FUNDAMENTALS OF COMPANIES ACT, 2013

    With the ever-changing global market scenarios, the terms corporate governance and corporate democracy have become the new talk of the town. The Companies Act, 2013  was a hope for elevating the two and to revive the debilitated corporate firms, although the genesis of the 2013 Act was long delayed but it still managed to establish itself. It gives prominence to the corporate governance structure and dwells upon making business-friendly policies. The Act gives importance to the safety of shareholders and tries enhancing accountability and disclosure norms, and provides a better framework for mergers and acquisitions. This blog focuses on some of its newer concepts and would give an overview of the complete Act. Furthermore, this paper would evaluate the impact that the 2013 Act has on the corporate world.

    ASSESSMENT OF CORPORATE GOVERNANCE UNDER COMPANIES ACT

    The Companies Act, 2013 has had a tumultuous journey in its short existence. Foreign investors which earlier had serious concerns regarding the law spectrum of the country, now confidently invest in the business corporations. Nonetheless, these investors have accepted and welcomed the new changes. Beyond the shadow of any doubt the governance standards have certainly improved, regulatory checks and accountability have received enormous boost. 

    1.     Section 245 enables shareholders and other stakeholders to file a class action suit, this makes them aware of their rights. 
    2.   They can file an application with the National Company Law Tribunal and can allege that the management of the company is shoddy or conduct of the affairs of any company are being conducted in a manner so as to inflict serious damage to the company. 
    3. These types of suits can usually be against the company and its directors or consultants and experts for any fraudulent or wrongful act. 
    4. The suit can also be against the partners for any spurious statement in the auditors’ report or for any unethical or fraud act or omission.

    ROLE OF WOMEN DIRECTORS

    1.   Keeping the technicalities of the Companies Act, 2013 aside, the Act has embedded a very important principle of gender equality through section 149(1). In countries such as Belgium, Canada, Denmark, Netherlands and France, there are already provisions which precisely allocate reservation for women in corporate boards. 
    2.   A public company which has a paid-up share capital in excess of Rs. 100 crores, or turnover of Rs. 300 crore or more, shall under section 149(1) of the 2013 Act appoint a woman director. 
    3.   The clause 49, at reasonable and relevant places imposes a mandatory requirement of having a woman director which adheres to rules set by the Competition Act, 2013. This section incontrovertibly has an empowering impact on the corporate safety and representation of a common woman. Status of women in the business world would definitely take a leap more than it ever did because of the decision.

    ONE PERSON COMPANY

    1.     Some countries have been very successful in implementing the concept of One Person Company (OPC), countries like the United States, Australia and the European nations have been fortunate enough to yield benefits from OPCs’. 
    2. With the homecoming of the 2013 Act and the introduction of OPC it is highly expected that the corporate world would definitely see major changes in the near future. This concept would still require a lot of time to firmly establish itself, corporate personalities would clearly require some time to utilize the idea. 
    3. The idea basically gives a chance to individuals to function on their own in the economic domain, this helps significantly in improving the overall economic stratus. 

    This has far been the bravest step taken by the law makers since, it’s a huge risk for the individual stepping up for the challenge because One Person Company has to pay taxes just like any other corporate entity. The biggest problem with the Companies Act, 2013 is that it provides no relaxation on the tax rules. The individual proprietors in some countries enjoy the benefit of paying taxes as an individual. This change is sine qua non, if the lawmakers want to make any. 

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    CORPORATE SOCIAL RESPONSIBILITY

    1. After the introduction of Corporate Social Responsibilities with the 2013 Act, mammoths of the corporate world have been reaping out huge benefits because of CSR. 
    2.   A data shows that the 55 percent of consumers are willing to buy products from the companies which are socially responsible.[1]
    3.   This brings forth the fact that CSR is a win-win for the Society and Corporations. Furthermore, CSR should not be treated as an optional to-do for companies, CSR should be made even more constructive. It is not rocket science to estimate the benefits of CSR, it helps to develop and strengthen the relation between consumers and companies. 

    OFFICER WHO IS IN DEFAULT

    1.   The Companies Act, 2013 goes a step ahead of its predecessor while determining the true meaning of “officer who is in default”, the Act truly broadens the scope of officer in default.[2]
    2.   Similarly, it goes a step ahead by placing an embargo on issuing shares at discounted price, this has been a huge blow to the corporate players since earlier with the 1956 Act, companies were able to issue their shares on discount and thus this would help them to repay the loans. 
    3.   As if prohibiting was not enough, section 53 of the 2013 Act, furthermore, imposes penalty and imprisonment on the defaulters, section 53 levies penalty equal to the amount raised by the issue of shares at a discount or Rs. 5 lakhs, whichever is lower.[3]
    4. Also, the 2013 Act strengthens and provides a speedy judicial proceeding. It establishes special courts and these courts can conduct proceedings for all the offences specified under sub-section (1) of section 435.[4]

