International

The India Companies Bill 2012 – a necessary change

The India Companies Bill 2012 is expected to become law in 2013. The bill is a significant step towards making India’s corporate legislation contemporary and in line with current business practices. The Bill both simplifies and complicates Indian corporate law and therefore developments around the implementation of the rules should be closely monitored.

The much awaited Companies Bill 2012, passed by the Lok Sabha in December, will replace the 56-year-old Companies Act 1956. The Bill is expected to be taken up in the Rajya Sabha in its next session, will receive President’s assent thereafter, and it is expected to become law early in 2013. 

It has been over ten years since the last major overhaul of the existing Act and, in many ways, this change has been long overdue. The Companies Bill is a significant step towards making India’s corporate legislation contemporary and in line with current business practices.

The Bill brings in measures to improve governance in the corporate sector, whether aimed at owners, managers or other stakeholders, including auditors, and the protection of investors interests. The Bill also proposes several positive measures on e-governance and simplification of several procedural aspects, which are also welcome. There are also changes relating to corporate restructuring, reorganisations, etc, which would also help corporates immensely.

The roles and responsibilities of directors, independent directors and auditors have also been dealt with in great detail; however, it would be good to ensure when the rules are framed to bring in adequate checks and balances, to serve as anti-abuse provisions.

Certain provisions in the Bill, however, should be made applicable to a smaller subset of companies before they are more widely implemented. Some of the provisions, such as those relating to auditors, concern matters which are still up for debate internationally, and where the views are divided – such as the PCAOB concept release on auditor independence and mandatory auditor rotation.

The Bill both simplifies and complicates Indian corporate law.  On one hand it reduces the number of sections from over 650 in the 1956 Act to 470 in the Bill, but on the other it increases substantially the extent of delegated legislation; there are over 300 places where the rules need to be prescribed, and these clauses would only be effective when the related rules are framed and notified. So while the Bill per se is shorter and structured in a manner that gives flexibility to the government to amend the rules as and when required, it also makes the legislation complex for the corporates to apply. The law is also expected to be strewn over numerous rules and notifications in addition to the Bill.

While the Bill is now on the verge of becoming law, it is important that developments around the implementation of the rules are closely monitored. It is expected that the draft rules will be made public in the coming weeks to seek comments from stakeholders before they are finalised. The rules should be completed after careful evaluation as several clauses are intended to be applied to all the 800,000+ companies or the 8,000+ listed companies. It would be ideal if some of these requirements are implemented in a phased manner, which would help in managing the implementation challenges as well as learning from the experiences of the initial application of these requirements.

Sai Venkateshwaran
Partner & Practice Leader
Financial Reporting Advisory Service
Grant Thornton India LLP
T +91 226626 2629
Sai.venkateshwaran@in.gt.com