COMPANIES BILL 2011- HIGHLIGHTS

COMPANIES BILL 2011- HIGHLIGHTS

By Dr T Padma., LLM., Ph D (Law)

kethepadma@gmail.com

BACKGROUND

In India, the Companies Act, 1956, is the most important piece of legislation that empowers the Central Government to regulate the formation, financing, functioning and winding up of companies. The Act contains the mechanism regarding organizational, financial, and managerial and all the relevant aspects of a company. It provides for the powers and responsibilities of the directors and managers, rising of capital, holding of company meetings, maintenance and audit of company accounts, powers of inspection, etc. The Companies Act, 1956 has been the founding pillar on which our corporate legal framework builds upon. It is a formidable, comprehensive document requiring a great deal of patience, time and perseverance to understand the intricacies of the subject. The Act came into force on 1^st April, 1956. Thereafter, the Companies Act, 1956 has undergone several changes by amendments.

The Companies Act is administered by the Central Government through the Ministry of Corporate Affairs and the Offices of Registrar of Companies, Official Liquidators, Public Trustee, Company Law Board, Director of Inspection, etc. The Registrar of Companies (ROC) controls the task of incorporation of new companies and the administration of running companies.

COMPANIES BILL, 2011

Ø  The Bill has 470 clauses and 7 schedules as against 658 Sections and 15 schedules in the existing Companies Act, 1956. Ø  The entire bill has been divided into 29 chapters. Ø  Following chapters have been introduced, viz. -        Registered Valuers (ch.17); -        Government companies (ch. 23); -        Companies to furnish information or statistics (ch. 25); -        Nidhis (ch. 26); -        National Company Law Tribunal & Appellate Tribunal (ch. 27); -        Special Courts (ch. 28) Ø  The Bill empowers Central Government to make rules, etc. through delegated legislation after having detailed consultative process (clause 470 and others). Ø  The Bill provides for self-regulatory process and stringent compliance regime.

The Ministry of Corporate Affairs took up a comprehensive revision of the Companies Act, 1956 (the Act) in 2004 keeping in view that not only had the number of companies in India expanded from about 30,000 in 1956 to nearly 7 lakhs, Indian companies were also mobilizing resources at a scale unimaginable even a decade ago, continuously entering into and bringing new activities into the fold of the Indian economy. In doing so, they were emerging internationally as efficient providers of a wide range of goods and services while increasing employment opportunities at home. At the same time, the increasing number of options and avenues for international business, trade and capital flows had imposed a requirement not only for harnessing entrepreneurial and economic resources efficiently but also to be competitive in attracting investment for growth. These developments necessitated modernization of the regulatory structure for the corporate sector in a comprehensive manner.

Earlier, a Bill called Companies (Amendment) Bill, 2003 had been introduced by Ministry of Corporate Affairs (MCA) (then Department of Company Affairs) in the Rajya Sabha on 7.5.2003. Later on, a large number of changes were found to be necessary in the Bill. A decision was, therefore, taken to carry out a comprehensive review of the Companies Act, 1956 and to introduce a new Companies Bill for the consideration of the Parliament.

The review and redrafting of the Companies Act, 1956 was taken up by the Ministry of Corporate Affairs on the basis of a detailed consultative process. A ‘Concept Paper on new Company Law’ was placed on the website of the Ministry on 4th August, 2004. The inputs received were put to a detailed examination in the Ministry. The Government also constituted an Expert Committee on Company Law under the Chairmanship of Dr. J.J. Irani on 2nd December 2004 to advice on new Companies Bill. The Committee submitted its report to the Government on 31st May 2005. After considering the report of the Committee and other inputs received from time-to-time, the Government took up the exercise of comprehensive review of the Companies Act, 1956.

A Companies Bill 2008 was introduced by the Government in the Lok Sabha on October 23, 2008. Due to dissolution of the 14th Lok Sabha, the Companies Bill, 2008 lapsed.

The Government decided to re-introduce the Companies Bill, 2008 as the Companies Bill, 2009, without any change except for the Bill year and the Republic year. The Ministry of Corporate Affairs had introduced the Companies Bill, 2009 in the Lok Sabha on August 3, 2009. The 2009 Bill was referred to Parliamentary Standing Committee on Finance which gave its report on 31^st August, 2010.

