With an aim to make it more substantial, reduce its volume and make it more relevant to today’s needs, the Lok Sabha has passed the much-awaited Companies Bill, 2011, on December 18, 2012. The Bill is all set to replace the 56-year-old Act and we take a look at some of the key changes.

The Companies Bill, 2011, has quite a few changes and, once implemented, is expected to be in sync with changing world of business and industry. “In view of various reformatory and contemporary provisions proposed in the Companies Bill, 2011 together with omission of existing unwanted and obsolete compliance requirements, companies in the country would be able to comply with the requirements of the proposed Companies Act in a better and more effective manner,” said a government statement.

Corporate Social Responsibility (CSR):

At the heart of the changes and the rule which has grabbed maximum eyeballs has been the one on CSR. Every company having net worth of Rs. 500 crore or more, or turnover of Rs. 1000 crore or more or a net profit of Rs. 5 crore or more during any financial year will have to constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.

The bill states that such a company will have to ensure that the company spends, in every financial year, at least 2 percent of the average net profits of the company made during the three immediately preceding financial years for CSR activities.

Insider trading:

According to the bill, no one including any director or key managerial personnel of a company will enter into insider trading. If any person flouts the provisions of this Section, he will be punishable with imprisonment for a term which may extend to five years. On the monetary side a fine which will not be less than Rs. 5 lakh, but which may extend to Rs. 25 crore or three times the amount of profits made out of insider trading, whichever is higher, or with both can be levied.

Remunerations:

The total managerial remuneration payable by a public company, to its directors, including managing director and whole-time director, and its manager in respect of any financial year cannot exceed 11 percent of the net profits of that company for that financial year. If the company in general meeting may authorize payment of remuneration exceeding 11 percent, approval of the Central Government is a must.

A director or manager may be paid remuneration either by way of a monthly payment or at a specified percentage of the net profits of the company or partly by one way and partly by the other. An independent director on the other hand will not be entitled to any stock option and may receive remuneration only by way of commission or fees.

Independent directors:

The bill provides that every listed public company shall have at least one-third of the total number of directors as independent directors and the Central Government may prescribe the minimum number of independent directors in case of any class or classes of public companies.

Every company existing on or before the date of commencement of this Act will have to within one year from such commencement or from the date of notification of the rules, comply with the requirements of the provisions. Every independent director in the first meeting of the Board in which he participates as a director and thereafter at the first meeting of the Board in every financial year or whenever there is any change in the circumstances which may affect his status as an independent director, give a declaration that he meets the criteria of independence as provided in the Act.

Serious Fraud Investigation Office:

Where the Central Government is of the opinion, that it is necessary to investigate into the affairs of a company by the Serious Fraud Investigation Office —

on receipt of a report of the Registrar or inspector under section 208;

on intimation of a special resolution passed by a company that its affairs are required to be investigated;

in the public interest or on request from any Department of the Central Government or a State Government, may assign the investigation into the affairs of the company to the Serious Fraud Investigation Office. Adding more teeth to the SIFO, the bill contains that where any case has been assigned by the Central Government to the SIFO no other investigating agency of Central Government or any State Government will proceed with a parallel investigation and in case any such investigation has already been initiated, it will not be proceeded further and the concerned agency will transfer the relevant documents and records in respect of such offences to SIFO.

Class action suit:

If a number of members or depositors feel that the management or conduct of the affairs of the company is being conducted in a manner prejudicial to their interests or that of the company, they may file a class action suit. These suits would be to either restrain the company from committing an act which is ultra vires the articles or memorandum of the company or restrain the company from committing breach of any provision of the Company’s memorandum or articles.

The suit can also be bought about to declare a resolution altering the memorandum or articles of the company as void if the resolution was passed by suppression of material facts or obtained by mis-statement to the members or depositors and may also be to restrain the company and its directors from acting on such resolution.

The requisite number of members in the case of a company having a share capital is not less than one hundred members of the company and in the case of a company not having a share capital, not less than one-fifth of the total number of its members.

Auditor:

According to the new Bill no listed company or a company belonging to such class or classes of companies will appoint or re-appoint an individual as auditor for more than one term of five consecutive years and an audit firm as auditor for more than two terms of five consecutive years.

The bill also states that every company, existing on or before the commencement of this Act is required to comply with provisions of this rule within three years from the date of commencement of this Act.