The Rajya Sabha passed the Companies Bill, 2012, on Thursday by a voice vote, paving the way for replacing the Companies Act, 1956, with a new legislation more in sync with the requirements of the corporate world in a globalised environment. The new law will be marked by greater focus on shareholder democracy, need for more corporate disclosures and less intrusive regulations. Several provisions have been introduced to ease corporate decision-making and improve governance.
It is now mandatory for certain classes of companies to spend at least 2% of their average profits in the last three years on corporate social responsibility activities. It also introduces the concept of class action suits.
The Bill, passed by the Lok Sabha on December 18, will now go for President's assent. The new law will be called the Companies Act, 2013.
But the long wait by corporates, CAs and lawyers is not over yet. The fine print of the clauses will be defined by rules that the corporate affairs ministry will frame now. “Almost all relevant clauses need to have rules, which the MCA would now put on its website to seek comments from stakeholders. Until the rules are formulated, the Act will not get operationalised,” said Harinderjit Singh, partner, Price Waterhouse.
The government has reduced the number of clauses in the Bill to around 470 from the earlier 650. Much of the Act will be governed by rules. The idea is that each time the government wants to make rule changes, it won't not need to go through the Parliament but can do it through an executive decision.
What this means is that until the rules are framed regarding CSR, auditor rotation, corporate governance issues, National Company Law Tribunal etc, stakeholders will not know how the fine print would work, who will be exempted and who will be covered. “For instance, we would not know unless the rules are made whether public limited companies would be exempted from mandatory rotation of auditors or not,” Singh said.
Pointing to another such instance, he said: “One of the important things the Bill does is to take away the power of high courts to approve mergers and acquisitions and bestow it on the National Company Law Tribunal. But the composition of this Tribunal, how would it work etc can be known only once the rules are made.”
Amrish Shah, transaction tax leader, Ernst & Young agreed that a lot will become clear once the rules are formed but said that nevertheless, “it is a step in the right direction”. “On the M&A front, the new Act has several progressive features and is more transparency-driven. It permits both inbound and outbound mergers. It would also help group reorganisation, as it provides for direct merger as well as a more robust process for considering merger. Even deal-making will be smoothened as inter-se shareholder rights have been specifically recognised as enforceable,” Shah added.
The new law with a slew of new provisions will have a major impact on India Inc going forward. For instance, companies will have to make investment through only two layers of investment companies under the new Bill. The Bill enhances the role of independent directors, who will be required to provide independent judgment on issues of strategy, performance, risk management, resources, key appointments and standards of conduct. They will also be required to scrutinise management performance and must satisfy themselves on the integrity of financial information.
Also, it mandates compulsory rotation of individual auditors every five years and caps the number of audits a company or an individual does to 20. These are new provisions which were not part of existing company laws. Under the new legislation, auditors will be required to report any offence involving fraud to the central government. If they don't, there will be a penalty of Rs 1 lakh-25 lakh.
The legislation spells out several new provisions including the concept of 'One Person' company, increases the cap on number of members in a private company to 200 from 50 and lays down conditions on private placement including a cap of single private with up to 50 persons in one financial year. It also spells out the minimum number of directors on the board of directors for public and private companies. In case of a public company, there will be a minimum of three directors. For private companies, at least two members are mandatory. In certain classes of companies – which will be specified in the rules – at least one woman director will be mandatory as per the new Companies Bill, 2012. The new Bill also caps the number of directorships a person can hold in companies to 20 of which not more than 10 will be public companies.
The new Bill also allows companies to change the object of fund-raising after shareholder approval through a special resolution and the dissenting shareholders will get an exit opportunity. The new Bill also requires greater participation and approval from shareholders. For instance, inter-corporate loans and investments above certain limits will need approval through a special resolution. Shareholder approvals will be required if loan/investments is greater than 60% of company’s paid-up capital, free reserves and securities premium account or 100% of its free reserves and securities premium account.
India Inc welcomed Parliament clearing the Bill. “This legislation is indeed a milestone in the history of company law and will revolutionise the administration and management of businesses in the times to come,” said Naina Lal Kidwai, president, Ficci.
“It is a historic moment for our country as it took 60 years to reach this stage. The new Companies Bill will enhance regulatory compliance,” corporate affairs minister Sachin Pilot said in his closing remarks as the Bill was put to vote. “Now, the focus will be on drafting the rules. It will be done in a transparent manner and we will put up the draft on our website for comments by August-end,” Pilot said. Officials in the ministry said the draft rules were almost ready and will be sent for the approval of the minister soon.
Dolphy D'Souza, partner in a member firm of Ernst & Young Global said the impact of this new legislation will be strongly felt on around 1 million registered companies in the country. “The requirement to rotate auditors or regulate related party transactions and to create a framework for implementing International Financial Reporting Standards in India are all very positive steps,” he said.
The Bill is divided into 29 chapters, 470 clauses and 7 schedules and allows government the powers to make rules in over 300 of the 470 clauses.