Step-up in compliances irks corporate India

Come Wednesday, the Companies Act, 2013, will complete five years. The law saw a significant shift from its earlier version (of 1956), including provisions for egovernance, corporate social responsibility, independent directors, newer audit norms like audit rotation, protecting minority shareholders and investors, and the National Company Law Tribunal (NCLT) with its appellate body.

The Companies Act, 2013, was enacted in the backdrop of what came to be known as the Satyam scam. The new Act was a step towards checking such misuse of the corporate entity and fraudulent activities.

Report card

So what have been the five years of the new company law regime like? “The key expectation was a more robust corporate governance framework. It has definitely brought about a sea change in how corporates function,” notes Akila Agrawal, partner and head for the mergers and acquisitions practice at Cyril Amarchand Mangaldas. Kalpana Unadkat, corporate and commercial partner at Khaitan & Co, agrees. “Corporate governance framework has strengthened appointment of independent directors, disclosures, broadening the scope of approvals required for related party transactions.”

One of the biggest positives from the Act, say experts, was the creation of an institutional framework for CSR.

However, the framework has a fair share of critics. “The idea of CSR is still confusing... The confusing language of the law suggests that it is voluntary but the government is enforcing it as if it is mandatory,” says Lalit Kumar, corporate partner at J Sagar Associates, a law firm.

An aspect in the implementation of the 2013 Companies Act was the staggered nature in which the provisions were brought into force. “It is prudent on the part of the Ministry (of Corporate Affairs) to have implemented such changes in a staggered manner so that companies have sufficient time to internalise them,” says Agrawal.

The law has seen two rounds of amendments to address the new dispute resolution measures in the form of the NCLT and the NCLAT (National Company Law Appellate Tribunal). This also forms the backbone of the Insolvency and Bankruptcy Code, making it the authority which addresses concerns of a company through its entire lifecycle, from incorporation to closure. The move to reduce the number of tribunals also saw the merger of the Competition Appellate Tribunal with the NCLAT, which now is responsible for appeal hearings on company law, insolvency and competition law matters.

Existing gaps

Some of the areas that need focus from the government are easing voluntary liquidation norms, reforms for private companies as part of ease of doing business, the disproportionate nature between the role and liability of independent directors, and capacity building in corporates and the regulator to improve compliances by corporates. “From an ease of doing business perspective, despite certain exemptions being introduced, unfortunately, things haven’t changed much. Onerous secretarial compliances even on private companies are still prevalent,” points out Unadkat.

In terms of implementation, the 2013 overhaul of the law has been insufficient, feels Kumar. “Except for a few provisions whose implementation is visible and showing some result (such as the rotation of auditors), for most other provisions, it is difficult to say that operating a company has become easy,” he says.

Experts point out that a simple work of incorporating a company is still time-consuming, with loads of paperwork and layered procedure. Further, provisions related to merger and acquisition have remained largely unchanged, experts add. “It takes same, if not more time, to complete any merger/ amalgamation of companies,” says Kumar.

Next steps

One of the major requirements in the coming years, according to experts, is regulators working together. “Different standards for related party transactions and approvals are prescribed by the SEBI Listing Regulations and the Companies Act. Regulators must work in tandem — this will go a long way in streamlining legal requirements and effective enforcement,” says Unadkat.

Also, there is a need for an NCLAT bench in every major city. The appellate tribunal is burdened with insolvency and competition law matters in addition to company law.