Independent directors, who have greater responsibilities under the new companies law, will face challenges in ensuring appropriate succession planning at firms, a senior government official said today.
Most provisions of the new Companies Act, which provides for a robust corporate governance framework and stronger steps to protect the interests of shareholders, came into effect from April 1.
A major challenge in implementing the new law would be in assimilating the "spirit of the inclusive model of corporate governance," M J Joseph, Additional Secretary at the Corporate Affairs Ministry, said today.
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"Corporate India would have to face up to the rigours of the new law, especially its transformative aspects related to enhanced standards of corporate governance and related-party transactions," he said here.
The new law envisages, among other things, a wider role for independent directors in governance issues, including performance evaluation of executive directors.
"It will be equally challenging for independent directors to ensure appropriate succession planning and grooming senior management level personnel for assuming higher responsibilities," he said at a conference organised by the PHD Chamber of Commerce and Industry.
Going by reports, many companies do not have long-term succession planning in place.
Joseph also said independent directors would also have to ensure that companies engage effectively with stakeholders, especially the local community.
The new law requires some companies to shell out at least 2 per cent of their three-year annual average net profit towards corporate social responsibility (CSR) activities.
Engagement with stakeholders is "essential to identify and implement CSR projects. Formulation of CSR policy will be challenging. It will also be challenging for boards to monitor and evaluate CSR projects to ensure that the resources allocated to CSR are optimally utilised," he said.
The ministry is implementing the Companies Act, which has 29 chapters, seven schedules and 470 sections.
About 187 sections, including those related to setting up the National Company Law Tribunal and its appellate body, are yet to be implemented.
"The matter is presently before the Supreme Court due to a legal challenge. After a final decision is pronounced, the ministry would take necessary action to establish required number of benches at different locations of the country. This process may take more than a year," Joseph said.
