Contributed by: Bhaskar Kulkarni and Chetan Shah, CFA
The new Companies Act 2013 brings in sweeping changes that raise the bar on corporate governance and aligns it with the international best practices. Set with the mindset that somebody comes forward and points out the lapses in governance it has far reaching consequences on all companies operating in India. To better understand the same IAIP hosted Sai Venkateshwaran, Head Accounting Advisory Services, KPMG India at an event in Mumbai on May 30th 2014. The session was well attended and appreciated by the members.
As a background, the Companies Act 2013 received the assent of the President of India in August 2013. The Act came into force on September 12, 2013 with only 98 provisions notified. In March 2014, the MCA (Ministry of Corporate Affairs) stated that another 183 sections would be notified from April 1, 2014. Companies Act 2013 is more concise with 470 sections as compared to its predecessor, which had about 777 sections (including amendments). The currently active sections cover most of the daily operations of a Company. The sections pertaining to Restructuring, Reorganization and Mergers of companies are not yet active. The National Company Law Tribunal (NCLT) is expected to be operational soon.
Sai went at length at six critical areas viz. reporting framework, audit accountability, responsibility of board, inclusive CSR agenda, investor protection, and easier restructuring of companies. Under the reporting framework it is now mandatory to declare consolidated financial statements even for unlisted companies. Like in Sarbanes Oxley Act (SOX), the director’s report should include discussion on adequacy and effectiveness of internal financial controls and operational areas. There is greater flexibility to depreciate assets over their useful lives instead of standard minimum rates.
Auditors have been made more accountable. They will have to report on internal financial controls, financial transactions, and other matters that have or can have adverse impact on the functions of the company. They will have to report all frauds to the central government within 60 days as against only materially significant fraud originally conceived. Citing an example of Apollo Tyres’ acquisition bid for Cooper Tires (which was later scrapped due to concerns expressed by investors), Sai questioned whether the auditors can report about such events and whether they have the expertise over such management decisions?
The responsibilities of the Board and those of independent directors have been increased. Now they will have to balance the interests of all stakeholders instead of just shareholders, comply with all laws and regulations, monitor the risk management framework of the company, take responsibility for internal controls over financial transactions. Related party transactions will have to be approved by the board if not at arms’ length principles. There will be penalties for non-compliance.
The Act tries to increase investor protections norms by making vigil mechanisms and whistleblower policies at companies mandatory. It has increased restrictions on loans and guarantees given to entities other than subsidiaries. Minority shareholders have been empowered to take class action suits against the company or directors or auditors.
Sai sees changes in the mindset at the companies and in the boardrooms. The tone is how to set it right. Companies have started aligning their systems and processes to comply with the new Act. There may be teething issues initially which would ease out over a period of time.
– BK and CGS
PS: You could find a copy of the presentation at http://www.cfasociety.org/india/Pages/ContinuingEducation-Presentations.aspx
For the video link click on http://spotforge.net/live/iaip300514/