India Releases Draft Rules for New Companies Act

September 12, 2013 Posted by India Briefing Reading Time: 2 minutes

Sept. 12 – The Indian government has released new draft rules for the 2013 Companies Act, which will replace the original Companies Act of 1956. The new draft rules cover the first half of the Companies Act and will be open for public comment until October. The second half of the Companies Act draft rules will be released next week for stakeholder input.

The Companies Act was originally passed over five decades ago under the authority of the Ministry of Corporate Affairs and outlines the process for structuring a business in India. The new Companies Act has been designed to streamline and clarify the country’s corporate law and enhance accountability and governance among companies operating in India.

The current draft release covers the rules governing incorporation and registration of a company in India, as well as the procedure for appointing auditors and a board of directors. The release also outlines the eligibility of foreign incorporated companies.

Under the new rules, auditors will be required to report within 30 days any material fraud amounting to five percent or greater of a company’s net profit. Rotation of individual auditors will also be required every five years and auditing firms must be rotated every ten years.

Companies with shareholder capital greater than Rs100 crore (US$15.6 million) or public debt exceeding Rs200 crore (US$31.3 million) will be required to have at least a third of its board of directors consist of independent appointees. For publicly listed companies, the board of directors will also be required to have at least one woman appointee.

In an amendment to the original Companies Act rules, Indian companies will now be allowed to merge with foreign companies, an action prohibited in the 1956 Companies Act. In the midst of economic fragility, this key amendment should create an additional stream of revenue and boost investor sentiment in the Indian market.

The Companies Act 2013 was passed by India’s upper and lower parliaments earlier this year and has received approval from Prime Minister Manmohan Singh. Following the comments period, the act will be notarized and entered into force.

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