Thursday, December 15

Companies Bill 2011 introduced in Parliament; retains 2% CSR spend

The Companies Bill, 2011, that seeks to make companies more accountable was introduced in the Lok Sabha on Wednesday by the minister for corporate affairs Veerappa Moily. If approved by Parliament, it would replace a 55- year-old legislation—the Companies Act, 1956.

The Bill enhances the accountability for those incorporating a company, and directors on the board, by framing additional disclosure norms.

“At the time of incorporation, it is now mandatory to file the consent of directors associating with the company. The director will also have to give particulars of other firms which they are associated with,” said Pavan Kumar Vijay, managing director, Corporate Professionals Group, which advises professionals and companies on corporate governance issues.

These details are not required under the Companies Act, 1956, and will make promoters and directors more accountable, said Vijay. It will also address the problem of bogus directors on company boards, he said.

The Government today introduced the new Companies Bill, retaining some contentious provisions like 2 per cent yearly spend on CSR activities and a fix term for independent directors. 

According to the Companies Bill 2011, every company with a networth of Rs 500 crore or more, or turnover of Rs 1,000 crore or more, or net profit of Rs 5 crore or more in a financial year will have to form aCorporate Social Responsibility (CSR) Committee, consisting of three or more directors, of which at least one director should be an independent director. 

"The Board of every company shall make every endeavour to ensure that the company spends, in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding years in pursuance of its CSR Policy," the Bill said.

The proposed Bill has provisions to take stringent action against corporate frauds. “In case of fraud, the defaulter can get an imprisonment of anywhere between six months to 10 years along with a fine,” said Vijay. Currently, these matters are decided by the courts.

The new Bill also proposes that persons signing the memorandum of association—document that regulates a company’s activities—will have to state upfront that they have not been associated with any fraud or mismanagement or breach of duty under the companies law.

“With scams such as companies vanishing after raising public monies as also opting for liquidation, the new Bill was designed with the aim of sensing frauds early and, therefore, these provisions have been incorporated. These will ensure that maximum responsibility is put on the companies when they register,” said a senior official at the ministry of corporate affairs on condition of anonymity.

The Bill also proposes to strengthen the Serious Fraud Investigation Office, a multi disciplinary body constituted by chartered accountants, company secretaries, revenue and corporate law officials.

It will also introduce concepts that are new to India, including the one-person company and class-action suits. The proposed regulation will also make it easier to start and shut companies.

The new regulations, if cleared by both houses of parliament, will apply to more than 800,000 companies registered in India.

Industry lobby, Federation of Indian Chambers of Commerce and Industry (Ficci) said the Bill is a step in the right direction. “The structure of the Bill is contemporary, sound and visionary rather than just an attempt to address shortcomings,” said Sidharth Birla, chairman, Ficci Corporate Law Committee.
The Bill was first introduced in the Lok Sabha in 2008 but lapsed after the House was dissolved on account of the general election.

Edited - Some parts are taken from LiveMint.

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