With
passage by the upper House of the Parliament on 8 August, the new Companies
Bill will replace the nearly six-decade-old Companies Act of 1956. The bill
will now go to President for his consent. The new legislation will come into
effect with notification by the corporate affairs ministry after the
presidential assent.
This
legislation is indeed a milestone in the history of company law and will
revolutionize the administration and management of businesses in the times to
come. The provisions of the bill are meant to prevent a Satyam Computer
Services Limited-like fraud, the biggest in India's corporate history running
into $1.5 billion detected in 2009. Working Rules which are expected to be put
out in the public domain before notification would provide greater clarity on
the operative provisions in the Bill while taking into account legitimate
concerns of business community.
The
new Companies Bill, which seeks to enhance compliance and transparency, makes
corporate social responsibility mandatory and protects the interest of
employees and small investors. The new law provides for improved corporate
governance, enhanced transparency besides increased accountability of company
managements and auditors. In fact, it is designed to balance the stakeholders'
interests, viz promoters, shareholders and public at large.
The
new Bill had introduced several changes and concepts which would simplify
regulations and bring greater clarity and transparency in managing businesses.
The global environment calls for economic laws and regulations that are
effective and efficient, have a reasonable compliance cost and keep Indian
businesses competitive.
Now
that the law is ready, it is time to focus and work on the practical aspects of
complying with its provisions. The new Companies Bill is commensurate with
"global standards vis-à-vis disclosure requirements, increased democratic
rights for shareholders, self-regulation and accountability.
The key highlights of the new Companies Bill are:
Introduction of concept of ‘Corporate Social
Responsibility’ (CSR):
With the introduction of CSR regime, India would possibly become
the first country to have Corporate Social Responsibility (CSR) spending
through a statutory provision. The new law would require companies that meet
certain set of criteria, to spend at least two percent of their average profits
in the last three years towards Corporate Social Responsibility (CSR)
activities. This is applicable to companies with a net worth of Rs 500 crore or
more, or Rs 1,000 crore turnover or Rs 5 crore net profits, who have to set up
a corporate social responsibility committee. The Bill allows companies
the freedom to choose areas of work for CSR; however the companies will also
have to give preference to the local areas of their operation for such
spending. If they are unable to meet CSR norms, they will have to give
explanations and may even face penalty.
Class Action Suit
The bill provides for class action suit, which is key weapon for
individual shareholders to take collective action against errant
companies. The move is being seen as a positive as it empowers small
shareholders to seek answers in case they feel that a company’s management or
its conduct of affairs is prejudicial to its interests or its members or
depositors.
Regulations for appointment and engagement of Auditors
The
new legislation limits the number of companies an auditor can serve to 20
besides bringing more clarity on criminal liability of auditors. The rotation
of auditors will take place every five years, while an audit firm cannot have
more than two terms of five consecutive years. It also makes auditors subject
to criminal liability if they knowingly or recklessly omit certain information
from their reports.
Setting up of Courts for Speedy Trial of Company cases.
The
proposed legislation would ensure setting up of special courts for speedy trial
and stronger steps for transparent corporate governance practices and curb
corporate misdoings.
Check and Balance for Directors
The
term for independent directors have been fixed for five years too. The
maximum number of directors in a private company has been increased from 12 to
15, which can be increased further by special resolution. It will be mandatory
for companies that one-third of their board comprises independent directors to
ensure transparency. Also, at least one of the board members should be a woman.
The concept of ‘One Person Company’ has been introduced in the new company law.
Acceleration in Mergers and Amalgamations
The
new bill will speed and accelerate amalgamations and mergers. While the old
bill only permitted merger of a foreign company with an Indian company, the new
bill allows merger of Indian companies into foreign companies which would aid
in consolidation of cross-border businesses/assets. The new bill permits
merger of a listed company with an unlisted one, subject to exit opportunity
being offered to shareholders of the listed company. While the old bill depended on precedents for merger of a subsidiary
with a parent (or between two small companies), the new bill provides a
separate and simplified regime for this without any approval from High
Court.
Miscellaneous
· To help in curbing a
major source of corporate delinquency, the Bill introduces punishment for
falsely inducing a person to enter into any agreement with bank or financial
institution, with a view to obtaining credit facilities.
· Increased the number of members of private companies from 50 to
200. This allows companies access to large pool of capital without going public.
· Gives rights for
objections to schemes to only creditors who owed over 5 per cent and minority
shareholders with over 10 per cent stake against no thresholds earlier.
· Gives recognition to transfer restrictions on inter-se
shareholders – ‘Right of First Refusal’ will be enforceable. This would clear
existing ambiguity on legal enforceability on transfer restrictions under
JV/shareholder agreements.
· Contains a detailed mechanism for acquisition of shares by majority
shareholder from minority shareholders.
· Restricts creation of multi-layered holding structures,
prohibiting making investments through more than two layers of investment
companies.
· Bans holding
‘Treasury Stock’, which is often used by companies to increase shareholding or
future monetization after consolidation.
· Corporate must
disclose the difference in salaries of the directors and that of the average
employee. This will protect the interest of shareholders as well as
employees.
· Mandates payment of
two years’ salary to employees in companies which wind up operations.
· Gives more statutory
powers to the government’s investigative arm Serious Fraud Investigation Office
(SFIO) to tackle corporate fraud.
· Financial Year of
any company can end only on March 31 and only exception is for companies, which
are holding / subsidiary of a foreign entity requiring consolidation outside
India, can have a different financial year with the approval of Tribunal.
Source: lawyersclubindia
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