India: Standing Committee Report on the Companies Bill 2009

The Companies Bill 2009 was introduced in the Lok Sabha on 3 August 2009 and was later referred to the Standing Committee on Finance for examination. The Committee's report was presented on 31 August 2010. (For full text of the standing committee report see here) It’s a comprehensive report and has several important things to say with regards to the financial aspects of running companies, independent directors and auditor liability.

A key development relates to the treatment of corporate governance norms. It is worth noting that it is stated that some of the matters included in the Corporate Governance Voluntary Guidelines 2009 should be included in the Bill. These include the separation of the roles of chairman and chief executive; the attributes and tenure of independent directors; board evaluation; the appointment of auditors and the rotation of audit partners and firms. More importantly, the Standing Committee has expressed the desire that all the significant and substantive matters included in the Corporate Governance Voluntary Guidelines 2009 and the Listing Agreement prescribed by SEBI may also be mandated for listed companies and considered for inclusion appropriately in the Bill. For unlisted companies, the Guidelines may remain voluntary.

In its report tabled on August 31, the standing committee has stated that “there is a need to circumscribe and limit the liabilities of Independent Directors, so that they are able to act freely and objectively and are able to share their expertise with the rest of the Board. A provision may also be made for their rotation by restricting their tenure in a company to say, five years.”

Further, the report recommends that “a code for independent directors may be considered for this purpose. The appointment process of Independent Directors may also be made independent of the company management by constituting a panel or a data bank to be maintained by the Ministry of Corporate Affairs, out of which companies may choose their requirement of Independent Directors.”

The committee has asked to allow for differential voting rights (DVRs) shares as well as to allow companies to be able to access public deposits, also from non-shareholders. The Companies Bill 2009 had in fact disallowed DVRs and said that companies will not be able to accept public deposits except from their shareholders. The committee has also recommended the rotation of the appointment of an internal auditor be made mandatory, that companies rotate their audit firms every five years and audit partners every three years as well as incorporate within the bill, joint and individual liability of both the audit firm as well as the partner. It also calls for tighter provisions on matters such as formation of subsidiaries and intercorporate loans and deposits.