Monday, June 30, 2014

Companies Act 2013- Lessons for Indian Corporate Sector

The Indian corporate sector is very positive since the Modi Govt. has assumed power in the center. But to maintain the positivism the Govt. has to some policy decision without delay. The current working of 2013 Companies Act and its impact on corporate world has brought some new lessons for corporate India. The views expressed by various CEOs, CFOs, company secretaries, finance and accounting professionals provide thought-provoking insights which may be useful for Indian Corporate world. We know that the 2013 Act has introduced several onerous requirements, but the companies were not provided sufficient time to prepare. As the majority of the sections and the related rules were notified during the last week of March 2014 and have an applicability date of 1 April 2014.  Moreover, a considerable number of interpretative issues and concerns continue to arise from implementation of the new Act.

The new Act empowers and strengthens shareholders’ democracy. Duties/responsibilities and liabilities of directors (including independent directors) and auditors have been significantly enhanced. Now the private companies will be subjected to several onerous requirements such as preparation of consolidated financial statements, internal financial control reporting, auditor rotation and approval of related party transactions, which were hitherto not applicable to such companies. The Act also has significantly enhanced disclosures to bring greater transparency in corporate reporting and self-governance. On many matters, requirement to obtain the Central Government’s approval has been replaced with the approval by shareholders. The Act further introduced several new concepts such as corporate social responsibility, requirement for woman director, rotation of auditors, class action suits, etc. The Modi Govt. should address the genuine concerns to keep the Indian corporate sector on track.

Recently the Earnest & Young has done a survey which has highlighted some of the very crucial points as follows: Regarding the enforcement of only 283 sections out of total 470 sections, has mixed views. The 47% participants were of the view that it would have been better to implement all the sections of the 2013 Act at one go. Immediate application of notified sections leaves companies without any time to prepare for the new requirement. Overwhelming majority (85%) participants were of the view that they need minimum three months to one year time to prepare for new requirements.

Most of the participants were agreed with the auditor’s reporting on fraud directly to the Central Government, an overwhelming majority (80%) felt that there should be materiality limit for such reporting. Reporting of immaterial frauds to the Government may impose significant additional cost and burden on all parties and yet achieve nothing. 68% participants were not in favor of applying any or all of the onerous requirements, e.g., preparation of CFS, internal financial control reporting, auditor rotation and approval of related party transactions, etc., to a private company. 44% participants felt that some of these requirements can apply to a private company, while 32% participants were of the view that all these requirements should apply to private companies. Out of companies who have decided to spend 2% amount on CSR activities, 52% companies have also identified activities or projects on which they will spend the prescribed amount. 48% companies have still not identified these activities or projects.

From participants representing companies with non-31 March year-end, 41% have already decided to comply with 31 March year-end requirement. There is an almost equal number, which has not decided its approach yet. 22% participants want to retain their current financial year (i.e., year-end other than 31 March) and would seek tribunal/ MCA approval for the same. 87% survey participants felt that minority protection will increase, if all related party transactions not meeting exemption criteria are approved by special resolution of disinterested shareholders. However, out of these participants, 26% participants felt that it may impede business activity and 17% participants were concerned that it will significantly impede business activity. Out of companies covered under CSR requirement, 55% have already decided to spend 2% amount of CSR activities. Approx. 34% companies are waiting for practices to emerge before they take a call on this matter.

Keeping in mind the said reflections the govt. should take immediate measures in notifying the remaining sections of the Companies act 2013 and overview the working of the notified sections to avoid the worrisome situation.

Source:, Earnest & Young Survey 2014.