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  • New Indian Companies Act.

    Apr 15, 2014   

    After being approved by Lok Sabha on 18th December 2012 and Rajya Sabha on 8th August, 2013, the widely anticipated Companies Act of 2013 came into force. The new legislation introduces changes to key procedures associated with the forming and management of companies in India. The new 2013 Act is a revamp of the 1956 Act that was outdated and could no longer be applicable with the rapidly changing corporate environment. Over the years, it has become increasingly important to enact legislation that is relevant for the entire corporate sector, regulators and industry stakeholders.

    Redrafting of the administrative portion of the 1956 Act led to Companies Bill 2009 passed by Lok Sabha one of the two houses of parliament. The bill was later withdrawn to pave the way for the 2011 Companies Bill, which received support from Parliamentary Standing Committee on Finance and later adopted in late 2012 to be known as Companies Act, 2013.

    The Companies Act 2013 bill has been considered as a piece of legislation meant to encourage local companies to be more competitive and relevant in meeting local industry needs. India is a developing nation, and there was a need to create new legislation that would ultimately focus on entrepreneurship as a tool to economic prosperity. The new law significantly empowers local entrepreneurs or start-ups while introducing strict compliance regulations for multinationals operating in India.

    Some key introductions in the Companies Act 2013 include the introduction of “One-person Company” allowing a single Indian citizen to register a company as an individual. This has been seen as a move to encourage entrepreneurship and reduce the dominance of multinationals as well as eliminate bottlenecks and bureaucracy associated with forming companies.

    Strict compliance and enforcement policies have come into place. For instance, the National Financier Reporting Authority (NFRA) has been empowered to both regulate and play an oversight role in streamlining local auditing procedures. Multinationals could experience challenges here since most of their auditing tasks are carried out in abroad offices.

    Mergers and Acquisitions have seen the introduction of reverse mergers which refers to foreign companies merging with local Indian companies. Some analysts have pointed out that this directive will reduce the level of influence enjoyed by multinationals on the local market scene. On the other hand, the provision requiring local companies to adopt CSR (Corporate Service Responsibility) policies is meant to advertise local enterprises and make them more attractive in the eyes of the public.

    The Companies Act, 2013 has also formulated new role bringing about changes in management hierarchies in companies. For instance one director now must be an Indian resident. Furthermore, new policies regarding appointment of independent directors and remuneration have been clearly spelt out. It is expected that multinationals operating in India will have to spend more to do business in India. Job responsibilities also overlap and can create duplicate job descriptions.

    Bottom line, the new Companies Act, 2013 favours local entrepreneurship and enforces strict compliances and mechanisms for multinationals as well as overhaul management hierarchies and key financial legislation to favour residents wishing to start new companies.

    These new changes are likely to have an effect on multinationals with legal entities in India. To understand how your company can align itself to realise full compliance with the Companies Act, 2013, please get in touch.