The Union cabinet on Thursday cleared the revised draft of the Companies Bill, 2011, aimed at recplacing the 55-year-old extant Companies Act with a new one. The Bill is now expected to be introduced in Parliament in the Winter session.
The Bill aims at improving corporate governance, increasing transparency and making independent directors more accountable. The main Opposition party, BJP, welcomed the move while opposing nod to increasing FDI in pension and insurance sector.
The Bill proposes many new norms, including companies spending on corporate social responsibility (CSR) activities, more powers to the serious fraud investigation office (SFIO), only two layers of subsidiaries for investment in companies, mandatory approval from shareholders and board on appointment of auditors, class-action lawsuits, stricter corporate governance clauses, among others.
The final draft of the Companies Bill, 2011, was prepared after considering the recommendations of the Parliamentary Standing Committee and taking the inputs from the finance and law ministries as well as the Planning Commission.
The new Bill is also crucial for the auditors, who stand to lose their job after every year of work if the shareholders do not endorse their re-appointment in their annual general meeting. However, the five-year fix tenure for the auditors will continue.
The parliamentary panel has suggested a mandatory annual approval of auditors by the shareholders in the AGMs and not just by their respective board of directors. This means, every company will now be required to mandatorily obtain the consent of its shareholders every year in order to continue with its auditors. However, auditors tenure for five-years will continue.
Welcoming the move, TN Manoharan, former president of the Institute of Chartered Accountants of India (ICAI) told FE: ?The new Bill is good for protecting the shareholders? interest. There are a number of additional measures in the new Bill which makes it better over the current companies Act, including whistleblowers policy and class-action suites. CSR is an evolving issue but the new Bill provides for practicing it in a conducive manner.?
The Bill has been most talked in recent times on the use of 2% of the net profit of a company above a threshold for CSR activities. While, corporate affairs minister Veerappa Moily clarified recently that CSR will not be mandatory, experts said the fine print of the Bill makes CSR activities mandatory. The CSR clause covers all companies that have either net worth in excess of R500 crore, or turnover of R1,000 crore or more, or net profit of R5 crore or more. Such companies will have to set aside 2% of the average net profit of the preceding three years for CSR activities.
Another contentious issue in the Bill is the clause whereby companies are allowed to have only two layers of subsidiaries for investment. Traditionally, Indian companies have created multiple subsidiaries to raise money or for investment purposes. Many such subsidiaries have been formed both inside and outside the country, including tax-friendly countries like Mauritius. But by allowing only two levels of subsidiaries, the Bill is aiming to check malafide practices, including siphoning of funds from profitable ventures, round-tripping of funds among others.
Once passed by Parliament, the Companies Bill, 2011, will replace the decade-old Companies Act, 1956. The Bill was introduced in the Lok Sabha in 2008 but lapsed because of change of government. It was reintroduced in August 2009 and then referred to the standing committee on finance. In 2011, the house panel made 178 amendments of which the government accepted 157. However, the government made 22 more changes and reintroduced it in the winter session of Parliament in December last year which was then referred to the Parliamentary Standing Committee on finance headed by former finance minister Yashwant Sinha.
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* New norms for companies spending on corporate social responsibility activities
* More powers to the serious fraud investigation office included in the new Bill
* Bill proposes only two layers of subsidiaries for investment in companies
* Mandatory approval from shareholders and board on appointment of auditors and stricter corporate governance clauses
