How Will India’s New Companies Act Affect Directors?

Bangalore skyline

India is one of those countries we as D&O practitioners come across regularly when analysing the need for local policies on behalf of our international and global clients. Received wisdom has it that local policies are generally needed in India to protect the interests of directors resident there against the threat of liability and to ensure regulatory compliance. So far so good, but what in fact are the threats faced by directors in India and how have they evolved?

The Companies Act, 2013

To answer the second of those questions first, India last year enacted a completely new Companies Act last year.  It replaces the old 1956 Act which had been amended no fewer than 25 times. The new Act covers the whole terrain of Indian company law and it is well beyond my scope here to summarise its contents. Also there are a range of complex transitional provisions affecting when all the various new laws come into force. There are nevertheless some eye-catching new features as summarised below.

  1. The new 2013 Indian Companies Act codifies for the first time the duties owed by directors to companies and lists the applicable fines for breaches of such duty. No doubt breach of the new code could give rise to civil liability as well as fines and penalties.
  2. For the first time D&O insurance is given official recognition as a means of protecting directors against liability.
  3. The 1956 Companies Act imposed the same liability on the person in charge of a company as the company itself. In other words, that individual could be prosecuted for the same offences as committed by the company.  The 2013 Act broadens the term “officer in default” to expressly include the chief executive officer, the chief financial officer, the share transfer agent and the company’s merchant banker within the class of “individuals who can be prosecuted”.
  4. New provision has been made for the direct enforceability of shareholders rights against directors by enabling them to claim compensation.
  5. The Registrar of companies is given increased inspection and enquiry powers including powers of search and seizure.  The Act also caters for the establishment of a new serious fraud investigation office.
  6. Fresh and strengthened mandates for audit and remuneration committees of public companies.

Several of these new features merit further scrutiny and attention and perhaps legal advice.Interesting questions as to the scope, limitations and suitability of local insurance protections from liability for directors may also arise. Indeed maybe for a company truly concerned about the exposure of its directors in India, the decision to buy a local D&O insurance policy in India should marks the start of a process of enquiry and due diligence rather than the end of one!

About Francis Kean

Francis is an Executive Director in Willis Towers Watson's FINEX Global, where he specializes in insurance for Dir…
Categories: Asia, Directors & Officers | Tags: , ,

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