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THE COMPANIES ACT 2013 AND ITS IMPACT ON THE CORPORATE LAW SCENE 

Publications, Research paper

ABSTRACT: 

The Companies Act,2013 was a long-awaited bill and was finally passed in 2013, after getting assent from the houses in 2012. The final nod from the president came in 2013 itself. The dire need for this act came after people realised that the 1956 act had to be revamped to fit into today’s generation, for the well-being of companies, stakeholders in companies and industries. After the 1991 economic liberalisation movement, several corporations went through rapid changes, many of them expanding vastly and some of them venturing into zones they never had. There are currently more than 1.66 million companies registered with the registrar general in India, many of them working at a foreign level with big foreign investors. A country’s economy is driven by its investors and protecting them is of utmost importance.  This left many doubts about how law and business read together, creating several loopholes and intricacies to be filled in for. A clear strategy in the form of carefully formulated laws was needed at the time to mitigate all risks posed by the expansion and liberalisation of the economy. In this paper, I am reviewing the changes this act has brought to the corporate scene as now is the right time for legal scholars to assess, critique and help amend the act. 

KEYWORDS: 

Judiciary, corporates, Corporate Social Responsibility (CSR), Investor protection, fraud 

RESEARCH METHODOLOGY:

This research was mainly conducted to assess whether the Act holds any significance at all in the functioning of companies and whether it still holds value in today’s day. In this paper, I have used secondary sources, mainly research papers from professors and publishings from organisations such as ICSI to base my views. I have also picked out facts that seem to be of utmost importance. Furthermore, I have researched cases to support my arguments. I have also gone through the Companies Act 2013, to find some important components of it such as amendments 

INTRODUCTION:

“We need leaders who are in love not with money, but with Justice.”-Martin Luther King Jr. This statement is what I believe drives the Companies Act of 2013. It is human nature to promulgate consumerism and capitalism. The only way to deter it is by placing legally binding rules and regulations. As industries grow bigger, existing players often become untouchable and new entrants cause competition. To help cope with this situation, unfair and unethical means are used by players in the industry to ultimately win the competition.  The Companies Act plays a pivotal role in fostering a more accountable and transparent economy. It aims to touch upon every section of business, such as corporate governance, accounting, company formation, investing and social responsibility. The main objects of the Act, as stated by Prof. Rajnikanta Khuntia:

  1. Bringing Flexibility & Adoption of Internationally Accepted Practices 
  2. Effective protection for different sections of Society 
  3. Self-regulation with more disclosures 
  4. Stringent Punishment for violation 
  5. Efficient enforcement of law 
  6. Healthy Growth of the Indian Economy 

The previous acts were in fact very narrow-minded and did not account for future prospects and shifts in business dynamics. The current act aims to solve this problem, by laying out a solid base for the future and requiring only amendments and tweaks to fit in with time. This research paper aims to critically analyze the different aspects of the act and see whether after 10 years of the act maturing, are there some discrepancies that still need to be fixed.

REVIEW OF LITERATURE:

HISTORY OF LEGISLATIONS REGARDING CORPORATIONS:

The history of company laws in India reflects the evolution of corporate governance and business regulation over the years. Here is an overview of the key milestones in the development of company acts in India:

  1. The Companies Act, 1850

This act was built on the British act of 1844 and helped bring the concept of limited liability to the table. Limited liability refers to partners of a corporation only being liable for the amount of capital they bring in. This was of utmost importance as frauds at the time used to convince people to set up companies, and then use capital without knowledge of the other partners, ultimately bleeding one partner dry.

  1.  The Companies Act, 1866

This act complied with the British Companies Act of 1862. It further laid down rules regarding the formation and winding up of a company.

  1.  The Companies Act, 1956

This was the first act after gaining independence from the British, hence a landmark one too. It provided comprehensive details on the functioning and regulations of companies in India. For the first time, corporate governance and investor protection were topics spoken about.  Subsequently, various amendments helped sustain the corporate scene in India without collapsing for 5 decades or so. 

As we can see, as the years passed by, there were more and more regulations placed, in order to formalise the business sector as much as possible. No legislation was stable and always required changes to fit into the given times. 

THE SATYAM CASE:

Satyam Softwares Ltd. was one of the largest IT exporting companies in 2009. The company was assumingly functioning very well until the chairman of the company came up and exposed himself. None of the 6 directors appointed to the board ever questioned Mr. Satyam on any decisions. What he did in return for this trust was tamper heavily with the books of the company, by seemingly increasing the accrued interest, largely falsifying the liabilities and overstating debtors. In the end, a whopping 7000 crores were fraudulently misplaced by the man and his brother. This sent shock waves through the business and legal community, exposing the mammoth gaps in rules and regulations regarding corporate governance. The CBI, SFIO, SEBA, NASSCOM and many authorities had to work hard to uncover the depth at which this fraud had occurred. Shareholders were shaken and investing went down largely, even crashing the market during an already bad economic depression. Many industry leaders, such as Mr. Narayan Murthy and Mr. Adi Godrej were called upon by the government to set up committees to help amend rules regarding good governance. This is what ultimately led the Lok Sabha to introduce a new bill (The Companies Bill, 2009) in the parliament. 

