Editorials, GS-3, Indian Economy, Uncategorized

Companies Bill affects independence of directors

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The Bill seeking to make further amendments to the Companies Act has been referred to the Parliamentary Standing Committee, which is expected to prepare its report within three months. After taking into consideration suggestions made by a high level panel on further possible changes to the law, the government had come up with the Bill as part of larger efforts to address difficulties faced by stakeholders and improve the ease of doing business in the country.

Background:

This would be the second time that Prime Minister Narendra Modi-led government would be amending the Companies Act, 2013 which was passed during the previous UPA regime.

Important changes:

The Companies (Amendment) Bill, 2016 seeks to simplify private placement process, remove restrictions on layers of subsidiaries and investment companies, amend CSR (Corporate Social Responsibility) provisions to bring greater clarity and exempt certain class of foreign entities from the compliance regime under this law.

  • The proposed changes are broadly aimed at addressing difficulties in implementation owing to stringency of compliance requirements.

Criticisms:

It is argued that the Companies (Amendment) Bill, 2016, unlike the existing law, allows for some pecuniary interest in companies for independent directors.

The proposed law allows such directors on their own to have transactions with companies where they are independent directors up to 10% of such independent director’s total income. Thus, the law legitimises self-dealing merchants as independent directors.

Concerns:

  • The above limit of 10% for transactions in the hands of independent directors can be altered by executive action through prescribing an altered limit. Vested interests can achieve a higher limit by influencing the executive. This would certainly further weaken independence on corporate boards.
  • The proposed change in law allows a relative of an independent director to be indebted to the company or its promoters and their satellites within a limit as may be prescribed by the Central Government. But, when a relative of an independent director is indebted to the company, the independence of such a director would be highly suspect. Especially when a relative of an independent director is indebted to promoters of a company, independence of such a director becomes a definite casualty.
  • Under the existing law, an independent director’s relative should not have been a senior employee of the company in the last three years. The proposed change in law seems to takes away this restriction and definitely strikes at the root of independence of directors.

Way ahead:

While many of the other proposals in the Companies Bill, 2016 are correctional or clarificatory in nature and are quite welcome, the amendments proposed in respect of independent directors are hard to justify. A law which undermines independence of directors, even if justified for pragmatic reasons, should not be espoused.

Conclusion:

The law has been rightly referred to the Parliamentary Standing Committee before it is considered by the Parliament. Now, an informed discussion and debate regarding the proposed changes in law relating to independent directors should be seen as a national priority.

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