10 THINGS TO KNOW ABOUT COMPANIES ACT,2013:

INDIA HAS BEEN HIT BY SOMETHING VIRAL!!!!!!!!!!!!!!
No, it is not an alien attack, neither foreign invasion, nor something endemic. It is the most researched, most talked upon and most controversial Companies Act, 2013. We will not go into detailed post mortem of the 470 clauses and all of the 309 pages of the new Act in this article. We would rather explore our way through the 10 major things in the Act which have hogged all the limelight ever since.

Even before that, let us take a moment and ponder on the thought of why was it even necessary to introduce a new Act? Well, let’s look at it this way: Bill Gates was not even one year old when the Act was enacted. Our corporate world was being dictated by a 57 year old Act!!! A radical change was extremely necessary to prune out the age old, now illogical sections and clauses. The Companies Act, 2013(hereafter referred to as “the new act”) does exactly that.

Here are the few major changes (both loopholes and benefits) brought about by the new Act which you must know and more importantly, understand:

1) Independent Directors(IDs):   Every listed company should have one-third of their board members as independent directors. They can hold a maximum of 20 directorships and two consecutive terms of 3 years.

Cheers! You have a more observant, active and impartial board. Quite fine, principally. However, how much “independent” will the independent directors be, especially when they are appointed by promoters? Also, how many people will actually volunteer to act as IDs and will diligently serve the purpose (which in turn, is the whole point)?

2) Corporate social responsibility (CSR): 2 percent of the company’s average net profit should be spent on corporate social responsibility during three preceding years. So what do I do to qualify my expense as CSR? Build a temple in my neighborhood? Or aid in supporting AIDS affected families? The act maintains a dignified silence in this regard. It only instructs to attribute the funds, formulate a CSR policy, form a committee. Major ambiguity indeed!

3) Women Directors: According to GMI Ratings’ Women on Boards Survey 2013, even on the world’s best-known companies, women account for only 11 percent of total directorships. In India, a sample of 89 companies with more than $1 billion in market valuation, the women percentage is less than 7 percent. Hence, it is of utmost importance to catalyst the representation of women in corporate decision-making. Hence, the new Act has asked companies to have at least one women director on board.

4)  Director Identification Number (DIN) – Every person willing to act as Director of a Company will have to register themselves with the government and obtain a Director Identification Number similar to that of an UID. This measure has been brought upon so that the Government can keep a hawk’s eye on the number of Directorships for an individual and monitor his activities. Will this measure actually encourage people to assume the responsibility?

5) Class Action Suits – A salient and worth appreciating move is the introduction of power to shareholders. Shareholders can now file class action suits. This, hopefully, would prevent any future “Satyam” inspired fraud officials to carry on their manipulations. However, it will be interesting to see how the same will be dealt in case of Government owned company. Something we will have to wait and watch.

6) Provisions relating to auditors- An auditor will be able to audit a maximum of 20 companies. Their work tenure will be of 5 years, subject to ratification. By way of this provision, the Act intends to

introduce better compliance mechanism with respect to the auditor.

7) Stringent Statutory Rules– The Serious Fraud Investigation Office has gained the power to arrest offenders and exclusivity on any case they take up.

8) Financial Year to end on March 31- With exception to companies holding foreign subsidiaries requiring consolidation outside India, the financial year of any company should end on March 31. This provision has been brought forward with a good intention in mind, i.e. to introduce uniformity of reporting. It does, however, put the closely held companies and small start-ups in a tight spot.

9) One Person Company (OPC):  Starting Up and do not want a co-partner? Try sole-proprietorship. Not interested? No worries. The new Act has a perfect solution- One Person Company (OPC).  Your liability will be limited to the amount invested by you. Hence, you get a perfect protection of the corporate veil. This is the best concept that the Bill has come up with, though it is yet to be implemented.

10) Stay Private with 200 Shareholders – The new Act increases the maximum number of shareholders in a private company from 50 to 200.This would help private entities to broaden their capital base without having to undertake the hassles of conversion to limited companies.

So far so good. However, the picture will clear only when the new Act gets implemented in full force. Till then, as we say time and again, we will have to wait and watch. As of now, we need to get used to all the new ways implemented by the government.

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