Parliament has passed a new bill which is the first major overhaul of company law in more than 50 years. (Read: What it means for you)
The legislation strengthens accounting standards and shareholder rights, and makes it mandatory for companies with market capitalisation of more than Rs 500 crore to spend 2 per cent of their annual net profits on corporate social responsibility (CSR), such as social work or charity.
Companies failing to spend on CSR will have to explain and disclose reasons in their annual books of account. Otherwise, a penalty could apply.
The Bill, aimed at improving corporate governance, also contains provisions to strengthen regulations for corporates as well as auditing firms.
The legislation was passed by the Rajya Sabha on Thursday. It had been cleared by the Lok Sabha in December and will now be sent to President Pranab Mukherjee for his assent.
The new bill has provisions that allow shareholder class action lawsuits.
To tackle corporate fraud, the new law allows more statutory powers to the government's investigative arm, the Serious Fraud Investigation Office (SFIO).
The amended legislation, with 470 clauses, also limits the number of companies an auditor can serve to 20.