By S Sivakumar, Advocate
FOR most of us, who have grown up reading the voluminous commentary on the Companies Act, 1956 by the legendary A Ramaiya, it is hard to believe that a brand new Companies Act is all set to replace the existing Act, which has been in existence for more than six decades. In all fairness� the Companies Bill, 2012, as passed by the Lok Sabha on December 18, 2012 is all set to create history by ushering in, a brand new law which would seem to jell very well with the scientific and technological improvements that have happened over the years.
Given the fact that this Bill, on being passed by the Rajya Sabha and on receiving the Presidential accent, would become law, hopefully during the Budget session in 2013, corporates would be well advised to start preparing for meeting the challenges that the new company law would pose.
Here is a very broad synopsis of the important provisions contained in the Companies Bill, 2012, as passed by the Lok Sabha�.
- �One Person Company ‘ concept being introduce �.
The concept of �one person company'(�OPC’) is being introduced. OPCs not required to hold Annual General Meetings and the Annual Returns of such Companies can be signed by the Company Secretary or the Director. OPCs can have only one Director. Provisions related to holding of Board Meetings, filing of reports with MCA, etc. have been considerably simplified for OPCs.OPCs are also given the option of not holding AGMs.
Our comments : This comes as a very big boon for MNCs having subsidiaries in India. Under the current law, a minimum of two shareholders are required for an Indian Company. Going forward, MNCs having wholly owned Subsidiaries would be greatly benefited by this concept. The Government needs to be heartily congratulated for introducing this great concept
- Private Companies can have up to 200 members
The maximum number of shareholders that a private company can have, is being increased from the current level of 50, to 200.
Our comments : This is a highly welcome move which would allow many companies with a larger base of shareholders, to remain private. Here again, a highly welcome provision.
- Concept of �Small Company’ being introduced
The concept of �small company’ being introduced�.. �small company’ would mean a company, which is not a �public company’ having a paid up capital not exceeding Rs 50 lakhs or such amount, not exceeding Rs 5 crores, as may be prescribed OR having sales turnover not exceeding Rs 2 crores or such amount not exceeding Rs 20 crores, as may be prescribed.
Our comments : This is another welcome highly welcome move from the Government, as �small companies’ are being exempted from many provisions of the Companies Act in terms of reporting requirements, holding of Board Meetings, etc. Many private companies would now be able to save time and efforts on meeting the procedural requirements of the new Companies Act.
- Significant changes in the provisions related to Directors
Some of the new provisions related to �Directors’ are summarized below�.
� In prescribed class or classes of Directors, at least one Director shall be a woman.
� Out of all the Directors, at least one Director shall be a person who has stayed in India for a total period of not less than 182 days in the previous calendar year.
� Every listed company is required to have, at least, 1/3 rd of the total number of Directors are Independent Directors.
� The maximum number of Directors of a company is being increased from 12 to 15.
� All listed companies are required to appoint Independent Directors.
� Unless provided by the Articles, companies having multiple businesses cannot appoint the same individual as the Chairperson as well as the Managing Director or CEO at the same time. However, such restriction would not apply to companies having multiple businesses and appointing one or more CEO for each such business.
� 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.
Our comments : MNCs and Foreign Companies will have to take note of the requirement to have one Director who should have spent, at least, 182 days in the previous calendar year. The current practice of having all Directors who are expatriates / foreigners would not work, under the new dispensation. The provisions related to Directors are highly welcome and would go a long way in improving corporate governance.
- Provisions related to Auditors
Here are some of these provisions in the Bill, as they relate to Auditors :
� At the first AGM, every company shall appoint auditors to hold office till the conclusion of the 6 th AGM, i.e for a period of 5 years. At every subsequent AGM, the members are required to ratify the appointment of auditors.
� The Bill provides for the compulsory rotation of individual auditors in every 5 years and of the audit firm in every 10 years, in the case of listed and other classes of companies to be specified.
� A transition period of 3 years from the commencement of the new Act is being given for companies to adopt to this auditor rotation requirement.
� Certain new disqualifications are being prescribed for auditors.
� Limited Liability Partnerships can be appointed as Auditors
� In addition to accounting standards, auditing standards have also been mandatory.
� Auditors cannot render services like internal audit, investment advice, management services, etc., directly or indirectly to the company or its holding company or subsidiary
Our comments :
The Government needs to be heartily congratulated for taking these bold steps, aimed at securing the independence of Auditors�
- CEO/CFO included as �Key Managerial Personnel’
The Chief Executive Officer (�CEO’) and the Chief Financial Officer (�CFO’) are now treated as �Key Managerial Personnel’. Under the proposed aw, Key Managerial Personnel, in relation to a company would include the CEO, the Managing Director or the Manager, the Company Secretary, the Whole-time Director, the CFO and any other officer as may be specified.