In view of numerous 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 withdrew the Companies Bill 2009 and introduced a fresh bill – The Companies Bill 2011.

The Companies Bill 2011 was presented on 14th December 2011 in the Winter Session to replace the existing Companies Act of 1956. It was immediately withdrawn following differences between the Congress and the opposition BJP.

The Parliamentary Standing Committee on Finance is likely to meet to sort out the differences on the Bill.

HIGHLIGHTS

The Companies Bill 2011 contains 29 Chapters, 7 Schedules, 470 clauses as against the Companies Bill, 2009 which consists of 426 clauses under 28 chapters and the Companies Act, 1956 which consists of 658 sections under 13 Parts and 15 schedules. The highlights are shown in the following table:

S.No.	Description	Clause Ref. in Companies Bill, 2011
1.	E-governance in all company processes	120
2.	Protection to minority shareholders
3.	Inclusion of at least one woman director on board	149
4.	Specific framework for Merger and Acquisitions of companies. Single forum for approval of mergers and acquisitions	233
5	Cross Border Mergers	234
6.	Squeeze Out Provisions	236
7.	Concept of One Person Company introduced.	3
8.	Key managerial personnel (KMP) to include Managing Director (MD) or Chief Executive Officer (CEO), Chief Financial Officer (CFO) and Company Secretary (CS).
9.	Punishment for personation for acquisition etc. of securities	38
10	Class Action Suits	37 & 245
11.	Registered Valuers	247
12.	Limit on maximum number of members of private company increased to 200 from 50	2(68)
13.	National Advisory Committee on Accounting Standards (NACAS) to be renamed as National Financial Reporting Authority (NFRA) and changes in responsibilities and powers	132
14.	Mandatory Rotation of auditors	139
15.	Mandatory Compliance with Auditing Standards	143
16.	Limited Liability Partnership eligible to be appointed as Auditor of Company	141
17.	Corporate Social Responsibility – 2% of average net profits of the previous three years	135
18.	Mandatory Internal Audit for prescribed classes of companies	138
19.	Secretarial Standards Introduced and provided statutory recognition	118 (10) & 205
20.	Secretarial Audit	204
21.	1/3rd of the total number of directors as independent directors – listed public companies
22.	Entrenchment Provisions in Articles of Association	5
23.	Statutory Status to the Serious Fraud Investigation Office (SFIO)	211
24.	Mediation and Conciliation Panel	442

IMPORTANT PROVISIONS IN BRIEF

The Companies Bill, 2011, inter alia, provides for—

1)        E-Governance

Maintenance and allowing inspection of documents by companies in electronic form are being allowed for the first time.

2)      Concept of Corporate Social Responsibility is being introduced

3)   Enhanced Accountability on the part of Companies

a)     In addition to the concept of Independent Directors (IDs) introduced, the provisions in respect of their tenure and 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.

b)     Corporate Social Responsibility (CSR) Committee of the Board proposed 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.

c)     Definition of ‘‘promoter’’ also included along with his liability in certain cases.

d)     Provisions in respect of vigil mechanism (whistle blowing) proposed to enable a company to evolve a process to encourage ethical corporate behaviour, while rewarding employees for their integrity and for providing valuable information to the management on deviant practices.

e)     The Central Government has been empowered to prescribe restrictions in respect of layers of subsidiaries for any class or classes of companies.

f)      New provisions suggested for allowing re-opening of accounts in certain cases with due safeguards.

4)   Additional Disclosure Norms

a)     New disclosures like development and implementation of risk management policy, Corporate Social Responsibility Policy, manner of formal evaluation of performance of Board of directors and individual directors included in the Board report in addition to disclosures proposed in such report in the Companies Bill, 2009.

b)     Consolidation of accounts: Accounts of Foreign subsidiaries to be attached for filing them with the Registrar. Subsidiary to include ‘associate’ and ‘joint venture’ for the purpose of consolidation.

c)     Every listed company required to file a return with the Registrar regarding change in the shareholding position of promoters and top ten shareholders of such company.

