Companies Bill 2012- Passed by Rajya Sabha is now just one step from reality
After the multi-brand retail FDI and Banking bill, we finally have the big bang economic reform: Companies bill. It appears that the United Progressive Alliance (UPA) government is making sure that every part of Plan A is firing on all cylinders. The government gave a facelift to 56-year-old companies act. On 18 December, the Lok Sabha passed the Companies Act 2012.Â Parliament had finally approved the new Companies Bill that will make sweeping changes in the way firms operate and are regulated and replace a nearly six-decade-old legislation, dated 08-08-2013. The new bill now needs the President’s nod to become law. The bill replaces the existing Companies Act, 1956, which has been amended at least 25 times in the past 57 years, with many of its provisions found to be outdated and inadequate. The passage of the bill, which is spread across nearly 30 sections and over 300 pages, was widely welcomed by stakeholders, including industry bodies, political leaders and consultants. Hereâ€™s a list of the newly introduced norms and regulations: New Definitions of commonly used Corporate Terms Introduced : The new Bill provides about three dozen new definitions, including terms such as frauds, promoters, turnover, related parties (to promoters), small companies, CEO, associate companies, employee stock options, to name a few. Ratio of Directorâ€™s Remuneration to Average of Employeesâ€™ Salary: Companies will have to disclose ratio of remuneration of each director on the board to the average of employeesâ€™ salary. One Man Company: According to the new law, even one person can form a company, as against the earlier requirement of at least two people. Safeguarding workmen: The new law mandates payment of two yearsâ€™ salary to employees in companies that wind up operations. ESOP: The employees stock option (Esop) could not be given to independent directors, as that was given to employees. A third of the board had to be filled with independent directors. New Corporate Social Responsibility Norms: The CSR condition will apply to firms that have a net worth in excess of Rs 500 crore, or a turnover of Rs 1,000 crore or more, or a net profit of Rs 5 crore or more. Companies are required to spend at least 2 per cent of their net profit on CSR. 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. Prohibition of Public Deposits: The act proposes to tighten the laws for raising money from the public. The move will hit chit funds. Only banking companies, NBFCs and other firms allowed by regulators will be permitted to accept deposits from the public. False Induction for Bank Credit: 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. Director Ceiling Raised: The maximum number of directors in a private company has been increased from 12 to 15, which can be increased further by special resolution.Â Class Action Suits: The act provides that: â€œShareholders associations or group of shareholders are to be enabled to take legal action in case of any fraudulent action on the part of company and to take part in investor protection activities and class action suits.â€Â Powers to SFIO: The legislation grants statutory powers to the Serious Fraud Investigation Office (SFIO) to tackle corporate fraud. The SFIO will get a big fillip once the legislation comes into force. Financial Year to end on March 31st every year: The financial year of any company can end only on March 31 and the only exception is for companies which are holding/subsidiary of a foreign entity requiring consolidation outside India. Audit Ceiling: Audit firms cannot take up more than 20 assignments at any time. The appointment of auditors for five years to be ratified annually. It also makes auditors subject to criminal liability if they knowingly or recklessly omit certain information from their reports.