Companies Bill 2011- A boon or bane?

After 7 long years of deliberation, yesterday the union cabinet finally approved and cleared the draft Companies Bill 2011, in a move to amend the 5 decade old Companies Act 1956. It is believed that the bill will now be tabled in the winter session of the parliament for further discussion and passage into an Act.

Included amongst the many new highlights of this bill, is the introduction of a New Corporate Responsibility Framework which will end up bringing much stricter corporate governance norms and power the shareholders with the ability to be more involved in the company affairs. As per the bill corporate honchos, will now have to set aside at least 2 per cent of the average profits reported in the preceding 3 years and spend it on corporate responsibility activities, such as investor education and human development activities in rural areas and make proper disclosures about the same.

One can refer to the initiative taken by fertilizer and agro commodity companies, who undertake various initiatives to educate rural farmers and teach them about the new techniques that could be applied to improve crop utility and output. To put in a nut shell, one can say that the new corporate framework will become more democratic in nature.

The bill also thrives to introduce stricter norms to prohibit insider trading activities by treating such as criminal offence subject to heavy punishment. The bill has further gone on to address the issue of fresh capital raising which is commonly know as IPO and FPO in the stock market. As per the amended act, much tighter laws will be introduced in this context so as to prevent any un-ethical and un-lawful activities, such as the IPO scam of 2005 where a number of stock operators and stock brokers duped unaware investors or their life savings.

Further companies will also have to adhere to additional disclosure norms and ensure mandatory rotation of auditors and audit firms. There is also a proposal to introduce class action suits which empower the shareholders and investors to sue a company for any mismanagement or unlawful activity and claim damages.

In regards to addressing the women empowerment issue, the bill proposes to make it mandatory to ensure a slot for women directors on the board of a company. Finally, it has also been decided that market regulator SEBI will be vested with the power to have the final word in case of any market related issues or conflict between to laws.

In conclusion, we at DSIJ believe that this new Companies Bill 2011 will bring about a more structured corporate framework, which is very much in line with the changing times that India is witnessing today. Investors have become much smarter and more aware of their rights and privileges, and one cannot fool them and take them for a ride.

However when it comes to the implementation and execution front, our system has always lacked in putting forth a foolproof framework free off any bureaucracy. Hence, though it is of some cheer to the investor community that this bill has been introduced with hopes to improve the way corporate India functions, but in realty one has to wait and watch how the actual act will work and help protect investor interests.