Companies Bill, 2011 Synchronizing Corporate Law with New Economic Realities

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Companies Bill, 2011 Synchronizing Corporate Law with New Economic Realities

Anshul Rishi | March 2012

A new Companies Act with some significant changes will have far reaching effect on the way companies are governed and the way the law relating to companies is administered in India

From JJ Irani Committee recommendations to the 2011 Bill, the Companies Bill has had a long journey but, hopefully, a new Companies Act may become a reality in 2012. The Companies Bill, 2011 (‘Bill’) seeks to make many key changes in the law relating to companies. And the motifs running through the Bill are: corporate social responsibility; corporate governance; and an attempt at responding to changing economic realities of the times that we live in.

The structure of the proposed legislation envisages 29 Chapters, 470 Clauses (Sections) and 7 Schedules as against 13 Parts, more than 700 Sections and 15 Schedules of the Companies Act, 1956. The new structure itself shows that a colossus is being sought to be pruned into a much leaner piece of legislation. This write-up enumerates and highlights only some of the key changes/provisions which are sought to be made through the proposed legislation.

CORPORATE SOCIAL RESPONSIBILITY

One of the more significant proposals relate to corporate social responsibility andprovides for the constitution of the Corporate Social Responsibility Committee of the Board in case of companies having net worth of rupees five hundred crore or more; or turnover of rupees one thousand crore or more; or a net profit of rupees five crore or more during any financial year. Further, it would be incumbent upon the Corporate Social Responsibility Committee to also formulate and recommend to the board, a Corporate Social Responsibility Policy indicating the activities to be undertaken by the company as specified in Schedule VII (Activities which may be included by companies in their corporate social responsibility policies). More significantly, it is also sought to be provided that the board of such companies shall make every endeavour to ensure that at least two percent of the average net profits of the company made during the three immediately preceding financial years is spent in every financial year in pursuance of such policy. If, however, the company fails to spend such amount, the board will have to give, in its report, the reasons for not spending such amount.

CORPORATE GOVERNANCE

The Bill also seeks to provide that independent directors may be selected from a data bank (Data bank of persons who are eligible and willing to act as independent directors with their names, addresses and qualifications) maintained by any body, institute or association as may be notified by the Central Government. It also proposes that the responsibility of exercising due diligence before selecting a person as an independent director from the databank would lie with the company making such an appointment. It is also proposed that the Central Government may prescribe the manner and procedure of selection of independent directors. Further, the company and the independent directors would be mandated to abide by the provisions of Schedule IV containing a ‘Code for Independent Directors’.

KEY PROVISIONS RELATING TO AUDITS & AUDITORS

The Bill also proposes secretarial audit of every listed company and companies belonging to other class of companies as may be prescribed and stipulates that such companies will also have to annex a secretarial audit report, given by a Company Secretary in practice, with the board’s report. The Bill also proposes that prescribed class or classes of companies would be required to appoint an internal auditor for conducting an internal audit of the functions and activities of the company. The Bill also seeks to provide for rotation of individual auditors and audit firms in case of listed companies or companies belonging to such class or classes as may be prescribed.

OTHER SIGNIFICANT CHANGES

The concepts of small companies as well as one person companies have also been sought to be introduced through this Bill. Small Company is defined in the Bill to mean a company, other than a public company, (a) the paid up share capital of which does not exceed fifty lakh rupees or such higher amount, as may be prescribed, not exceeding five crore rupees; or (b) the turnover of which as per its last profit and loss account does not exceed two crore rupees or such higher amount, as may beprescribed, not exceeding twenty crore rupees. The Bill defines One Person Company to mean a company which has only one person as a member.

In addition, there are some other important proposed provisions like increasing the maximum number of members in case of a private company to two hundred; prescribed class or classes of companies to have atleast one woman director; every company to have atleast one director who has stayed in India for a total period of not less than one hundred and eight two days in the previous calendar year; listed companies to file a return with the Registrar in case there is a change in the number of shares held by its promoters and top ten shareholders; any document, record, register or minutes etc. required to be kept by a company or allowed to be inspected or copies to be given to any person by a company, may be kept or inspected or copies given in electronic form; strengthening the Serious Fraud Investigation Office by granting it statutory status and by giving it more teeth.

Further, changes/provisions have been sought to be made, inter-alia, in relation to deposits; dividends; directors; private placement; buy back of shares; registration of charges; voting through electronic means; financial statements; creation of Mediation and Conciliation Panel, constitution of Nomination and Remuneration and Stakeholders Relationship Committees; compromises, arrangements and amalgamations; transfer of securities; special courts; meetings; global depository receipts; foreign companies; revival and rehabilitation of sick companies; class action suits; winding up etc.

CONCLUSION

The proposed legislation can have a far reaching effect on the way companies are governed and the way the law relating to companies is administered in India. Given the clamour around some of the proposed provisions like the demand for making mandatory the spending on CSR activities, when and in what form, the new Companies Act comes into effect would be interesting to watch.