Dr Sanjiv Agarwal

The Indian Companies Act of 1956, the largest price of legislation of the world with over 700 sections is going to be a history soon. A new Companies Bill with over 400 sections has been very recently introduced in both houses of the Parliament. This Companies Bill, 2011 when enacted (likely to be in next session) shall become Companies Act, 2012, thus replacing 55 year old legislation, most of the provisions of which had  in today’s business environment become redundant or purposeless, given the liberalized and global economic scenario.

The new Bill which could see the light of the day after 10 years has stricter disclosure requirements, calls for more vigil and accountable corporate boards with truly responsible independent directors and asking the corporates to be social responsible.

 It propose to make company spending on CSR activities (corporate social responsibility) mandatory for companies with turnover of Rs 1000 crores    or net worth of Rs 500 crores or net profit of Rs 5 crore or more. Such companies would be required to keep aside two percent of their three years’ average profit for such activities and also disclose how it has been utilized. Though no penalty is proposed, companies will have to disclose non compliance and reasons therefor.  Most of the listed companies at NSE and BSE would fall in this criteria. The new Bill proposes to cover certain CSR programmes such as poverty eradication, education, women empowerment, child mortality, maternal health, disease fighting, environment protection etc including donations to central or state government’s relief funds. Apart from audit committee and shareholder’s grievance committee, board of directors will also have a mandatory CSR committee of atleast three directors. Companies will also be required to have a board approved CSR policy in place.

It also talks of strengthening   of corporate boards which includes independent directors and women directors on boards of certain companies. It also seeks rotation of auditors or audit firms with a cooling period in between two fixed terms of four years each. It also introduces new ideas such as fixed term for independent directors, one person company, class action suits, tightening of fund raising, cross border amalgamations, easy mergers and acquisitions, simplified rehabilitation of sick companies and issue of differential right shares etc.

Enforcement measures have also been tightened with serious fraud  investigation office being made statutory body with arrest powers and setting up a national financial reporting authority for monitoring and compliance of accounting and auditing standards. It will have powers to order investigation, levy penalties and even debar professionals.

All in all, Companies Act, 2012 will have important and for reaching provisions for a more accountable and responsible corporates of future India.

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February 2024