India’s Companies Act 2013

The Companies Act, 1956 had more than 650 sections; it was amended several times according to changing economic scenarios.  The Act came into force when there were only approx 0.03 million companies in India which is now raised to more than one million.  57 years after the first Companies Act was enacted and over 20 years after liberalisation, India inched closer to bringing more contemporary issues, such as corporate governance, investor protection, corporate social responsibility and measures to check frauds, under the legislation.
 
After much deliberation, the Companies Act, 2013 which seeks to revise and modify the existing company law, in consonance with changes in national and international economic environment, was passed by the Indian Parliament on 8 August, 2013.  It received President Assent on 29 August, 2013 and was notified in Official Gazette on 30 August, 2013 as Companies Act, 2013 and is made applicable to whole of India.
 
The Act aims at improving corporate governance and also contains provisions to strengthen regulations for companies.  The new legislation contains 29 Chapters, 7 Schedules, and 470 sections as against the Companies Act, 1956 which consisted 658 sections under 13 Parts and 15 schedules. 
 
Key Reforms under Companies Act, 2013
 
Disclosure: Companies Act, 2013 (‘the Act’) has brought Private Companies on par with Public Companies in terms of disclosures requirements are concerned.
 
Uniform Financial Year: All companies to follow uniform financial year i.e. April to March within a period of two years.
 
Intimation to Registrar: Every important resolution passed by Board in terms of loan, investment, merger, appointment of Key Managerial Personnel, approvals of financials etc. needs to be intimated to Regulators within 30 days of passing resolution.
 
Resident Director: All foreign companies and multinationals having subsidiaries in India would now require to have at least one Resident Director who has stayed for 182 days or more in India in previous financial year before his appointment.
 
Independent Directors: The concept of Independent Directors is now incorporated in the Act.  Independent directors to abide by separate code of conduct prescribed under the Act and they can be appointed for a maximum tenure of 10 years.  Even unlisted companies meeting threshold criteria would require having Independent Directors.
 
Consolidated Financial Statement: All Companies are required to prepare Consolidated Financial Statements (CFS) of its subsidiaries which include even Joint Venture and Associate companies.  Intermediate WOS through which investment is made would not require preparing CFS; only the ultimate Indian Holding Company would require preparing CFS.  Further this will not apply to WOS of a Company which is incorporated outside India.  It means if a Foreign Company has WOS in India and has made further investment in other Indian Companies through this WOS, then the WOS would be require to prepare CFS.  Further the Companies would not require preparing CFS for F.Y. 2014-15 if they do not have any subsidiaries but have only associates or joint ventures or both, as the case may be.  As per the recent clarification issued by government it is clear that if the Company have subsidiary and JV/Associate both then it has to prepare CFS considering subsidiary and JV/Associate company.
 
Auditors: The Company meeting threshold criteria as prescribed under the Act needs to rotate the Auditors periodically.  An individual cannot be an auditor for more than five years and Audit Firm cannot be an auditor for more than 10 years.  Further the Act cast duty on the Auditors to report the fraud committed against the Company and whether the Company has adequate internal financial controls systems in place and its operative effectiveness.
 
Shareholder Supremacy: The Act upholds the supremacy of the shareholders of a Company and therefore it has vested authority in the shareholders to approve significant transactions that the management wants to undertake, especially in case of investments, providing loans and related party transactions.  The measure is fortified by prescribing that if a shareholder is the related party, that shareholder would abstain from voting on the resolution.
 
Class action suits: The Act specifically provides for class action suits (under Section 245) brought by: (i) members or (ii) depositors of a company, in case they feel the management or conduct of the affairs of the company is in a manner prejudicial to the interests of the company or its members or depositors.
 
Raising of Funds: The Act has tightened the provisions relating to the raising of funds by companies through issue of capital either as a public issue or private placement and through public deposits.  The measures have been the result of several companies which having raised monies from the public on the promise of fabulous returns have later vanished or lost all the money in their ventures.  Similarly, if a company has raised money on a representation that the money would be utilisedfor a specific purpose, it cannot unilaterally change the purpose to which the money is to be applied.  This would require prior approval of the shareholders and shareholders who do not wish to support such a change in object are entitled to be bought out at a fair price.
 
Corporate Social Responsibility: Corporate Social Responsibility (CSR) has been made mandatory through the provisions of Section 135 of Companies Act, 2013 which requires every company who has Annual Turnover of INR 10 billion, or a Net Worth of INR 5 billion, or a Net Profit of INR 50 million and above to spend at least 2% of average net profit of preceding three financial years on CSR Activities.
 
What the Government wants the corporate sector to do is to give back a small portion of the wealth it has created with the help of the resources drawn from the society and its surroundings to provide succor and relief to the under-privileged sections of the society.  Companies would in fact gain from such initiatives as they would enhance their reputation and image among all sections of people.
 
Going Forward
 
The introduction of new Companies Act is a welcome step for moving ahead the economic development agenda of India.  But there are more than 370 places under the Act “where as may be prescribed” has been given in the provisions where regulators i.e. Registrar of Companies, Ministry has been given considerable amount of power to enact and frame subordinate legislation in the form of rules.
 
The major part of the Act and Rules has been made effective since 1 April, 2014 but the rules framed by the regulators are mainly overriding the Act in itself in terms of stringency or restriction is concerned which raises many practical difficulties in terms of doing business is concerned.
 
While the corporate sector would certainly be expected to conduct its affairs in responsible and transparent manner, the government would have to demonstrate that its intentions are to encourage the corporate sector and not to restrict or create obstacles in its working.  If the corporate sector prospers, society and all its stakeholders will prosper.

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Whilst every effort has been taken to ensure that the contents are factually correct at the time of printing, rules, regulations and tax laws do change.  Readers are advised to seek professional advice before making any decision based on the information contained herein.