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Highlights of the Companies Bill 2011 DEEPA KHATRI

Highlights of the Companies Bill 2011 DEEPA KHATRI. History of the Companies Act, 1956. The Companies Act, 1956 had come into force on 1 st April, 1956. It had replaced the Companies Act, 1913.

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Highlights of the Companies Bill 2011 DEEPA KHATRI

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  1. Highlights of the Companies Bill 2011 DEEPA KHATRI

  2. History of the Companies Act, 1956 • The Companies Act, 1956 had come into force on 1st April, 1956. • It had replaced the Companies Act, 1913. • The Companies Act, 1956 was enacted with the object to amend and consolidate the law relating to companies and certain other associations.

  3. Need for a new Companies Law • The changing national and international economic environment • Exponential growth of the Indian economy • Changes in the stakeholders’ expectations • Emergence of corporate form of organization as the preferred vehicle for commercial activity with large scale mobilization of resources from the public.

  4. Need for a new Companies Law • ….Contd • Manifold Increase in Number of Companies • Year No. of Companies • 1956 30,000 approx • 2010 (31.12.10) 8,72,740 • The need of a legal framework was felt to enable the Indian corporate sector to adopt the best international practices in a globally competitive manner, fostering a positive environment for investment and growth.

  5. Making of new Companies Bill The drafting of a new Companies Bill was taken up by the Government on the basis of a detailed consultative process. A ‘Concept Paper on new Company Law’ was placed on the website of the Ministry on 4th August, 2004. The inputs received were put to a detailed examination in the Ministry. The Government also constituted an Expert Committee on Company Law under the Chairmanship of Dr. J JIrani on 2nd December 2004.

  6. Making of new Companies Bill The Committee included representatives from concerned Departments and Ministries, professional Institutes and trade bodies and individual experts as members or special invitees. The Committee deliberated extensively on various issues and submitted its Report to the Government on 31st May, 2005. After considering the report of the Committee and other inputs received from time to time, the Government took up the exercise of comprehensive review of the Companies Act, 1956

  7. Making of new Companies Bill • Finally, a comprehensive revised Bill, was prepared in consultation with Ministry of Law and was introduced by the Government in the LokSabha on 23rd October, 2008 as “Companies Bill 2008”. The said Bill was referred to the Parliamentary Standing Committee but lapsed automatically on the dissolution of 14thLokSabha in terms of Article 107(5) of the Constitution of India. • The Bill was again introduced by the Government in LokSabha as “Companies Bill, 2009” on 3rd August 2009. • The Bill was referred to the Parliamentary Standing Committee on 9th September 2009 for examination.

  8. Making of new Companies Bill…. Contd The Committee took the representations of Ministry of Corporate Affairs at various sittings held between September 2009-July 2010. The Committee also heard the views of representatives of FICCI, CII, ICAI, ICSI, ICWAI, SEBI, RBI, Indian Banks Association and various experts and other associations and regulators. The Hon’ble Parliamentary Standing Committee (PSC) adopted its report on 26 August, 2010 and placed the same before LokSabha on 31st August, 2010.

  9. Making of new Companies Bill The Parliamentary Standing Committee made numerous recommendations in its Report. The Central Government also received several suggestions for amendments in the said Bill from various stakeholders.

  10. Making of new Companies Bill The Central Government has accepted in general the recommendations of the Standing Committee. The Government also considered the various suggestions received from various stakeholders.

  11. Introduction of Companies Bill, 2011 In view of large amendments to the Companies Bill,2009 arising out of the recommendations of the Parliamentary Standing Committee and the suggestions of the stakeholders, the Central Government decided to withdraw the Companies Bill, 2009 and introduce a fresh Bill – Companies Bill, 2011 incorporating the recommendations of the Standing Committee and suggestions of the stakeholders.

