HIGHLIGHTS OF THE COMPANIES BILL, 2011 (as passed in Lok Sabha on 18.12.12)

HIGHLIGHTS OF THE COMPANIES BILL, 2011

(as passed in Lok Sabha on 18.12.12)

Ø The Bill has 470 clauses as against 658 Sections in the existing Companies Act, 1956.

Ø The entire bill has been divided into 29 chapters.

Ø Many new chapters have been introduced, viz., Registered Valuers (ch.17); Government companies (ch. 23); Companies to furnish information or statistics (ch. 25); Nidhis (ch. 26); National Company Law Tribunal & Appellate Tribunal (ch. 27); Special Courts (ch. 28).

Ø The Bill is forward looking in its approach which empowers the Central Government to make rules, etc. through delegated legislation (clause 469 and others).

Ø The Companies Bill is the result of detailed consultative process adopted by the Government.

The salient and unique features of the Bill are as under:

1. DEFINITIONS

Ø New definitions are introduced in the Bill, some of which are accounting standards, auditing standards, associate company, CEO, CFO, control, deposit, employee stock option, financial statement, global depository receipt, Indian depository receipt, independent director, interested director, key managerial personnel, promoter, one person company, small company, turnover, voting right etc..

Ø Definition of private company changed – the limit on maximum number of members increased from 50 to 200.

Ø Private company which is a subsidiary of a public company shall be deemed to be a public company. Confusion whether such a company can retain the provisions in the articles of private company though now a public company removed.

Ø Associate Company - A company is considered to be an associate company of the other, if the other company has significant influence over such company (not being a subsidiary) or is a joint venture company. Significant influence means control of at least 20 per cent. of total share capital of a company or of business decisions under an agreement.

Ø Dormant Company - Where a company is formed and registered under this Act for a future project or to hold an asset or intellectual property and has no significant accounting transaction, such a company or an inactive company may make an application to the Registrar for obtaining the status of a dormant company.

Ø “expert” includes an engineer, a valuer, a chartered accountant, a company secretary, a cost accountant and any other person who has the power or authority to issue a certificate in pursuance of any law for the time being in force.

Ø “foreign company” means any company or body corporate incorporated outside India which,—

(a) has a place of business in India whether by itself or through an agent, physically or through electronic mode; and

(b) conducts any business activity in India in any other manner.

Ø “Key Managerial Personnel (KMP), in relation to a company, means—

(i) the Chief Executive Officer or the Managing Director or the Manager,

(ii) the Company Secretary;

(iii) the whole-time director;

(iv) the Chief Financial Officer; and

(v) such other officer as may be prescribed

Ø “officer who is in default”, means any of the following officers of a company, namely:—

(i) whole-time director;

(ii) key managerial personnel;

(iii) where there is no key managerial personnel, such director or directors as specified by the Board in this behalf and who has or have given his or their consent in writing to the Board to such specification, or all the directors, if no director is so specified;

(iv) any person who, under the immediate authority of the Board or any key managerial personnel, is charged with any responsibility including maintenance, filing or distribution of accounts or records, authorises, actively participates in, knowingly permits, or knowingly fails to take active steps to prevent, any default;

(v) any person in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act, other than a person who gives advice to the Board in a professional capacity;

(vi) every director, in respect of a contravention of any of the provisions of this Act, who is aware of such contravention by virtue of the receipt by him of any proceedings of the Board or participation in such proceedings without objecting to the same, or where such contravention had taken place with his consent or connivance;

(vii) in respect of the issue or transfer of any shares of a company, the share transfer agents, registrars and merchant bankers to the issue or transfer.

Ø Bill defines the term ‘promoter’ to mean a person -

(a) who has been named as such in a prospectus or is identified by the company in the annual return, or

(b) who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or

(c) in accordance with whose advice, directions or instructions the Board of Directors is accustomed to act.

Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a professional capacity.

Ø Definition of subsidiary company in relation to any other company (that is holding company), changed to mean a company in which the holding company –

· Controls the composition of the Board of Directors; or

· Exercises or controls more than one half of the total share capital (instead of equity share capital as prescribed under the 1956 Act) either at its own or together with one or more of its subsidiary companies.

Provided that such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed.

Ø Small company has been defined as a company other than a public company having a paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed not exceeding Rs.5 crore or turnover of which does not exceed two crore rupees or such higher amount as may be prescribed not exceeding twenty crore rupees. [clause 2(85)].

Ø The number of persons in any association or partnership not to exceed such number of persons as may be prescribed (not exceeding one hundred). The restriction not to apply to an association or partnership, constituted by professionals who are governed by special Acts. (clause 464)

2. CLASSIFICATION & REGISTRATION

Ø Concept of One Person Company (OPC limited) introduced [Clause 2(62)].

Ø Concept of Small companies have been introduced which shall be subjected to a lesser stringent regulatory framework [Clause 2(85)].

Ø Provision for Conversion of Companies already registered has been introduced [Clause 18].

Ø Registration process has been made faster and compatible with e-governance.

