Companies Act 2013: Changing of the guard

After much vacillation, the Companies Act, 2013, has finally been enacted by the Indian parliament to replace the Companies Act, 1956, which was increasingly being viewed as archaic and out of step with the requirements of the corporate world.

Some aspects of the act

One person companies: In addition to private limited companies and public limited companies, the new Companies Act has introduced the concept of the one person company (OPC) – a company that can be incorporated with a single shareholder. The previous legislation required companies to be established with at least two members. OPCs are primarily aimed at giving small-scale entrepreneurs, artisans and people engaged in traditional industries, such as handicrafts, handlooms and pottery, the benefits of a corporate structure, such as limited liability and easier access to credit.

Corporate social responsibility: The new Companies Act is said to be the first companies’ legislation globally that requires companies fulfilling prescribed criteria to spend on corporate social responsibility (CSR) initiatives. Companies that do not spend on CSR initiatives would be required to explain their non-compliance. While the “comply or explain” regime is non-interfering in theory, some commentators have raised concerns that the prescriptive definition of CSR in the Companies Act coupled with the requirement to explain non-compliance may result in regulatory interference in the affairs of companies.

Siddharth Hariani is a partner, Aditya Bhargava is a senior associate, and Raghuveer Sarathy is an associate at the Mumbai office of Phoenix Legal.