A new company law for a new economic environment

After a long wait, the Rajya Sabha finally approved the Companies Bill, 2012 on August 8, 2013. The Lok Sabha had, after detailed deliberations, approved the Companies Bill in December 2012. It is now on the cusp of becoming an act, and only requires presidential assent and notification in the Gazette of India.

Once effective, it will replace a fifty-year-old legislation, the Companies Act, 1956 (“Companies Act”), the primary legislation for the incorporation, operation, and governance of corporate bodies in India. The bill promises to create a more effective, efficient, and simplified corporate law framework in India.

A good indication of the simplified structure is the overall framework of the Companies Bill. While the Companies Act consisted of 658 sections, the Companies Bill appears to be much cleaner, and takes only 470 clauses (divided into twenty-three chapters) and seven schedules to deliver the message. Through a series of posts here, I will explore and analyse the wide breadth of amendments proposed. To begin with, I will provide an overview of the major proposals.

One-person company

In line with global norms, the Companies Bill introduces the concept of “one person company”, a special type of private company. Defined in Clause 2(62) of the Companies Bill, the term simply means a company in which only one person is a member. These companies have been provided the flexibility of having only one director and enjoy exemptions in relation to filings and the holding of meetings. For instance, if there is only one director, Clause 122(4) of the Companies Bill proposes that a board resolution that needs to be passed can simply be entered in the minute books of the company, without holding a physical board meeting.

Private companies

Life may get tougher for private companies under the new regime. They stand to lose many of the exemptions they were entitled to under the Companies Act. A good example would be Clause 62 of the Companies Bill, which makes a special resolution a mandatory prerequisite for a preferential allotment in a private company. Under Section 81(1A) of the Companies Act, the requirement for a special resolution was applicable only to public companies.

Corporate Social Responsibility

Detailed provisions on corporate social responsibility (“CSR”) are also part of the Companies Bill. CSR activities have been made mandatory for the first time in India. Companies will have to spend on such activities in one financial year, at least two per cent of the average net profits of the three preceding financial years. This requirement is restricted, according to Clause 135 of the Companies Bill, to every company with: (a) a net worth of Rupees five hundred crore or more, or (b) a turnover of Rupees one thousand crore or more; or (c) a net profit of Rupees five crore or more, during any financial year. Such companies must constitute a corporate social responsibility board committee consisting of three or more directors, out of which at least one director will be an independent director.

M&A

Changes have been proposed in the procedure for mergers and amalgamations to make the process simpler and more efficient. The provision for fast-track mergers, where the approval of the National Company Law Tribunal is not required, if it is a merger between two small companies, between a holding and subsidiary company, or between any other companies as may be prescribed, appears to be a welcome change. Cross-border mergers have also been specifically permitted under the Companies Bill.

Corporate governance

In the wake of the Satyam scandal, the Companies Bill has sought to prescribe stringent standards of corporate governance. The term “independent director” has been defined, and the standards and qualifications necessary for appointment have been prescribed. Further, independent directors should make up at least two-thirds of the board of directors of every listed company. Interestingly, independent directors have been insulated from any liability in case of a fraudulent act (unless of course it has been done with their knowledge). It is expected that such a provision will go a long way in attracting the right kind of talent to these posts as they can now be assured that they will not be subject to any liability unless they have willfully taken part in it.

 

Class action suits

Clause 245 of the Companies Bill introduces the concept of class action suits. Simply put, a class action suit is one where a number of persons with the same claims and legal grounds can sue a corporate body. The Enron situation, where class actions suits were filed in the U.S. against Enron claiming millions in damages, is a well known example.

Under the Companies Bill, a class action suit can be filed against a company, its auditors, directors, or other concerned experts by a prescribed number of members or depositors if they are of the view that the affairs of the company are being carried out in a manner that is prejudicial to their interest. It will indeed be interesting to see how this provision plays out in the corporate sector.
These amendments are just a few of the many changes proposed in the new Companies Bill. This proposed law looks to alter the way businesses are run today to make them more efficient and profitable, but also socially conscious and accountable to their stakeholders.

Even though it is difficult to predict how all the proposed changes will interact with each other, the corporate world will finally see some changes to Indian company law to bring it in line with the changing economic environment.

(Deepa Mookerjee is a member of the faculty at myLaw.net.)