Companies Bill 2012 made easy ~ Better Corporate Governance, Stringent Disclosure Norms, CSR and more..

ANALYSIS OF THE NEW COMPANIES BILL 2012 

RELIANCE INDUSTRIES LTD

Posted by ~ Er Tejas Somaiya

Prelude

The Companies Bill 2011 was laid before the Parliament in December 2011 and was referred to Parliament Standing Committee on Finance. The Standing Committee submitted its report in June 2012 and based on Standing Committee's report, the Companies Bill 2011 was amended and was introduced as the new Companies Bill, 2012. The Bill was passed by the Lower House of Parliament on 18th December 2012. The Bill is pending the Upper House of Parliament-the Rajya Sabha and therefore, may undergo further changes.

The Bill is divided into 29 chapters and contains 470 clauses as against 658 sections in the existing Companies Act, 1956.

Corporate Governance: Concept of Independent Directors ("ID") has been introduced for the first time in Company Law. Some of the important points relating to IDs are mentioned below:

• Maximum number of directors has been increased from 12 to 15 directors. Further, no Central Government's permission in required to increase the maximum number of directors beyond 15. RIL's board presently comprises of 12 members with 7 Independent Directors. Thus, one of the clause (of the New Companies Bill) which mandates at least 1/3rd of total number of directors as IDs is already satisfied even if the number is increased to 15 members.
• Appointment of at least one woman director on the board has been made mandatory (for prescribed class or classes of companies). Presently, there is No Woman Director in RIL and hence, it is entitled a transition period of one (1) year for the compliance of this provision.
• Every company shall have at least one director resident in India for at least 182 days in previous calender year, is made mandatory for all companies. At present, all directors can be foreigners not residing in India.
• ID cannot be granted any stock options in companies and this appears to be in direct conflict with Clause 49 read with the applicable SEBI guidelines as per which, IDs may be granted stock options. Stock Options, granted to directors (Executive Directors), shall be included in the remuneration.
• A person cannot be director in more than 20 companies as against 15 companies in the existing Companies Act, 1956 and out of these 20 he cannot be an ID in more than 10 public companies.

Auditors and Accounts: The last audited accounts signatory for RIL includes - Chaturvedi & Shah, Deloitte Haskins & Sells and Rajendra & Co., Chartered Accountants

•  Every company must appoint an individual or a firm as an auditor at the first AGM, who shall hold office till the conclusion of its fifth AGM and thereafter till the conclusion of every fifth meeting. Further, the Bill mandates rotation of individual auditors in every five years and for audit firms every ten years.
• Auditors are prohibited from rendering specified services to the company/ its holding company/ subsidiary company which includes - internal audit, investment banking services, outsourced financial services, actuarial services, investment advisory services and other management services.
• Companies having subsidiaries are required to prepare consolidated financial statement of the company and all subsidiaries; the consolidated financial statements are also required to include financial statements of associate companies and joint ventures.

Corporate Social Responsibility (CSR)

• CSR has been made mandatory for companies with a Net Worth of INR 500 crores (INR 5 billion) or more, or a turnover of INR 1000 crores (INR 10 billion) or more, or a Net Profit of INR 5 crore (INR 50 million) or more during any financial year.
• Such companies must spend 2% of their Average Net Profits the company made during three immediately preceding financial years.
• Such company is required to constitute - Corporate Social Responsibility Committee of the board which shall include three (3) or more directors and one (1) independent director. This committee would formulate and recommend CSR activities to the Board.
  RIL on it's part is committed to 'safety of persons over all production targets'.

Mergers and Amalgamations:

• Merger of Indian company with foreign company is allowed under the New Companies Bill. The Companies Act, 1956 does not permit merger of Indian company into a foreign company.
• Mergers between two small companies or between holding company and it's wholly owned subsidiary has now been simplified without the requirement of the court process. Notice has to be issued to Registrar of Companies (ROC) and Official Liquidator (OL) first and objections/ suggestions have to be taken before the members in general meeting. Objections to such arrangement can be made by persons holding 10 percent of the shareholding or having outstanding debt of at least 5 percent of total outstanding debt as per latest audited financial results.

Serious Fraud Investigation Office (SFIO)

• Central Government shall establish an office called the SFIO to investigate frauds relating to a company; one such instance being SFIO investigating INR 850 crore (INR  8.5 billion) fraud in accounts of Reebok India.
• SFIO is empowered to arrest in respect of certain offences involving frauds. 

The Bill is passed by Loksabha and introduced in Rajyasabha, still waiting to be passed. Post passing by Rajyasabha consent of President of India will be necessary before the Bill becomes an Act.