Friday 5 June 2015

Changes to the Companies Act 2013

Why in the news?

Government recently notified amendments to the Companies Act, seen as a relief to the Indian industry.

What was the earlier Act like?

Companies Act was originally passed in 1956. Last year, several amendments were made ensure better corporate governance (in the wake of scams like Satyam, etc.). 

Key provisions:

Major Aspect
Notable Details
Types of companies
Concept of one-person company
Enhancing number of members and minimum capital requirements for Private Ltd. firms
Classification of Public Ltd. into listed and unlisted
Board of directors
15 - Maximum directors - can be increased if a resolution is passed by shareholders
1 Women director
1 Indian resident director must
Maximum 20 companies can be served by a director
Independent directors - 33% in public companies, for maximum 10 years, performance review mechanism
Meetings - minimum 4/year with a quorum (33% or 2 directors)
Committees - audit, stakeholder relationship, CSR, nomination and remuneration
Annual General meetings (AGM)
All have to hold after meeting a quorum - except one-person companies by sending general notice
Electronic and proxy voting also allowed
Auditing mechanisms
Audit committee of Board of Directors
External auditors - can audit 20 companies at max, if fraud - report to Union govt, can't keep auditing same company for a long time
New Statutory Bodies
National Company Law Tribunal
National Financial Reporting Authority
Investor and Education Protection Fund
Serious Fraud Investigation Office - old body but given statutory status
2% of last 3 year's average profit if: net profit of 5Cr + net worth of 500Cr +turnover of 1000 Cr -- doesn't apply to earnings by branches abroad
CSR committees in companies to policy

So, what was wrong with this Act?

Areas such as related party transactions, inter-corporate loans, and fraud reporting have had corporates struggling for a while now, trying to balance compliance with the new requirements without hampering the day to day business requirements. This made 'doing business' difficult, hurting investments and economic growth.

What has changed now and how would it help?

Sixteen amendments were made to the Companies Act of 2013, pertaining to winding up of companies, board resolutions, bail provisions and utilisation of unclaimed dividends.
 The 'Statement of Objects and Reasons' stated that the changes being introduced are: 
  • to improve ease of doing business
  • to provide stricter penalties for fraud cases

On the whole, it is a step in the right direction, and would certainly bring some ease to doing business in India.   


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