The Bill contains provisions covering the remuneration, disclosure in annual returns, disclosure of shareholding, prohibition of dealings in the company’s securities, insider trading, etc.
A whole time Key Managerial Person cannot hold office in more than one company except in its subsidiary, at the same time.
The CFO shall be responsible for maintaining the books of accounts of the company, preparing the financial statements of the company and to file the same with the ROC. The CFO shall, in addition to others, be treated as an �officer who is in default’ and could be liable to any penalty or punishment by way of imprisonment, fire or otherwise, in terms of the provisions of the Act
Our comments : It is very interesting to see the CEO and the CFO being included under the concept of Key Managerial Personnel, for the first time. Till now, for all practical purposes, only the Directors and the Company Secretary were treated as officers in default. The CEO and the CFO would now need to be handling their duties diligently, in the light of the tough provisions contained in the new Act, which also include prosecution related provisions.
- Provisions related to Board Meetings
The Bill contains several important provisions related to holding of Board Meetings, some of which are discussed below:
� Directors can participate in Board Meetings thro’ the video conferencing mode or other audio visual mode, as may be prescribed.
� At least 4 meetings should be held each year. There is no requirement of holding the meeting every quarter, with the only requirement being that, not more than 120 days shall elapse between two consecutive meetings.
� The Bill provides for certain matters which can be transacted only at Board meetings.
� Certain powers which were earlier allowed to be exercised by passing ordinary resolutions in general meetings will not have to be passed by special resolutions.
� Limits for political contributions increased from 5% to 7.5% of the average net profits of the company during the immediately preceding three years.
� Several new provisions to be applicable for listed companies.
� No need for taking Central Government’s approval for a company to provide a loan etc. its Director.
� The Bill contains provisions related to prohibition on forward dealings in securities of the company by Directors or Key Managerial Personnel.
� The Bill contains provisions for prohibiting insider trading in the Company.
Our comments : The provisions related to Directors being allowed to participate in meeting thro’ the video conferencing mode or the audio visual mode is highly welcome. The Government needs to be complimented, also, for the official hike in the limit on political contributions, by companies.
- Appointment and Remuneration of Managerial Personnel
Some of the provisions related to Managerial Personnel are discussed below�
� The appointment of Managing/Whole-time Director is requirement to be approved at the general meeting by special resolution and if the appointment is not in accordance with Schedule V of the new Act, then approval of the Central Government is required.
� Provisions related to appointment of MD/WTD/Manager shall also apply to Private Companies.
� Where a company is required to re-state its financial statements due to fraud or non-compliance with any requirement of the Act and the Rule, the company shall recover from any past or present MD/WTD who, during the period for which the financial statements are required to be re-stated, the remuneration received (including stock options) arisen due to such statement or non-compliance in excess of what would have been paid to the MD/WTD/Manager under such re-stated statements.
� The Schedule provides the conditions under which the company can pay remuneration to its managerial personnel in excess of the prescribed limits, without the Government’s approval.
Our comments : We would need to wait if these provisions could result in bureaucratic issues getting cropped up. The provisions related to recoveries from the defaulting Directors, in terms of re-statement of accounts, are most welcome and should hopefully, result in lesser �window dressing’ of the accounts of companies.
- Provisions related to accounts
� The Bill recognizes the fact that the books of accounts may be kept in electronic form also.
� The Bill provides for re-opening or re-casting of books of account of the company.
� Companies having subsidiaries are required to prepare consolidated financial statements of the company and all the subsidiaries, to be presented in the AGM. The salient features of the financial statements of the subsidiaries are also required to be attached. For this purpose, �subsidiary’ would include associate companies and joint ventures.
Our comments : These are highly welcome developments, especially, the provisions related to re-opening and re-casting of the accounts.
- March 31 to be the date of end of financial year
Under the Bill, Indian Companies are compulsorily required to have March 31 as the financial year end date. The only exception is for Indian Companies which are holding or subsidiary Companies of foreign entities requiring consolidation outside India, which are allowed to have a different year end, with the approval of the Tribunal.
Our comments : Under the current law, there is no compulsion for Indian Subsidiaries of MNCs to have March 31 as the year end date. Under the new law, a different financial year is permitted only if there is a need for consolidation of accounts in terms of laws applicable outside India. A time frame of two years from the commencement of the new Act has been given to Indian Companies to align their financial year.
