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Fifty-seven years after the first Companies Act was enacted and over 20 years after liberalisation, India on Thursday inched closer to bringing more contemporary issues, such as corporate governance, investor protection, corporate social responsibility and measures to check frauds, under the legislation.
Even as the treasury benches and the Opposition had yet to evolve a consensus on many other pieces of legislation, the much-awaited Companies Bill was passed by the Rajya Sabha on Thursday. The Bill, vetted twice by a Parliamentary panel, had already got the approval of the Lok Sabha in December last year. Now, only the President’s assent will be required for it to become law.
Once the new law is put in place, profit-making companies will be required to spend two per cent of their average net profit of three years on activities related to corporate social responsibility (CSR). Three years will be counted as preceding the one during which CSR was to be undertaken.
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However, the government has diluted the mandatory provision for CSR after objections from India Inc. Those failing to meet the obligation will have to explain the reasons for the shortfall. The norm is valid only for companies with net worth of Rs 500 crore or more, or turnover of Rs 1,000 crore or more, or a net profit of Rs 5 crore or more, during the past three financial years. Experts believe this would bring a paradigm shift because the old legislation only provided for voluntary guidelines for CSR.
Moving the Bill for consideration, Corporate Affairs Minister Sachin Pilot said private companies, while maximising their growth, also had a responsibility towards society, besides equitable and sustainable growth for the country. Pilot emphasised that the Bill aimed to encourage firms to undertake social welfare voluntarily, instead of imposing that through “inspector raj”.
The Bill, aimed at improving corporate governance, also contains provisions to strengthen regulations for companies, as well as auditing firms.
The new legislation, with 470 clauses, limits to 20 the number of companies an auditor can serve. It has also brought in more clarity on auditors’ criminal liability. Besides, the approved Bill also includes annual ratification of appointment of auditors for five years and introduction of a new clause related to offence of falsely inducing banks for obtaining credit. Companies will have to disclose ratio of remuneration of each director on the board to the average of employees’ salary.
To a question raised by a member of Parliament, Pilot said the employees stock option (Esop) could not be given to independent directors, as that was given to employees. A third of the board had to be filled with independent directors.
The government has also made provisions regarding incorporation of companies. According to the new law, even one person can form a company, as against the earlier requirement of at least two people.
Safeguarding workmen in the legislation, the new law mandates payment of two years’ salary to employees in companies that wind up operations. This liability would be overriding, Pilot said while pointing out companies had been allowed easy exit.
Besides, the changed law allows more statutory powers to the government’s investigative arm, the Serious Fraud Investigation Office (SFIO), to tackle corporate frauds.
The industry has appreciated the new Bill, saying it is commensurate with global standards vis-à-vis disclosure requirements, increased democratic rights for shareholders, self-regulation and accountability, while also restraining the management powers of promoters.
“We commend the government for prioritising the Bill. It shows the government’s commitment to ushering in the new era of corporate regulation,” Confederation of Indian Industry Director-General Chandrajit Banerjee said.
| A PRIMER ALL YOU WANTED TO KNOW ABOUT THE NEW COMPANIES LAW? |
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Why? The Companies Act, 1956, though amended 25 times, was not in sync with the new economic and corporate realities How long it took Four years since it was first introduced as Companies Bill, 2009, in the Lok Sabha on Aug 3, 2009 The course it took The Lok Sabha passed it in December 2012, after a Parliamentary standing committee gave its second report in August last year Key changes Rewritten extensively; new provisions for investor protection, better corporate governance and corporate social responsibility; new terms defined New corporate terms defined The Bill prescribes 33 new definitions, including those of CEO, CFO, etc Investor-protection measures Class action suit, better disclosure in financial statements and disclosure of interests of directors, etc; procedures related to disclosure of transactions with parties related to directors, promoters, etc, streamlined Anti-fraud measures Prohibition on forward dealings in companies’ securities by key managerial personnel; insider trading rules; restriction on non-cash transactions involving directors Business-friendly measures Provision for single-person company, woman directors; cap on number of persons in a private company raised to 200; e-voting recognised Key concerns Numerous provisions contain the clause “as may be prescribed”. Companies fear this might allow too much discretion for the ministry What now? The Bill goes for Presidential assent. The draft rules on the Companies Act will then be made public and the Act come into effect, with a notification by the corporate affairs ministry |
