The passage of a new corporate law in India moved one step closer to reality recently when the Cabinet recently announced that it had approved amendments to the Companies Bill 2011 (the “Bill”). This cleared a major hurdle for the Bill, which has undergone several revisions and attempted to incorporate the numerous recommendations made by the Finance Committee as well as the suggestions of various other stakeholders. The Bill, which was first introduced in the Indian parliament nearly four years ago, is now expected to be approved by Indian legislators in the Winter Session. The passage of the much anticipated legislation would mark the first comprehensive changes to Indian corporate law in 50 years and would replace the current Companies Act (the “Act”), which has been in force since 1956 and has been deemed to be severely outdated and overly complex.
The new Bill is intended to update the corporate law with internationally recognized best practices. From a governance perspective, it seeks to make numerous fundamental changes aimed at greater shareholder democracy, stricter corporate norms and improved and more effective enforcement. When approved, the new Bill would empower shareholders to make more informed decisions. For instance, the Bill would require a special resolution for a number of issues, including not re-appointing the retiring auditor, the removal of auditors, related party transactions, dividend payments in certain cases and loans to managing and wholetime directors. Moreover, companies will be required to disclose additional information for shareholder review in their annual reports and directors’ reports.
The Bill also explicitly defines the roles and responsibilities of a board member, which is not currently done so in the Act, as well as specifies the key attributes in determining the independence of a director. Among the other changes being contemplated by the Bill are the introduction of class action lawsuits, which would allow investors to sue a company and claim damages; mandatory disclosure of corporate social responsibility (“CSR”) policies by certain companies and the earmark of profits for CSR initiatives; and a requirement for shareholders to approve a special resolution on managerial payout without prior approval from the Government.
We note that the Bill may still undergo some minor adjustments before it is approved. In addition, there does not yet appear to be a timeline as to when companies must comply with any changes to the law. With the Indian proxy season having just concluded, we hope that at least some of the proposed changes will go into effect by the 2013 proxy season. However, it appears more likely that companies will be given a grace period in which to enact the major provisions of the Bill.