The New Companies Bill - Indeed Revolutionary & Land Mark Legislation

With passage by the upper House of the Parliament on 8 August, the new Companies Bill will replace the nearly six-decade-old Companies Act of 1956. The bill will now go to President for his consent. The new legislation will come into effect with notification by the corporate affairs ministry after the presidential assent.

This legislation is indeed a milestone in the history of company law and will revolutionize the administration and management of businesses in the times to come. The provisions of the bill are meant to prevent a Satyam Computer Services Limited-like fraud, the biggest in India's corporate history running into $1.5 billion detected in 2009. Working Rules which are expected to be put out in the public domain before notification would provide greater clarity on the operative provisions in the Bill while taking into account legitimate concerns of business community.

The new Companies Bill, which seeks to enhance compliance and transparency, makes corporate social responsibility mandatory and protects the interest of employees and small investors. The new law provides for improved corporate governance, enhanced transparency besides increased accountability of company managements and auditors. In fact, it is designed to balance the stakeholders' interests, viz promoters, shareholders and public at large.

The new Bill had introduced several changes and concepts which would simplify regulations and bring greater clarity and transparency in managing businesses. The global environment calls for economic laws and regulations that are effective and efficient, have a reasonable compliance cost and keep Indian businesses competitive.

Now that the law is ready, it is time to focus and work on the practical aspects of complying with its provisions. The new Companies Bill is commensurate with "global standards vis-à-vis disclosure requirements, increased democratic rights for shareholders, self-regulation and accountability.

The key highlights of the new Companies Bill are:

Introduction of concept of ‘Corporate Social Responsibility’ (CSR):

With the introduction of CSR regime, India would possibly become the first country to have Corporate Social Responsibility (CSR) spending through a statutory provision. The new law would require companies that meet certain set of criteria, to spend at least two percent of their average profits in the last three years towards Corporate Social Responsibility (CSR) activities. This is applicable to companies with a networth of Rs 500 crore or more, or Rs 1,000 crore turnover or Rs 5 crore net profits, who have to set up a corporate social responsibility committee.  The Bill allows companies the freedom to choose areas of work for CSR; however the companies will also have to give preference to the local areas of their operation for such spending. If they are unable to meet CSR norms, they will have to give explanations and may even face penalty.

Class Action Suit

The bill provides for class action suit, which is key weapon for individual shareholders to take collective action against errant companies. The move is being seen as a positive as it empowers small shareholders to seek answers in case they feel that a company’s management or its conduct of affairs is prejudicial to its interests or its members or depositors.

Regulations for appointment and engagement of Auditors

The new legislation limits the number of companies an auditor can serve to 20 besides bringing more clarity on criminal liability of auditors. The rotation of auditors will take place every five years, while an audit firm cannot have more than two terms of five consecutive years. It also makes auditors subject to criminal liability if they knowingly or recklessly omit certain information from their reports.

Setting up of Courts for Speedy Trial of Company cases.

The proposed legislation would ensure setting up of special courts for speedy trial and stronger steps for transparent corporate governance practices and curb corporate misdoings.

Check and Balance for Directors

The term for independent directors have been fixed for five years too. The maximum number of directors in a private company has been increased from 12 to 15, which can be increased further by special resolution. It will be mandatory for companies that one-third of their board comprises independent directors to ensure transparency. Also, at least one of the board members should be a woman. The concept of ‘One Person Company’ has been introduced in the new company law.

Acceleration in Mergers and Amalgamations

The new bill will speed and accelerate amalgamations and mergers. While the old bill only permitted merger of a foreign company with an Indian company, the new bill allows merger of Indian companies into foreign companies which would aid in consolidation of cross-border businesses/assets. The new bill permits merger of a listed company with an unlisted one, subject to exit opportunity being offered to shareholders of the listed company. While the old bill depended on precedents for merger of a subsidiary with a parent (or between two small companies), the new bill provides a separate and simplified regime for this without any approval from High Court.

Miscellaneous

· To help in curbing a major source of corporate delinquency, the Bill introduces punishment for  falsely inducing a person to enter into any agreement with bank or financial institution, with a view to obtaining credit facilities.

· Increased the number of members of private companies from 50 to 200. This allows companies access to large pool of capital without going public.

· Gives rights for objections to schemes to only creditors who owed over 5 per cent and minority shareholders with over 10 per cent stake against no thresholds earlier.

· Gives recognition to transfer restrictions on inter-se shareholders – ‘Right of First Refusal’ will be enforceable. This would clear existing ambiguity on legal enforceability on transfer restrictions under JV/shareholder agreements.

· Contains a detailed mechanism for acquisition of shares by majority shareholder from minority shareholders.

· Restricts creation of multi-layered holding structures, prohibiting making investments through more than two layers of investment companies.

· Bans holding ‘Treasury Stock’, which is often used by companies to increase shareholding or future monetization after consolidation.

· Corporate must disclose the difference in salaries of the directors and that of the average employee. This will protect the interest of shareholders as well as employees.

· Mandates payment of two years’ salary to employees in companies which wind up operations.

· Gives more statutory powers to the government’s investigative arm Serious Fraud Investigation Office (SFIO) to tackle corporate fraud.

· Financial Year of any company can end only on March 31 and only exception is for companies, which are holding / subsidiary of a foreign entity requiring consolidation outside India, can have a different financial year with the approval of Tribunal

By Anurag Tiwari, Advocate