Indian lawyers eagerly await the passage of Indias
Companies Bill 2011 to replace the outdated Companies Act 1956.
But they are concerned by the new laws corporate-social
responsibility (CSR) requirement and layering restrictions.
Sources agree that the Companies Bill 2011 is an urgent piece of
legislation, and the bill is expected to pass during the monsoon
session of parliament, which began August 8. The last
iteration of the Companies Act was implemented over 50 years
ago and does not recognise contemporary concerns.
Moreover, the new law is expected to change
corporate governance in India. Key provisions address quotas
for female board directors, require unlisted companies with
subsidiaries to publish consolidated balance sheets, and grant
stronger rights to minority shareholders.
Vijaya Sampath, former group general counsel of
Bharti Enteprises and senior partner at Lakshmi Kumaran &
Sridharan, told IFLR that the bill is a
long-pending, urgent and important piece of legislation, and
the sooner it is enacted into law, the better for the corporate
Though Indias regulatory regime has been widely
criticised for its lack of certainty and clarity, the text
of the Companies Act 2011 is relatively straightforward.
Sampath said: Its current form has been drafted quite
well, with many ambiguous provisions now clarified.
But CSR and layering restrictions have counsel
Clause 135(5) of the bill sets out a CSR
requirement that applies to every company with a net worth of
more than INR 500 crore ($73.3 million), a turnover of INR
1,000 crore or a net profit of 5 crore. It requires the board,
in each financial year, to make every endeavor to
ensure the company spends at least two percent of its net
profits made during the three years prior.
However, its not clear whether the CSR
spending requirement is mandatory or discretionary. Though
companies will not be punished for not setting aside the
required capital for CSR, they will be required to disclose
their reason for non-participation in their annual reports.
Sampath also noted that the bill does not define CSR.
Restrictions on investment
Another concern involves restrictions on layering
of corporate subsidiaries, forcing companies to become more
transparent about their structuring. Clause 186 states that
companies will not be permitted to make investments through
more than two layers of investment companies.
It is believed the provision was instigated by
issues encountered during the so-called Satyam scandal of 2009,
when the companys chair confessed Satyams accounts
had been falsified.
However the provision also directly targets
Mauritius-based companies. According to a Reuters report, 39.5%
of Indias total foreign direct investment between April
2000 and February 2012 was routed through Mauritius. This year
India considered reviewing its bilateral tax treaty with
Mauritius after reports that the country loses $600 million in
revenue each year from Mauritius-based companies.
Dr Paritosh Ch Basu, group controller for Essar
Group, stated his personal views: I personally believe
that, if structuring is done on a transparent basis in order to
add value for shareholders, there is nothing wrong. However, if
the layering is to make companies as remote as possible and
tracing of transactions becomes difficult, the government needs
to issue certain guidelines.
It is unclear whether the rule will apply
retroactively, and if so, what the time frame will be for
compliance. However, Sampath said that restrictions on the
number of downstream investments should not be a deterrent,
though in an ideal world one would have liked more flexibility
Though this requirement will undoubtedly irritate
foreign investors who are accustomed to structuring as they
wish, it will also apply to Indian corporates looking to invest
There are other smaller issues raised by the bill,
such as contradictions with other laws governing boards.
Sampath said it is important to ensure that laws are in sync
with each other, but that some details should be left until
after the Companies Act is legislated.
Dr Basu said that, in his personal view, the bill
must be passed. After implementation of the new bill, if
difficulties are faced and if genuine amendments are needed,
they can be added when necessary, he said. But as
of now, the bill should be passed as an act, because the first
step towards solving problems is to begin with
Though the bills drafting is generally clear,
there are fears the lack of clarity on key points may result in
litigation and parliamentary gridlock that generates
uncertainty long after its passage.