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Globally there has been growing demand for giving shareholders greater say on executive compensation — what is referred to as 'say on pay' vote. Legislation now requires a say on pay vote in the US, and similar legislation is under development in the UK and other countries. In India, managerial remuneration has always been subject to shareholder vote, although not always with active participation from institutional and minority shareholders.
The Companies Bill now enhances some of the disclosures relating to managerial remuneration, which would provide shareholders more relevant information to participate and vote on these matters. The Bill requires a disclosure of the compensation details between the fixed component and performance-linked incentives along with the performance criteria. Further, it requires every listed company to disclose the ratio of the remuneration of each director to the median employee's remuneration and other details as prescribed.
Leg-up for minority shareholder rights
Currently under the Companies Act, certain related-party transactions require approval of the central government and the listing agreement requires the company to present a list of such transactions and related information to the audit committee.
However, under the Bill, related-party transactions other than those entered into in the ordinary course of business on an arm's length basis require Board approval, and in the case of companies with paid-up capital or transaction amounts exceeding prescribed limits, require shareholders' approval through a special resolution.
For shareholder approval, none of the related parties interested in that transaction are entitled to vote. Therefore, in a related-party transaction involving the promoters, which requires shareholder approval, only the minority or non-promoter shareholders can vote. Minority shareholder rights coming of age, indeed.
Smaller Bill, but bulky rules?
Companies Bill 2012 both simplifies and complicates Indian corporate law. On one hand it reduces the number of sections from over 650 in the Act to 470 in the Bill. But on the other, it substantially increases the extent of delegated legislation; there are over 300 places where the rules need to be prescribed, and these clauses in the Bill would be effective only when the related rules are framed and notified. The current structure provides the Central Government flexibility to amend the rules as and when required, without going to Parliament for changes.
So, while the Bill per se is shorter, it also makes the legislation complex for corporates, with the law expected to be strewn across numerous rules and notifications in addition to the Bill. And this can only worsen over the years as rules are amended from time to time.
New vehicle for sole proprietors
Companies Bill 2012 introduces the concept of a One Person Company (OPC) for the first time in India. It defines an OPC as a company which has only one member. India is known for entrepreneurship and the country has a large unorganised sector, with a plethora of sole proprietorships. Arguably the oldest and most common form of doing business in India, sole proprietorships previously had limited options for incorporating the business. Although no empirical studies have been done as yet on the advantages of incorporating (for example, limited liability) vis-à-vis sole proprietorship (presumably fewer compliance requirements), an OPC is certainly a welcome and, perhaps, much-needed option available to business owners, and allows them to work within the structure of a corporate entity. The compliance requirements for an OPC have already been simplified as compared to other companies, and it will be interesting to see the response from sole proprietorships towards embracing this alternative.