  12. Introduction of Companies Bill, 2011 The Companies Bill, 2011 was thus introduced in the Lok Sabha on 14th December, 2011. The Bill contains 470 clauses and 7 schedules. (as compared to 658 sections and 14 schedules under the Act)

  13. Guiding Principles in the making of Companies Bill • Providing a compact statute to enable easy interpretation-systematic arrangement of sections, simple language; (substantive law/procedure in rules) • Bringing compactness by deleting the redundant provisions; • Adopting best global practices; • Strengthening enforcement powers and prescribing stringent penalties; • Segregating procedural aspects from substantive law providing greater flexibility to bring changes in consonance with economic and technical environment

  14. Concept of self regulation introduced The control of the Central Government over internal corporate processes largely substituted by shareholder control. • Shareholders democracy recognised. • Supplanting excessive intervention of the Central Government in the internal affairs of companies with an easy-to-comply regime of self-regulation with accountability. • More mandatory disclosures. • Greater emphasis on protection of shareholder rights • Redrafting took into consideration Satyam, 2G Spectrum scam


  16. New definitions introduced The Bill prescribes 33 new definitions., such as accounting standard, auditing standard, associate company , CEO, CFO, control, deposit, employee stock option, global depository receipt, Indian depository receipt, , independent director, interested director, promoter, one person company etc.,

  17. Types of Companies (1) Private company • Must have a minimum paid up capital of Rs one lakh or such higher paid up capital as may be prescribed • Its articles must- • Except in the case of OPC ,limit the number of members to 200 (against 50 under the Companies Act,1956) 2. Restrict right to transfer shares 3. Prohibit any invitation to the public to subscribe for any securities of the company

  18. Types of Companies (2) Public company – • Which is not a private company • Has a minimum paid up capital of Rs. 5 lakh or such higher paid up share capital as may be prescribed. • Private co which is a subsidiary of public company shall be deemed to be a public company

  19. Types of Companies • 3.One Person Company • One Person Company (OPC) is a private company and may be registered with one shareholder and may have a single director. • The single member shall nominate some other person with his prior consent who shall be member in the event of his death. • The words ‘‘One Person Company’’ shall be mentioned in brackets below the name of such company, wherever its name is printed, affixed or engraved (Australia, UK….)

  20. One Person Company The Bill provides relaxation to OPCs from a number of compliance requirements relating to holding of general meetings and board meetings. The Central Government is empowered to exempt OPCs from compliance of certain provisions, by issuing notification.

  21. Types of Companies (4) Holding and subsidiary company • Holding co. means a company which exercises control over another company and a subsidiary is one over which control is exercised. • Control can be exercised through • composition of board of directors ( power to remove or appoint majority of directors without the consent or concurrence of some other person ) • shareholding .if holding company controls more than one half of total share capital ( instead of equity share capital as was prescribed under companies Act which means preference shares will also be counted.) • Such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed.

  22. Types of Companies (5) Associate company • A company is considered to be an associate company of the other, if the other company has a significant influence over such company or is a joint venture company. • SIGNIFICANT INFLUENCE means a control of at least 20 per cent of total share capital of a company or of taking business decisions power under an agreement.

  23. Types of Companies (6) Small company • Small company means a private company whose paid-up share capital does not exceed Rs 50 lakh or such higher amount as prescribed or a company whose turnover as per the profit and loss account is less than Rs 2 crore or such higher amount prescribed) Following companies cannot be a small company- • A holding or subsidiary company, • a non-profit company licensed under section 8, or • a company governed by any Special Act. • Such Companies will be given various procedurals relaxations by issuing notification by CG.

  24. Types of Companies (7) Listed company • Listed company means a company which has any of its securities listed on any recognized stock exchange.

