The Bill, passed by the Lok Sabha in its winter session, introduces several provisions that will change the way companies function and govern themselvesThe Companies Bill, 2012 ("Bill") has been passed by the Lok Sabha in the winter session. Among the slew of "improvements" in the existent Companies Act, 1956, are certain provisions which may radically better the manner in which private as...
The Bill, passed by the Lok Sabha in its winter session, introduces several provisions that will change the way companies function and govern themselves
The Companies Bill, 2012 ("Bill") has been passed by the Lok Sabha in the winter session. Among the slew of "improvements" in the existent Companies Act, 1956, are certain provisions which may radically better the manner in which private as well as public companies are being managed presently. The Bill has a significant number of provisions sought to enhance corporate governance practices by companies; these include provisions dealing with auditors, independent directors, mandatory valuation, class action suits and corporate social responsibility.
This Article seeks to examine a few of such provisions.
Appointment, Removal, etc. of auditors
- An auditor (a firm or otherwise) of a company has to be compulsorily appointed for five years [Section 139]. It appears that appointment for a lesser term is not even possible and the only way the term could be curtailed is by removal (which requires a prior approval of the Central Government followed by a special resolution of the shareholders).
- Further, sub-section (2) of Section 139 ensures rotation of auditors of listed companies (and prevent frauds, which may occur with the connivance of the auditors) by introducing a break or cooling-off between two terms.
- Also, the members have been conferred the power to require that-
(a) in the audit firm appointed by it, the auditing partner and his team shall be rotated at such intervals as may be resolved by the members; or
(b) the audit shall be conducted by more than one auditor.
[Section 139(3)] - The Bill also seeks to prohibit the auditors from rendering specified services to a company/its holding company/subsidiary company, namely:
(a) accounting and book keeping services;
(b) internal audit;
(c) design and implementation of any financial information system;
(d) actuarial services;
(e) investment advisory services;
(f) investment banking services;
(g) rendering of outsourced financial services;
(h) management services; and
(i) any other kind of services as may be prescribed. - Additionally, an auditor is now allowed to audit only 20 companies at a time and in case of firms, the limit is applicable to each partner. The exemption that was provided earlier in relation to private companies has been withdrawn.
The Bill makes secretarial audit of every listed company compulsory and such audit shall be conducted by a practicing company secretary.
Independent Directors
Although the concept of Independent Directors is not new to listed companies, it does not form part of the Companies Act, 1956. The Bill has not only introduced the concept of independent directors but has also provided the role and responsibilities of such directors. Listed companies (although the Central Government may specify any class of companies to appoint a specific number of independent directors on its board) are required to have one-third of the total directors as independent directors [Section 149(4)]. It shall be mandatory for all independent directors to abide by a specified 'code of conduct' (set forth specified as a schedule). Some of the other important provisions in relation to independent directors are:
- Maximum term of an Independent Director has been restricted to five years, at once subject to a maximum of 2 such terms;
- Independent Directors cannot be granted stock options; and
- Independent directors shall have one separate board meeting every year without the presence of non-independent directors & management.
The above mentioned provisions ensure that the Independent Directors shall be more vigilant and cautious.
Investment by Companies
Under the Bill, companies have been restricted from making investments from more than two layers of investment companies. This new limitation may prevent structuring flexibility for business groups/conglomerates. However, there is an exception provided. The restriction shall cease to apply when an Indian company acquires a foreign company which has more than two layers of subsidiaries as per the laws of such foreign country. Further, the Bill is silent on the impact on existing structures having more than two layers of investment companies.
Further, the Bill does not provide the exemptions currently available under the Companies Act, 1956 in relation to investments/loans to be made by a company including:
- Exemption in relation to investment / loan / guarantee /security by a holding company in/to its wholly owned subsidiaries, stands withdrawn (Section 372A of the existing Act); and
- Exemption to private companies and holding-subsidiary companies for making loan or providing guarantee to a director etc., stands withdrawn (Section 295 of the existing Act).
Acceptance of Deposits
(a) issuance of a circular to its members including therein a statement showing the financial position of the company, the credit rating obtained, the total number of depositors and the amount due towards deposits in respect of any previous deposits accepted by the company and any other details prescribed in the rules;
(b) filing a copy of the circular along with such statement with the Registrar within thirty days before the date of issue of the circular;
(c) depositing such sum which shall not be less than fifteen per cent of the amount of its deposits maturing during a financial year and the financial year next following and kept in a scheduled bank in a separate bank account to be called as deposit repayment reserve account;
(d) providing such deposit insurance in the manner and to the extent prescribed in the rules;
(e) certifying that the company has not committed any default in the repayment of deposits accepted or payment of interest on such deposits; and
(f) providing security, if any for the due repayment of the amount of deposit or the interest thereon including the creation of such charge on the property or assets of the company:
Corporate Social Responsibility
...the Bill does not provide the exemptions currently available under the Companies Act, 1956 in relation to investments/loans to be made by a company...
The Companies Bill, 2012 mandates certain classes of companies to invest at least 2 percent of average net profits towards corporate social responsibility initiatives. The above mentioned provision shall be applicable on companies having net worth of '500 crore or more, or turnover of '1000 crore or more or a net profit of '5 crore or more during any financial year. Further, such companies are also required to constitute a Corporate Social Responsibility Committee of the board which shall consist of three (3) or more directors, out of which at least one (1) director shall be an independent director. Such committee shall formulate a corporate social responsibility policy.
Apart from the above mentioned corporate governance related amendments, the Companies Bill, 2012 has introduced a significant number of provisions which will change the way companies function and govern themselves.
The Bill has also provided for a lot of matters including private placements, corporate loans and investments and M&A which will be further administered via rules to be notified by the Central Government, which may make this new law dynamic.
Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.