Companies Bill of 2012 Passed; Everything A Startup Must Know

Government EmblemThe Rajya Sabha passed the Companies Bill yesterday. The new legislation, which now needs the President’s nod to become law, will replace the ancient Companies Act of 1956 and has brought in new measures for investor protection, better corporate governance and corporate social responsibility. Here’s what you need to know.

Highlights of the Companies Bill 2012

  • Concept of One Person Company (OPC limited) introduced. Which will be treated as Private Limited Company only.
  • The bill increased the number of members of private companies from 50 to 200. This allows companies access to large pool of capital without going public.
  • The new bill gives recognition to transfer restrictions on inter-se shareholders – ‘Right of First Refusal’ will be enforceable. This would clear existing ambiguity on legal enforceability on transfer restrictions under JV/shareholder agreements.
  • While the old bill only permitted merger of a foreign company with an Indian company, the new bill allows merger of Indian companies into foreign companies which would aid in consolidation of cross-border businesses/assets.
  • The new bill permits merger of a listed company with an unlisted one, subject to exit opportunity being offered to shareholders of the listed company.
  • While the old bill depended on precedents for merger of a subsidiary with a parent (or between two small companies), the new bill provides a separate and simplified regime for this without any approval from High Court.
  • The new bill also gives rights for objections to schemes to only creditors who owed over 5 per cent and minority shareholders with over 10 per cent stake against no thresholds earlier.
  • The new bill also has a detailed mechanism for acquisition of shares by majority shareholder from minority shareholders.
  • The bill restricts creation of multi-layered holding structures, prohibiting making investments through more than two layers of investment companies.
  • The new bill bans holding ‘Treasury Stock’, which is often used by companies to increase shareholding or future monetization after consolidation.
  • The new bill asks that listed companies and other specified companies will have to change individual auditor after five years and audit firm after 10 years. The old bill had no provisions for this.
  • Under the new bill, companies are required to spend at least 2 per cent of their net profit on CSR. The companies will also have to give preference to the local areas of their operation for such spending.
  • The new bill also requires companies to appoint one woman director.
  • The proposed legislation would ensure setting up of special courts for speedy trial and stronger steps for transparent corporate governance practices and curb corporate misdoings.
  • The changed law allows more statutory powers to the government’s investigative arm Serious Fraud Investigation Office (SFIO) to tackle corporate fraud.
  • To help in curbing a major source of corporate delinquency, introduces punishment for falsely inducing a person to enter into any agreement with bank or financial institution, with a view to obtaining credit facilities.
  • The limit in respect of maximum number of companies in which a person may be appointed as auditor has been proposed as 20.
  • Independent directors’ shall be excluded for the purpose of computing ‘one third of retiring directors’.
  • Appointment of auditors for 5 years shall be subject to ratification by members at every Annual General Meeting.
  • ‘Whole-time director’ has been included in the definition of the term ‘key managerial personnel’.
  • The term ‘private placement’ has been defined to bring clarity.
  • Maximum number of directors in a private company increased from 12 to 15 which can be increased further by special resolution.
  • Financial Year of any company can end only on March 31 and only exception is for companies, which are holding / subsidiary of a foreign entity requiring consolidation outside India, can have a different financial year with the approval of Tribunal.

In conclusion the bill provides for class action suit, the move aids individual shareholder to take action against companies, better disclosure requirements in financial statements and disclosure of interests of directors etc. The bill has tightened the screws on insider trading norms in the country, it aims at prohibition on forward dealings in securities of company by key managerial personnel, insider trading rules and restriction on non-cash transactions involving directors. It has also streamlined procedures relating to disclosure of transactions with parties related to directors, promoters etc.

About the Author: Navin Rungta, is the co-founder of e-Lagaan, a services company which offers CA, CS, business legal & payroll services for businesses in India.

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