India’s Companies Bill amendment to allow foreign mergers

by Commercial Blawg on September 2, 2013

  • SumoMe

(Feature post regarding India’s Companies Bill amendment)

India’s parliament has passed a new corporate law which gives a welcome overhaul to the restrictive Companies Act of 1956, in an effort to stimulate the economy, eliminate unnecessary bureaucracy, improve governance and facilitate better business practice.

The news is positive for organisations in the country, but the introduction of The Companies Bill of 2012 should also be beneficial to the global corporate community. This is because the new legislation permits Indian enterprises to merge with foreign businesses.

Partner at Ernst & Young Amrish Shah told the International Business Times in an email that changes enabling this international collaboration will help bring India “up to the global platform”. The law which forbade these dealings was becoming an ever-bigger burden in an increasingly connected business world.

The jurisdictions in which this will apply are not yet confirmed, but the move will enable consolidation of businesses and assets across the Indian border. Efforts to reduce bureaucracy apply in a number of different merger deals, significantly simplifying the process for most businesses.

Notably, parent companies wishing to merge with a subsidiary organisation will no longer need to obtain approval from the high court, and the same goes for listed and unlisted businesses consolidating, as long as shareholders are offered the chance to exit.

Parliament has also approved changes that should help to foster independent boards, even limiting the term of directors to a maximum of two five-year stints to prevent fostering of relationships with management, which can compromise efficacy of this corporate governance strategy.

These independent executives are also prohibited from engaging in financial transactions with the company they sit for that are worth more than ten per cent of revenue. A newly-established National Financial Reporting Authority will be responsible for monitoring activity.

Corporate law changes also obligate businesses to enforce gender equality rules, since they are now required to reserve a certain number of board seats for women. Data from the OECD shows that, in 2009, less than ten per cent of boardroom members in Indian listed companies were female – less than the OECD average.

Another move which has taken the business world by surprise is the introduction of advised corporate social responsibility contributions. Certain large-profit companies will be compelled to donate two per cent of net profits towards these types of enterprise unless adequate reasoning for not doing so can be provided.

The government has been extremely clear about the types of project that are classified under social responsibility, including the likes of environmental sustainability initiatives, eliminating the vagueness surrounding classification before and ensuring valuable contributions.

All-in-all, passage of The Companies Bill, 2012 should help to improve business transparency and reduce bureaucracy at an advantage to executives and shareholders alike. The international corporate community should also stand to benefit through the authorisation of cross-border deals.


Commercial Blawg

Commercial Blawg

Business law blogger at CommercialBlawg
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