Parliament on Thursday approved the new Companies Bill that will make sweeping changes in the way firms operate and are regulated and replace a nearly six-decade-old legislation.
The new bill, which now needs the President's nod to become law, makes it mandatory for companies to spend on social welfare, empowers investors against frauds committed by promoters, encourages companies to have women directors, and seeks to bring in greater transparency in corporate governance matters such as executive salaries and the role of auditors.
Corporate Affairs Minister Sachin Pilot termed the passage of the legislation a "historic feat" and said it will give impetus to the country's growth momentum by ushering in a regime of "less regulations and more compliance."
The bill replaces the existing Companies Act, 1956, which has been amended at least 25 times in the past 57 years, with many of its provisions found to be outdated and inadequate.
The passage of the bill, which is spread across nearly 30 sections and over 300 pages, was widely welcomed by stakeholders, including industry bodies, political leaders and consultants.
"The focus of the bill is to enhance transparency and ensure fewer regulations, self-reporting and disclosure...It will outline the positivity in the economy," said Pilot, who has aggressively sought the support of lawmakers and other stakeholders for the bill since becoming Corporate Affairs Minister in October 2012.
The Bill was passed by the Lok Sabha more than seven months ago. Since then, its passage in the upper house has been delayed by disruptions in Parliament.
It has been almost three years since the submission of first report on the Companies Bill by the Parliamentary Standing Committee on Finance.
Pilot said that 96 per cent of the recommendations made by the Parliamentary Committee have been accepted and the Ministry would try to incorporate further suggestions by various stakeholders while formulating the final rules.
Among others, the new Bill provides about three dozen new definitions, including terms such as frauds, promoters, turnover, related parties (to promoters), small companies, associate companies and employee stock options.
It provides for a uniform financial year (April-March) for all companies, while the concept of one-person company has been introduced for the benefit of small entrepreneurs. Besides, the new Bill proposes strong checks against fraudulent money-collection activities through issuance of various securities.
The Bill requires auditors to be changed every five years to avoid collusion with the management, while rules would be tightened for appointment of independent directors.
To safeguard the interests of small investors, the Bill proposes approval by two-thirds of the public shareholders for deals that involve promoters and related entities.
It has a provision for setting up special courts for speedy trials and stronger steps for transparent corporate governance practices and curbing corporate misdoings.
The law also provides for "faster winding up" of firms as also for speedier clearances to businesses.
Participating in the Rajya Sabha debate, Congress leader Mani Shankar Aiyar asked Pilot to guard against bogus business entities.
Supporting the Bill, the BJP said a proper check needs to be there to ensure that unscrupulous people do not take advantage of the one-person company provision.
Industry bodies expressed their full support to the government for implementation of the Bill, with the CII saying its passage shows the "government's commitment to usher in a new era of corporate regulation."