All companies are currently governed by the Companies Act, 1956. The Act has been amended 24 times since then. Three committees were formed in the last ten years, chaired by Justice V B Eradi (2001), Naresh Chandra (2002) and J J Irani (2005) to look into various aspects of corporate governance and company law. The Companies Bill, 2009 incorporates some of these recommendations. Main features The major themes of the Bill are as follows: It moves a number of issues that are currently specified in the Act (and its schedules) to the Rules; this change will make the law more flexible, as changes can be made through government notification, and would not require an amendment bill in Parliament. On a number of issues, the Bill moves the onus of oversight towards shareholders and away from the government. It also requires a super-majority of 75 percent shareholder votes for certain decisions. The powers of creditors have been enhanced in cases where a company is in financial distress. It has new provisions regarding independent directors and auditors in order to strengthen corporate governance. Finally, the bill increases penalties, and provides for special courts. Types of companies The Bill provides for six types of companies. Public companies need to have at least seven shareholders, and private companies between two and 50 shareholders. Charitable companies should have at least one shareholder, may have only certain specified objectives, and may not distribute dividend. Three new types of companies have been defined, which have less stringent provisions. These are one-person companies, small companies (private companies with capital less than Rs 50 million and turnover below Rs 200 million), and dormant companies (formed for future projects, or no operations for two years). Corporate Governance The Bill defines the duties of directors and norms for composition of boards. The number of directors is capped at 12. At least one director should be resident in India for at least 183 days in a calendar year and at least a third of the board should consist of independent directors. The Bill also sets guidelines for auditors. Certain related persons such as creditors, debtors, shareholders and guarantors cannot be appointed as auditors. Certain services such as book-keeping, internal audit and management services may not be undertaken by the auditors. Removal of an auditor before completion of term requires approval of 75 percent of the shareholders. Adjudication The Bill provides for a National Company Law Tribunal (NCLT) to adjudicate disputes between companies and their stakeholders. It also establishes an Appellate Tribunal. The NCLT may ask the government to investigate the working of a company on an application made by 100 shareholders or those who hold 10 percent of the voting power. Arrangements All arrangements such as mergers, takeovers, debt split, share splits and reduction in share capital must be approved by 75 percent of creditors or shareholders, and sanctioned by the NCLT. Standing Committee’s Recommendations The Parliamentary Standing Committee on Finance has submitted its report, and suggested several significant amendments. Corporate governance Substantive matters covered in various corporate governance guidelines should be contained in the Bill. These include: separation of offices of Chairman and Chief Executive Officer; limiting the number of companies in which an individual may become director; attributes for independent directors; appointment of auditors. Delegated legislation The Committee noted that the Bill provided excessive scope for delegated legislation. Several substantive provisions were left for rule-making and the Ministry was asked to reconsider provisions made for excessive delegated legislation. The Ministry has agreed to make some changes to include the following provisions in the Act: the definition of small companies; the manner of subscribing names to the Memorandum of Association; the format of Memorandum of Association to be prescribed in the Schedule; the manner of conducting Extraordinary General Meetings; documents to be filed with the Registrar of Companies. The Committee recommended that provisions relating to independent directors in the Bill should be distinguished from other directors. There should be a clear expression of their mode of appointment, qualifications, extent of independence from management, roles, responsibilities, and liabilities. The Committee also recommended that the appointment process of independent Directors should be made independent of the company’s management. This should be done by constituting a panel to be maintained by the Ministry of Corporate Affairs, out of which companies can choose their requirement of independent directors. Investor protection The Ministry, in response to the Committee’s concerns for ensuring protection of small investors and minority shareholders, indicated new proposals. These include: enhanced disclosure requirements at the time of incorporation; shareholder’s associations/groups enabled to take legal action in case of any fraudulent action by the company; directors of a company which has defaulted in payment of interest to depositors to be disqualified for future appointment as directors. The Ministry also made some suggestions on protection of minority shareholders/small investors, which the Committee accepted, including the source of promoter’s contribution to be disclosed in the Prospectus; stricter rules for bigger and solvent companies on acceptance of deposits from the public; return to be filed with Registrar in case of promoters/top ten shareholders stake changing beyond a limit. Corporate Delinquency Recommendations include: subsidiary companies not to have further subsidiaries; main objects for raising public offer should be mentioned on the first page of the prospectus; tenure of independent director should be provided in law; the office of the Chairman and the Managing Director/CEO should be separated. The Committee emphasised that the procedural defaults should be viewed in a different perspective from fraudulent practices. Shareholder democracy The Committee recommended that the system of proxy voting should be discontinued. It also stated that the quorum for company meetings should be higher than the proposed five members, and should be increased to a reasonable percentage. Foreign companies The Bill requires foreign companies having a place of business in India and with Indian shareholding to comply with certain provisions in the proposed Bill. The Committee observed that the Bill does not clearly explain the applicability of the Bill to foreign companies incorporated outside India with a place of business in India. It recommended that all such foreign companies should be brought within the ambit of the chapter dealing with foreign companies. Next steps The report of the Standing Committee indicates that the Ministry has accepted many of its recommendations. It is likely that the government will take up the Bill for consideration and passing during the winter session, which starts on 9th November. This article was published in PRAGATI on November 1, 2010
