Disclosure norms to be tightened

The government will look beyond the recommendations of the Irani Committee report to formulate strict compliance and disclosure provisions in the new Companies Act.

"Compliance with the Companies Act cannot be left to 'self regulation'," an official said. The government would come up with a Bill which would provide for sufficient deterrence so that companies practiced good corporate governance, he added.

While the JJ Irani Committee report on Company Law has recommended scrapping of the process of inspection of books of accounts under Section 209A of the Companies Act, the ministry is of the opinion that the inspection provides a first line of check against non-compliance.

The Irani panel had suggested that rather than inspecting the working of companies through the enforcement machinery to assess whether or not the company was abiding by the law, the law should provide for a system of oversight through random scrutiny of documents filed with the Registrar of Companies.

Section 209A of the Act specifies that the books of account and other books and papers of every company have to be open to inspection by the registrar of Companies. As per the Section, directors and the officials of a company are required to produce the books and furnish explanations that may be required.

The Irani committee has recommended that the government instead strengthen the investigation process.

While the ministry is considering making the board of directors more accountable, the Irani panel has recommended that while undertaking the process of investigation and prosecution of directors of companies, statutory notices should be issued only to whole time directors, and non-whole time directors may be asked for explanation only after applying the "knowledge test".

According to the test, a director, who is found not to have initiated any action in spite of being aware of any wrong, should be held liable. On the question of disqualification of directors, the Irani committee has said that disqualification should be prescribed in the Act.

It has also suggested that disqualification of directors under Section 274(1)(g) should not be applicable to directors joining the boards of sick companies as it will discourage professionals.

While accepting the suggestion, the government is also considering specifying stricter norms for strengthening the provisions relating to disqualification of directors.

The government is also examining the issue of rotation of auditors as the idea has emerged as one of the means of ensuring that auditors remain independent.

The Irani committee has recommended that changing an auditor should be left to shareholders. Some members of the Irani panel were of the opinion that a rotation of auditors should take place every five years in all listed companies.