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Things to know about the new Companies Bill
The Indian Parliament cleared the new Companies Bill, 2012 last week. It awaits approval from the President of India to become a law. It will replace the old law and usher in changes that could have an impact on businesses and investors.
Here are some key things to know about the new bill:
Corporate Social Responsibility
CSR is a management theory, where a company engages in non-profit-making activities for the good of the society. According to the new Act, companies are required to spend at least 2% of their profits on CSR activities.
IMPACT: The rule will impact companies' balance sheets to the tune of Rs. 12,000-15,000 crore annually, as per the PTI report. It could also help provide tax benefits, according to a Times of India report. Another report states that 457 of the top 500 companies listed on the BSE would have to shell out Rs. 6,751 crore for CSR.
A big portion of the new bill concentrates on safeguarding investors in case of a fraud. Shareholders can now hold a company liable through a class-action suit - which is a lawsuit that represents many individuals collectively. It also provides investors an exit route if companies veer away from the objective stated in a prospectus while raising funds. Companies will also be held punishable for misleading an individual to enter into an agreement for raising funds.
IMPACT: In case of a fraud like the Satyam scam, Indian shareholders too can seek damages like their US and UK counterparts. They could not do so in 2008. Also, if a company raises funds for a particular reason, even if it has extra funds left, it cannot use it for other purposes. These regulations will largely benefit large and small shareholders, who have often been hit by an abrupt change in a company's interests.
The third biggest feature of the bill is improvement in corporate governance rules. The bill mandates that one third of the board of directors be independent. It also enforces stricter rules by limiting tenures and the number of directorships.
The new law also ensures independence for auditors who are supposed to act in the interest of the shareholders. An individual auditor needs to be rotated every five years while the auditing firm needs to compulsorily be changed every 10 years.
IMPACT: The bill will also allow 26% foreign direct investment in the pension sector. These pension funds can invest in long-term assets. By opening up the sector, the government wants to channelize funds into the infrastructure sector, which needs nearly $1 trillion in investment.
The new law is much smaller with just 470 clauses in 29 chapters along with seven schedules. It is merely 309 pages, according to a FirstPost report. Compare this with the older Act, which had a whopping 658 clauses and 15 schedules spread over 13 chapters.