Compulsory voting at elections to local bodies in Gujarat Last week, the Gujarat Local Authorities Laws (Amendment) Act, 2009 received the Governor’s assent. The Act introduces an ‘obligation to vote’ at the municipal corporation, municipality and Panchayat levels in the state of Gujarat. To this end, the Act amends three laws related to administration at the local bodies- the Bombay Provincial Municipal Corporation Act, 1949; the Gujarat Municipalities Act, 1963 and; the Gujarat Panchayats Act, 1993. Following the amendments, it shall now be the duty of a qualified voter to cast his vote at elections to each of these bodies. This includes the right to exercise the NOTA option. The Act empowers an election officer to serve a voter notice on the grounds that he appears to have failed to vote at the election. The voter is then required to provide sufficient reasons within a period of one month, failing which he is declared as a “defaulter voter” by an order. The defaulter voter has the option of challenging this order before a designated appellate officer, whose decision will be final. At this stage, it is unclear what the consequences for being a default voter may be, as the penalties for the same are to be prescribed in the Rules. Typically, any disadvantage or penalty to be suffered by an individual for violating a provision of law is prescribed in the parent act itself, and not left to delegated legislation. The Act carves out exemptions for certain individuals from voting if (i) he is rendered physically incapable due to illness etc.; (ii) he is not present in the state of Gujarat on the date of election; or (iii) for any other reasons to be laid down in the Rules. The previous Governor had withheld her assent on the Bill for several reasons. The Governor had stated that compulsory voting violated Article 21 of the Constitution and the principles of individual liberty that permits an individual not to vote. She had also pointed out that the Bill was silent on the government’s duty to create an enabling environment for the voter to cast his vote. This included updating of electoral rolls, timely distribution of voter ID cards to all individuals and ensuring easy access to polling stations. Right to vote in India Many democratic governments consider participating in national elections a right of citizenship. In India, the right to vote is provided by the Constitution and the Representation of People’s Act, 1951, subject to certain disqualifications. Article 326 of the Constitution guarantees the right to vote to every citizen above the age of 18. Further, Section 62 of the Representation of Peoples Act (RoPA), 1951 states that every person who is in the electoral roll of that constituency will be entitled to vote. Thus, the Constitution and the RoPA make it clear that every individual above the age of 18, whose name is in the electoral rolls, and does not attract any of the disqualifications under the Act, may cast his vote. This is a non discriminatory, voluntary system of voting. In1951, during the discussion on the People’s Representation Bill in Parliament, the idea of including compulsory voting was mooted by a Member. However, it was rejected by Dr. B.R. Ambedkar on account of practical difficulties. Over the decades, of the various committees that have discussed electoral reforms, the Dinesh Goswami Committee (1990) briefly examined the issue of compulsory voting. One of the members of the committee had suggested that the only effective remedy for low voter turn outs was introducing the system of compulsory voting. This idea was rejected on the grounds that there were practical difficulties involved in its implementation. In July 2004, the Compulsory Voting Bill, 2004 was introduced as a Private Member Bill by Mr. Bachi Singh Rawat, a Member of Parliament in the Lok Sabha. The Bill proposed to make it compulsory for every eligible voter to vote and provided for exemption only in certain cases, like that of illness etc. Arguments mooted against the Bill included that of remoteness of polling booths, difficulties faced by certain classes of people like daily wage labourers, nomadic groups, disabled, pregnant women etc. in casting their vote. The Bill did not receive the support of the House and was not passed. Another Private Member Bill related to Compulsory Voting was introduced by Mr. JP Agarwal, Member of Parliament, in 2009. Besides making voting mandatory, this Bill also cast the duty upon the state to ensure large number of polling booths at convenient places, and special arrangements for senior citizens, persons with physical disability and pregnant women. The then Law Minister, Mr. Moily argued that if compulsory voting was introduced, Parliament would reflect, more accurately, the will of the electorate. However, he also stated that active participation in a democratic set up must be voluntary, and not coerced. Compulsory voting in other countries A number of countries around the world make it mandatory for citizens to vote. For example, Australia mandates compulsory voting at the national level. The penalty for violation includes an explanation for not voting and a fine. It may be noted that the voter turnout in Australia has usually been above 90%, since 1924. Several countries in South America including Brazil, Argentina and Bolivia also have a provision for compulsory voting. Certain other countries like The Netherlands in 1970 and Austria more recently, repealed such legal requirements after they had been in force for decades. Other democracies like the UK, USA, Germany, Italy and France have a system of voluntary voting. Typically, over the last few elections, Italy has had a voter turnout of over 80%, while the USA has a voter turnout of about 50%. What compulsory voting would mean Those in favour of compulsory voting assert that a high turnout is important for a proper democratic mandate and the functioning of democracy. They also argue that people who know they will have to vote will take politics more seriously and start to take a more active role. Further, citizens who live in a democratic state have a duty to vote, which is an essential part of that democracy. However, some others have argued that compulsory voting may be in violation of the fundamental rights of liberty and expression that are guaranteed to citizens in a democratic state. In this context, it has been stated that every individual should be able to choose whether or not he or she wants to vote. It is unclear whether the constitutional right to vote may be interpreted to include the right to not vote. If challenged, it will up to the superior courts to examine whether compulsory voting violates the Constitution. [A version of this post appeared in the Sakal Times on November 16, 2014]
