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The long awaited Companies Bill 2009 (the Bill) is now all set to ready and on its passing by the Parliament, would replace the existing Companies Act, 1956. The Bill was introduced in the Parliament in August 2009 and after vetted by the Standing Committee on Finance of the Parliament and modifications thereafter (in August 2010) it is likely to be introduced by the Ministry of Corporate Affairs (MCA) in the next session of the Parliament (may be May 2011) for its enactment.

 

The brief outlines of some of the new features of the Bill are as under -

 

  1. One Person Company (OPC) [Clause 2 (zzK) read with Clause 3 and 5]

After introduction of Limited Liability Partnership Act, 2008, OPC would be a new business form in corporate space in India. Under OPC, there would be one member whose liability would be limited to the extent of capital amount subscribed by the member. In true sense, OPC would face lift the traditional proprietorship form of business. OPC would bestow leverage to an Individual entrepreneur to enter in the Indian Corporate world without fear of loss of capital due to the tag of ‘personal liability’ attached to proprietorship form of business organization. As per the Statement of Objects and Reasons of the Bill, the Government intends to provide for a simpler compliance regime for OPC. For instance, Memorandum of OPC shall indicate the name of a person who shall become member, in the event of death, disability or otherwise of the single memberThe OPC would not require to hold annual general meeting every year (Clause 85). However, the appointment of one Director would mandatory in the case of OPC (Clause 132) The word ‘OPC’ would be suffixed with the name of One Person Company so as to distinguish it from other type of Companies.

 

  1. Key Managerial Personnel (KMP)

The KMP has been defined [in Clause (2 zza) read with Clause 178] as -

  1. Managing Director, the Chief Executive Officer or the Manager and where there is no Managing Director or Manager, a whole-time director or directors
  2. the Company Secretary; and
  3. the Chief Financial Officer;

 

As per the Bill, every whole-time KMP of a company shall be appointed by means of a resolution of the Board containing the terms and conditions of the appointment including the remuneration. Whole-time KMP shall not hold office in more than one company at the same time unless permitted by the company. Further, if the office of any KMP is vacated, the resulting vacancy shall be filled up by the Board within a period of six months from the date of such vacancy.

 

The Bill stipulates that where a company fails to comply with any of the provisions of this section, it shall be liable to a penalty of one lakh rupees and every director and KMP who is in default shall be liable to a penalty of twenty-five thousand rupees, for each such default. The Clause 172 of the Bill prescribes prohibition on forward dealings in securities of company by a KMP and any contravenes on this shall be punishable with imprisonment for a term which may extend to two years or with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees, or with both.

 

3.     Independent Director.

The concept of ‘Independent Director’ is not new to Corporate India as currently it is being governed by Clause 49 of the Listing Agreement for listed Companies. The inclusion of Independent Director in the Bill envisage to bring the institution of Independent Director under an Act of the Parliament. The provisions are more or less the replication of Clause 49 of the Listing Agreement except number of Independent Directors of the Board. As per Clause 49, for a company with an executive Chairman, at least one-half of the board should comprise of Independent Directors and the case of a company with a non-executive Chairman, at least one-third of the board should be of Independent Directors. As against this, as per the Clause 132 of the Bill, every listed public company having such amount of paid-up share capital as may be prescribed shall have at the least one-third of the total number of directors as independent directors. The Central Government may prescribe the minimum number of independent directors in case of other public companies and subsidiaries of any public company.

 

The “Independent director”, in relation to a company, means a non-executive director of the company, other than a nominee director (a) who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience (b) who, neither himself nor any of his relatives or had any pecuniary relationship or transaction with the company or holds any senior management position, position of a KMP or has been an employee or a partner, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed or holds together with his relatives two per cent or more of the total voting power of the company; or is a Chief Executive or director that receives twenty-five per cent or more of its income from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds two per cent or more of the total voting power of the company; and (c) possesses such other qualifications as may be prescribed. An independent director shall not be entitled to any remuneration, other than sitting fee, reimbursement of expenses for participation in the Board and other meetings and profit-related commission and stock options as may be approved by the members.

 

The Bill also prescribes that Independent Director to give certificate of independence to the Board. The Independent Director is expected to act as whistle blower and to evolve a corporate governance institution over a period of time in company where he/she serves.

 

4.     The Class Action.

With inclusion of this Clause in the Bill, any one or more members or class of members or one or more creditor or class of creditors can file an application before the Tribunal when the Management or Control of affairs of the company are being conducted in a manner which is prejudicial to the interest of the company (Clause 216). The Banking companies shall be out of the purview of Class action under the Bill.