CORPORATE GOVERNANCE:

Corporate governance refers to how all systems in a company are controlled, ensuring growth and prosperity to all stakeholders. It covers several topics including 

  1. Stockholder and stakeholder interests
  2. Business ethics 
  3. Transparency in accounting 
  4. Effective and efficient decision-making 

While earning profits it is very easy to forget the core values of a company and find new ways, sometimes legally right but unethical methods of profits. Similarly, account shielding has historically led to insolvency and bankruptcy of companies. To curb these malpractices from occurring and destroying the general fabric of the market, the Company Act of 2013 lays down some important rules which aim to:

  1. Adopt global standards and practices to ultimately help with a seamless transition from a domestic to an international trade society 
  2. Protection of every member of society 
  3. Promoting self-regulation and adding transparency to members of the company itself 
  4. Propagating and executing strict punishment 
  5. Efficient enforcement of law by creating tribunals for specific issues 
  6. A macro objective of growth of the economy and flourishing of trade 

Some methods used to promote good governance:

  1. Whistleblower mechanism: the 1956 rules did not lay out any mandate for addressing the concerns of any stakeholder of the company, be it shareholders or employees. Realising the importance of a whistleblower, as seen in the case of Enron industries too, the new act sought to promote a mechanism for genuine concerns to reach through all managerial levels.
  2. Insider trading: Due to the increase in insider trading, starting from the  Harshad Mehta scam, where the man singlehandedly put the whole of the Bombay stock exchange into a frenzy by attempting insider trading and fraudulent methods, it became empirical for SEBI to lay down stringent rules regarding the same.
  3. Auditing: Auditors were found to be the main culprit in promoting accounting scams by companies. They would take commissions and bribes to ignore falsified accounting books and give them a green signal. This led to accounting scams to be a criminal offence. Taking this action further, the companies act too lays down penalties for the same. 
  4.  Committees: The act mandated 4 committees : 
  1. The audit committee
  2. Nomination and Remuneration Committee
  3. Stakeholder relation committee 
  4. CSR committee
  1. Independent Directors (ID): One of the main rules of the act was to incorporate independent directors into a company. This refers to members of the board who do not have any material or pecuniary relationship with the company or related persons except for a sitting fee. An extensive code of conduct too was made for the directors. This was the main way they could curb anything that resembled the Satyam scam from happening. 
  2. The level of independence, tenure, remuneration and liability have been described by the act in detail so as to not cause any loopholes. The appointment of a woman in the board too was a step taken towards equality. In my opinion, the tenure of the ID cut down to 5 years in order to curb any significant acquaintance with members was the important rule for IDs. 
  3. Separation of powers: MD and CEO are two positions of eminent power. Assigning it to one person often causes too much power in the hands of a person. The act aims to distribute powers, just like the government, to help function smoothly.

CSR: 

CSR refers to the obligations of businessmen to pursue those policies to make those decisions or to follow those lines of relations which are desirable in terms of the objectives and values of our society, as said by Bowen. Essentially it refers to the corporate sector spending a little of its earnings on the public and its surroundings, from where it derives its power. In order to further understand CSR, let us understand the Concentric Circle concept. 

  1. Inner Circle: this mainly consists of already laid down responsibilities which are fundamental, such as jobs and economic growth.
  2. Intermediate circle: this refers to issues that have changing social values and priorities. Essentially it depends on the dynamics of the economy as a whole. 
  3. Outermost circle: this is a vague area for newer responsibilities to be carried out. It isn’t still completely developed and hence much attention is paid to the inner circle compared to the outer ones. 

TATA CASE STUDY:

In a free enterprise, the community is not just another stakeholder in business but is in fact

the very purpose of its existence.”

– Jamsetji Nusserwanji, Tata Founder, Tata Group.

