Wednesday 4 September 2013

India: Companies Act 2013 published in the Gazette

A copy of the Companies Act 2013 has been published in the Gazette of India: see here (pdf). There is much to note in the Act, of which only section one has been brought into force. A few highlights follow. First, much has been written about the new Act and corporate social responsibility. Section 135 requires companies of a certain size to spend at least two percent of their average net profits in pursuit of their corporate social responsibility policy. This has been described as a mandatory requirement. However, section 135 provides that if the required amount is not spent then the directors are required to disclose their reasons for not doing so.

Second, the Act contains provisions which in other jurisdictions are contained in corporate governance codes, including the composition of the board and the formation of audit, remuneration and nomination committees. The Act also contains, in Schedule IV, a code of professional conduct for independent directors. Third, the new framework for external auditor appointment and rotation is contained in section 139. Listed companies are not permitted to appoint (or reappoint) an audit firm for more than two terms of five consecutive years.

Fourth, the duties of directors are set out in section 166, which states that "[a] director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment." The way in which this duty is expressed raises several questions. Is this a single duty or several? Must directors always act in the best interests of the identified stakeholders? Is this feasible where, for example, a decision may be in the best interests of the shareholders but not the employees?

Update (9 September 2013) - the first tranche of draft rules have been published for consultation: see here.

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