Column: Need for speed, caution as well

Sep 24 2013, 05:07 IST
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SummaryThe fast implementation of the new Companies Act is laudable, but speed breakers remain

It is happening and that too at a hastened pace. History shows that earlier attempts to replace the company law never generated such flurry of activities as has been the case this time. The pace has resulted in around one-fifth of the sections of the new Act being enforced in less than a month and a half since the Rajya Sabha approved the Bill. The draft rules are also already out for public comments. This shows the government’s will to implement the new law in its entirety at the earliest. This is laudable. It should be no surprise if the coming days are packed with action. But, speed also brings with it jerks. The notified sections could pose transition challenges from the old to the new law. But that happens every time any law is replaced.

Certain important definitions have also been notified, e.g. associate companies, CEO, CFO, ‘control’, books and papers (allowing them in electronic form); financial statements now include cash flow statement and statement of changes in equity. The Act also defines global depository receipt, key managerial personnel (KMP), net worth, postal ballot, private and public company, promoter, related party, subsidiary company, turnover and total voting power, among other terms.

Many operative provisions have also been notified. These include provisions relating to prospectus (including shelf prospectus and red herring prospectus) and allotment of securities (other than private placement which is not notified); restriction on subsidiary to hold shares in its holding company; payment of dividend in proportion to amount paid-up on each share. On the list of the new provisions notified is the free transferability of securities of a public company. However, notwithstanding this concept of free transferability, the new Act recognises the contract agreed between persons in a public company restricting transfer of securities as an enforceable contract, this being a major change. The other notified sections include extraordinary general meeting; contents of explanatory statement; quorum for shareholders’ meeting; restricting member’s right to vote when calls and other sums are due; ordinary and special resolutions; punishment for failure to distribute dividend after its declaration.

Upholding the interest of accountable corporate governance, the provisions on the appointment of additional directors, restriction on the board’s powers to pass certain resolutions without shareholders’ approval by special resolution have also been notified. Similarly, there is a fair expectation that the cause of transparency will also be served with the notification of

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