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India: Companies Act changes

Vijaya Sampath
As of April 1 2014, 283 sections of the Companies Act 2013 (of the total 470 sections) and the related rules dealing with these sections have been notified by the Ministry of Corporate Affairs. Many new concepts have been introduced, the scope of others has been widened and many sections in the previous Act of 1956 have been dropped.

Some of the new concepts range from new classes of one person and small companies to shareholder empowerment through class action suits. Certain profit-making companies have to spend 2% of their average net profits in the three preceding financial years on specified social schemes, or explain their reasons for not doing so.

The scope of other concepts like related party transactions have been widened for increased governance to include arrangements that involve relatives, firms in which such person or relative is an employee, partner or director of a company, its holding, associate or subsidiary company for the previous financial years. These will be subject to scrutiny and approval by the board, audit committee and shareholders as applicable. To the dismay of many, exemptions for private companies have been withdrawn and compliance requirements are almost the same as for public companies.

The role, scope, tenure and qualifications for auditors and independent directors have been prescribed in detail, as well as prohibited activities for each of them.

Investor protection gets a thumbs-up with the prohibition of insider trading, and the introduction of postal ballot and e-voting, providing a quantum increase in disclosure requirements on boards' reports to the shareholders, annual reports, and explanatory statements to general meeting resolutions.

The Companies Act is a mixed bag, with something for everyone to cheer as well as aspects that create a few frowns. The full implications of the legislation have not yet sunk in, but it is clear that the government will have almost unrestrained authority to frame rules, mentioned in 417 places in the Act. The 1956 Act is dead, long live the Companies Act, 2013.

Vijaya Sampath

Lakshmikumaran & Sridharan

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