In what may come as good news for India Inc, come April 1, around 60% of the new Companies Act, 2013, will come into force. The ministry of corporate affairs (MCA) on Wednesday came out with an additional list of around 183 sections of the new Act that will come into effect in six days. In September 2013, MCA had notified 98 sections of the new law and, later in February this year, notified the section dealing with Corporate Social Responsibility.
Altogether, 282 sections out of 470 sections will get notified from April 1. However, experts said despite these notifications, certain provisions of the old Companies Act, 1956, will continue to be in force, leading to confusion in the next fiscal.
According to ministry officials, the draft rules to these 183 sections will come out in the next few days.
These sections deal with various key aspects of the new companies law, including public and private placement, allotment of securities, resolutions requiring special notice, establishment of Serious Fraud Investigation Office (SFIO), 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.
MCA has, however, left out 40% of the 470 sections in the new law, the rules for which will not be released anytime soon as they are still under the works.
These remaining sections relate to National Financial Reporting Authority (NFRA), Investor and Education Protection Fund, compromise and arrangement, oppression and mismanagement, winding up, sick companies ,special courts and National Company Law Tribunal (NCLT), among others. Some of the left-out sections deal with fraud and the damages required to be paid by companies involved.
Lalit Kumar, partner in J Sagar and Associates, a leading law firm, said: "It is a good sign for India Inc that MCA has come out with a list of 180-odd sections which will be notified. However, there were some expectations on the transitory period for the implementation of some key sections like appointment of women director, auditor appointment and rotations, etc. As of today, there is no such mention."
Echoing the sentiments, Sai Venkateshwaran, partner and head of accounting advisory services, KPMG in India, said: "Corporates will get very little time to understand the ramifications...One does hope the rules contain some additional transitional provisions that would provide companies reasonable time to comply with the new requirements."
MCA had first notified a total of 98 sections in September, 2013, which did not require any rules. Then in February-end, MCA notified the sections dealing with Corporate Social Responsibility (CSR), which makes it mandatory for a certain class of companies to set aside at least 2% of their average net profit towards CSR projects.
The Companies Act, 2013, was passed by Parliament and approved by the President in August. Once fully enforced, it will replace the current Companies Act, 1956.
The new companies law has a host of important provisions. For instance, companies will have to make investment through only two layers of investment companies under the new law. The Act 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’s performance and will need to 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 that were not a part of the current company laws. Under the new laws, auditors will now be required to report any offence involving fraud to the central government. If they don’t, the new law provides for a penalty of R1 lakh-25 lakh for non-compliance. It also introduces the concept of class action suites for the first time.
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 on the board. In certain class of companies, which will be specified in the rules, at least one women director will be mandatory. The new law also caps the number of directorship, a person can hold in companies to 20 of which not more than 10 will be public companies.