ANALYSIS

OF FIVE KEY FEATURES OF THE NEW C OMPANIES ACT

The new Companies Act has primarily focussed on the areas of management
autonomy and investor protection. The old Companies Act 1956 is unable to
meet the new requirements of the economic environment currently prevalent in
India. To address the needs for an accelerated economic growth the new
companies act is introduced by the Government of India. The bill includes some
of the revolutionary changes that have been long awaited. Transparency in
corporate governance and accountability of auditors has also been paid good
attention while drafting the bill. Provision for investor protection such as Class
Action Suit which was already present in many countries has been finally
introduced in India.
MANDATORY CSR ACTIVITIES
By passing of the new Companies Act India would join list of countries such as
Sweden, Norway, The Netherlands, Denmark, France, and Australia that has
mandated CSR activities for corporations. The clause 135 in the new Companies
Act mandates a qualifying corporation to spend at least 2 percent of average net
profit made in the preceding three financial years, in CSR activities. A qualifying
company that fails to spend the amount are required to explain the reason for
their failure in the report of the board of directors. According to Ernst and young,
about 3000 companies in India would qualify for mandatory CSR activities as per
the new law and would bring about $2 Billion of spending in CSR activities. The
CSR activities can be focused on any of the following areas as per the Schedule
VII and should include at least one:

1) Eradicating extreme hunger and poverty

2) Promotion of education
3) Promoting gender equality and empowering
women
4) Reducing child
maternal health

mortality

and

improving

5) Combating [HIV], [AIDS], malaria and other

diseases
6) Ensuring environmental sustainability
7) Employment-enhancing vocational skills
8) Social business projects

According to Ernst
and young, about
3000 companies in
India would qualify for
mandatory CSR
activities as per the
new companies act
and would bring
about $2 Billion of
spending in CSR
activities

9) Contribution to the Prime Ministers National

Relief Fund
However, sceptics have noted the mandate of CSR activities by the government,
is not a good policy. CSR activities are voluntary in nature. However mandating
CSR would make the activities more of a duty being delivered, rather than an
inspirational activity. When the voluntary aspect of conducting CSR activities is
lost, the spending could be considered as just as an additional tax burden. This

only exacerbates an already high corporate tax rate in India. According to KPMG
the corporate tax rate in India is 32.45% which is higher than a global average of
24.09%. Further addition of 2% for CSR activities might make India an
unattractive place for investments. Thereby, there is the need for CSR activities
to remain as a voluntary rather than a mandatory task for corporations.

APPOINTMENT AND ROTATION OF AUDITORS

The new companies act will introduce provision for appointment of auditors for
five consecutive years. However, as public stake is involved in listed companies,
the act also has provisions that ensure that auditors do not serve for a longer
time for such companies. A listed company can appoint an individual as auditor
for one five year term and an auditing firm for two consecutive five year term.
There is cooling period of five years before the same auditor or auditing agency
can be appointed.
One important change in the law is that the auditors are made more accountable
to punish an auditor, if found guilty of abetting
or colliding in fraud. Such auditor shall be

removed and will get debarred for a period of

five years. This would put a check on any
Investors in US,
fraudulent activities engaged by the corporate.
using the provision
Also to ensure independence from the company,
for Class Action Suit,
auditors are prohibited from holding any interest
sued Satyam and
in the company or its subsidiary or have any
claimed a
business interest with the company.

compensation of Rs.
675 Crore in
settlement for the
loss incurred by them
due to the scam.

CLASS ACTION SUITS

This is a huge step to ensure investor protection.

Class Action Suit would ensure that the investors
could take action when incidents such as the
Satyam Scam occur. The implications of not

having a provision such as the Class Action Suit

were huge. Satyam lured investors to invest in
the company by showing fudged financial
statements by showing inflated revenues. Around 300,000 retail investors in
India lost about Rs. 5000 Crore in the case. Whereas, investors in US, using the
provision for Class Action Suit, sued Satyam and claimed a compensation of Rs.
675 Crore in settlement for the loss incurred by them due to the scam.
Class action is a right to members or deposit holders or their representatives to
file an application before a tribunal for restraining a company from some
specified acts. The shareholders or depositors can claim damages against a
company, directors, auditors, experts and advisors for their wrongful conduct.
NATIONAL COMPANY LAW TRIBUNAL
The Government shall be forming National Company Law Tribunal (NCLT) that will
have jurisdiction over corporate restructuring proposals. Several judicial and
quasi judicial powers will be transferred to NCLT. The primary difference between
a court and a tribunal is that a court is governed by detailed statutory rules and

evidence and a procedure is involved in decision making process, whereas a

tribunal can create its own procedures for decision making. However it could be
concluded that by the institution of NCLT the government intends to reduce the
delays in corporate law proceedings.
ONE PERSON COMPANIES
One of the new concepts that is present in many countries and has found its way
into the new Companies Act is the One Person Company. With the passing of the
bill a company could floated of just one person who is both its director as well as
its share holder. There is provision by which the original member of the company
can appoint a nominee who takes over the company on the actual owners
incapacity to deliver his duties, thus enabling a perpetual life for the company.
However the major hurdle in setting up a One Person Company is the high tax
rate of 30%.
REFERENCES:
http://blogs.economictimes.indiatimes.com/lawstreet/entry/one-personcompanies-flying-solo-companies-bill-2012
http://www.caclubindia.com/articles/comparison-between-old-versus-newprovisions-of-companies-act-18151.asp#.UhT6nZG3TIU
http://taxmantra.com/comparative-analysis-companies-bill-2012-1956-act.html/
http://www.dnaindia.com/analysis/1631374/column-new-companies-bill-takesethics-to-a-newer-level
http://www.ssireview.org/blog/entry/mandatory_csr_in_india_a_bad_proposal
http://asianphilanthropy.org/?p=3113
http://www.thehindubusinessline.com/opinion/new-companies-bill-auditing-theauditors/article4232350.ece
http://www.deloitte.com/assets/Dcom-India/Local
%20Assets/Documents/Regulatory%20alerts/2012/RA-25-2012.pdf
http://www.thehindubusinessline.com/industry-and-economy/class-action-suitsto-soon-be-a-reality-in-india/article5007431.ece
http://forbesindia.com/article/breakpoint/class-action-suits-are-up-againstchallenges/34781/1
http://www.indianexpress.com/news/sc-clears-national-company-lawtribunal/617559/2
http://www.mondaq.com/india/x/219108/Corporate+Commercial+Law/Companie
s+Bill+2012+And+The+Constitution+Of+NCLT+And+NCLAT
http://articles.economictimes.indiatimes.com/2013-04-18/news/38647444_1_ncltnational-company-law-tribunal-rajya-sabha