The Companies Bill has been approved by the Lok Sabha. It is a vast Bill. It covers everything and replaces the earlier Companies Act of 1956. Watch the video:
In an interview to CNBC-TV18, Hitesh Jain, partner at ALMT Legal speaks about the Companies Bill and gives his outlook going forward. Below is the edited transcript of his interview with CNBC-TV18's Latha Venkatesh and Ekta Batra.
Q: What are the implications on the P&L and the balance sheets of companies? The corporate-social responsibility (CSR) expenditure now is nearly being mandated at 2 percent. I understand the wording is not mandatory, but companies may spend. Yet a board member will have to be in a committee, which will monitor this expense and give credible explanations, if that 2 percent is not met. Will this, therefore, begin to impact the P&L in some fashion?
A: There are two very important provisions in the clause. The first clause is that the board is mandated to ensure that the company will spend on the CSR. Second thing is that they have to give their explanation. So, effectively although there is no mandatory obligation on the company, but a responsibility is cast upon the board members.
Added with the responsibility, to give the explanation for non-implementation or implementation makes it mandatory. When you are not able to give a satisfactory explanation about not spending on CSR activities then the regulator will certainly have a power to question the roles and responsibility of the directors. So, effectively it gives a teeth, it is not just a provision on the paper, but it puts an obligation on the board, which they cannot easily get away. So, one thing is very clear that the new bill has looked into this provision extremely carefully. Although not mandatory, but a binding obligation is on the board to make sure that the company will spend on the CSR.
Q: After the Companies Bill being passed, what are the most common queries that you are facing from clients at this point in time? What are they most worried about in terms of adherence going forward?
A: The first query, which we are facing from the client, is about the CSR. The second is about the Memorandum of Association. They are also worried about the roles and responsibility of the independent directors. The fourth concern, which they are discussing, is the provisions pertaining to investor protection mechanism.
There is one very important provision. If you are obtaining the credit facilities and loan from the bank, if incorrect information is provided, it puts a heavy onus on the board. The queries are also directed towards the roles and responsibility of the independent directors. What is the responsibility, whether they are going to be liable, to what extent they will be responsible? The independent directors attend for the sake of attending and there is no positive contribution. For example, when you look into the various examples, you deal with the frauds in the corporate governance or the problems arising in the corporate governance and the independent directors playing just a role on the paper.
Q: If you can make it a little more specific for us, only touching on independent directors. I understand that clause 184 of the Bill requires way more disclosures compared to clause 299 of the Act, the one that is going out. What those disclosures are? How much more onerous they are? Are there are any stiffer penalties? How does the life of independent director become tougher?
A: Earlier, it was just pertaining to conflict of interest where they were just required to disclose only in the limited area. But now it has to be voluntarily. When they are facing a particular situation or resolution is placed before the board, the obligation is now on the independent directors to voluntarily provide every possible information, which can come into way of conflict with the board or where he is an interested party. So, the first obligation upon the independent director is about providing the information.
The second is about that if it is found that it has not given the proper disclosure and suppose if there is an action by the shareholders then there is also the penalty and provisions of special court. So, all in all, basically the disclosures are required from independent directors or the directors. The conflict of interest is concerned, that has been widened. The voluntary obligation, which has been cast, is very important because they do not wait, but they have to give upfront all the information.
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