The Lok Sabha on Tuesday, 18^th December 2012, gave its approval for the Companies Bill 2011; the proposed legislation will replace the existing Companies Act 1956, which was enacted 56 years ago.

The Statement of Objects and Reasons of the new Bill states that:

The Companies Act, 1956 had been enacted with the object to consolidate and amend the law relating to the companies and certain other associations. The said Act has been in force for about 55 years and had been amended several times.

In view of changes in the national and international economic environment and expansion and growth of economy of our country, the Central Government after due deliberations decided to repeal the Companies Act, 1956 and enact a new legislation to provide for new provisions to meet the changed national and international, economic environment and further accelerate the expansion and growth of our economy. And for this purpose a Bill, namely, the Companies Bill, 2009 was introduced on August 3, 2009 in the Lok Sabha along with the Statement of Objects and Reasons appended to the said Bill outlining its salient features.

The said Bill was referred to the Parliamentary Standing Committee on Finance for examination and report and the Committee gave its Report on August 31, 2010.

Subsequent to the introduction of the Companies Bill, 2009 in the Lok Sabha, the Central Government received several suggestions for amendments in the said Bill. The Parliamentary Standing Committee on Finance also made numerous recommendations in its Report. The Central Government has accepted in general the recommendations of the Standing Committee and also considered the suggestions received by it from various stakeholders.

In view of large amendments to the Companies Bill, 2009 arising out of the recommendations of the Parliamentary Standing Committee on Finance and suggestions of the stakeholders, the Central Government decided to withdraw the Companies Bill, 2009 and introduce a fresh Bill incorporating therein the recommendations of Standing Committee and suggestions of the stakeholder.

Apart from reducing the number of sections drastically, the Bill also brings in changes like a ‘one man company’ (which was crucial to bring the Indian law up to steam with developments in corporate law), making independent directors more accountable and improving the corporate governance practices, the Bill seeks to make corporate social responsibility mandatory for certain companies. The new Bill was introduced to incorporate the changes that had been suggested by many stakeholders and members after the 2009 Bill had been presented before Parliament.

Key features of new Bill:  The Companies Bill, 2011, is organized as 29 chapters, 470 sections and 7 scheduled. A substantial part of the law will be in form of Rules, to be prescribed separately. It has introduced 33 new definitions.

Here’s a look at some of its key highlights.

1. A private company can have a maximum of 200 members, which previously was 50 in the Companies Act, 1956.
2. The concept of One Person Company introduced. It means only one person can form a company in comparison to minimum two shareholder previously. It will be a private limited company only.
3. Concept of dormant companies introduced. It can be formed for a future project or to hold an asset or intellectual property.
4. Money raised through a prospectus cannot be used for dealing in equity shares of another company. If a company changes terms of the prospectus or objects for which money is raised, it shall provide dissenting shareholders an exit opportunity.
5. Apart from existing shareholders, if the Company having share capital at any time proposes to increase its subscribed capital by issue of further shares, such shares may also be offered to employees by way of ESOP, subject to the approval of shareholders by way of Special Resolution.
6. NBFCs not covered by the provisions relating to acceptance of deposits. They will be governed by Reserve Bank of India Rules.
7. Companies can accept deposits only from its members, that too after obtaining shareholders approval.

Acceptance of deposit also subject to compliance with certain  conditions –

8. Public companies can accept deposit from public on complying certain conditions like credit rating.
9. Listed companies required to file a return in a prescribed form with the Registrar regarding any change in the number of shares held by promoters and top 10 shareholders of such company, within 15 days of such change.
10. Postal Ballot to be applicable to all the companies, whether listed or unlisted.
11. Interim dividend in a current financial cannot exceed the average rate of dividend of the preceding three years if a company has incurred loss up to the end of the quarter immediately preceding the declaration of such dividend.
12. Every company is required at its first annual general meeting (AGM) to appoint an individual or a firm as an auditor. The auditor shall hold office from the conclusion of that meeting till the conclusion of its sixth AGM and thereafter till the conclusion of every sixth meeting. The appointment of the auditor is to be ratified at every AGM.
13. Individual auditors are to be compulsorily rotated every 5 years and audit firm every 10 years in listed companies & certain other classes of companies, as may be prescribed.
14. A partner or partners of the audit firm and the firm shall be jointly and severally responsible for the liability, whether civil or criminal, as provided in this Bill or in any other law for the time being in force. If it is proved that the partner or partners of the audit firm has or have acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers, then such partner or partners of the firm shall also be punishable in the manner provided in clause 447.
15. Prescribed class or classes of companies are required to appoint at least one woman director.
16. At least one director should be a person who is a ordinary resident in india in previous calendar year
17. At least one-third of the total number of directors of a listed public company should be independent directors.

18. Existing companies to get a transition period of one year to comply.

19. Liability of independent directors and non-executive directors not being promoter or key managerial personnel to be limited.
20. A person can hold directorship of up to 20 companies (previously 15 companies), of which not more than 10 can be public companies.
21. Companies with more than 1,000 shareholders, debenture-holders, deposit-holders and any other security holders at any time during a financial year to constitute a Stakeholders Relationship Committee, with a non-executive director as a chairperson and such other members as may be decided by the board.
22. No permission of central government required to give a loan to a director.
23. The provisions on inter-corporate loans and investment (372A of Companies Act 1956) extended to include loan and investment to any person.
24. No central government approval required for entering into any related party transactions.
25. No central government approval required for appointment of any director or any other person to any office or place of profit in the company or its subsidiary.
26. The Bill makes provision for cross border amalgamations between Indian Companies and companies incorporated in the jurisdictions of such countries as may be notified from time to time by the Central Government.
27. The Bill provides provisions related to Corporate Social Responsibility (CSR).
28. The National Company Law Appellate Tribunal shall now consist of a combination of technical and judicial members not exceeding 11, instead of 2 as provided in the Companies Act 1956.
29. The Central Government may establish as many special courts as may be necessary to provide speedy trial of offences.
30. CSR is mandatory for company having 5 Crore or above profit in last 3 year. If they don’t spend then will gave they will give reason for it
31. The new legislation has more provisions to guard interest of employees. It mandates 2 year salary payment to employee in case of company is shutting down its operations.

We would come back with more on this topic. In the meantime, if you need any assistance with matters relating to company law, please feel free to contact us.

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