Volume 4, Issue 10

28th December, 2012

Business Alert
Companies Bill 2012 – Salient Provisions

The Companies Bill, 2012 The Companies Act, 1956, the Indian law governing companies has been in force for about fiftysix years and it has seen several amendments over these years. In view of the pace of changes in national and international economic environment and the expansion and growth of Indian economy, a new legislation had become the need of the hour. The process of substituting the existing legislation with a new one started way back in 2009 and finally, the Companies Bill, 2012 (Bills) has been passed in the Lok Sabha (lower house of the Indian Parliament) on 18th December, 2012. This alert covers the key changes brought out in new legislation which are relevant from a practical viewpoint:

Incorporation of Companies

  • Amendment in the definition of a “Private Limited Company” ‐ increase in maximum number of members from existing 50 to 200.
  • In case of unincorporated companies such as association of persons, partnership firms carrying on banking business and for other businesses respectively, limit of members increased to 100 as compared to earlier limit of 10 and 20 persons.
  • Introduction of a new concept of “One Person Company” (OPC).

Share Capital and Dividend

  • In relation to infrastructure projects, preference shares may be issued for a period exceeding 20 years, subject to redemption, at the option of the preferential shareholders, of such percentage annually as may be prescribed.
  • Any consolidation and division of share capital by companies which results in change in the voting percentage, shall require prior approval of the National Company Law Tribunal (NCLT).
  • All provisions related to further issue of capital (including preferential and bonus issue) are also made applicable to Private Limited Companies.
  • Only sweat equity shares can be issued at discount subject to compliance of certain condition as prescribed.
  • ‘Private placement’ defined, with detailed provisions for such placement. Provisions for offer or invitation for subscription of securities on private placement basis revised to ensure more transparency and accountability.
  • Transfer of prescribed percentage to reserves before declaration of dividend shall be at the discretion of the companies.

Provisions relating to Accounts and Audit:

Financial Statements and Board’s Report

  • Consolidated financial statements made mandatory.
  • Mandatory signatures on financial statements by the Chairperson or by two directors and by the Chief Financial Officer and Company Secretary, if any.
  • Financial year now has to be a period/year ending on 31st day of March. However, a holding company or a subsidiary of an entity incorporated outside India can have a different financial year, with the permission of NCLT, to facilitate consolidation of financial statements outside India.
  • Companies already in existence need to align their financial year within a period of two years from the date of applicability of the new legislation.
  • Certain additional information to be included in the Report of Board of Directors and Directors’ Responsibility Statement.
  • Introduction of provisions to allow voluntary revision of financial statements or Board’s report in respect of any of the three preceding financial years.
  • Introduction of mandatory reopening and recasting of the financial statements on an order made by NCLT or a court.
  • Financials to be approved only by passing board resolution and not through resolution by circulation.


  • Tenure of Auditor’s appointment will now be till the conclusion of sixth Annual General Meeting (AGM) from the AGM in which he is appointed as an Auditor.
  • Ratification of appointment of Auditors by members at every AGM is made mandatory.
  • Mandatory rotation of Auditors has been provided for in case of listed companies and such other companies as may be prescribed. Members may resolve that the Audit Partner and Audit team be rotated at specified intervals.
  • A single Auditor can now hold office as auditor only in respect of 20 companies. In case of a firm of auditors, this limit is made applicable to each partner.
  • Auditors are restricted from providing certain specified non-audit services. In case of other services, approval of the Board of Directors or Audit Committee will be required.


  • Books of accounts can now be kept in electronic mode, the manner of which will be prescribed.
  • Rates of depreciation are replaced with the useful lives of assets.

Accounting and Auditing Standards

  • National Advisory Committee on Accounting Standards (NACAS) is to be replaced by National Financial Reporting Authority (NFRA).
  • Auditing Standards for compliance by the Auditors of companies will be notified by the Central Government in consultation with Institute of Chartered Accountants of India (ICAI) and NFRA.

