Practising governance

Aug 12 2014, 23:28 IST
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SummaryIn the new Companies Act , the preference is towards disclosure norms over regulatory approvals

Replacing a 57-year-old legislation, the new Companies Act 2013 is a landmark, with far reaching implications for all companies incorporated in India. This Act in many ways attempts to align India with international practices and requirements.

The spotlight is now firmly on the key aspects of the governance framework. Particular emphasis has been laid on the audit and finance functions in addition to the board-level committees, all of which have a legal and moral responsibility to identify and disclose aspects of a promoter-driven agenda that could harm the interests of other stakeholders.

The requirement relating to the mandatory change of auditors stipulates a five-year period for rotation in the case of an individual and a 10-year period for a firm, to be calculated retrospectively, albeit with a relatively short cooling-off period.

Listed companies, unlisted public companies with a paid up share capital of R10 crore or more, private limited companies with a paid up share capital of R20 crore or more; and companies with public borrowings from financial institutions, banks or public deposits of R50 crore or more, need to rotate their statutory auditors. With companies being given only three years to work towards this change, this time-based limitation has essentially set the proverbial cat among the pigeons.

The situation is not so complex in the case of PSUs, which were already undergoing different levels of audit checks for their working and expenditures. Independent statutory auditors are appointed by the CAG for a period of three years at a time, followed by an independent audit by the CAG auditors. This is in addition to the stock exchange norms for quarterly reviews. There is a specific requirement in the context of the audit of companies where the equity participation by the government is 51% or more.

The 2013 Act has also unveiled a new era, where there is a clear preference towards disclosure norms over regulatory approvals. A key aspect in this context is related party transactions (RPTs). While the 1956 Act warranted central government approval for RPTs by large-cap companies, the 2013 Act necessitates a greater set of disclosures with shareholders’ approval. The scope of RPTs in the 2013 Act is deeply layered with provisions for a wider scope and coverage.

While the requirements for RPTs appear to be onerous, the same can be addressed by determining the scope of related parties with reference to AS-18, Clause 49 and the Income-tax Act, 1961, before mapping parties

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