    REGULATORY BODIES

    1.     There are three regulators which work towards making the system transparent, these are National Company Law Tribunal (NCLT), National Financial Reporting Authority (NFRA) and Serious Fraud Investigation Office (SFIO). The Central Government has constituted National Company Law Tribunal (NCLT) under section 408 of the Companies Act, 2013 (18 of 2013) 1st June 2016. 
    2.     All the proceedings related to arbitration, arrangements, reconstructions, compromise, and the winding up of companies are disposed of by the NCLT. The SFIO got legal status due to the 2013 Act. The NFRA got its legal framework from the Companies Act, 2013 and it supervises auditing profession under the same Act. These establishments, being in accordance of the rule have successfully decentralized the powers.[5]

    SIGNIFICANT BENEFICIAL OWNER

    Preventing financial crimes and bringing transparency to the corporate world is the main agenda of the Companies Act, 2013. Under section 90, Significant Beneficial Owner is introduced, it has a simple aim of identifying ultimate individual owners behind corporate structures. Furthermore, whoever qualifies as an SBO needs to make a declaration to the company. Even after all these pros, the move has its own cons.[6]

    ASSESSMENT OF COMPANIES ACT, 2013

    •     A country which is diversified and as large as India, it does not require a team of legal giants to predict that having the Companies Act is an advantage. The Companies Act, 2013 is a result of an ambitious attempt to codify all the laws that might relate to the companies. 
    •   Overall, it’s a perfect tool for the legal practitioners dealing with the companies in India, although the Act fails to provide a free environment for the companies, there’s a lot of interference of the central government in private enterprises. This demoralizes budding companies, makes them concerned about laws which keep on changing since there are amendments on a regular basis.
    •   Judging the Act from a researcher’s perspective, it is definitely a failure when it comes to providing a good and unrestrained platform for companies. The investors cannot keep pace with the reforms and thus, this Act becomes a block in front of the Indian economy.  

    To overcome the challenges, the lawmakers need to avoid reactive approaches instead of the proactive approach. It is crystal clear that the Act isn’t consistent enough with its rules, circulars, regulations, notifications, clarifications and as well other statutes dealing with matters similar to the gist. The current Act is acceptable for a short period of time, it might even give positive outcomes, but betting on it for the long-term returns would be a mistake, a mistake which the legislators wouldn’t like to commit. In 2019, the lawmakers had an intent of punishing the CSR defaulters with criminal consequences. Stakeholders as expected, didn’t support the idea and so a committee was formed to examine the same, the committee nonetheless, spoke favorably of decriminalization and as a result the amendment did not come into effect. To prevent this type of blunders from happening again, the policy makers should try to engage with the suitable stakeholders from the first step of policy formulation. The 2013 Act tries to consider the best interests of shareholders by introducing class action suits, and it is totally welcomed but there are always possibilities of its misuse. Final verdict, it is unfortunate that the country is not able to appreciate the modern corporate concepts and is miserably failing in implementing them.

    CONCLUSION

    The world is changing, a virus causes markets to tumble down, times as unpredictable as these, nothing can really be said about a topic as hot as the economy. India is about to face a threat of which it has no past hand experience, economy is continuously falling through the slope, and covid-19 is as bad as it gets. These conditions lead to bankruptcies, demoralizes the investors, local companies are shaken to their very core, these conditions can end up giving chills to corporate mavericks, forget about the budding businessmen, destabilize the stock markets and what not. Because of this the concept of corporate governance has risen to new heights, it holds utmost importance in economic crises and as a result the Companies Act, 2013 needs to be even more stable. 

    Mergers and Acquisitions are going to come in action soon, the Act does the best to simplify the entire M&A process. Concerning the global context, the policymakers need to introduce even newer progressive provisions, implementation of a faster method of mergers is needed of the hour. The existing provisions need to be simplified; investor friendly regulations should match the standards of global corporate gameplay. Indian company law needs to be inspired by American, European and Japanese corporate models. The Companies Act, 2013 can be a knight in the shining armour. It is totally acceptable that no act/rules/regulations are perfect, they all have their own shortcomings but keeping that aside, the times are changing, and the imperfections need to be perfected, they should carry the sword of positive change. Nonetheless the Companies Act, 2013 is waiting for a reform in these hard and competitive times.

    REFERENCE

    [1] Katie Russel, ‘Why CSR?’, FRONETICS, available on https://www.fronetics.com/csr-four-benefits-corporate-social-responsibility/ (Last visited on 11th May, 2020).

    [2] The Companies Act, 2013, s. 2(60).

    [3] The Companies Act, 2013, s.53.

    [4] Chetan Ladha, “Corporate Governance and Company’s Act, 2013- A Critical Analysis”, INTERNATIONAL JOURNAL LEGAL DEVELOPMENTS AND ALLIED ISSUES, vol 3, July 2017.

    [5] Companies Act 2013 Key Highlights and Analysis, available at https://www.pwc.in/assets/pdfs/publications/2013/companies-act-2013-key-highlights-and-analysis.pdf

    (Last visited on 3rd May, 2020).

    [6] The Companies Act 2013: Time To Reboot?, available at https://www.mondaq.com/india/shareholders/890282/companies-act-2013-time-to-reboot (Last visited on 4th May, 2020) .


    BY RUSHIKESH D. PATIL| MAHRASHTRA NATIONAL LAW UNIVERSITY, NAGPUR

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