5)   Facilitating rising of capital by companies

a)     Provisions for offer or invitation for subscription of securities on private placement basis revised to ensure more transparency and accountability.

b)     Companies being allowed to issue equity shares with differential voting rights.

c)     Central Government empowered to prescribe, through rules, the requirements in connection with provision for money made by a company for allowing purchase of company’s shares by its employees under a scheme for their benefit. Disclosure to be made in the Board’s report in respect of voting rights not exercised directly by the employees in respect of shares to which the scheme relates.

6)   Audit Accountability

a)     Rotation of auditors and audit firms being provided for.

b)     Stricter and more accountable role for auditor being retained. Provisions relating to prohibiting auditor from performing non-audit services revised to ensure independence and accountability of auditor. Subject to the maximum prescribed number of companies, the members of a company may resolve that the auditor or audit firm of such company shall not become auditor in companies beyond the number as may be specified in such resolution.

c)     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.

d)     The Authority shall consider the International Financial Reporting Standards and other internationally accepted accounting and auditing policies and standards while making recommendations on such matters to the Central Government which will improve the competitiveness of our companies with other companies. The Authority is also proposed to be empowered with quasi judicial powers to ensure independent oversight over professionals.

e)     Cost Audit: Cost records to be mandated for companies engaged in production of such goods or rendering of such services as may be prescribed. The concept of ‘‘cost auditing standards’’ being mandated.

f)      Secretariat Audit: Prescribed class of companies would need to attach with the Board’s Report, a Secretarial Audit Report given by a company secretary in practice.

 7)   Managerial Remuneration

a)     Provisions relating to limits on remuneration provided in the existing Act (11% of net profits) included.

b)     For companies with no profits or inadequate profits remuneration shall be payable in accordance with new Schedule of Remuneration annexed to the Bill and in case a company is not able to comply with such Schedule, approval of Central Government would be necessary. Individual limits for remuneration enhanced in the Bill vis-à-vis the existing limits. Concept of payment of periodic fees which shall include sitting fees to directors being included in the Bill.

c)     Independent Directors (IDs) not to get stock option: IDs not to get stock option but may get payment of fees and profit linked commission subject to limits specified in the Bill/rules. Central Government may prescribe amount of fees under the rules.

8)  Facilitating Mergers/ Acquisitions

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.

9)  Protection for Minority Shareholders

a)     Exit option to shareholders in case of dissent to change in object for which public issue was made.

b)     Specific disclosure regarding effect of merger on creditors, key managerial personnel, promoters and non-promoter shareholders is being provided. The Tribunal is being empowered to provide for exit offer to dissenting shareholders in case of compromise or arrangement.

c)     The Board may have a director representing small shareholders who may be elected in such manner as may be prescribed by rules.

10)  Investor Protection

a)     Acceptance of deposits from public subject to a more stringent regime. Central Government to have power to prescribe class or classes of companies which shall not be permitted to allow use of proxies. The Bill also to have provisions to provide that a person shall have proxies for such number of members /such shares as may be prescribed.

b)     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.

11)  Serious Fraud Investigation Office (SFIO)

Statutory status to SFIO proposed. Investigation report of SFIO filed with the Court for framing of charges shall be treated as a report filed by a Police Officer. SFIO shall have power to arrest in respect of certain offences of the Bill which attract the punishment for fraud. Those offences shall be cognizable and the person accused of any such offence shall be released on bail subject to certain conditions provided in the relevant clause of the Bill.  Definition of ‘Fraud’ provided. Stringent penalty provided for fraud related offences.

12)  Woman Director

At least one woman director is being made mandatory in the prescribed class or classes of companies.

13)  National Company Law Tribunal (Tribunal)

Keeping in view the Supreme Court’s judgment, on the 11th May, 2010 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.

14) Mediation and Conciliation Panel

 It is proposed to create and maintain as ‘Mediation and Conciliation Panel’ for facilitating mediation and conciliation between parties during any proceeding under the proposed Legislation before the Central Government or Tribunal.

15)  Central Government to have power to exempt/modify provisions of the Act for a class or classes of companies in public interest. Relevant notification shall be required to be laid in draft form in Parliament for a period of thirty days.

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         [Published in Supreme Court  Journal  / Weekly January, 2012]