New Delhi, Oct. 4: The Union cabinet today approved the long-pending Companies Bill 2011. The bill, which will replace the Companies Act of 1956 after Parliament’s approval, aims to improve corporate governance, increase transparency and make independent directors more accountable.
“The bill is designed for the 21st century and takes note of companies’ explosion in India,” finance minister P. Chidambaram told reporters after the cabinet meeting.
The Companies Bill, 2011 proposes a string of new norms, including asking companies to spend about 2 per cent of their average profit over three years towards corporate social responsibility activities and more powers to the Serious Fraud Investigation Office.
Besides, there should only be two layers of subsidiaries for investment in companies.
Provisions on governance include mandatory approval from shareholders and board on the appointment of auditors and class-action lawsuits.
“The final draft of the Companies Bill 2011 was prepared after considering the recommendations of the parliamentary standing committee and inputs from the finance and law ministries as well as the Planning Commission,” said Chidambaram.
The bill raises the accountability of auditors: companies will be required to mandatorily obtain the consent of its shareholders every year to continue with its auditors. However, the auditors’ tenure of five years will continue.
The corporate social responsibility (CSR) clause covers all companies that have either a net worth in excess of Rs 500 crore, or a turnover of Rs 1,000 crore or more, or a net profit of Rs 5 crore or more. Such companies will have to set aside 2 per cent of the average net profit of the preceding three years for CSR activities.
However, it was unclear whether the 2 per cent CSR spending has been made mandatory (as suggested by the government) or left to the company (as suggested by industry bodies).
Companies have been allowed to have only two layers of subsidiaries for investment.
Traditionally, Indian companies have created multiple subsidiaries to raise money, or for investment purposes. Many such subsidiaries have been formed both inside and outside the country, including tax-friendly countries such as Mauritius. But by allowing only two levels of subsidiaries, the bill is aiming to check malafide practices, including siphoning of funds from profitable ventures and round-tripping of funds.
Efforts to change the companies law, which was enacted in 1956, began more than four years ago. Two versions have been lobbed to the standing committee on finance and many of the suggestions have been incorporated already, including one that makes it mandatory for a certain class of companies to have at least one woman director on the board.
On Thursday, however, the cabinet said whole-time directors would be treated as “key managerial personnel (KMP)”, which will make them equally responsible for the operations of a company as its managing director.
The government has given in to the standing committee on this point. Earlier, it had maintained that whole-time directors had little control over the operations of a company and ought not to be categorised as KMPs.
The press note had an interesting but vaguely-worded statement on the role of the Comptroller and Auditor General (CAG), a source of acute embarrassment for the UPA government with its damning reports on presumptive loss to the exchequer because of the telecom spectrum allocations in January 2008 and the allotment of coal blocks to a number cherry-picked investors since 2005.
The statement merely said that the provision relating to the audit of government companies by the CAG had been modified to enable it to perform such audits effectively. But it did not spell out what the modification was.
The term “private placement” has also been defined but it wasn’t spelt out, leaving companies and investors curious to know what the change was.