The Telegraph
Thursday , January 10 , 2013
Since 1st March, 1999
CIMA Gallary


Twenty-seven years after the first attempt to pass modern-day legislation to regulate companies, the companies bill, 2012 finally completed its first rite of passage: on December 18, 2012, the Lok Sabha cleared the bill to become law. A paucity of time and the brutal gangrape of a young woman in Delhi interfered with the course of events, and the Rajya Sabha could not meet and pass the bill, which would have paved the way for the president, Pranab Mukherjee — who, as finance minister, tried to bring the bill to Parliament for passage twice, but failed — to sign it into law. It is a much-needed and critical piece of legislation that will make navigating the business landscape in the 21st century much easier. It has taken too long to replace its 56-year-old predecessor, the Companies Act 1956, and, understandably, concern over further delay in its passage persists. It will probably be tabled for its second rite of passage — in the Rajya Sabha — in the budget session of Parliament in February, but many people believe that the Upper House could seek more amendments (it was passed very quickly and without too much debate in the Lok Sabha).

Company executives and managers have welcomed the bill, others have serious misgivings. For one thing, the mandatory requirement for companies to set aside 2 per cent of their after-tax profits for corporate social responsibility has raised a lot of hackles. For another, granting near-sweeping powers to the government in framing rules under the new law is perceived as excessive by many legal experts. The new bill has seven chapters, 479 sections and seven schedules; the phrase “as may be prescribed” has been used a reported 416 times. This could be interpreted as giving law-making power to the government in the guise of rules that could be in violation of other parts of the Constitution.

These are not the only sticking points, but the major ones. There are provisions related to independent directors that could disincentivize serious professionals from taking on the job. Imposing a term limit of five years on auditors — otherwise called auditor rotation — may promote independence, but it also limits the amount of time an auditor has to become familiar with the intricacies of the company’s businesses. When it is time to hand over to the next audit firm, a few things could fall between the cracks. It is possible that the Rajya Sabha may force some amendments to address these concerns. But in the interests of creating a modern legislative framework, this companies bill should be passed, warts and all.