Investor protection to get a big boost

Though the Companies Act, 1956, provided for several provisions to protect the interests of shareholders, it did not keep pace with the changing business environment.

The new Companies Act addresses several investor concerns and seeks to provide a more hospitable environment for minority shareholders, especially in the wake of scams and scandals, such as the one that hit Satyam Computer Services in 2009.

Virendra Jain, president of Midas Touch Investors' Association, a non-profit organisation working for safeguarding investors' interest, recalls how the association could not maintain a class action suit in the Satyam case as there was no provision under the Companies Act, 1956, for such an action.

"We had to move under the Consumer Protection Act and the case was dismissed eventually by the Supreme Court. We worked actively with the ministry to bring in the class action provisions, which will be a big boon for investors," Jain said.

Satyam's founder-chairman, B Ramalinga Raju, shook the Indian corporate world in January 2009 when he confessed to falsifying the software company's accounts.

Under the new Act, a prescribed number of members and depositors can file an application against the management or the company "if its affairs are conducted pre-judicial to their interest or the interest of the company and may call for specified orders in such respect".

An application might be filed or any other action taken under this section by any person, group of persons or any association representing the persons affected by any act or omission. Further, if the members seek any damages or compensation or demand any other suitable action from or against an audit firm, the liability shall lie on the firm and of each partner involved.

The companies Act also gives protection to whistleblowers who may bring out some wrongdoing in the company. The Act contains provisions to enable the directors and employees to report concerns. Such a vigil mechanism will place adequate safeguards against victimisation of persons .

Investors are also entitled to an exit option if a company changes its objects. "Specific provision has been formulated to provide exit opportunity by the promoters to the dissenting shareholders being those shareholders who have not agreed to the proposal to vary the terms of contracts or objects referred to in the prospectus," Corporate Professionals, a corporate financial advisory firm, said in a note describing the provisions in the new law.

Further, the new Act puts restrictions on non-cash transactions involving directors. Companies cannot enter into any arrangement by which a director of the company or of its holding company or any person connected with him can acquire assets for the consideration other than cash from the company and vice versa without the approval of the company in a general meeting.

The Act also provides for conduct of internal audit of certain companies. Other key investor-friendly provisions listed by the Corporate Professional note include:

• Prohibition on forward dealings in securities of company by a key managerial personnel
• Prohibition on insider trading of securities Voting through electronic means No mid-night annual general meeting – The time of calling of AGM has been specified to be in business hours, that is, between 9 a.m. and 6 p.m.
• Quorum for meetings – fixed as per the membership base of the Company instead of specified number irrespective of size.
• Minutes of proceedings of general meeting, meeting of board of directors and other meeting and resolutions passed by postal ballot
• Maintenance and inspection of documents in electronic form