New law is a step towards responsible India Inc

Aug 12 2013, 13:54 IST
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SummaryA youthful and investor-friendly companies Bill is finally here.

Just before the companies Act was set to hit the retirement age, a youthful and investor-friendly companies Bill is finally here. The new Bill retains the old provisions, but also adds stronger and progressive provisions.

A provision which would find favour with most shareholders is the dispensation of requirement of mandatory transfer to reserves before declaring dividend. Higher the dividend payout, happier the investors. Similarly, granting of general voting rights to preference shareholders where the company has defaulted in dividend payout for more than two years would garner a thorough support.

Fairness in thought and conduct seems to find prime place in the theme of the Bill. Any preferential allotment of capital by a company would now require price determination by registered valuer ensuring the existing shareholders are not diluted on a non-fair basis. Where a listed company is proposed to be merged with an unlisted company, the shareholders would be given an option to exit from the listed company on receipt of fair compensation. The Bill seeks to protect the interest of minorities by introducing the concept of exit opportunities to dissenting shareholders.

The investors would now be better empowered to enforce agreed upon rights on specific matters by inclusion of entrenchment provisions in the Articles of Association (AOA). Entrenchment provision means a provision which allows amendment of specific provisions of AOA only if certain procedures more restrictive than a special resolution are followed. This would certainly find investors including minority and other classes throwing a red carpet welcome.

The companies Bill includes certain general provisions for safeguarding minority interest and for enforcing better corporate governance: Bestowing right to specified group of shareholders and creditors to object to a scheme (restricting frivolous claims), intimation to regulators (including income-tax authorities) about a scheme, sending expert valuation report to shareholders along with the notice of meeting, mandatory valuation by registered valuer under specified situations and obtaining certificate from companys auditor stating the accounting treatment in the scheme is in accordance with Accounting Standards.

The companies Bill stresses on transparency. In line thereof specified transactions (such as purchase, sale of goods or services and leasing of property) with related parties would need prior board approval and in certain cases shareholder approval through special resolution. Alternatively, a company could enter into such transactions without approval, if it is in normal course of business and at arms length arrangement. Similarly, prior shareholder approval is required by

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