Companies Bill made easy in 10 steps

A new law gives more teeth to the shareholder and empowers him to take legal action against a company for fraud.

Here comes the big bang economic reforms: Multi-brand retail FDI, Banking bill, Companies bill and many more are in the pipeline. It appears that the United Progressive Alliance (UPA) government is making sure that every part of Plan A is firing on all cylinders.

The government gave a facelift to 56-year-old companies act. On 18 December, the Lok Sabha passed the Companies Act 2012. More importantly, the bill gives more teeth to shareholders. Now, they can take legal action against fraud. Also, it closes a window for independent directors as they won't get any stock options.

Here's a list of 10 things you must know about Companies Bill:

The bill aims at improving corporate governance also contains provisions to strengthen regulations for companies and auditing firms.

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Although the bill does not precisely define what constitutes corporate social responsibility (CSR), it will mandatory for profit-making companies to spend on activities related to CSR.

The CSR condition will apply to firms that have a net worth in excess of Rs 500 crore (Rs 5 billion), or a turnover of Rs 1,000 crore (Rs 10 billion) or more, or a net profit of Rs 5 crore (Rs 50 million) or more.

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The act proposes to tighten the laws for raising money from the public. The move will hit chit funds. Only banking companies, NBFCs and other firms allowed by regulators will be permitted to accept deposits from the public.

A director's remuneration should not exceed five per cent of a company's net profit. The new law also aims to strengthen corporate governance. It will be mandatory for independent directors to constitute at least one-third of the board.

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If a company winds up operations, it must pay two years' salary to its employees.

The act provides that: "Shareholders associations or group of shareholders are to be enabled to take legal action in case of any fraudulent action on the part of company and to take part in investor protection activities and class action suits."

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The legislation grants statutory powers to the Serious Fraud Investigation Office (SFIO) to tackle corporate fraud. The SFIO will get a big fillip once the legislation comes into force.

The bill also bans buy back of shares within one year of the last buyback of shares.

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Audit firms cannot take up more than 20 assignments at any time. The appointment of auditors for five years to be ratified annually.

Brief history: The amendments, to the Bill that has been in force since 1956, were first introduced in August 2008. However, it was withdrawn as the Lok Sabha was dissolved. It was again introduced in Parliament in 2009 and sent to the Standing Committee, which presented its report in August 2010.

Notably, unlike most Bills, the Bill was referred to the Standing Committee twice. The revised Bill 2011 was again referred to the committee as certain new provisions were included. The current amendments to the Bill are in line with the suggestions put forward by a Parliamentary Standing Committee on Finance.