Most Indian Subsidiaries of MNCs would then, need to have March 31 as the financial year end, in the absence of a need for consolidation of accounts for the MNC holding company
- Miscellaneous Provisions
Here is a peep into some of the other important provisions contained in the Companies Bill, 2012�
� Minimum rate of interest on inter-corporate loans to be the prevailing rate of interest on dated government securities.
� Conversion of public company to private company requires approval of the Tribunal.
� All types of charges are now required to be registered.
� For the first time, the concept of Secretarial Standards introduced, to be followed by every company.
� Secretarial audit prescribed for listed companies and other class of companies at may be prescribed.
� The term �officer who is in default’ would now include share transfer agents, merchant bankers to the issue and the registrars, apart from the CEO, CFO, the Directors and the Company Secretary.
� Concept of �Corporate Social Responsibility’ introduced for the first time. Every company having a net worth of Rs 500 crores or more of turnover of Rs 1,000 crores or more or a net profit of Rs 5 crores or more during any financial year shall have to constitute a CSR Committee of the Board consisting of three or more Directors, out of which, at least one Director shall be an independent Director. The Board of every company has to ensure that the company spends at least 2% of the average net profits of the company made during the three immediately preceding financial years, in every financial year, in accordance with the CSR policy.
� Internal audit is to be made mandatory for certain classes of companies to be specified.
� Provisions related to postal ballot shall be applicable to all the companies, whether listed or not.
� The Bill provides for establishment of a vigil mechanism in the prescribed manner by every listed company or such classes of companies, as may be prescribed.
� Provisions related to inter-corporate loans and investments are now being extended to include loans and investment to any other personnel also.
� No Central Government approval is required by a company for entering into any related party transactions.
� A company shall, unless otherwise prescribed, cannot make investment through’ more than two layers of investment companies subject to certain exemptions.
� The Bill provides for class action by specified number of members or depositors against the company except for a banking company.
� The manner of declaring a company sick and the process for its revival and rehabilitation has been completely rationalized.
� The Central Government is empowered to appoint Special Courts to ensure speedy trial of offences under this Bill.
� The bill provides for special provisions related to acts of frauds.
� The Bill governs all types of securities � as contrasted to the present law, which only covers shares and debentures.
� The Bill provides for establishment of Mediation and Conciliation panel by the Central Government.
Our comments : Compliance under the new Companies Act would now become a huge task, given the fact that the entire company law has been rewritten, with a lot of new provisions.
Before concluding �
The Companies Bill, 2012 has 29 chapters, 470 Sections and 7 Schedules. A substantial portion of the Bill would be in the form of the Rules, which would be prescribed, after the Bill becomes law. That the Bill has about 33 new definitions, which would indicate the depth of this Bill and the paradigm shift that it would bring to company law.
The Government needs to be complimented for restricting the total number of Sections to less than 500, despite that several new concepts have been introduced. The Companies Act, 1956 has 658 Sections.
It is unfortunate that this historic piece of legislation has not got the publicity that it so richly deserves. As we know, the Companies Bill, 2011 which was laid before the Parliament in December 2011 was referred to the Parliamentary Standing Committee on Finance headed by the highly respected Mr Yashwant Sinha. Based on the recommendations of this Committee, the Companies Bill, 2012 was laid before the Lok Sabha and was passed on December 18, 2012. Mr Yashwant Sinha needs to be heartily congratulated for the excellent efforts that have gone into preparation of this Bill which was passed by the Lok Sabha. Perhaps, this is one classic case of how the ruling party and the opposition party can work together to bring out a good legislation.
It would seem that the new Indian Companies Act, as and when passed, would compare with those prevailing in countries like UK and in some respects, would indeed be better. In fact, in my view�. the new Companies Act would soon become a piece of legislation which other countries would be eager to emulate.
As a fellow member of the Institute of Company Secretaries of India, I am very happy to see that the new company law is finally coming into force, sooner than later. Being anon-tax legislation, one can understand the delay in bringing about this legislation, not-withstanding the efforts that have been going into this for almost about two decades now. Mr P Chidambaram deserves to take the credit for finally managing to have the Companies Bill, 2012 pass through the Lok Sabha.
Lastly��by no means can this piece be treated as even bringing the flavour of the proposed new company law. If I have created a basic interest among the TIOL netizens on the new company law, my effort would be worth it.
(The Author is Director, S3 Solutions Pvt Ltd, Bangalore)