Ø For the first time, articles may contain provisions for entrenchment [clause 5(3)].

Ø A declaration, in the prescribed form, required to be filed with the Registrar at the time of registration of a company that all the requirements of the Act in respect of registration and matters precedent or incidental thereto have been complied with, will be required to signed by both - a person named in the articles as a director, manager or secretary of the company as well as by an advocate, a chartered accountant, cost accountant or company secretary in practice, who is engaged in the formation of the company. (clause 7)

Ø Registered office

Ø A company shall, on and from the 15^th day of its incorporation and at all times thereafter have a registered office capable of receiving and acknowledging all communications and notices as may be addressed to it.

Ø Company is required to furnish to the Registrar verification of its registered office within 30 days of its incorporation in the prescribed manner.

Ø Where a company has changed its name(s) during the last two years, it shall paint or affix or print, along with its name, the former name or names so changed during the last two years.

Ø Notice of change, verified in the manner prescribed, shall be given to the Registrar, within 15 days of the change, who shall record the same.

Ø Commencement of business

Ø A company having a share capital shall not commence business or exercise any borrowing powers unless a declaration is filed with Registrar by a director verified in the manner as may be prescribed that:

every subscriber to the memorandum has paid the value of shares agreed to be taken by him;

Paid-up capital is not less than Rs. five lakh/ one lakh

Ø the company has filed with the Registrar the verification of its registered office.

3. PROSPECTUS AND ALLOTMENT OF SECURITIES

Ø This chapter is divided into two parts. Part I relates to ‘Public offer’ and Part II relates to ‘Private Placement’

Ø “Public offer” includes initial public offer or further public offer of securities to the public by a company, or an offer for sale of securities to the public by an existing shareholder, through issue of a prospectus.’

Ø The term 'private placement' has been defined to bring clarity. “Private placement” means any offer of securities or invitation to subscribe securities to a select group of persons by a company (other than by way of public offer) through issue of a private placement offer letter and which satisfies the conditions specified in this section.

Ø Detailed disclosures are provided in the Bill itself. It includes disclosures about sources of promoter’s contribution.

Ø In case of variation in the terms of contract referred to in the prospectus or objects for which the prospectus was issued, the dissenting shareholders shall be given exit opportunity by promoters or controlling shareholders.

Punishment for fraudulently inducing persons to invest money (clause 36)

Ø Any person who, either knowingly or recklessly makes any statement, promise or forecast which is false, deceptive or misleading, or deliberately conceals any material facts, to induce another person to enter into, or to offer to enter into any agreement for, or with a view to, obtaining credit facilities from any bank or financial institution shall be liable for punishment for fraud. This provision is proposed to help in curbing a major source of corporate delinquency.

4. SHARE CAPITAL AND DEBENTURES

Ø If a company with intent to defraud, issues a duplicate certificate of shares, the company shall be punishable with fine which shall not be less than 5 times the face value of the shares involved in the issue of the duplicate certificate but which may extend to 10 times the face value of such shares or rupees 10 crores whichever is higher. Stringent penalties have also been imposed for defaulting officers of the company. [clause 46(5)]

Ø Where any depository has transferred shares with an intention to defraud a person, it shall be liable under section 447 i.e. provisions for punishment for fraud.[clause56(7)]

Ø Security Premium Account may also be applied for the purchase of its own shares or other securities. [Clause 52(2)(e)]

Ø A company cannot issue share at a discount. [Clause(53)]

Ø A company limited by shares cannot issue any preference shares which are irredeemable. However, a company limited by shares may, if so authorised by its articles, can issue preference shares which are liable to be redeemed within a period not exceeding twenty years from the date of their issue.

Ø A company may issue preference shares for a period exceeding twenty years for infrastructural projects subject to redemption of such percentage of shares as may be prescribed on an annual basis at the option of such preference shareholders. [Clause 55].

Ø Every company shall deliver debenture certificate within six months of allotment. [Clause 56(4)(d)].

Ø Reduction of share capital to be made subject to confirmation by the Tribunal. The Tribunal on receiving an application for reduction of share capital, shall give notice to the Central Government, Registrar and to the SEBI and consider the representations received in this behalf. (Clause 66)

5. E-GOVERNANCE

E-Governance proposed for various company processes like maintenance and inspection of documents in electronic form, option of keeping of books of accounts in electronic form, financial statements to be placed on company’s website, holding of board meetings through video conferencing/other electronic mode; voting through electronic means.

6. BOARD AND GOVERNANCE

Ø Number of directors:

Ø Minimum : Public company -3 Private -2 , OPC-1.

Ø Maximum : limit increased to 15 from 12 .

More directors can be added by passing of special resolution without getting the approval of Central Government as earlier required.

Ø Woman director

At least one woman director on the Board of such class or classes of companies as may be prescribed.

Ø Resident Director

Every company shall have at least one director who has stayed in India for a total period of not less than one hundred and eighty-two days in the previous calendar year. [clause 149(2)].

