The much awaited new Companies Act came into force on Tuesday, ushering in far-reaching changes in the way corporates are governed and interest of investors are protected in the country.
Right from compulsory spending on social welfare activities to mandatory requirement of woman director on boards to stronger disclosure regime, the Companies Act, 2013 has been finalised after exhaustive consultations with various stakeholders including general public.
To protect the interests of investors, the government has made it mandatory for public deposit—taking companies to insure such deposits, among others.
Spread across 470 sections, 29 chapters and 7 schedules, the voluminous legislation replaces the nearly six-decade old Companies Act. Apart from notifying all the schedules, the Corporate Affairs Ministry has so far notified about 19 chapters and more than 280 sections.
In a first-of-its-kind move, certain class of companies are now required to spend at least two per cent of their three year annual average net profit towards Corporate Social Responsibility (CSR) works. In case, they are unable to shell out the requisite money, the same has to be explained to the government.
CSR would be applicable to entities having at least Rs 5 crore net profit, or Rs 1,000 crore turnover or Rs 500 crore net worth.
To ensure robust corporate governance framework, the law requires companies to mandatorily rotate their auditors, who would also have to report suspected fraud to the board.
Also certain class of corporates are needed to have a vigil mechanism that provides a platform for employees and directors to express their grievances.
Moreover, the Corporate Affairs Ministry - which is implementing the law - has brought in stringent disclosure norms especially for related party transactions and for beneficial investments made by companies both directly and indirectly.
Among others, e-voting has been made mandatory for listed companies and those having less than 1,000 shareholders.
“The new Act is now operational having wide and far ranging impacts. It significantly raises the bar on governance,” consultancy firm KPMG in India’s Partner and Head Sai Venkateshwaran said.
Nearly 60 per cent of the Companies Act, 2013, including rules, has been completed by the Ministry.
Certain provisions of the new Companies Act would not be coming into force immediately. These are related to National Company Law Tribunal (NCLT), National Financial Reporting Authority (NFRA), Investor and Education Protection Fund and winding up of companies, among others.