India Approves Company Bill 2011, making CSR mandatory

LokSabha Approves Company Bill 2011 Posted: 19 Dec 2012 09:04 AM PST INDIACSR Bureau NEW DELHI: On 18 December, finally the Lok Sabha passed the Companies Act 2011,  paving the way for a new modern company law. The new act will replace the existing Companies Act 1956, which was enacted 56 years ago. More importantly, the bill gives more muscle to shareholders. Now, shareholders can take legal action against frauds. It is to be noted that Company Bill closes a window for independent directors as they won’t get any stock options. Besides making independent directors more accountable and improving the corporate governance practices, the Bill seeks to make corporate social responsibility mandatory for certain companies. More Power to Serious Fraud Investigation Office Replying to the discussions on the Bill, Corporate Affairs Minister Sachin Pilot said that more powers are being conferred upon Serious Fraud Investigation Office  (SFIO) to tackle the issue of corporate frauds. SFIO will be given more statutory powers in the new Bill. Moreover, there will be better co-ordination between investigative agencies at the State and Centre, I-T Department and the Information Technology Ministry with SFIO. The Minister also sought more cooperation from the state investigative agencies in this regard. According to Sachin Pilot, when the current Companies Act of 1956 was made, there were only 30,000 registered companies in India. In 2012, there are over 8,50,000 companies. The Companies Bill, 2011, which was passed by the Lok Sabha yesterday (18 December 2012), on its enactment will allow the country to have a modern legislation for growth and regulation of corporate sector in India. The existing statute for regulation of companies in the country, viz. the Companies Act, 1956 had been under consideration for quite long for comprehensive revision in view of the changing economic and commercial environment nationally as well as internationally. In view of various reformatory and contemporary provisions proposed in the Companies Bill, 2011, together with omission of existing unwanted and obsolete compliance requirements, the companies in the country will be able to comply with the requirements of the proposed Companies Act in a better and more effective manner. The Companies Bill proposes that profit-making companies that meet certain conditions will be required to set aside 2 per cent of the net profit towards CSR. The Salient features of the Companies Bill 2011 are as follows: 1. (Amendment in Clause 135): In the Section on Corporate Social Responsibility (Section135), which is being introduced as a statutory provision for the first time, the words ‘make every endeavour to’ have been omitted from its Sub-clause (5). So that the first para of Sub-clause (5) of Clause 135 now reads as follows: “The Board of every company referred to in sub-section (1), shall ensure that the company spends in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy.” Such clause is also amended to provide that the company shall give preference to local areas where it operates, for spending amount earmarked for Corporate Social Responsibility (CSR) activities. The approach to ‘implement or cite reasons for non implementation’ retained. 2. (Amendment in Clause 36): To help in curbing a major source of corporate delinquency, Clause 36 (c) amended, to also include punishment for falsely inducing a person to enter into any agreement with bank or financial institution, with a view to obtaining credit facilities. 3. (Amendment in Clause 143): Provisions relating to audit of Government Companies by Comptroller and Auditor General of India (C&AG) modified to enable C&AG to perform such audit more effectively. 4. (Amendment in Clause 186): Clause 186 amended to provide that the rate of interest on inter corporate loans will be the prevailing rate of interest on dated Government Securities. 5. (Amendment in Clause 144): Provisions relating to restrictions on non audit services modified to provide that such restrictions shall not apply to associate companies and further to provide for transitional period for complying with such provisions. 6. (Amendment in Clause 203): Provisions relating to separation of office of Chairman and Managing Director (MD) modified to allow, in certain cases, a class of companies having multiple business and separate divisional MDs to appoint same person as chairman as well as MD. 7. (Amendments in Clause 147 and 245): Provisions relating to extent of criminal liability of auditors – particularly in case of partners of an audit firm – reviewed to bring clarity. Further, to ensure that the liability in respect of damages paid by auditor, as per the order of the Court, (in case of conviction under Clause 147) is promptly used for payment to affected parties including tax authorities, Central Government has been empowered to specify any statutory body/authority for such purpose. 8. (Amendment in Clause 141): The limit in respect of maximum number of companies in which a person may be appointed as auditor has been proposed as twenty companies. 9. (Amendment in Clause 139): Appointment of auditors for five years shall be subject to ratification by members at every Annual General Meeting. 10. (Amendment in Clause 139): Provisions relating to voluntary rotation of auditing partner (in case of an audit firm) modified to provide that members may rotate the partner ‘at such interval as may be resolved by members’ instead of ‘every year’ proposed in the clause earlier. 11. (Amendment in Clause 2): ‘Whole-time director’ has been included in the definition of the term ‘key managerial personnel’. 12. (Amendment in Clause 42): The term ‘private placement’ has been defined to bring clarity. 13. (Amendment in Clause 61): Approval of the Tribunal shall be required for consolidation and division of share capital only if the voting percentage of shareholders changes consequent on such consolidation. 14. (Amendment in Clause 152): Clarification included in the Bill to provide that ‘Independent Directors’ shall be excluded for the purpose of computing ‘one third of retiring Directors’. This would bring harmonisation between provisions of Clause 149(12) and rotational norms provided in Clause 152. 15. (Amendment in Clause 470): Provisions in respect of removal of difficulty modified to provide that the power to remove difficulties may be exercised by the Central Government up to ‘five years’ (after enactment of the legislation) instead of earlier up to ‘three years’. This is considered necessary to avoid serious hardship and dislocation since many provisions of the Bill involve transition from pre-existing arrangements to new systems.