The TATA group has been a frontrunner in CSR both pre- and post-independence, leading the government to appoint members of the group to chair committees to implement CSR rules. About two-thirds of the equity from the parent company is utilised in philanthropic interests. Even when the economic conditions didn’t support external costs, the company made sure to do whatever it could to contribute to society. About 14% of profits are moved towards social causes every year by the company.  Some of the remarkable achievements of the TATA group have been mentioned below:

  1. Tata as a company had reportedly helped many of Gandhiji’s campaigns in South Africa. 
  2. The group amended and tweaked its Company articles to try and fit in CSR as a maxim to follow. Free vocational training, health benefits, and employee benefits were maximised for employee satisfaction. A new article was added stating to be mindful of its social and moral responsibilities to consumers, employees, shareholders, society and the local community.
  3.  Over 500 self-help groups have been established by the company, especially for women in farming.  Self-help groups refer to informal groups which are often governed by members to improve conditions for their sector. They pool money and also ask for funding from corporates. Self-help groups help people for a more legitimate group in order to secure funding. 
  4. Social welfare organisations:

The group helps a diverse population by funding organisations such as The Tribal Cultural Society and the National Association for the Blind. It has established various schools and bodies such as the Shishu Niketan School of Hope, Tata Steel Rural Development Society. Not only does this help people in need by connecting funds to targeted areas but also establishes a relationship with the people receiving funding, thereby promoting goodwill and tax reduction.

With Tata spread across various industries such as the automobile industry and the Tea industry, the company tries to look into industry-specific problems and finds solutions for them. 

  1. TATA automobiles promote green energy and make products with recycled material. Furthermore, EVs are heavily promoted by the company to reduce emissions. Further, the joined hands with the Cummins Engine Company in USA to help create engines which decrease emissions. 
  2.   TATA Tea established the Srishti Welfare Centre at Munnar, Kerala to help children and relatives of the employees of tea estates in Kerala. 

The establishment of the CSR rule by the Companies Act 2013 saw an uproar in the private sector. They criticised the act for trying to push government duties onto the corporate sector and claimed that the tax being paid must cover all expenses for public welfare. However, it is to be noted that while some masses of society are furthering their wealth to unimaginable amounts, the majority of the population still suffers from acute poverty and illness. A company ultimately is made by the surroundings of it—including people, resources and environment and hence must do its best to give back to its surroundings. 

RULES: 

The Act of 2013 lays down many rules for encouraging CSR:

  1. The act is applicable to companies with a turnover of more than 1000 crores, or a net worth of 500 crores or more or a net profit of 5 crores or more during a financial year. 
  2. As mentioned above, there must be a separate committee to govern CSR functions in the company.
  3.  The act prescribes that a company must spend at least 2% of its profits on all CSR activities. 

The Act also defines what is counted as CSR. Few of them are listed below:

  1.  Works in terms of education such as improving vocational skills, and schools for disabilities for mainly children, elderly and women.  Promoting sports among the youth. 
  2. Technological development among the poor by providing devices and internet  to stay connected 
  3. Helping with hunger by collaborating with organisations such as Akshaya Tritiya etc. helping access drinking water and necessities and essentials.  
  4. Setting up SHGs, orphanages, care centres and hospitals for those in need
  5. Promoting gender equality and encouraging more women to take up jobs.
  6. Protection of environment and heritage, promoting sustainable development in all departments such as animal welfare, agriculture, forestry etc.
  7. Contributing to the Prime Minister’s relief fund and other schemes set up by the government. 

Non-compliance with CSR mandates gives rise to stringent penalties.

AMENDMENTS:

The Act went through some amendments since 2013. I will be discussing the amendments and their significance below:

  1. 2015: This amendment greatly simplified the procedural aspect of the formation of private companies. The rationale behind this was that micromanaging certain aspects can be an encumbrance to comply with. This helped the process of incorporation easier, thereby promoting new business ventures to develop. 
  2. 2017: This further relaxed norms of certain aspects that the government saw as trivial. This further increased the ease of doing business. It also increased the board’s responsibilities, to help foster good governance.  This largely helped with boosting investor confidence. 
  3. 2019: this was a major shift in the Act as it sought to decriminalize a few offences previously putting members into jail. While stringent punishment is valid, excessive punishment creates fear and must be curbed to help grow trade. Another major shift was the relaxation of CSR provisions. 
  4. 2020,2021: Due to COVID-19, not many changes were made. However, the Act gave importance to promoting rural entrepreneurs. 

SUGGESTIONS AND CONCLUSION:

The Companies Act, 2013 in my opinion was a landmark bill. This revolutionised the way companies functioned in India. This is the fruit of all the hurdles and obstacles faced by the Indian market in a newly independent phase. The act not only promotes corporate governance domestically, but also plays an important role in how the world perceives trade with India. Stricter rules regarding fraud will invite more and more companies to set up in India and create trust for investments. Going forward, minor tweaks in the same can help greatly cope with changing dynamics in the market. CSR can be almost attributed to work like fundamental duties. The reduction of CSR compliances however is a vice of the amendments. Even a moment of relaxation will cause companies to find loopholes in spending money towards charity and not profit. All in all, the Act has achieved its status as one of the most valid and arguably well-written bills of the parliament. It covered all the basic necessities to help build the economy, without causing much backlash from communities. The timing of the bill too was perfect to help start the flames of a consumeristic time, where customers, shareholders and interested parties are placed first in terms of priorities.  

MAHATHI NANGA 

Op Jindal Global University