COMPANIES BILL 2013 - TO BECOME A REALITY ON APRIL FOOL'S DAY?

By Ruma Dubey

Old is gold but does that mean, we continue to store our shoes and clothes of 50 years ago? As our life changes, so do the needs and we outgrow a lot of things of the past. But holding on to them, creates only clutter and confusion.  And in this context, it warms the heart to know that the age-old, Companies Act of 1956 has finally undergone a makeover and starting this 1^st April, we might actually see a new, Companies Act, 2013 becoming a reality.

India Inc still follows rules of 1956, an era when there was no internet, no mobile phones and definitely, no social networks. So much has changed since then and it makes perfect sense to know that we now have a Bill which is not pertinent, more current with the times.  At that time, there were only 30,000 registered companies and today there are 8,50,000 registered companies and that brings the entire change into perspective.

The first Bill for a change in the Companies Act was made in 2009, which was then withdrawn after the introduction of the Companies Bill, 2011, which was considered and approved by the Lok Sabha on 18 December 2012 as the Companies Bill, 2012 (the Bill). Then in August 2013, it got approval from the Rajya Sabha and from the President of India. Today, it is known as the Companies Act, 2013. This Bill too, along with new Banking licenses, are likely to have far reaching consequences in the near future. The new banking licenses are just a few weeks away and though it has been stated that Companies Act, 2013 will come into effect from 1^st April, till it actually becomes a reality, we can only hope.

Here is hoping that it does not turn out to be an All Fools Day this 1^st April for the Companies Act, 2013 and we usher in a new era, a new Govt in tow!

Let us take a quick look at some of the aspects of the Bill which are significant for India Inc.

• It has 470 sections compared to 658 sections in Companies Act, 1956.

• Introduction of a New Corporate Responsibility Framework for bringing stricter corporate governance – to set aside 2% of the average net profits reported in the preceding 3 years to spend on corporate responsibility activities by companies either having a net worth of Rs.5 billion or turnover of Rs.10 billion or more or having net profit of Rs.5 crore or more. If the company does not spend money on CSR, it needs to disclose the reasons.

• Insider trading will now be treated as a criminal offence and is subject to severe punishment.

• Financial year of a company can end only on 31st March and only companies which are holding/subsidiary companies of foreign entity can have a different year ending, subject to approval from the Tribunal. 

• Compulsory rotation of individual auditors every five years and of audit firm every 10 years. 

• Auditors can serve only upto 20 companies. 

• Maximum number of members which a private company can have is increased from 50 to 200.

• Concept of One Person Company has been introduced and the said company will be formed as a private limited company. 

• Along with accounting standards, auditing standards have also been made mandatory.

• Books of accounts, documents, records, register or minutes of meetings can now be kept in electronic form too.

• Maximum number of directors increased to 15 from 12 and certain prescribed class or classes of companies should have at least one woman director.

• Proposal to introduce class action suits to empower the shareholders and investors who can now sue a company for any mismanagement, illegal conduct and claim damages.

• Powers being conferred upon Serious Fraud Investigation Office wherein it can conduct searches and seizures on the premise of a fraudulent company.

• Remuneration of a director of a company should not be more than 5% of the net profit.

• Shares  cannot  be issued at a discount except sweat equity shares
• Time gap between 2 buy-backs shall be minimum 1 year

• Credit rating made mandatory for acceptance  of public deposits
• Restriction on multi layer investment subsidiaries

• Any valuation of shares/assets etc  required under 2013 Act to be performed by a Registered Valuer

• Mandatory transfer  of profits to reserves for dividend declaration dispensed

• Inability to pay  debts will be considered as criteria for determining a sick company

Overall, this new Bill is more in line with the new global environment we today work in. Making companies more responsible – socially, morally and financially is a good thing so if many factions of India Inc crib, you can be assured that the Bill is in the right direction. The Bill protects the minority shareholders much better and makes the independent directors more responsible.

This is truly a step in the right direction and one hopes that it becomes a reality as expected on 1^st April’14.