The Companies Act, 1956 was undoubtedly a significant landmark in the development of Company Law in India. It consisted of 658 sections and fourteen schedules. With the enactment of this legislation in 1956, the Companies Act 1913 was repealed. The Companies, Act 1956 has since then provided the legal framework for corporate entities in India. The Act was enacted with the object of amending and consolidating the law relating to Companies and certain other associations. The main object of the Act was to provide protection to investors, creditors and public at large and at the same time leaving management free, to utilize its resources and energies for the optimum output.

 

However, the working of the Companies Act brought to light several lacunae and defects in its provisions. Therefore, the Act was amended from time to time. But despite extensive changes the principal Act still suffered from certain serious defects.

 

The Ministry of Corporate Affairs took up a comprehensive revision of the Companies Act, 1956 (the Act) in 2004 keeping in view that not only had the number of companies in India expanded from about 30,000 in 1956 to nearly 7 lakhs, Indian companies were also mobilizing resources at a scale unimaginable even a decade ago, continuously entering into and bringing new activities into the fold of the Indian economy. In doing so, they were emerging internationally as efficient providers of a wide range of goods and services while increasing employment opportunities at home. At the same time, the increasing number of options and avenues for international business, trade and capital flows had imposed a requirement not only for harnessing entrepreneurial and economic resources efficiently but also to be competitive in attracting investment for growth. These developments necessitated modernization of the regulatory structure for the corporate sector in a comprehensive manner.

 

BACKGROUND

 

Earlier, a Bill called Companies (Amendment) Bill, 2003 had been introduced by M/o Corporate Affairs (MCA) (then Department of Company Affairs) in the Rajya Sabha on 7.5.2003. Later on, a large number of changes were found to be necessary in the Bill. A decision was, therefore, taken to carry out a comprehensive review of the Companies Act, 1956 and to introduce a new Companies Bill for the consideration of the Parliament.

The review and redrafting of the Companies Act, 1956 was taken up by the Ministry of Corporate Affairs on the basis of a detailed consultative process. A `Concept Paper on new Company Law’ was placed on the website of the Ministry on 4th August 2004. The inputs received were put to a detailed examination in the Ministry. The Government also constituted an Expert Committee on Company Law under the Chairmanship of Dr. J.J. Irani on 2nd December 2004 to advice on new Companies Bill. The Committee submitted its report to the Government on 31st May 2005. Detailed consultations were also taken up with various Ministries, Departments and Government Regulators. The Bill was thereafter drafted in consultation with the Legislative Department of the Central Government. As a result, the Union Cabinet on 29^th August 2008 gave its approval for introduction of the Companies Bill, 2008 in the Parliament to replace the Companies Act, 1956, the existing statute for regulation of companies in the country and considered to be in need of comprehensive revision in view of the changing economic and commercial environment nationally as well as internationally.

If we compare Companies Act, 1956 with Companies Bill, 2008 the following changes can be termed as radical.

 

• All restrictions on managerial remuneration removed.
• Concept of one-person company introduced.
• Companies (except NBFC and Banks) prohibited from accepting public deposits.
• In addition to Company Secretary and Managing Director / Manager, a company having prescribed paid up capital should have ‘Chief Financial Officer’.

 

OTHER IMPORTANT CHANGES IN COMPANIES ACT, 1956 BROUGHT BY THE COMPANIES BILL, 2008

 

One Person Company

 

• The Bill proposes a provision for single person companies (it will have OPC Ltd. at the end of its name).
• To make things simpler, it proposes the option of returns and other procedural documents to be filed online.
• It will enable companies having paid up capital and turnover lower than the limit prescribed to operate.
• It will open the floodgates of investment by individuals and boost entrepreneurship in the country.

 

Incorporation

 

• Documents to be filed at the time of incorporation should contain name of first directors, their Director Identification Number (DIN), address etc. with their consent and particulars of interest.
• Provisions of printing of memorandum and articles have been dispensed with.
• Change of registered office outside city by only special resolution and no permission is required for the same.
• Change of registered office outside state will require approval of Central Government.

 

Partnership

 

• Partnerships will get a great advantage with the Bill extending the present limit of 20 partners to a maximum 100.
• It will promote the setting up of firms with high expertise and domain specialization.
• It will also facilitate partnership firms and also to pave way for the LLP Bill.

