The Union Cabinet on Thursday approved the long-awaited Companies Bill that will completely recast the key provisions of the decades-old Companies Act 1956.
It will bring in a new corporate responsibility framework, a rigorous regime and greater role for independent directors, more responsibility on independent directors and introduces new concepts like one person company, class action suits and women directors on boards.
“The Cabinet has cleared the Companies Bill, 2011. It is likely to be tabled in the ongoing Winter Session,” Corporate Affairs Minster Veerappa Moily said after the Cabinet meeting. The Bill is unlikely to face hurdles in Parliament as it had been vetted by BJPleader Yashwant Sinha-headed Standing Committee on Finance.
The government has been attempting an overhaul of the Companies Act for almost a decade. Experts say the move will bring about a complete change in the corporate law framework, in line with the changing times.
“Corporate laws have to modernise and keep pace with the business environment. The Companies Act is perhaps, the only fundamental legislation that is still based on the 1956 framework. The nod is a welcome move and hopefully, this time, we will see quick and effective legislation of the Bill,” said Vivek Gupta, partner, BMR Advisors.
The Satyam scam, which exposed the weakness in the corporate governance framework, the role of auditors and independent directors, forced the government to put the process on the fast track.
The Bill was originally introduced in the Lok Sabha in 2008 but had lapsed because of change of government. It was reintroduced in August 2009. The Bill suggests that profit-making companies above a certain threshold will have to spend at least 2% of the average profits in the preceding three years on CSR activities and make a disclosure to shareholders about the policy adopted in the process.
The government diluted the provision after stiff opposition from the industry and decided not to make 2% CSR spend mandatory. The Bill also seeks to provide for class action suits and a fixed term for independent directors. Among other things, it proposes to tighten laws for raising money from the public.
The Bill also seeks to prohibit any insider trading by company directors or key managerial personnel by treating such activities as a criminal offence. The Bill will give more powers to the Serious Frauds Investigation Office. The Cabinet had deferred the Bill last month after the Finance Ministry and the Planning Commission aired the Sebi’s concerns over conflict of some provisions in the Bill with the existing laws and suggestion of further fine-tuning it.
The Corporate Affairs Ministry had moved a fresh proposal after resolving the overlap issues, and giving Sebi regulations a greater force in case of a conflict with any other law. “The Bill has been through various iterations and the industry anxiously awaits a new corporate law that would lay stress on responsible self-regulation,” said Chandrajit Banerjee, Director General, CII