Teething Troubles In New Regime

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Corporate India shares its experience as it gears up for a new company law regime

Rajeev UberoiLending to Special Purpose Vehicles will become risky: Rajeev Uberoi

The Companies Act 2013 is in keeping with the changing market dynamics, with a focus on investor protection and interest of minority shareholders. While the stress on corporate governance practices is welcome, it will also be one of the biggest challenges when it comes to implementation. Getting quality independent directors is a concern.

Another challenge, especially for the financial services companies, is the issue of inter-corporate borrowing. Sections 185 and 186 of the Act have put restrictions on inter-corporate borrowing. As an infrastructure sector lender, we do a lot of lending to project-specific Special Purpose Vehicles (SPVs) that are backed by holding companies. If the holding companies are not able to back these SPVs financially, lending to them will now become a riskier proposition. While the government may have tightened the rules guiding inter-corporate borrowing to avoid misuse of this route to raise funds, this has an impact on the business of infrastructure sector lenders such as IDFC.

The rules seem to have overlooked this aspect and may need to be revisited, more so for financial services companies.

The distinction between private and public companies has blurred.

Rajeev Uberoi
Group General Counsel & Group Head – Legal & Compliance, IDFC

Jamil KhatriAuditor rotation inconsistent with global trends: Jamil Khatri

Auditor rotation is one of the more controversial requirements of the Companies Act 2013 (Act). Even though the European Parliament recently approved rotation rules for member countries, support for rotation outside the European Union has been limited. For example, regulators in the United States considered rotation after the Enron debacle and concluded that there was insufficient evidence that rotation would increase audit quality.

Despite resistance by several stakeholders, the Act provides for mandatory rotation, which makes India one of the first few countries to implement this requirement. In addition to listed companies, several unlisted companies are also covered by the rotation requirement based on paid-up capital or public borrowings. Requiring rotation for such a large group of unlisted companies is unique and inconsistent with the global trends.

The Act restricts the appointment of audit firms to 10 years with a cooling-off period of five years thereafter. The Act provides for a three-year transition period to implement these requirements. Thus, companies that have completed seven years or more with their current audit firm can continue with their current auditors for a maximum period of only three years.

Large companies and business groups need to start planning for the eventual transition. Factors such as accelerating the change to obtain access to the best audit teams, choosing an audit firm that understands the company through previous work, but is still independent to perform the audit, and implications on audit of global operations, will impact the timing of the initial rotation and the choice of the new auditor.

Jamil Khatri
Global head, Accounting Advisory Services Practice KPMG

Rajvardhan SatamThe challenge will be to map related party transactions: Rajvardhan Satam

The change in the company law regime was long overdue and is a welcome change in keeping with the times.

Having said that, the new Act should have been implemented in one go, instead of the piecemeal way it has come about, as the Act has been in the making over the last three-four years. The haste in notifying the same along with rules, in bits and pieces, during the course of the last week of the previous financial year (FY 2013-14) should have best been avoided. This has added to the confusion, forcing corporates as also practising professionals to seek frequent clarifications and directions from the Ministry of Corporate Affairs.

The Act redefines the role of independent directors, raising the bar on corporate governance. Just as the Act gives a transition period for rotation of auditors, there should have been a transition period for independent directors, given the enhancement in their roles.

Another issue that would need careful examination is related party transactions. It is a big challenge especially for large corporate houses to map all transactions across the organisation and its subsidiaries to arrive at treatment for related party transactions. The fact that all of this comes into immediate effect adds to the challenge.

While greater corporate involvement in social spending is welcome, the restrictions in the scope of spending could have been avoided.

Rajvardhan Satam
Company Secretary, Lupin

 

Madhusudan RaoCompliance will be a huge drain on management time: Madhusudan Rao

The Companies Act 2013 is a landmark legislation and will have far reaching consequences on all companies operating in India. It, for sure, raises the bar on governance, deals with investor protection, fraud mitigation, auditor accountability, director responsibility, enhanced disclosure norms, stricter enforcement and institutional restructure. The legislation addresses the demands of modern times. The new law is futuristic and provides flexibility to corporate environment. More importantly, the new law encourages corporate democracy, thrust on self- regulation, and reduces the number of government approvals.

The Companies Act, 2013, not only attempts to ensure compliance, but also wants the board and company secretary to certify. This is a stringent and onerous responsibility and the management needs to demonstrate and satisfy directors that there is enough mechanism to ensure a 100 per cent compliance. It will be a huge drain on management time, and is expected to change the face of relationship between the audit committee and the board, the board and promoters, shareholders and the company, and finally, the auditors and the company.

The Companies Act, 2013, will help organisation like ours to further our corporate social responsibility footprint in the country and scale up our involvement and commitment for the causes we believe in. Most importantly, it will provide an excellent opportunity to converge multiple technologies, applications and resources of various organisations, including the government, the community, and the private sector to deliver a comprehensive solution to improve the living standards of the societies around us.

Madhusudan Rao
Chief Financial Officer and India Controller, Ingersoll Rand

DID YOU KNOW?

Making of the law: It took 10 years for the government to draft a new company law. The first concept paper on the legislation was put on the MCA website in August, 2004

Last-week rush: Although the government took long time to frame the law, private and public companies barely got five days to study the provisions of the Act before it came into effect from April 1, 2014

The UK Companies Act: The United Kingdom took two years implement its new Companies Act, 2006 in a phased manner

Auditing private sector: Private companies are now required to undertake internal audit under the new act

Directors’ burden: Directors need to take onus of ‘internal financial controls systems’ only in case of listed companies, whereas auditors need to do so in case of all companies

Back-up plan: Subsidiaries of foreign companies, which used shared service centres outside India for maintenance of books, will now need to take back-up of such data on servers located in India

Resident directors: All companies now need to have a resident director (staying in India for more than 182 days)

No independent directors for private companies: Private companies do not need to appoint independent directors, although draft rules on CSR suggested otherwise

Section-8 Companies: Non-profit companies (earlier referred to as Section-25 companies under the Companies Act, 1956) will now be called Section-8 companies

Depreciation break: Schedule II of the act allows depreciation of intangible assets (toll roads) using a revenue-based method. This was not in the Act as notified but reinstates an earlier MCA clarification.

[Business Standard]

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