Against the backdrop of the collapse of corporate giants like Enron and the enactment of the Sarbanes-Oxley Act in the US, the Government of India has formulated the Companies (Amendment) Bill, 2003.

The bill, an amalgam of the recommendations by various committees, is aimed at better corporate governance and greater transparency in corporate reporting, and includes a number of laudable proposals.

Greater transparency in financial reporting was suggested in amendments relating to the appointment of auditors, their duties and functions. The categories of persons disqualified from being appointed as auditor of a company was enlarged and prohibitions from accepting certain assignments in the auditee company, its holding and subsidiary companies were introduced. The audit committee was to be rendered more efficacious by granting it additional powers and functions and provisions relating to public issues by companies were tightened to crack down on fly-by-night operators.

But a number of proposed amendments also received brickbats from certain quarters. The quantum of penalties under the act was sought to be enhanced.

The bill recast the composition of the board of directors by providing in the case of certain companies the minimum size of the board and also that a majority of the directors must be 'independent' – not associated or concerned with the company, not related to the management of the company, and not holding 2% or more of the company's share capital.

These proposals were met with much opposition since the promoters of a company were more attuned to its needs than independent directors. The categories of people excluded from being regarded as independent would make it extremely difficult for companies to appoint competent persons as directors. Amendments proposing that companies must have only one layer of subsidiaries and that all investments should be made through a single investment company prevented diversion of funds.

Offences under the act are punishable against 'officers in default' and the bill made the independent directors, ordinary directors and intermediaries in the stock market liable under the act.

Despite its good intentions, the bill was drafted in a manner that resulted in ambiguous and conflicting interpretations and a number of proposed clauses require clarification and modification. It also comes down rather strongly on corporate independence.

In October 2003, under intense pressure from corporates and industry associations, the Union Cabinet returned the bill to the Department of Company Affairs (DCA) for redrafting. The DCA is currently engaged in a complete overhaul of the act to make it more industry friendly and a new 'avatar' of the bill is likely to be introduced this year.

Sankalita Shome is a lawyer in the corporate and securities law practice group at Nishith Desai Associates in Mumbai.