ASSIGNMENT ON NEW COMPANY LAW BILL w.r.t. CSR AND CORPORATE

GOVERNANCE

SUBMITTED TO: SUBMITTED BY:

Prof. Hari parmeshwar Shankar Sharan Tripathi (34)

JIMS KALKAJI

PGDM (IB)

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New Company Law Bill w.r.t. CSR

The ministry of company affairs (MCA), which is finalizing the new Companies Bill, has

accepted a Parliamentary Standing Committee’s recommendation on the issue. The standing

committee on finance headed by former finance minister Yashwant Sinha has proposed that

companies with a turnover of Rs 1,000 crore or net profit of Rs 5 crore or more earmark 2% of

their net profit for the preceding three years on CSR.

Though corporates and industry chambers had lobbied hard against the move, the government

has decided to go ahead with the proposal. It is, however, unclear what really constitutes

spending on CSR. The standing committee had said that companies would decide the policy and

the spending.

While mandating CSR spend, the government had decided against policing and will leave it to

companies to implement what is being prescribed in the law. In case a company fails to meet the

prescribed spend, it will have to spell out the reasons for the shortfall to its shareholders.

The CSR spending proposed to be mandated in the new Companies Act would be in addition to

what is being prescribed for companies in the mining or the coal sector. For instance, in case of

Posco, the environment ministry has asked the Korean company to spend 2% of its annual profit

on CSR.

The coal ministry is also toying with the idea of mandating a CSR levy on miners who dig for

the mineral in the so-called No-Go areas that are environmentally sensitive.

The proposal for mandating a CSR spend was first discussed by the corporate affairs ministry

around two years ago but it had to be turned into a voluntary exercise in the wake of protests

from companies. But armed with a recommendation from parliamentarians, the ministry is now

set to implement its plan.

The revised Companies Bill will be placed in Parliament during the Budget session that starts

later this month. The bill has been sent to law ministry for vetting, corporate affairs minister

Murli Deora said. Corporate India has, however, got one last chance to present its case when the

ministry meets industry representatives next week.

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New Company Law Bill w.r.t. Corporate Governance

National Financial Reporting Authority (Section 132)

Introduction of National Financial Reporting Authority is not a new thing as such. Institute of

Chartered Accountants of India earlier had many of these powers. This authority shall be

responsible for accounting and auditing standards in India. This authority shall be responsible for

monitoring and enforce compliance of these standards and for that purpose oversee the quality of

professions associated with ensuring compliances. The authority shall investigate professional

and other misconducts committed by members and firms of chartered accountants. There is also

a provision for appellate authority.

Audits and Auditors (Section 139, 142, 143, 144)

Every company shall appoint an individual or a firm as auditor in its first annual general meeting

till conclusion of sixth annual general meeting and thereafter till the conclusion of every sixth

annual general meeting. No listed or other company as prescribed shall appoint an individual for

more than one term of five years and a firm for more than two consecutive terms of five years.

Any firm having a same partner or partners shall not be appointed in its place.

The remuneration of auditors shall be fixed by company in its general meeting.

Section 143 decide power and duties that every auditor of a company shall have a right of access

at all times to the books of account and vouchers of the company and shall be entitled to require

from the officers of the company such information and explanation as he may consider necessary

for the performance of his duties as auditor. This section lists some matters which are to inquire

specially and to report.

Sub – section (12) cast very important duty; if an auditor, Company Secretary in practice or Cost

Accountant of a company, in the course of the performance of his duties has reason to believe

that an offence involving fraud is being or has been committed against the company by officers

or employees of the company, he shall immediately report the matter to the Central Government

within such time and in such manner as may be prescribed.

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Further, Section 144 list nine services which an auditor cannot provided directly or indirectly to

the company.

Directors (Sections 149, 150, 151, 163, 166 and Schedule IV)

There shall be at least one women director in companies of prescribed class or classes.   There

shall be at least one director who stayed in India for not less than 182 days in previous calendar

year as per sub – section (3).