  25. Types of Companies (8) Company for Charitable Objects,etc. • as limited company for promoting commerce, art, science, sports, education, research, social welfare, protection of environment, religion, charity • intends to apply its profits in promoting its objects • prohibits payment of dividend to its members • privileges given to such companies

  26. Formation of a Company (1) Name availability : Application+ fee to the Registrar online. (2) Filing of documents with registrar for registration Memorandum and articles duly signed by all the subscribers. Any 7 or more person in case of public company, 2 or more in case of private company, one person in case of one person company Clauses of memorandum : Memorandum of association has different clause like • Name whether private or public • State in which registered office is situated • Objects –earlier main objects and other objects • Liability – whether limited or unlimited • Capital – authorized capital with the division into shares

  27. Formation of a Company • Every clause if you wish to alter has a procedure . • Name –special resolution + CG approval • State to state – special resolution + CG approval. Order of CG to be filed with each State • Object - • Unutilized money from public issue cannot change its object

  28. Formation of a Company • Under the Companies Act 1956, a company raising money from the public is free to use the money for any other purpose, if the original objective cannot be met for some reason . to plug this loophole a restrictive clause has been brought in. According to this , a company, which has raised money from public through prospectus and still has any unutilized amount out of the money so raised, shall not suddenly enter new areas by changing its objects unless a special resolution is passed by the company and exit option is given to dissenting shareholders.

  29. Formation of a Company • Declaration by advocate, CA , CS in practice who is engaged in the formation of company AND by a person named in the articles as a director, manager or secretary that all the requirements of this Act pertaining to formation has been complied with • Affidavit from each subscriber and from first directors that he is not convicted and have not been found guilty of any fraud to any company during the preceding 5 years. (new provision) • Address for correspondence till registered office is established • Particulars of subscribers and first directors with proof of identity (new) • Particulars of interest of the first directors in other firms (new)

  30. Formation of a Company (3) Issue of Certificate of Incorporation and Allotment of CIN (NOT A CONCLUSIVE PROOF) Because if after incorporation it is proved that the company has been formed by furnishing false information, promoters, first directors and for persons giving declaration will be guilty of fraud and liable to imprisonment and fine. Further tribunal may on the application made to it pass the following order (a) can order for change in its memorandum and articles (b) can direct that liability of the member shall be unlimited (c) can remove the name of the company from register Order for winding up

  31. Formation of a Company • Articles may contain entrenchment provision – it provides a more restrictive procedure than passing a special resolution for altering certain provision in the articles . For example , the articles could mandate that certain provisions in it can be altered only if agreed to by all the members of the company in writing. • Provisions for entrenchment can be made either on formation of the company, or by an amendment in the articles agreed to by all the members of the company in the case of a private company and by a special resolution in the case of a public company.

  32. Share Capital and Debentures Equity share with differential rights as to dividend, voting or otherwise in accordance with such rules as may be prescribed (retained); and

  33. Deposits • Prohibition on acceptance of deposit from public : No company shall invite, accept or renew deposits under this Act from the public . However a public company having such net worth or turnover as may be prescribed, may accept deposits from the public. • Banking company and Non banking Financial company are not covered by the provisions relating to acceptance of deposits from the public and they will be governed under rules issued by Reserve Bank of India. • Acceptance of deposit from members allowed : A company may accept deposits from its members by passing a resolution in general meeting and subject to such rules as may be prescribed.

  34. E- Governance Initiatives • Circulation of financial statements electronically and placing on company’s website. • Existing provisions on mandatory electronic registry (MCA 21) retained. • Notice of meetings may be sent by electronic mode. • Voting by electronic mode at the meeting permitted. • Dividend may be paid electronically. • Books of accounts may be kept in electronic mode. • Participation of directors in Board meeting by means of video conferencing or other audio visual means capable of recording and storing the proceedings allowed.