 

Companies in name of charitable or other company

 

• There is a more stringent regime for not-for-profit companies.
• There is recognition now of CEO, CFO and Company Secretary as key managers or personnel to keep a strict check on companies who get themselves registered for a charitable purpose.

 

Prospectus and Allotment of Securities

 

• Unlike the 1956 Act, which uses ‘prospectus and allotment, and other matters relating to issue of shares and debentures’ the bill uses a wider term i.e. securities.
• This naturally means that a security could be anything other than a share or a debenture.
• The provision with regard to issuing of a prospectus is more or less the same.
• Global Depository Receipts (GDRs) have been introduced in clause 36. A resolution can be made regarding issuing of GDRs. This provision will facilitate business with foreign companies.
• RBI supervision for raising deposits by corporate’s may prevent frauds and instances of vanishing companies.
• The provision to deter insider trading by key company executives, with violations punishable with imprisonment and fine of up to Rs. 1 crore, could help ensure fair play and equal opportunity for all in the stock markets.

 

Share Capital and Debentures

 

• There are slight changes with respect to reduction and increase in share capital in the Bill.
• Company can buy its own securities except through any subsidiary company (including its own) as well as investment companies.
• Restrictions on buying back in certain cases have been put.
• Flexibility to raise equity capital has been restricted.
• Shares at discount and those with differential voting rights would not be allowed. This would ensure Equality amongst shareholders or for creating ‘share-holders’ democracy.
• The Bill provides for civil and criminal liability in case a person applies and acquires shares of companies through misrepresentation, i.e., using multiple depository accounts, may deter manipulation of Initial Public Offers and stock offerings of companies. (Any misstatement in the prospectus inviting any person to subscribe to shares or debentures may result in the promoters being imprisoned for three years besides paying a penalty of Rs 25 lakh. Depending on the gravity of the crime, the penalty can involve either of the two or both. Where initial public offers (IPO) of shares, are involved, the maximum penalty under the new Bill will rise to Rs 50 lakh).
• Misstating facts in IPO document and fraudulently inducing people to invest, including by way of using celebrities, are set to become non-compoundable offences (where prison term cannot be converted to financial penalties).

 

Acceptance of Deposit by Companies

 

• This Bill introduces a new chapter on acceptance of deposit by Companies, from public and its repayment before the commencement of the Act.
• Moreover, banking companies and non-banking financial companies would not fall under this.
• It also includes damages for committing of frauds.
• If deposits accepted before the new Act is not repaid within one year, officer concerned will be personally liable.

 

Management and Administration

 

·         This chapter is almost the same as the 1956 Act.

·         Central Government is replaced with Tribunal, which has the power to call an AGM, and also put sanctions for not following the same.

·         Electronic Voting has been introduced in meetings.

·         Listed company to publish report of each Annual General Meeting with ROC.

·         Unpaid dividend can be claimed any time. The limit of seven years will not apply.

 

Declaration of Dividends and Payments

 

·         Companies to declare/ pay dividends out of the profits of the company (made in previous financial year/s), after providing for depreciation.

 

Investor Education and Protection Fund

 

·         Central Government to establish such a fund, after parliament adopts a law in this regard. Unpaid Dividend Account of companies to be utilized for the purpose of this fund.

 

Constitution of National Advisory Committee on Accounting and Auditing Standards

 

·         Apart from the provisions regarding auditing and accounting of a company, this bill provides for setting up of a National Committee on Accounting and Auditing Standards, with members from SEBI, RBI, and CAG etc.

·         Auditors would be barred from providing non-audit services to ensure their fair-mindedness. Currently, only accounting standards are mandatory.

 

Meeting of Board and its Powers

 

• Provision made for Board meeting by video conferencing.
• Board meeting to require seven days notice except for urgent business if at least one independent director is present.
• Stakeholders’ grievance committee to be formed to resolve grievances of shareholder, debenture holders and other security holders, if they are more than 1,000.
• If there is arrangement between company and its directors in respect of acquisition of assets for consideration other than cash, prior approval in general meeting is required.

