The Companies Act is the backbone of corporate governance in India. The principles of the regulation of the formation, management, and dissolution of companies in India were laid down by the Companies Act 1956. Time went by and it was felt that due to the ever-changing complexity of business, new market practices, and economic integration worldwide, this law had to be changed. The archaic 1956 Act was replaced with the enactment of the Companies Act 2013 which brought into place significant reforms to achieve better governance, transparency, and accountability.
We will discuss the major differences in the Companies Act 1956 and the Companies Act 2013. The comparison would help understand how the new legislation reflects the needs of the modern corporate environment.
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Meaning
The Companies Act refers to the legal framework through which companies are incorporated, regulated, and dissolved in India. The Companies Act 1956 was the primary statute that laid the basic structure of company law in India, regulating all kinds of aspects, such as the formation of a company, corporate governance, accounting standards, and rights of the shareholders. Over time, with changes in the business environment and the need for more robust corporate governance, the Companies Act 2013 was introduced. It replaced the 1956 law to improve transparency, accountability, and compliance in corporate practices. It brought many reforms to modernize Indian corporate laws, bringing them to par with international standards and addressing issues of governance, shareholder rights, and financial transparency.
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Key Differences Between the Companies Act 1956 and Companies Act 2013
The Companies Act of 1956 and the Companies Act of 2013 present two key points of departure in India's history with corporate law. Although the former laid down a base to govern companies, the latter presented many of its new-age reforms concerning current-day challenges of companies in this respect. Most fundamentally, differences between the two indicate an enhanced necessity to seek higher corporate governance and responsibility in accordance with modern and contemporary international norms and requirements. Let us now discuss the major differences between Companies Act 1956 and Companies Act 2013.
1. Number of Sections
1956 Act: The Companies Act 1956 consisted of 658 sections spread over 13 parts with 15 schedules.
2013 Act: The Companies Act 2013 is concise in nature, with 470 sections, divided into 29 chapters, and 7 schedules. The number of sections has been reduced for the sake of simplicity of structure.
2. Corporate Governance
1956 Act: It has fewer provisions on corporate governance, which resulted in more loopholes in the aspects of board accountability.
2013 Act: It has provided stricter norms on corporate governance, including independent directors, audit committees, and disclosures that are mandatory in order to increase transparency.
3. One-Person Company (OPC)
1956 Act: The concept of a one-person company did not exist.
2013 Act: Introduced the concept of a One-Person company (OPC), allowing individuals to start a company with a single shareholder, promoting entrepreneurship.
4. Financial Year
1956 Act: Companies were allowed to choose any financial year, provided it was for a period not exceeding 15 months.
2013 Act: Stipulated that all companies need to have the same financial year which would extend from the 1st of April to the 31st of March.
5. Corporate Social Responsibility
1956 Act: No regulations were made that relate to the term CSR.
2013 Act: Mandatory CSR of the company with a net worth exceeding INR 500 crores; or has turnover over INR 1,000 crores, or its net profit also in excess of Rs. 5 crores.
6. Board Constituent and meetings
1956 Act: It made it easy for companies to have flexibility with regard to board composition and did not impose independent directors for private companies.
2013 Act: This act demanded that particular categories of companies should comprise specific numbers of independent directors and placed severe constraints regarding the functioning of the board meetings and minimum member participation in the board meetings.
7. Appointment and Rotation of Auditors
1956 Act: The auditor reappointment is possible under the Act but without mandatory rotation of auditors.
2013 Act: Introduced changing auditors every five years to avoid collusion and gain independence
8. Class Action Suits
1956 Act: It did not provide for class action suits.
2013 Act: Provided for class action suits. It is an action by shareholders and depositors against a company on grounds of malpractice or fraudulent practices. It brings accountability into the system.
9. Mergers and Acquisitions
1956 Act: The merger and acquisition procedure was a long process requiring various regulatory approvals under the 1956 Act.
2013 Act: Made mergers easier to achieve and less cumbersome in small-scale companies and between holding and subsidiary companies, needing fewer sanctions.
10. Electronic Filing and Documentation
1956 Act: Most documents and presentations were done through physical writing.
2013 Act: Promoted the electronic presentation and record maintenance of accounts. This digitization paved the way for a very efficient process of management in a company.
11. Penalties and Enforcement
1956 Act: Sanctions given to such non-compliance companies were soft. This provided them ample opportunities to deviate without having to worry about substantial punishment.
2013 Act: Strict measures against violation of corporate law; in some cases, an offense might be punishable even by imprisonment.
12. National Company Law Tribunal (NCLT)
1956 Act: The 1956 Act company law cases were dealt with by the High Courts, and part of the regulatory decision had been vested in the Company Law Board.
2013 Act: NCLT and NCLAT are the specialized tribunals created specifically to tackle corporate disputes as well as governance matters effectively.
AspectCompanies Act 1956Companies Act 2013Number of Sections658 sections, 13 parts470 sections, 29 chaptersCorporate GovernanceLimited provisions for governanceStrong focus on corporate governance with independent directors and audit committeesOne-Person CompanyNot availableIntroduced the concept of One-Person Company (OPC)Financial YearFlexible financial year periodMandatory April to March financial yearCorporate Social ResponsibilityNo CSR provisionsMandatory CSR for eligible companiesBoard CompositionMore flexibility for board structureMandated independent directors for certain companiesAuditor RotationNo mandatory rotationMandatory rotation every five yearsClass Action SuitsNot providedIntroduced provisions for class action suitsMergers and AcquisitionsComplex and time-consumingSimplified for certain types of mergersElectronic FilingPrimarily manual filingPromoted e-filing and digitizationPenaltiesLighter penaltiesStricter penalties for non-complianceTribunalsHigh Courts and Company Law Board handled mattersNCLT and NCLAT were established for corporate dispute resolution
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Conclusion
The Companies Act 1956 gave way to the Companies Act 2013, which marks a step into modernization of the corporate law framework of India. In the new Act, a number of reforms have been brought forth to bring out more transparency, accountability, and corporate governance with simplified business processes. These were some of the landmark novelties in the 2013 Act—mandatory CSR, independent directors, auditor rotation, and class action suits—all of them are now closer to the standards followed worldwide in the corporate sector. In addition to these specialized tribunals, for example, NCLT, they enable expeditious resolution of disputes.
Whereas the Companies Act 1956 laid the foundation for corporate governance in India, the Companies Act 2013 provides Indian companies with an opportunity to operate in a much more efficient and robust regulatory environment, which is an outgrowth of the complexity that modern business presents.
Differences Between Companies Act 1956 and Companies Act 2013 FAQs
1. What are the major differences between the Companies Act 1956 and the Companies Act 2013?
The Companies Act 1956 was relaxed but not modern governance. The reforms of corporate social responsibility, independent directors, and stricter compliance norms were not there.
2. Why was the Companies Act 2013 introduced?
The Companies Act 2013 was enacted to reform the existing legal framework of a company, strengthen corporate governance, ensure better compliance, and be in harmony with the international practices adopted for the regulation of corporations.
3. What is the meaning of the One-Person Company under the 2013 Act?
The incorporation of OPC in the Act aimed to promote entrepreneurship since it enables one person to start a company.
4. What is the role of NCLT under the Companies Act 2013?
The National Company Law Tribunal has come to replace High Courts in many matters dealing with corporate disputes and regulatory issues in a much more efficient manner.
5. What are the mechanisms for enforcement of CSR under the Companies Act, 2013?
Section 135 requires a company with the prescribed financial thresholds to expend at least 2% of its average profits on social causes.