  35. Concept of Key Managerial Personnel • ‘Key Managerial Personnel’- a new term coined in the Bill means- • The Chief Executive Officer, the Managing Director or the Manager; • The Company Secretary; • The Chief Financial officer if the Board of Directors appoints him; and • Such other officer as may be prescribed

  36. Concept of Key Managerial Personnel …Contd • Companies belonging to such class or classes of companies as may be prescribed shall have the following whole time KMP. • -Managing director, or CEO or manager and in their absence , a whole time director; and • -company secretary

  37. Every KMP shall be appointed by a Board resolution containing the terms and conditions of appointment including the remuneration • If there is any vacancy in any of these posts, it should be filled within a period of 6 months. • Each KMP is liable as ‘officer who is in default’

  38. Promoters This was defined under SEBI Law. This has now been defined in theBill. Promoter is a person who controls a company, directly or indirectly, irrespective of the number of shares held in the entity. Named as promoter in a prospectus or identified as one by the company in its annual return. In accordance with whose advice, the Board is accustomed to act

  39. Promoters … Contd • Sources of promoters’ contribution to be disclosed in prospectus. • A return to be filed with the Registrar with respect to change in the number of shares held by promoters and top tenshareholders (to ensure audit trail of ownership)

  40. Fraud defined • The term ‘fraud’ in relation to affairs of a company or any body corporate, has been defined in the Bill to include- • any act, • omission, • concealment of any fact OR • abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person,

  41. Fraud • shall be punishable with • imprisonment , not be less than six months but which may extend to ten years • shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud.

  42. DIRECTORS • Number of directors : • minimum 3 in case of public • 2 in case of private company, • 1 in case of OPC. • maximum limit 15 (from 12 under Companies Act)

  43. DIRECTORS • Woman directors: Induction of atleast one woman director on the Board of certain class of companies . • Director on the basis of stay in India : • atleast one director shall be a person who has stayed in India for a total period of not less than one hundred and eighty-two days in the previous calendar year

  44. Independent Director Why independent director • For good corporate governance • to bring independence, impartiality while taking decision • to have the benefit of their wide experience • to protect the interest of the minority and small shareholders • Definition: Though Companies Act,1956 does not define ‘independent director’ , clause 49 of the Listing Agreement provides for appointment of independent directors. • independent director is defined to mean a director other than a managing director or a whole-time director or a nominee director of a company • eligibility to become independent director: (i) The candidate must be “a person of integrity and possess the relevant expertise and experience” in the opinion of the board.

  45. Independent Director (ii) The proposed candidate and / or his relative not to have any pecuniary relationship with the company, or their promoters, or directors, during the two preceding financial years • Appointment • Listed co to have at least 1/3rd independent directors on their board . For other class of public company, it may be prescribed by Central Government • To be appointed from databank notified by the government . 20,756 Professionals have enrolled as independent directors with Prime Directors database. • Can be appointed for 2 consecutive terms of 5 years each. Cooling off period of 3 years before reappointment, provided that during the cooling period the director was not associated with the company in any other capacity.

  46. Independent Director • Code of conduct prescribed under schedule IV • Independent directors to give a declaration of independence every year. • Immunity has been proposed to such independent directors • The Bill limits the liability of an ID “only in respect of acts of omission or commission by a company which had occurred with his knowledge, attributable through board processes, and with his consent or connivance or where he had not acted diligently.”

  47. Duties of Directors • (CLAUSE 166] :For the first time duties of directors have been defined in the Bill listing some do’s and don’t’s.

  48. Vigil mechanism for directors • The Companies Bill proposes a whistle blower mechanism whereby every listed company or such class or classes of companies, as may be prescribed, are required to establish a system for directors and employees who want to report genuine concerns with respect to any deviant practices of the company. • Prohibition on insider trading of securities : the Bill prohibits insider trading by directors by treating such activities as criminal offence.

  49. Board Meeting • Notice may be sent by electronic means. • The participation of the directors by video conferencing or by other audio visual means shall also be counted for the purposes of quorum

  50. Annual General Meeting • Day , place and time : During business hours, (9am to 6pm), on any day not being national holiday (as declared by Central Government) , at registered office or at such other place within the city, town or village in which the registered office is situate • Notice: general meeting may be called by giving not less than 21 days clear notice either in writing or through electronic mode . As a green initiative electronic mode has been introduced for giving notice.

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