New Companies Bill gets Parliament’s approval

The new Companies Bill received Parliament's approval with the Rajya Sabha passing it today, after the Lok Sabha gave its approval on 18 December 2012.

The bill will now go to President Pranab Mukherjee to be signed into an Act.

The new legislation will take effect after the President signs it into law and the corporate affairs ministry issues the necessary notification.

The new bill, which will replace the Companies Act of 1956, seeks to enhance compliance, transparency, encourage self-regulation and make corporate social responsibility mandatory.

Replying to the debate on the bill in the Rajya Sabha, corporate affairs minister Sachin Pilot said the new bill will help bring India's corporate governance in sync with the changing global business environment.

Pilot said the main focus of the legislation is on enhancing transparency and compliance.

"For the next two to three decades, this will bring positivity in the economy,'' said Pilot adding that the views of all the stakeholders, including industry chambers, have been taken into consideration.

The bill, which was first introduced in the Lok Sabha in August 2009, was referred to the standing committee on finance a month later. It was brought back to the Lok Sabha as Companies Bill 2011, but again referred to the standing committee.

The Lok Sabha finally cleared the bill after the standing committee submitted its report in June 2012.

The Rajya Sabha is adopting the bill more than 7 months after the Lok Sabha passed the bill.

The new legislation followed extensive reviews and the final draft incorporates several new provisions for investor protection, better corporate governance and corporate social responsibility etc.

It also defines 33 new terms that have come into vogue in recent times, including associate company, small company, employee stock option, promoter, related party, turnover, chief executive officer, chief financial officer, global depository receipt, etc.

The bill provides for class action suit, which is key weapon for individual shareholders to take collective action against errant companies. It has also streamlined procedures relating to disclosure of transactions with parties related to directors, promoters etc.

It provides for prohibition on forward dealings in securities of a company by key managerial personnel, insider trading rules and restriction on non-cash transactions involving directors.

The new bill provides for new concepts such as a single person company while also raising the cap on the number of persons in a private company to 200.  It also provides for e-voting at company meetings.

The salient features of the new Companies Bill, 2012 are:

• Business friendly corporate regulation/ pro-business initiatives
• e-Governance initiatives
• Good corporate governance and CSR
• Enhanced disclosure norms
• Enhanced accountability of management
• Stricter enforcement
• Audit accountability
• Protection for minority shareholders
• Investor protection and activism
• Better framework for insolvency regulation and
• Institutional structure.

Other important features of the Bill are: 

• In addition to the concept of independent directors (IDs), the new bill provides for their tenure, liability etc have been provided. Code for IDs provided in a new schedule to the Bill. Databank for IDs proposed to be maintained by a body/institute notified by the central government to facilitate appointment of Ids;
• The bill proposes a corporate social responsibility (CSR) committee of the company's board in addition to other committees of the board, viz, audit committee, nomination and remuneration and stakeholders relationship committee. These committees shall have IDs/non-executive directors to bring more independence in Board functioning and for protection of interests of minority shareholders;
• Provisions in respect of vigil mechanism (whistle blowing) proposed to enable a company evolve a process to encourage ethical corporate behavior, while rewarding employees for their integrity and for providing valuable information to the management on deviant practices;
• New provisions suggested for allowing re-opening of accounts in certain cases with due safeguards;
• Provides for rotation of auditors and audit firms;
• Retains stricter and more accountable role for auditor. Provisions relating to prohibiting auditor from performing non-audit services revised to ensure independence and accountability of auditor;
• National Advisory Committee on Accounting and Auditing Standards (NACAAS) proposed to be renamed as National Financial Reporting Authority (NFRA) with a mandate to ensure monitoring and compliance of accounting and auditing standards and to oversee quality of service of professionals associated with compliance;
• Simplified procedure (through confirmation by the central government), laid down for compromise or arrangement, including for merger or amalgamation of holding companies and wholly owned subsidiary(ies), between two or more small companies and for such other class or classes of companies as may be prescribed. This would result into faster decisions on approvals for mergers and amalgamations resulting effective restructuring in companies and growth in the economy. For other companies, such matters would be approved by Tribunal.
• Rules for acceptance of deposits from public to be subject to a more stringent regime;
• Provisions for class action suits revised to provide minimum number of persons who may apply for such suits. Safeguards against misuse of these provisions also being included;
• National Company Law Tribunal (Tribunal): Keeping in view the Supreme Court's judgment, on the composition and constitution of the Tribunal, modifications relating to qualification and experience etc of the members of the Tribunal have been made. Appeals from Tribunal shall lie to National Company Law Appellate Tribunal.