STATEMENT OF OBJECTS AND REASONS
The Companies Act, 1956 had been enacted with the object to consolidate and amend the law relating to the companies and certain other associations. The said Act has been in force for about fifty-five years and had been amended several times.
2. In view of changes in the national and international economic environment and expansion and growth of economy of our country, the Central Government after due deliberations decided to repeal the Companies Act, 1956 and enact a new legislation to provide for new provisions to meet the changed national and international, economic environment and further accelerate the expansion and growth of our economy. And for this purpose a Bill, namely, the Companies Bill, 2009 was introduced on 3rd August, 2009 in the Lok Sabha along with the Statement of Objects and Reasons appended to the said Bill outlining its salient features. The said Bill was referred to the Parliamentary Standing Committee on Finance for examination and report and the Committee gave its Report on the 31st August, 2010.
3. Subsequent to the introduction of the Companies Bill, 2009 in the Lok Sabha, the Central Government received several suggestions for amendments in the said Bill. The Parliamentary Standing Committee on Finance also made numerous recommendations in its Report. The Central Government has accepted in general the recommendations of the Standing Committee and also considered the suggestion received by it from various stakeholders.
4. In view of large amendments to the Companies Bill, 2009 arising out of the recommendations of the Parliamentary Standing Committee on Finance and suggestions of the stakeholders, the Central Government decided to withdraw the Companies Bill, 2009 and introduce a fresh Bill incorporating therein the recommendations of Standing Committee and suggestions of the stakeholders.
5. Paragraph 7 of the Statement of Objects and Reasons appended to the Companies Bill, 2009 states the salient features of the said Bill. The notes on clauses appended to the aforesaid Bill also explain the provisions of the Companies Bill, 2009, pending in this august House. The revised Bill, namely, the Companies Bill, 2011, inter alia, makes the following amendments to the Companies Bill, 2009 which broadly include—
(i) E-Governance:- Maintenance and allowing inspection of documents by companies in electronic form being allowed for the first time.
(ii) Concept of Corporate Social Responsibility is being introduced.
(iii) Enhanced Accountability on the part of Companies:
(a) In addition to the concept of Independent Directors (IDs) introduced, the provisions in respect of their tenure and liability, etc., have been provided. Code for IDs provided in a new Schedule to the Bill. Databank for IDs proposed to be maintained by a body/institute notified by the Central Government to facilitate appointment of IDs.
(b) Corporate Social Responsibility (CSR) Committee of the Board proposed in addition to other Committees of the Board viz Audit Committee, Nomination and Remuneration and Stakeholders Relationship Committee. These committees shall have Ids/non-executive directors to bring more independence in Board functioning and for protection of interests of minority shareholders.
(c) Definition of ‘‘promoter’’ also included along with his liability in certain cases.
(d) Provisions in respect of vigil mechanism (whistle blowing) proposed to enable a company to evolve a process to encourage ethical corporate behaviour, while rewarding employees for their integrity and for providing valuable information to the management on deviant practices.
(e) The Central Government has been empowered to prescribe restrictions in respect of layers of subsidiaries for any class or classes of companies.
(f) New provisions suggested for allowing re-opening of accounts in certain cases with due safeguards.
(iv) Additional Disclosure Norms:
(a) New disclosures like development and implementation of risk management policy, Corporate Social Responsibility Policy, manner of formal evaluation of performance of Board of directors and individual directors included in the Board report in addition to disclosures proposed in such report in the Companies Bill, 2009.
(b) Consolidation of accounts: Accounts of Foreign subsidiaries to be attached for filing them with the Registrar. Subsidiary to include ‘‘associate’’ and ‘‘joint venture’’ for the purpose of consolidation.
(c) Every listed company required to file a return with the Registrar regarding change in the shareholding position of promoters and top ten shareholders of such company.
(v) Facilitating raising of capital by companies:
(a) Provisions for offer or invitation for subscription of securities on private placement basis revised to ensure more transparency and accountability.
(b) Companies being allowed to issue equity shares with differential voting rights.
(c) Central Government empowered to prescribe, through rules, the requirements in connection with provision for money made by a company for allowing purchase of company’s shares by its employees under a scheme for their benefit. Disclosure to be made in the Board’s report in respect of voting rights not exercised directly by the employees in respect of shares to which the scheme relates.
(vi) Audit Accountability:
(a) Rotation of auditors and audit firms being provided for.
