Companies Bill gets Cabinet clearance

Far-reaching changes in the company law to improve investor protection, corporate governance and use of electronic documents would become a reality once the proposed amendments to the companies Bill are carried out.

Changes in the law to this effect were cleared by the Cabinet here on Friday. The proposed amendments would enable incorporation of single-person companies and allow up to 100 partners in partnership firms compared to 20 now.

The amendments mandate that at least 33% of the members on the board of companies should comprise independent directors. The proposed changes would be introduced in Parliament during the forthcoming winter session, science & technology minister Kapil Sibal said after the Cabinet approved the amendments. Briefing newspersons after the meeting, he said the aim of the changes was to overhaul the company law and bring it in line with the times.

The proposed amendments have been approved by the Cabinet four years after a decision to review the six-decade-old company law was mooted. Many changes are based on the recommendations of the Irani Committee. Amendments to the Companies Bill, 2008, coupled with the new law on limited liability partnership (LLP) firms would bring about a sea change in the way companies are regulated, Mr Sibal said.

The Bill calls for substantial reduction in government control on the affairs of companies, by promoting an era of self-regulation and shareholder democracy. Electronic documentation is being made mandatory in several cases to make information accessible to shareholders. With the ministry of corporate affairs high on its e-governance initiative, the new company law promotes easy access of corporate data over the Internet.

In a major boost for individual entrepreneurs to set up their own companies, the proposed law allows formation of one-person companies, a shift that will change the present requirement of at least two persons. Partnerships are set to gain a major advantage with the Bill extending the present threshold of 20 partners to a maximum 100, a move which is likely to promote the setting up of firms with high expertise and domain specialisation. The Bill recognises insider trading by company officials like company CEO, CFO and company secretaries as a criminal liability.

Giving away with the regulatory overlaps coming in the way of operation for companies, the Bill demarcates a jurisdictional domain for legislations such as company law, Sebi Act and Banking Regulation Act. Officials told ET the new company law will apply to all companies while Sebi Act will be applicable to listed companies in matters such as issue and trading of shares and payment of dividend to shareholders. In such cases, special laws such as the Sebi Act will have overriding powers, Mr Sibal said in response to queries.

Appointment of managing directors and decisions on internal affairs of companies will be left to shareholders, with the government shunning its regulatory oversight in such matters. The policy adopted under the new law substitutes governmental control in internal corporate processes by shareholder control. Transition of private companies to public companies and vice versa will get easier. To speed up the process of resolving corporate disputes, the Bill provides for setting up special courts to deal with various company law offences. The Bill has introduced a revised framework for regulation of insolvency of a company in cases of its liquidation.

The new law seeks to provide a single forum for approval of mergers and acquisitions. While high courts are responsible for clearing M&As, officials say the new law enables the sectoral regulators to approach courts for enabling hassle-free clearance for companies. The Bill will set up a separate framework for enabling fair valuations of M&As that will require valuations being done by registered valuers.