 

The recent developments (like Satyam episode) have started the awareness of shareholder’s activism in India. The proposed provision would boost active shareholder’s participation in the corporate sector in India. This provision is in line with the similar provisions prevailed in the corporate laws of the developed nations like US and UK. The provision would surely empower investors to sue a company for ‘oppression and mismanagement’ and claim damages, if they find ‘all is not well’ with their company.

 

5.     The Prohibition on Insider Trading

The Prohibition on Insider Trading has brought with the scope of the Bill (Clause 173). Currently this provision is governed by SEBI’s (Prohibition of Insider Trading Regulations, 1992 and is mandatory for listing Companies only. By way introduction this provision in the Bill, all KMP of all Companies shall be prohibited to circulate ‘price sensitive information’ to any person. Any contravention of this provision by a KMP shall attract stringent fine which may extend to imprisonment to five years or with fine extending to Rs. One Crore or with both [Clause 173]

 

6.     Corporate Social Responsibility

After vetting Bill by Standing Committee on Finance, the Ministry of Corporate Affairs (MCA) is likely to include compulsory CSR Cess in the Bill. The CSR Cess would be applicable for every company having net worth of Rs.500 crore or more, or turnover of Rs.1000 crore or more or a net profit of Rs.5 crore or more during a year, such Companies shall be required to formulate a CSR Policy and to ensure that every year at least 2% of its average net profits during the three immediately preceding financial years is spent on CSR activities as may be approved and specified by the company. The directors shall also be required to make suitable disclosures in this regard in their report to members. A lot of debate is going on in public domain whether to make CSR a mandatory or not.

 

7.     Measures of Corporate delinquency

Based on suggestions given by the Standing Committee on Finance, the Ministry of Corporate Affairs, is likely include following measures to prevent incidences of corporate delinquencies in the Bill 

1)       Every company to have at least one director who is resident in India.

2)      Subsidiary Companies not to have further subsidiaries. Every company to have only one Investment Company.

3)      Source of promoters‘ contribution to be disclosed in prospectus. Promoter to be included in the list of officer in default.

4)      Main objects for raising public offer to be mentioned in the prospectus on first page.

5)      Company to vary terms of the contracts or objects mentioned in Prospectus subject to shareholders approval and public notice.

6)      A Return to be filed with registrar in case promoters‘/ top ten shareholders‘ stake changes beyond a limit (To ensure audit trail of ownership)

7)      Rotation of individual auditor and audit firm to be made mandatory.

8)      Separation of office of Chairman and MD / CEO in a company.

 

8.     Associate Company [Clause 2 (f)]

“Associate company”, in relation to another company, means a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence or of any other company.

 

For the purposes of this clause, “significant influence” means control of at the least twenty-six per cent of total voting power, or of business decisions under an agreement.

 

9.     Financial year [Clause 2 (zq)]

“Financial year”, in relation to any company or body corporate, means the period ending on the 31st day of March every year, and where it has been incorporated on or after the 1st day of January of a year, the period ending on the 31st day of March of the following year, in respect whereof financial statement of the company or body corporate laid before it in its annual general meeting is made up. Provided that on an application made by a company or body corporate, the Tribunal may, if it is satisfied that the circumstances so warrant, allow any period as its financial year, whether that period is a year or not;

 

As per the existing definition as provided in Section 2 (17) of the Companies Act, 1956, financial year means in relation to any body corporate, the period in respect of which any profit and loss account of the body corporate laid before it in annual general meeting is made up, whether that period is a year or not; provided in relation to an insurance company, ‘financial year’ shall mean the calendar year referred to in sub-section (1) of the Insurance Act, 1938 (4 of 1938).

 

Hence, the companies would now be required to adopt April to Mach as its financial year or else get approval from the Tribunal for any other period as its financial year.

 

 

As we all know, the Companies Bill has been in the subject of public discussions for more than a decade in the country and has given lot many surprises like compulsory 2% CSR Cess and the last one as mentioned by the Corporate Affairs Minister to reserve one women independent director in case of companies with five or more directors on the board.

 

As the MCA is in the process of giving last touch on the finer points emerged after the Standing Committee report and the recommendations/suggestions of the apex business/industrial associations, professional bodies and other stakeholders, let us hope that the Companies Bill 2009 will now see the light of the day.

 

DS Mahajani

Email – dsmahajani@yahoo.com

 

Source:

1)       The Companies Bill 2009 and

2)      The Report of Standing Committee On Finance in the Parliament on the Companies Bill 2009.

The views express are personal.

 

 

 

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Category Corporate Law, Other Articles by - DS Mahajani 



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