Published Editorial

New law is a step towards responsible India Inc.

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The Financial Express

by

Narendra Rohira
Tax Partner
EY

Contributed by:

Deepa Dalal
Associate Director, Transaction Tax
EY

Just before the companies Act was set to hit the retirement age, a youthful and investor-friendly companies Bill is finally here. The new Bill retains the old provisions, but also adds stronger and progressive provisions.

A provision which would find favor with most shareholders is the dispensation of requirement of mandatory transfer to reserves before declaring dividend. Higher the dividend payout, happier the investors. Similarly, granting of general voting rights to preference shareholders where the company has defaulted in dividend payout for more than two years would garner a thorough support.

Fairness in thought and conduct seems to find prime place in the theme of the Bill. Any preferential allotment of capital by a company would now require price determination by registered valuer ensuring the existing shareholders are not diluted on a non-fair basis. Where a listed company is proposed to be merged with an unlisted company, the shareholders would be given an option to exit from the listed company on receipt of fair compensation. The Bill seeks to protect the interest of minorities by introducing the concept of exit opportunities to dissenting shareholders.

The investors would now be better empowered to enforce agreed upon rights on specific matters by inclusion of entrenchment provisions in the Articles of Association (AOA). Entrenchment provision means a provision which allows amendment of specific provisions of AOA only if certain procedures more restrictive than a special resolution are followed. This would certainly find investors including minority and other classes throwing a red carpet welcome.

The companies Bill includes certain general provisions for safeguarding minority interest and for enforcing better corporate governance: Bestowing right to specified group of shareholders and creditors to object to a scheme (restricting frivolous claims), intimation to regulators (including income-tax authorities) about a scheme, sending expert valuation report to shareholders along with the notice of meeting, mandatory valuation by registered valuer under specified situations and obtaining certificate from company’s auditor stating the accounting treatment in the scheme is in accordance with Accounting Standards.

The companies Bill stresses on transparency. In line thereof specified transactions (such as purchase, sale of goods or services and leasing of property) with related parties would need prior board approval and in certain cases shareholder approval through special resolution. Alternatively, a company could enter into such transactions without approval, if it is in normal course of business and at arm’s length arrangement. Similarly, prior shareholder approval is required by a company before making any inter corporate loans or investments which do not satisfy arm’s length principles. Further, inter-corporate loans (including between group companies) need to be benchmarked with prevailing rate of interest on dated Government securities. Interestingly, tax laws also require related party transaction to be at arm’s length. This shows the lawmakers are in sync with a holistic objective.

There was no restriction on investment made by a company through various investment companies (read as special purpose vehicles). Under the Bill, companies will not be permitted to invest through more than a two-layered structure. This will promote greater transparency and concise structures which will be utmost welcomed by the investors. However, implementation of the same in sectors requiring project specific companies and multiple layered structures such as infrastructure and real-estate will need to be seen. Also, whether the existing corporate structures need to be aligned to the policy will attract some thought.

However, there is no bar on a company acquiring a foreign company that has more than two investment subsidiaries. This will give a breather to the corporates looking outbound to acquire larger groups having multiple entity structures. However, time will determine how this aligns with Reserve Bank of India's policy on allowing overseas investments only through single layered structure.

The Bill unveils a concept of class action suits in India. Now, not only can a group of shareholders, but even depositors can participate in such suits against mismanagement. Further, they can seek compensation not only from the company but also from auditors and expert advisors for any unlawful or wrong conduct. This concept has witnessed international followers and now embarks its movement in India.

The provisions of the Bill such as minimum independent director requirement, auditor rotation requirements, debut of class action suits are a fast march towards an investor friendly India Inc.

Views expressed are personal.