These days we all have
become so used to watching the parliament not function, that even if it runs
for one day, it comes as a shocker to us. However amidst uproars on countless
issues and innumerable adjournments of both the houses, the Rajya Sabha on
Thrusday finally passed the New Companies Bill. This is for your information
just one bill passed out of 52 other crucial bills which are lined up for this
session. Though the government is making every possible effort for a smooth
functioning of the parliament, the Opposition doesn’t seem to oblige to this
idea and continues to disrupt its proceeding and waste crores of taxpayers’
money. Nevertheless, let us now focus on the brand new company law passed
by the parliament which is proposed to be more appropriate for the 21stcentury India and its challenges.
The New Companies Bill made it mandatory for profit
making companies to spend on activities related to Corporate Social
Responsibility (CSR). With the new legislation, India would possibly become the
first country to have Corporate Social Responsibility (CSR) spending through a
statutory provision. The bill will now go for presidential assent. The lower
house of parliament Lok Sabha cleared the bill Dec 18 last year.The best thing
about the new Companies Act is that it is simple, with greater clarity of
intent and purpose. It replaces the old law with over 700 conflicting clauses
with something shorter and sweeter: 470 clauses and all of it in 309 pages. Not
bad for something that will govern all listed and unlisted companies in the
country. However, a modern law does not by itself become a great law, for
success depends on implementation. Here are the main issues that will make or
mar the success of the new law.
Presenting the bill in Parliament, Corporate Affairs
Minister Sachin Pilot termed the passage of the Bill as a new era for corporate
law and regulation in Indian economy and said this is a ‘historic moment for
the country.’ The proposed bill aims at enhancing corporate governance and also
contains provisions to strengthen regulations for corporates as well as
auditing firms and promises to ensure an equitable and sustainable growth
of the country. The new Bill has introduced numerous changes and concepts which
should simplify regulations and bring greater clarity and transparency in
managing businesses. Let us now look at
some key highlights of the bill.
Around 193 recommendations have been included in the
Companies Bill by the Parliamentary Standing Committee and with the passing of
this Bill; the Companies Act of 1956 will be replaced. The proposed legislation
would ensure setting up of special courts for speedy trial and stronger steps for
transparent corporate governance practices and curb corporate misdoings. The
new law would require companies that meet certain set of criteria, to spend at
least two per cent of their average profits in the last three years towards
Corporate Social Responsibility (CSR) activities. But only companies
reporting Rs 5 crores or more profits in the last three years need to invest in
CSR initiatives.
The Bill allows companies the freedom to choose areas
of work for CSR and the mandate of a rotation in auditors every 5 years gives
the process added credibility. In case, entities are unable to comply with the
CSR rules, they would be needed to give explanations. Otherwise, they would
face action, including penalty. The amended legislation also limits the number of
companies an auditor can serve to 20 besides bringing more clarity on criminal
liability of auditors. The new bill also clears that the rotation of auditors
will take place every five years, , while an audit firm cannot have more than
two terms of five consecutive years. It also makes auditors subject to criminal
liability if they knowingly or recklessly omit certain information from their
reports.
The term for independent directors have been fixed for
five years too. The maximum number of directors in a private company has
been increased from 12 to 15, which can be increased further by special
resolution. The new law also makes its mandatory for companies that one-third
of their board comprises independent directors to ensure transparency. Also, at
least one of the board members should be a woman. The new bill will speed
amalgamations and mergers. The bill provides for class action suit, which is
key weapon for individual shareholders to take collective action against errant
companies. The move is being seen as a positive as it empowers small
shareholders to seek answers in case they feel that a company’s management or
its conduct of affairs is prejudicial to its interests or its members or
depositors.
The Companies Bill also states that corporates must
disclose the difference in salaries of the directors and that of the average
employee. This will protect the interest of shareholders as well as
employees. The new law mandates payment of two years’ salary to employees in
companies which wind up operations. The law also gives more statutory powers to
the government’s investigative arm Serious Fraud Investigation Office (SFIO) to
tackle corporate fraud.
Given the fact that the last Companies Bill is almost a
century old and holds no relevance in today’s markets, this is a welcoming step
which will prove to be a boost for our country’s economy. Industry stalwarts as
well as organizations such as FICCI have too welcomed it calling it step
towards greater transparency and accountability.
For any kind of bouquets and brickbats, feel free to
leave a comment below or mail me at author.vish94@gmail.com
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