 

Directors

 

• The Bill terminates the government role in the appointment of managing and whole time directors.
• The duties of directors are codified for the first time under Clause 147(2).
• If any director contravenes the provisions of this clause he/she shall be punished with fine which shall not be less than 1 lakh rupees but may extend to 5 lakh rupees.
• Conflict with Clause 49(Listing Agreement) of SEBI: At least 33% of the company’s board must be independent directors which are in variance with Clause 49 of SEBI (Securities and Exchange Board of India) listing agreement.
• The Bill has also proposed that at least one-third of the directors in companies listed on the stock exchange be independent.
• The Bill has also proposed that at least one director should be a person ordinarily resident in India, i.e. for at least 182 days stay in India in a calendar year which will make the company accountable in case the foreign directors abandon the company.
• A director can be disqualified for non-attendance only if he remains absent for all meetings of Board for period of twelve months without obtaining leave of Board.
• Director can himself file details of his resignation to ROC.
• Company has no discretion in accepting resignation of director. It becomes effective when his resignation is received or the date specified in his resignation letter, whichever is later.

 

Registered Valuers

 

• A new concept of government-approved valuer is being introduced. Valuation of shares of companies involved in M&A schemes or those that allot shares for consideration other than cash would need the stamp of these independent registered values.
• This means the shareholder of the merged entity can fetch the right price of his stake.

 

National Company Law Tribunal and Appellate Tribunal

 

• The Bill lays down the complete structure, power and functions of the NCLT.
• An appeal lies to the Appellate Tribunal and finally, the Supreme Court.
• Civil Courts will have no jurisdiction.
• This will involve more competency and specialization.

 

Insider Trading

 

• The Bill also seeks to make promoters of firms more responsible by prohibiting insider trading, thu­­­­s far barred only by the stock market regulator, but not by the Companies Act, and bars them from raising money from the public without getting requisite approvals.
• The Bill makes it compulsory for directors of companies to obtain a director identification number (DIN) from the ministry. This is the equivalent of the permanent account number used by the income-tax department, and the ministry is hoping to use this to check frauds.
• Criminal sanctions can also be imposed in this regard.

 

Winding Up and Liquidator

 

• ‘Company Liquidator’ has been introduced who shall be an independent person and not a government employee. Summary procedure for liquidation where book value of assets of company are less than Rs. 1 Crore.

·         In order to expedite the process of winding up which in case of the current law takes up a lot of time.

 

Compromises, Arrangements and Amalgamations

 

• The Bill streamlines the way mergers and acquisition takes place.
• The Bill confers power on a single body to grant sanctions to such schemes vide clause 202.
• The Companies Tribunal is the ultimate authority in this regard.
• A set of procedure is to be followed for amalgamation or merger of two companies.
• A draft of the scheme is to be adopted by the directors of the merging companies and the same is to be filed with the ROC.
• The Bill provides for Amalgamation by mutual agreement.
• It provides that a foreign company can merge/amalgamate into a company registered under this Act at the terms and conditions provided for in the arrangement. The shareholders may be paid in cash, Depository Receipts (Indian) or part of both, as the case may be.
• Foreign companies to comply with prescribed provisions only if not less than 50% of capital of the foreign capital is held by Indian citizen or companies incorporated in India.
• It provides for purchase of minority share holding, wherein an acquirer after becoming equity holder of 90% or more, can purchase rest of the shares in the manner prescribed in clause 207.

 

Other Provisions

 

• Class Action Suits: Minority shareholders can challenge the management as a whole.
• Special Courts to be established to try offences under Companies Act. The judge will be of grade of Sessions Judge or Additional Sessions Judge
• Concept of dormant company introduced- If the company has no significant accounting transaction or is an inactive company; it can make application to ROC for obtaining status of a dormant company. Even such company has to file annual return.
• The Bill also facilitates easy transition of companies from one form to another. For instance, if a body corporate wants to transform into a limited liability partnership (LLP) firm or the reverse the law will make it easy. 

 

Comparison of the Companies Act, 1956 and the Companies Bill, 2008 in tabular form.

