishment for falsely inducing a person to enter into any agreement with bank or other fiscal institution, with a view to obtaining credit facilities, which helps in controlling a major source of corporate felony, a surprising regulatory principle by including all companies into the snug regulatory provisions of the law, with the possibility that the government has a power to exempt such companies as it deems fit, and that the government will be willing to exercise such power to exempt as and when the government feels appropriate.

This backdrop to the new act thus leads us to the issue of the errors present in the act and their subsequent ironing out by the legislature through amendments and circulars. Every piece of new legislation being enacted, daws criticisms from, different sections of the public and same can be said to be that with the new companies act. Critics have remarked upon the judgment as being quintessentially the repainted version of the old act. The notable references drawn in this regard are extremely high discretion in the hands of law makers as regards to rule making and  numerous drafting errors which lead us to the conclusion that such an act has not ironed out deficiencies present in the previous act of 1956.[7] One such provision is section 185 of the act which because of the vague and unclear draft language used, forced the MCA to issue a clarification that “harmonious interpretation” of section 372A of the 1956 Act and section 185 of the 2013 Act which defeats in essence the object of what a new act seeks to achieve. What is suggested prima facie in the present discussion is that, hiatuses and lapses in the newly drafted act[8] are usually rectified by rules and clarifications, which are in the domain of executive or other legislative bodies. This we believe creates controversy and further confusion in the operating decisions taken up by the companies. For example, is bond market something that can be left to the preference of the Ministry of Corporate Affairs (MCA), or Ministry of Finance at their own convenience?[9]

The Companies Act, has gone through two rounds of deliberation by Parliamentary committees, besides, being debated and discussed among public and legal luminaries for four years before it was passed. The significant changes in the provisions related to governance, e-management, compliance and enforcement, disclosure norms, auditors and mergers and acquisitions, have led it to be termed as a case of an extremely forward-thinking and a piece of legislation focused on streamlining the issues and challenges in the corporate governance however our opinion says it to be a piece of a haste enactment, which though in reality is not true. Law is not result of fortune that we need to take as given. We provide for ourselves the law. The Indian corporate sector was running fine enough for almost six decades with the 1956 Act. In the event that whatsoever we required another law, we required it for bettering the working of organizations, not battering them with regulations which trade off on fundamental business opportunity and errors in the most basic of draft sections. These anomalies create, in today’s world an environment where land fringes have gotten prohibitive – global moguls might basically quit of entering India, and a few Indian organizations may consider migrating themselves somewhere else. Corporate regulation must be realistic; it can’t serve its own particular need, or the needs of some insecure attitude roused by a “no mistake henceforth” disposition. It is still time to rectify a few issues by rulemaking and some by correcting the law, yet it might be truly an epic oversight assuming that we permit the law and the standards to be actualized the way they at this moment are having replaced the old act or clothing the old act as new. To conclude, it is seen that the companies act, indeed is a seminal piece of legislation is a new beginning for the corporate world, but its impact may be not met with that effect as contemplated by its drafters because of some unfortunate anomalies.

[1]The Companies Act, 2013, section 2(62).

[2]See Ernst and Young, Report on “Companies Act -2013 and its impact in India”, <available at http://www.ey.com/Publication/vwLUAssets/EY-Companies-Act-2013-What-will-be-its-impact-on-fraud-in-India/$FILE/EY-Companies-Act-2013.pdf last accessed on 24-03-2014>

[3]The Companies Act, 2013, section 135.

[4]See generally, The Companies Act, 2013, Board’s Report, section 134.

[5] The C.S.R rules, notified on Feb 27th 2014 would be in effective from 1st April 2014, <available at, http://mca.gov.in/Ministry/pdf/CompaniesActNotification2_2014.pdf last accessed on 24-03-2014>.

[6] Deloitte Report on, “Companies Act, 2013 – Fresh thinking for a new start.” <available at http://www.deloitte.com/assets/DcomIndia/Local%20Assets/Documents/Thoughtware/Tax_thoughtpapers_Dec_19/Deloitte_Companies%20Act,%202013.pdf last accessed on 25-03-2014>.

[7]See, for, e.g., the controversy regarding the applicability of the newly incorporated section 185 to the holding-subsidiary transactions has been a dilemma.

[8] See, generally, Examples include, sec. 4(7) of the 1956 act, which used to protect every private company, which is subsidiary of a foreign company, to be deemed as public company being deleted and thus becoming major setback to FDI. See, generally, 2(87) of the Companies Act, 2013.

[9]Vinod Kothari, Ten Monsters in the Companies Act, 2013, Stable URL: <available at http://indiacorplaw.blogspot.in/2014_02_01_archive.htmllast accessed on 25-03-2014>.

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