Transparency on board in Companies Act changes

The minimum application or investment by an applicant would have to be Rs 50,000 or more paid only through cheque,demand draft or electronic transfer to trace the ultimate beneficiary and the end use of funds. The offer for subscribing to private equity can be done only four times in a financial year and once in a calendar quarter with a minimum gap of 60 days between two offers.

The existing Act permits private placement of shares to 49 persons or less without a cap on the equity amount or the number of offers. Only when a firm offers shares or debentures to 50 or more people,the placement is treated as a public offer,with the company forced to file a prospectus with proper disclosures.

Unlisted companies have been violating the Companies Act and raising unlimited amounts through private placement to more than 50 “friends,associates or other persons” without attracting the disclosures of a public issue.

An example is Sahara Group firms — Sahara India Real Estate Corp and Sahara Housing Investment Corp — which raised Rs 4,843 crore from 6.6 million investors through fully convertible debentures even though their boards had authorised a private placement.

The final version of the proposed amendments seeks total disclosure by insisting that firms offer such securities through a “private placement offer document” sent only to persons whose names were recorded by the company prior to the invitation to subscribe.

Subsequently,they would have to file with the Registrar of Companies the “complete list of all security holders,with their full names,addresses,number of securities and such other information as prescribed”. Any violation would attract a fine amounting to the offered value or Rs 10 crore,whichever is higher.

Transparency would also be ensured in these companies — which collect paid up capital of Rs 5 crore or more — through new clause 145 (3) under which one-third of their board directors would have to be independent directors.

Currently,only listed companies have to provide for appointment of independent directors on their Board under the Listing Agreement with SEBI.

These independent directors would have to be eminent persons with no pecuniary relationship or transaction with the company or its subsidiaries,and who have not held any position in them in the past three years.

The relatives of the independent directors also should not have had any money dealing beyond Rs 50 lakh or 2 per cent of the gross turnover or total income,whichever is lower,in the last two years or during the current fiscal,says the proposed amendment.

These rules,approved by the Law Ministry,would also be applicable to listed companies where the role of independent directors has been a topic of public debate,especially after the Satyam Computer board approved a buyout of Maytas Infra and Maytas Properties.

The buyout was subsequently rejected by the shareholders and Satyam founder Ramalinga Raju landed in prison for alleged corporate fraud of Rs 14,000 crore — the largest in India’s corporate history.

In order to ensure that interests of independent directors do not get aligned with the firms,the amendment stipulates that “no independent director should have a tenure exceeding,in the aggregate,a period of five consecutive years” and only in exceptional circumstances could they be given five more years.

Any independent director who has served for 10 years can be reappointed in the same company after a cooling off period of three years,it adds. They cannot be given stock options and would be entitled to a quarterly fee of Rs 6 lakh in companies with a paid-up capital of Rs 10 crore or turnover of Rs 50 crore and above.

Auditors would also have to be rotated with individual auditors being changed every four years and auditing firms every seven years with cooling off period of three years and five years respectively.

The Satyam fraud,where a maze of subsidiaries made it difficult to track the corporate accounts and hence the flow of funds,has also prompted a new entry that henceforth,“a company shall make investment only through two layers or such number of layers of investment companies as may be prescribed”.

Multiple layers of subsidiaries were believed to have been used by Reliance Telecom to route money for acquiring 2G licence for Swan Telecom as the present act allows firms to establish any number of subsidiaries,which in turn could set up their own subsidiaries,and so on.