Other Audits

  • Provisions relating to Internal Audit introduced for specified companies.
  • Secretarial audit is made compulsory for all listed companies and other specified companies. The report of this audit shall be annexed to the Board’s Report.

Corporate Social Responsibility

  • New provisions introduced to ensure spending by companies on Corporate Social Responsibility (CSR).
  • Companies will get covered based on the amount of net worth, turnover and net profit.
  • For the companies covered, it is mandatory to spend at least two percentage of average net profits of last three years on CSR activities.

Provisions relating to Directors:

Appointment and Qualification

  • Limit of maximum directors increased from 12 to 15 with a power to add more directors upon passing of Special Resolution.
  • At least one director should be a woman director in specified classes of companies.
  • At least one of the directors shall be a person who has stayed in India for 182 days or more in previous (calendar) year. Presently, all directors can be foreign nationals residing outside India.
  • Managing Director, Whole Time Director or Manager to be appointed for a period of upto five years at a time. At present, these provisions apply only in case of public companies.

Maximum number of Directorships

  • Number of directorships that a person can hold is increased from 15 to 20.
  • Further, number of directorships in public companies should not be more than 10. This ceiling will also include directorships held in private limited companies which are either holding or subsidiary of a public company.

Board Meetings

  • Four board meetings are to be held in a year and the time gap between two meetings shall not be more than 120 days.
  • For OPC, small companies and dormant companies, it shall be deemed to have complied with provisions if at least one meeting is conducted half yearly and the gap between two meetings should be at least 90 days.
  • Conducting board meetings via video conferencing or by other audio visual means is now recognised.
  • A director remaining absent from all the meetings in a financial year will have to vacate the office even if leave of absence is granted.

Independent Directors

  • The term “Independent director” is introduced and defined for the first time in the legislation.
  • Independent directors should be a majority in the composition of Audit Committee of listed companies or such companies as may be specified.
  • Independent directors should constitute at least half of the members of Nomination and Remuneration Committee.

Appointment of Key Management Personnel

  • Specified companies will now have to appoint whole time Key Management Personnel.
  • Key Management Personnel can be
    • Managing Director or Chief Executive Officer or Manager and in their absence a Whole Time Director
    • Chief Financial Officer  
    • Company Secretary and
    • Such other officer as may be prescribed
  • Key management personnel will need to disclose the contracts/arrangements in which they have interests in the same manner as applicable in case of directors.

Overall Managerial Remuneration - Public Companies

  • For increase in remuneration of Managing Director, Whole Time Directors and Managers in excess of the percentage as specified in the Bill, Central Government approval is not required except in cases where total remuneration of all the directors / managers exceeds 11% of net profits.
  • Independent Directors not to get stock options but may get payment of fees and commission subject to limits specified in the Bill/rules.

Insider Trading and Allied Provisions

  • Specific provisions are introduced prohibiting insider trading of securities.
  • Directors and Key Managerial Personnel are now prohibited to enter into any forward dealings in company’s securities.


  • Small Company defined as Company with Paid-up share capital not exceeding Rs 5 million or turnover not exceeding Rs 20 million.
  • The provisions governing loans to directors and to persons in whom the directors are interested are now applicable to Private Limited Companies also.
  • Restrictions on amount of inter company loans are now made applicable to Private Limited Companies also.
  • Transactions in immovable property and leasing of property are covered under related party transactions. However, Government approval is not required. Only prior approval by special resolution is needed.
  • Certain new grounds are added for winding up by NCLT and for striking off the name of the company by Registrar of Companies.

SKP’s Comments

It is pertinent to note that the Bill still awaits approval of the Rajya Sabha (Upper House of the Indian Parliament) and therefore the possibility of subsequent changes cannot be ruled out. Subsequent to this approval, the Bill would then need an assent from the President of India before it gets notified as an enforceable Act.