The Parliament has passed the historic Companies Bill 2012, moved by Shri Sachin Pilot, Minister of Corporate Affairs. The Bill was passed by the Rajya Sabha here today which had already been passed by the Lok Sabha many months ago (in December 2012). Shri Pilot has termed it as a historic day for the country as it will usher in a new era in the Corporate Governance.

The new Companies Bill, on its enactment, will allow the country to have a modern legislation for growth and regulation of corporate sector in India. The existing statute for regulation of companies in the country, viz. the Companies Act, 1956 had been under consideration for quite long for comprehensive revision in view of the changing economic and commercial environment nationally as well as internationally. The new law will facilitate business-friendly corporate regulation, improve corporate governance norms, enhance accountability on the part of corporates/ auditors, raise levels of transparency and protect interests of investors, particularly small investors.

The salient features of the new Companies law are: Business friendly corporate Regulation/ pro-business initiatives; e-Governance Initiatives; Good Corporate Governance and CSR; Enhanced Disclosure norms; Enhanced accountability of Management; Stricter enforcement; Audit accountability; Protection for minority shareholders; Investor protection and activism; Better framework for insolvency regulation; and Institutional structure. Other important features of the Companies Bill, 2012 are:

(i)   Enhanced Accountability on the part of Companies:

(a) In addition to the concept of Independent Directors (IDs) introduced, the provisions in respect of their tenure and liability etc have been provided. Code for IDs provided in a new Schedule to the Bill. Databank for IDs proposed to be maintained by a body/institute notified by the Central Government to facilitate appointment of IDs. (Clauses 149(10); 149(11); 149(7); 150);

(b) Corporate Social Responsibility (CSR) Committee of the Board proposed in addition to other Committees of the Board viz Audit Committee, Nomination and Remuneration and Stakeholders Relationship Committee. These committees shall have IDs/non executive directors to bring more independence in Board functioning and for protection of interests of minority shareholders. (Clauses 135, 177 and 178);

(c) Provisions in respect of vigil mechanism (whistle blowing) proposed to enable a company to evolve a process to encourage ethical corporate behavior, while rewarding employees for their integrity and for providing valuable information to the management on deviant practices. (Clause 177 (9) and 177 (10));

(d)   New provisions suggested for allowing re-opening of accounts in certain cases with due safeguards. (Clause 130 and 131).

(ii)     Audit Accountability:

(a) Rotation of auditors and audit firms being provided for. (Clause 139 (2));

(b) Stricter and more accountable role for auditor being retained. Provisions relating to prohibiting auditor from performing non-audit services revised to ensure independence and accountability of auditor. (Clause 141 and Clause 144);

(c) National Advisory Committee on Accounting and Auditing Standards (NACAAS) proposed to be renamed as National Financial Reporting Authority (NFRA) with a mandate to ensure monitoring and compliance of accounting and auditing standards and to oversee quality of service of professionals associated with compliance.

(iii) Facilitating Mergers/ Acquisitions:

Simplified procedure (through confirmation by the Central Government), laid down for compromise or arrangement including for merger or amalgamation of holding companies and wholly owned subsidiary (ies), between two or more small companies and for such other class or classes of companies as may be prescribed. This would result into faster decisions on approvals for mergers and amalgamations resulting effective restructuring in companies and growth in the economy. For other companies, such matters would be approved by Tribunal. (Clause 233 and 232).

(iv)   Investor Protection:

(a) Acceptance of deposits from public subject to a more stringent regime. (Clause 76);

(b) Provisions for Class Action Suits revised to provide minimum number of persons who may apply for such suits. Safeguards against misuse of these provisions also being included. (Clause 245).

(v)   National Company Law Tribunal (Tribunal): Keeping in view the Supreme Court’s Judgment, on the 11th May, 2010 on the composition and constitution of the Tribunal, modifications relating to qualification and experience etc of the members of the Tribunal have been made. Appeals from Tribunal shall lie to National Company Law Appellate Tribunal. (Chapter XXVII).

Corporate governance reform strengthens director accountability, audit oversight and investor protections under the new companies framework. The new companies statute modernises corporate regulation by strengthening board accountability through defined roles and liabilities for Independent Directors, mandating key board committees including a CSR Committee, instituting vigil mechanisms and account re opening provisions; tightening audit oversight via auditor rotation, limits on non audit services and establishment of the National Financial Reporting Authority; streamlining certain merger procedures while retaining Tribunal oversight for others; enhancing investor protections on deposits and class actions; and revising the National Company Law Tribunal's composition and appellate route.