 "New Companies Act takes effect")
Among these are setting up of a National Company Law Tribunal (NCLT), a National Financial Reporting Authority (NFRA), winding-up of sick companies and special courts. Companies will be required to follow the provisions in this regard of the old Companies Act, 1956. Some of the left out sections also related to the Investor and Education Protection Fund, compromise and arrangement, oppression and mismanagement, fraud and the damages required to be paid by companies involved.
So far, the government has notified 283 of the 470 sections. The first notification, of 99 sections, was in 2013. The provisions on corporate social responsibility (CSR) were notified on February 27. Last week, the ministry of corporate affairs (MCA) notified 183 new sections, to take effect from Tuesday.
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Experts say the new law will bring more transparency in corporate governance, while allowing flexibility to companies in exceptional situations. Initially, the government faced a lot of criticism on the implementation and lack of clarity in the law. The draft rules and, eventually, notification of final rules by MCA in recent months have helped ease the scenario to a large extent, they say.
“There is a lot of clarity now. Since some of the sections are yet to be notified, companies are expected to face a bit of confusion but still it is a good start,” said Pavan Kumar Vijay, managing director of Corporate Professionals, a financial and legal consultancy firm.
Replacing the 58-year-old legislation, the new law would have stricter norms for independent directors, auditors, key appointments and standards of conduct. While there is a mandatory provision on spending for CSR, companies can explain if they want to digress from the norm. From Tuesday, companies with a net worth of more than Rs 500 crore or revenue of more than Rs 1,000 crore or net profit of more than Rs 5 crore will have to mandatorily spend two per cent of their average net profit over the three preceding years on CSR activities.
Also, companies must file returns on public deposits within three months and reconstitute their boards, with at least one woman and two independent directors (IDs) within a year.
The sections notified by MCA include some key provisions related to public and private placement, allotment of securities, resolutions requiring special notice, powers to the Serious Fraud Investigation Office, one-person company, related-party transaction, audit and auditors, qualification of directors, board and its powers and revival and rehabilitation of sick companies, among others.
The new law will also bring stringent norms in place for IDs, who can be held accountable under the law for activities in the company, said Vijay. He added it would also be tough for companies not following good governance practices, as it was drafted on the basis of experience from scams such as those at Satyam and SpeakAsia.
According to Deloitte Touche Tohmatsu’s India senior director, Abhay Gupte, companies will have to be extra careful of the IDs they choose. Each ID needs to issue a certificate of his independence annually. Companies will also have to implement succession planning for this category, as they are required to be rotated after 10 years of overall service on the board.
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Some key norms companies will have to follow under the new Companies Act
- Have to devise strategy and policy for implementing CSR norms
- Reconstitute boards to add woman director(s), small shareholders directors and at least one resident Indian director
- Finalise a new code for independent directors
- Implement succession planning for its independent directors as they are required to be rotated after 10 years
- Reconstitute audit committees and establish nomination and remuneration
- Directors will have to sign a directors responsibility statement
- Will be required to make new disclosures pertaining to risk management, board evaluation, remuneration, CSR
- File returns with the Registrar of Companies on changes in top 10 shareholders