(b) Stricter and more accountable role for auditor being retained. Provisions relating to prohibiting auditor from performing non-audit services revised to ensure independence and accountability of auditor. Subject to the maximum prescribed number of companies, the members of a company may resolve that the auditor or audit firm of such company shall not become auditor in companies beyond the number as may be specified in such resolution.
(c) National Advisory Committee on Accounting and Auditing Standards (NACAAS) proposed to be renamed as National Financial Reporting Authority (NFRA) with a mandate to ensure monitoring and compliance of accounting and auditing standards and to oversee quality of service of professionals associated with compliance.
The Authority shall consider the International Financial Reporting Standards and other internationally accepted accounting and auditing policies and standards while making recommendations on such matters to the Central Government which will improve the competitiveness of our companies with other companies. The Authority is also proposed to be empowered with quasi -judicial powers to ensure independent oversight over professionals.
(d) Cost Audit: Cost records to be mandated for companies engaged in production of such goods or rendering of such services as may be prescribed. The concept of ‘‘cost auditing standards’’ being mandated.
(e) Secretariat Audit: Prescribed class of companies would need to attach with the Board’s Report, a Secretarial Audit Report given by a company secretary in practice.
(vii) Managerial Remuneration:
(a) Provisions relating to limits on remuneration provided in the existing Act (11% of net profits) included.
(b) For companies with no profits or inadequate profits remuneration shall be payable in accordance with new Schedule of Remuneration annexed to the Bill and in case a company is not able to comply with such Schedule, approval of Central Government would be necessary. Individual limits for remuneration enhanced in the Bill vis-à-vis the existing limits. Concept of payment of periodic fees which shall include sitting fees to directors being included in the Bill.
(c) Independent Directors (IDs) not to get stock option: IDs not to get stock option but may get payment of fees and profit linked commission subject to limits specified in the Bill/rules. Central Government may prescribe amount of fees under the rules.
(viii) Facilitating Mergers/ Acquisitions:
Simplified procedure (through confirmation by the Central Government), laid down for compromise or arrangement including for merger or amalgamation of holding companies and wholly owned subsidiary(ies), between two or more small companies and for such other class or classes of companies as may be prescribed. This would result into faster decisions on approvals for mergers and amalgamations resulting effective restructuring in companies and growth in the economy. For other companies, such matters would be approved by Tribunal.
(ix) Protection for Minority Shareholders:
(a) Exit option to shareholders in case of dissent to change in object for which public issue was made.
(b) Specific disclosure regarding effect of merger on creditors, key managerial personnel, promoters and non-promoter shareholders is being provided. The Tribunal is being empowered to provide for exit offer to dissenting shareholders in case of compromise or arrangement.
(c) The Board may have a director representing small shareholders who may be elected in such manner as may be prescribed by rules.
(x) Investor Protection:
(a) Acceptance of deposits from public subject to a more stringent regime.
(b) Central Government to have power to prescribe class or classes of companies which shall not be permitted to allow use of proxies. The Bill also to have provisions to provide that a person shall have proxies for such number of members /such shares as may be prescribed.
(c) Provisions for Class Action Suits revised to provide minimum number of persons who may apply for such suits. Safeguards against misuse of these provisions also being included.
(xi) Serious Fraud Investigation Office (SFIO): Statutory status to SFIO proposed. Investigation report of SFIO filed with the Court for framing of charges shall be treated as a report filed by a Police Officer. SFIO shall have power to arrest in respect of certain offences of the Bill which attract the punishment for fraud. Those offences shall be cognizable and the person accused of any such offence shall be released on bail subject to certain conditions provided in the relevant clause of the Bill. Definition of ‘Fraud’provided. Stringent penalty provided for fraud related offences.
(xii) Woman Director: At least one woman director being made mandatory in the prescribed class or classes of companies.
(xiii) National Company Law Tribunal (Tribunal): Keeping in view the Supreme Court’s judgment, on the 11th May, 2010 on the composition and constitution of the Tribunal, modifications relating to qualification and experience, etc., of the members of the Tribunal have been made. Appeals from Tribunal shall lie to National Company Law Appellate Tribunal.
(xiv) Mediation and Conciliation Panel: It is proposed to create and maintain as ‘‘Mediation and Conciliation Panel’’ for facilitating mediation and conciliation between parties during any proceeding under the proposed Legislation before the Central Government or Tribunal.
(xv) Central Government to have power to exempt/modify provisions of the Act for a class or classes of companies in public interest. Relevant notification shall be required to be laid in draft form in Parliament for a period of thirty days.
6. The notes on clauses explain, in detail, provisions of the Bill.
7. The Bill seeks to achieve the above objectives.