 

S.NO.	HEAD	OLD PROVISION	NEW PROVISION	BENEFIT/REMARKS
1	One Person Company	No provision for One-Person Company.	Provision for One Person Company.	It will enable companies having paid-up capital and turnover lower than the limit prescribed to operate.
2	Minimum Capital	Minimum Capital requirement for Private and Public Companies.	Dispensed with.	In order to create uniformity and to avoid too much procedural requirements.
3	Partnership	20 partners	100 partners	In order to facilitate partnership firms and also to pave way for the LLP Bill.
4	Charitable Companies	Section 25 Companies could get away easily (NPO, NGO etc.)	Strict provision; now recognizes of CEO, CFO and Company Secretary as key managers or personnel.	To keep a strict check on companies who get themselves registered for a charitable purpose.
5	Shares with differential voting rights	Differential rights were there.	Share with differential rights eliminated.	Equality amongst shareholders for creating ‘share-holders’ democracy.
6	Minority Rights, Clause 218	Not present earlier.	Class Action Suits introduced.	In order to protect the minority shareholders.
7	M & A, Clause 204	Power with High Court as well to sanction a restructuring scheme.	Exclusive power granted to the Company Tribunal in this regard.	To facilitate faster mergers and acquisitions and faster decisions.
8	Valuers, Clause 218	Not present earlier.	Government approved valuers.	Again, for faster facilitation of mergers and amalgamations.
9	Joint Ventures	Does not recognize specific requirements in JV agreements.	In JV agreements, the AOA of the company would be reinforced with a provision for imposing conditions more stringent than the statutory requirements with the consent of the shareholders.	This is to ensure that companies don’t use these JV agreements to circumvent essential company law regulation.
10	Independent Directors	Not present earlier.	Prescribes a limit of 33% independent directors on the board, in conflict with Clause 49 of SEBI listing agreement.	Again, to promote a fairer administration and shareholders democracy.
11	Investor Education & Protection Fund.	Investor Education & Protection Fund not present.	Investor Education & Protection Fund has been introduced.	Sharer holders’ democracy.
12	Accounting and auditing standards	Currently, only accounting standards are mandatory.	Constitution of National Advisory Committee on Accounting and Auditing Standards  with members from SEBI, RBI, and CAG etc.	Auditors would be barred from providing non-audit services to ensure their fair-mindedness.
13	Insider Trading	Insider Trading is barred only by the stock market regulator.	Barred by the Companies Bill now and also a bar on raising money from the public without getting requisite approvals.	This is done in order to curb frauds; criminal sanctions can also be imposed in this regard.
14	E- Voting, Clause 97	No provision for electronic voting.	Electronic voting has been introduced in meetings.	To ensure fair voting and to avoid deadlocks.
15	Deposits, Clause 67	No such restriction in the earlier Act regarding public deposits.	No company can invite or accept public deposits except for the manner provided for under this head. Moreover banking companies and non-banking financial companies would not fall under this.	It includes damages for committing of frauds.
16	Global Depository Receipt (GDRs), Clause 205	No provision of GDRs.	Separate provision acknowledging GDRs.	In order to facilitate business with foreign companies.
17	Video Conferencing	Provision for video conferencing not present.	Provision for video conferencing.	To ensure that meetings are not postponed or resulting in deadlock.
18	Limited Liability Partnership(LLP)	No provision relating to LLP.	Easy transition of companies from one form to another.	LLP will benefit private limited companies and partnerships. So LLPs can effectively function in consonance with the Companies Act.
19	Liquidator	Official liquidator in the earlier act.	‘Company Liquidator’ has been introduced who shall be an independent person and not a government employee. Summary procedure for liquidation where book value of assets of company are less than Rs. 1 crore.	In order to expedite the process of winding up which in case of the current law takes up a lot of time.

 

Conclusion

 

It was the need of the hour to come out with a new legislation as the current law has become obsolete and has been amended a number of times (around 23). There has been a lot of changes in the way companies function since nineties and therefore there is a need of a new Act.

 

The proposed legislation will facilitate faster business decisions. Further the Companies Bill will encourage foreign investors as it will create an enabling environment. The Bill has also proposed some far-reaching changes in the statutory framework and is expected to address the business and investor community’s desire for a more contemporary and effective regulatory environment. It primarily seeks to reduce government control over corporate processes, impart greater transparency, focus on corporate governance, stricter compliance requirements and greater accountability to stakeholders.