Now that both houses of Parliament have passed the Bill, it will go to President Pranab Mukherjee for his assent before it becomes law, following which the Ministry of Corporate Affairs will issue a notification.
The new rules make the earmarking of funds by companies for corporate social responsibility (CSR) spending mandatory. Companies are required to spend at least 2 per cent of their net profit on CSR. The companies will also have to give preference to the local areas of their operation for such spending. If they are unable to meet CSR norms, they will have to give explanations and may even face penalty.
To help in curbing a major source of corporate delinquency, the Bill introduces punishment for falsely inducing a person to enter into any agreement with bank or financial institution, with a view to obtaining credit facilities.
The new legislation has more provisions to guard the interests of employees. It mandates payment of two years' salary to employees in case a company shuts operations.
The appointment of auditors for five years shall be subject to ratification by members at every annual general meeting. Also, the limit in respect of maximum number of companies in which a person may be appointed as auditor has been proposed as 20.
Independent directors shall be excluded for the purpose of computing "one-third of retiring directors".
The maximum number of directors in a private company has been increased from 12 to 15, which can be increased further by special resolution.
The financial year of any company can end only on March 31 and the only exception is for companies which are holding/subsidiary of a foreign entity requiring consolidation outside India.
It also makes auditors subject to criminal liability if they knowingly or recklessly omit certain information from their reports.
The Bill has a provision that keeps tabs on exorbitant remunerations for the board of directors and other executives of the companies. This will protect the interest of shareholders as well as employees.
With inputs from agencies