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New corporate Law to minimise government interference
May, 31st 2008

A new corporate law which seeks to minimise government interference in the functioning of companies while entrusting greater responsibilities to shareholders is in the offing. The ministry of corporate affairs has circulated a draft Cabinet note on the proposed new company law to bring sweeping changes in areas like director boards constitution and functioning, bankruptcy rules, executive pay and financial statements.

Ministry officials said replacing the half-a-century-old statute with a sophisticated one and bringing a new limited liability partnership (LLP) law are top priority. We will introduce the LLP Bill in Parliament this winter session and the company law Bill in the Budget session, a source said.

The proposed new company law will increase disclosure requirements on various aspects and reduce government interference. Sources said the ministry has accepted many of the recommendations made by the J J Irani panel, that include reserving a third of board seats in listed companies for independent directors irrespective of whether the board chairman is a company employee. Contrary to a parliamentary panels recommendation, the new law will not impose a restriction on the number of subsidiaries a holding company can have as this is important for business planning.

The complex family trees of corporate houses have been a puzzle for regulators the world over. However, the new law will mandate companies to be transparent about their transactions with subsidiaries. Besides consolidation of parent-subsidiary balance-sheets, an out-of-the-way deal should be disclosed in the financial statements with justification. The new law will also bring more clarity into the contentious issue of direct and indirect control of entities which is important in the context of sectoral FDI ceilings.

The new law would not require public companies to take government approval before raising the strength of its board of directors or its subsidiarys board beyond 12. The board of directors will also get total freedom to raise the remuneration of directors including managing director against the current requirement of seeking government approval if it is to be raised beyond a limit prescribed in the Companies Act. The new law will also facilitate early detection of financial trouble and facilitate timely turnaround.

Besides, small companies with a paid-up capital or turnover below a threshold will get a special treatment in the new law. They will not be required to follow the norms that will increase compliance cost.

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