The Companies Act, 2013

Business, in the 21st century demands a comprehensive regulatory environment that meets the need for efficient corporate governance without stifling the growth and ease of business. Currently, ranked 142 on the ‘Ease of Doing Business’ Index of World Bank, the clamour for a more effective legislation promoting transparency in Company affairs had grown stronger, resulting in the enactment of The Companies Act, 2013. The Companies Act, 2013 has replaced The Companies Act, 1956 (partial). The New Act received presidential assent on 29 August, 2013. 98 sections of this landmark legislation had been put into effect since 12 September, 2013. On 1 April, 2013, 184 other sections were made effective bringing the total tally to 282 sections. The Old Act has still not been completely repealed. The Companies Act, 2013 contains 29 Chapters, 7 Schedules and 470 sections and is much more concise in comparison to its flabbier predecessor. A key feature of the act is the 300 odd references to Rules that are and may be notified by the Central Government.The objective of the Act is to introduce an efficient and modern corporate governance structure facilitating transparency in corporate culture, mitigate fraud risk and promote a unique CSR initiative.

The Companies Act, 2013 gives fillip to the demands for more efficient mechanisms for Corporate Governance. The Act enhances the existent mechanisms and introduces new ones to ensure better accountability. Among others, the mandatory requirements for consolidated financial statements, internal audit mechanisms and higher auditor accountability etc ensure transparency in the affairs of the company. The mandatory Audit Report is to ensure that internal financial control systems are in place and effective, the scope for which has been widened beyond mere financial reporting requirements of the Sarbanes- Oxley Act, 2002 (a United States statute). The criterion for assessing Related Party Transactions has been widened and several provisions governing ‘Key Managerial Personnel’ and inter-corporate loans have been modified and renewed. Introduction of class action law suits and fraud mitigating provisions give a strong underline to this predominantly democratic piece of legislation, in line with globally accepted practices. Despite introducing novel mechanisms for better regulation and accountability, several provisions of the act may prove to be debilitating for companies owing to lack of clarity and conflict with other statutes such as the Income Tax Act, 1961.

The most momentous feature of the Act is its Corporate Social Responsibility agenda, that imposes a mandatory requirement on all companies with net worth over INR 500 crores, or turnover over INR 1000 crores or net profit (net profit before tax) of 5 crores or more, to set aside 2 per cent of their average net profit of the past 3 financial years for CSR activities, specified under Schedule VII. A mandatory CSR committee of the Board of Directors is to be constituted containing a minimum of 3 members to plan, ensure and monitor the CSR policy of the company. The Act also lays down the criteria for drafting a proper CSR policy; some of them being- CSR activities are to be undertaken within the territory of India and are not to include activities undertaken in the ordinary course of business. Certain issues with respect to taxation are expected to be resolved through Rules and Circulars.

In keeping pace with the rapid growth of start-ups, the Companies Act, 2013 innovates through the introduction of One Person Company (a separate entity from its promoter), Small Company and Dormant Company with simpler and relaxed compliance regimes. Also, the increase in the maximum membership of non-corporate entities such as partnerships firms, HUF firms or firms formed under other statutes, will help them consolidate and grow.

The Companies Act, 2013 while being efficient and comprehensive leaves much to be desired in clarity and consistency. It is to be anticipated that Rules accompanying the Act will provide better clarity and straighten out the creases, unless the issue is a fait accompli.

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