Ø Appointment of Key Managerial Personnel [Clause 203(1)]

Every company belonging to such class or classes of companies as may be prescribed shall have the whole-time key managerial personnel.

Unless the articles of a company provide otherwise, an individual shall not be the chairperson of the company as well as the managing director or Chief Executive Officer of the company at the same time [Proviso to Clause 203(1)]

Ø Every Company Secretary being a KMP shall be appointed by a resolution of the Board which shall contain the terms and conditions of appointment including the remuneration. If any vacancy in the office of KMP is created, the same shall be filled up by the Board at a meeting of the Board within a period of six months from the date of such vacancy [Clause 203 (2) & (4)].

Ø If a company does not appoint a Key Managerial Personnel, the penalty proposed is :

- On company – one lakh rupees which may extend to five lakh rupees.

- On every director and KMP who is in default – 50,000 rupees and 1,000

rupees per day if contravention continues.

Ø Independent Directors

Ø Concept of independent directors has been introduced for the first time in Company Law: [clause 149(5)]

· All listed companies shall have at least one-third of the Board as independent directors.

· Such other class or classes of public companies as may be prescribed by the Central Government shall also be required to appoint independent directors.

· The independent director has been clearly defined in the Bill.

· Nominee director nominated by any financial institution, or in pursuance of any agreement, or appointed by any government to represent its shareholding shall not be deemed to be an independent director.

· 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 as may be approved by the members.

· An Independent director shall not be entitled to any stock option.

· Only an independent director can be appointed as alternate director to an independent director. [clause 161(2)].

Person other than retiring director

Ø If a person other than retiring director stands for directorship but fails to get appointed, he or the member intending to propose him as a director, as the case may be, shall be refunded the sum deposited by him, if he gets more than twenty five per cent of total valid votes [clause 160(1)].

Resignation of director

Ø A director may resign from his office by giving notice in writing. The Board shall, on receipt of such notice, intimate the Registrar and also place such resignation in the subsequent general meeting of the company. [clause 168(1)]. The director shall also forward a copy of resignation alongwith detailed reasons for the resignation to the Registrar.

The notice shall become effective from the date on which the notice is received by the company or the date, if any, specified by the director in the notice, whichever is later. [clause 168(2)].

Ø If all the directors of a company resign from their office or vacate their office, the promoter or in his absence the Central Government shall appoint the required number of directors to hold office till the directors are appointed by the company in General Meeting [clause 168(3)].

Participation of directors through video-conferencing

Ø Participation of directors at Board Meetings has been permitted through video-conferencing or other electronic means, provided such participation is capable of recording and recognizing. Also, the recording and storing of the proceedings of such meetings should be carried out [clause 173(2)].

The Central Government may however, by notification, specify such matters which shall not be dealt with in the meeting through video-conferencing and such other electronic means as may be prescribed. [clause 173(2)]

Notice of Board Meeting

Ø At least seven days’ notice is required to be given for a Board meeting. The notice may be sent by electronic means to every director at his address registered with the company. [clause 173(3)].

A Board Meeting may be called at shorter notice subject to the condition that at least one independent director, if any, shall be present at the meeting. However, in the absence of any independent director from such a meeting, the decisions taken at such meeting shall be final only on ratification thereof by at least one independent director. [clause 173(3)].

Duties of directors (clause 166)

For the first time duties of directors have been defined in the Bill. A director of a company shall :

Ø act in accordance with the articles of the company.

Ø act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment.

Ø exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment.

Ø not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.

Ø not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates and if such director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain to the company.

Ø not assign his office and any assignment so made shall be void.

Penalty:

If a director of the company contravenes the provisions of this section such director shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.

Board Committees

Ø Besides the Audit Committee, the constitution of Nomination and Remuneration Committee has also been made mandatory in the case of listed companies and such other class or classes of companies as may be prescribed. [clause 178(1)].

Ø The Audit committee shall consist of a minimum of three directors with independent directors forming a majority and majority of members including its Chairperson shall be persons with ability to read and understand the financial statement. [clause 177(2)].

Ø The Nomination and Remuneration Committee shall formulate the criteria for determining qualifications, positive attributes and independence of a director and recommend to the Board a policy, relating to the remuneration for the directors, key managerial personnel and other employees [Clause 178(3)].

Ø The Nomination and Remuneration Committee shall consist of three or more non-executive director(s) out of which not less than one half shall be independent directors. [clause 178(1)].

Ø Where the combined membership of the shareholders, debenture holders, deposit holders and any other security holders is more than one thousand at any time during the financial year, the company shall constitute a Stakeholders Relationship Committee. [clause 178(5)].

Managerial Remuneration [clause 197]

Ø Provisions relating to limits on remuneration provided in the existing Act being included in the Bill. Maximum limit of 11% (of net profits) being retained.

Ø For companies with no profits or inadequate profits remuneration shall be payable in accordance with new Schedule of Remuneration (Schedule V) and in case a company is not able to comply with Schedule V, approval of Central Government would be necessary.

Certain Insurance Premium not to be treated as part of the remuneration