Every listed company and companies of prescribed classes shall have at least one – third of total

number of directors as independent directors. First time in companies act, independent director

has been defined. Every independent director has to give an annual declaration of independence

to Board. Independent Director shall not be entitle to receive stock option but may receive

remuneration and reimbursement of expenses. An independent director shall hold office for as

term of five consecutive years but shall not hold office for more than two consecutive terms.

Such independent director shall be eligible for appointment after expiration of three years of

ceasing and any other association with company thereafter.

The company and independent directors shall abide by provision of Schedule IV.

Independent directors shall not be subject to the provision of retirement by rotation.

Under Section 150, the central government may prescribe manner and procedure for appointment

of independent director. His appointment shall be approved in general meeting. In notice for such

meeting an explanatory statement shall indicate justification for choosing the appointee. For

benefit of companies, a data bank shall be maintained containing name, address and qualification

of eligible and willing persons.

As per Section 151, a listed company may have one director elected by such small shareholders.

Under section 163, the articles of a company may provide for the appointment of not less than

two-thirds of the total number of the directors of a company in accordance with the principle of

proportional representation.

Section 166 of the bill defines duties of directors.  These duties include good faith, due and

reasonable care, skill and diligence, independent judgment, no direct or indirect conflict of

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interest. Any contravention to this section is an offence punishable with a fine from one lakh to

five lakh rupees.

Committees of the Board of Directors (Sections 177, 178)

Section 177 deals with Audit committee of board of directors. Every listed companies and some

other class of companies shall constitute an audit committee. Audit committee shall be

constituted with minimum three independent directors with majority of financially literate

persons. The chairperson should also be a person with ability to read and understand financial

statement.  Terms of reference of an audit committee shall include matters.

The audit committee shall have power to investigate into these matters. The auditors and key

managerial personnel have right to be heard in the meetings of audit committee. Where Board

does not accept any recommendation of the committee, same shall be disclosed.

This section also provide for vigil mechanism for directors and employees to report genuine

concerns in prescribed manner. Any person who uses such vigil mechanism shall have direct

access to chairperson of the audit committee.

Section 178 deals with "Nomination and Remuneration Committee" and "Stakeholders

Relationship Committee". The Nomination and Remuneration Committee shall identify persons

who are qualified to become directors and who may be appointed in senior management. The

Board of Directors of a company which consists of more than one thousand shareholders,

debenture-holders, deposit-holders and any other security holders at any time during a financial

year shall constitute a Stakeholders Relationship Committee.

Related Party Transactions (Section 188):

No company shall enter into any contract or arrangement with a related party without consent of

board of directors given by a resolution passed in a meeting with respect to certain matters. The

section also prescribed when a transaction exceeds a certain prescribed threshold limit shall be

entered only after prior approval of the company in general meeting by a special resolution. No

interest member shall vote on such special resolution. However, there is no such requirement of

any approval when transaction is on an arm's length price. Every related party transaction shall

be reported in Board's report to shareholders.

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There is also a provision of register of contracts and arrangements in which directors are

interested.

Secretarial Audit (Sections 204, 205)

Every listed company and such other companies shall annex a secretarial audit report given by a

company secretary in practice to its Board's report. The secretarial auditor shall audit secretarial

and other record. Secretarial auditor will report compliance of companies law and other laws

applicable to the company and compliance with secretarial standard.

Class Action (Section 245)

Section 245 of the bill introduce concept of class action first time in India. Where members,

Depositors or any class of them are of the opinion that conduct of affair of company are being

conducted in a manner prejudicial to the interest of company, its members or depositors; they

may file an application before tribunal. The class action may be against auditors as well. The

number of members or depositors may be 100 or such other number as may be prescribed.

These are major footstep of corporate governance under proposed Companies Bill 2012. This

certainly may improve status of corporate governance in Indian companies which are out of

present corporate governance structure which majorly target listed companies.

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