The Hindu Business Line : Road to global relevance?

The Companies Bill 2008, currently inching its way through the legislation process, has evoked interest among professionals, as during the many earlier occasions. Perhaps, things may pan out differently this time, making our corporate law globally more relevant, even if the route were to be more onerous.

A positive view, that is, and Mr Kaushik Dutta, National leader IFRS practice PricewaterhouseCoopers, seems to agree. "The Bill is futuristic and will greatly be instrumental in bringing in an era of transparency, self-regulation and ease of operation for Indian companies to be relevant as key players in the global economic landscape," says Mr Dutta, during a recent email interaction with Business Line.

Since 2004, the Ministry of Corporate Affairs has been undertaking a comprehensive exercise to revise the Companies Act of 1956 in order to align Indian corporate laws and regulations to the needs of increasingly globalised Indian economy and corporates, he reminds.

"The number of companies increased from 30,000 in 1956 to over 7,00,000 in 2008 which includes a number of companies which are either dormant or effectively inoperative. The sheer task of the regulators to effectively perform their duty of oversight is very daunting and was one of the drivers for change."

Excerpts from the interview:

Does the Bill make compliance easier?

Ease of operations is one of the pillars the new Bill rests on, and there are a number of far-reaching changes that address this. The areas include appointment and fixing of the remuneration of directors by the company without the approval of the Central Government, and the limits on the number of subsidiaries being done away with, which unlocks diverse structuring options for Indian companies.

The Bill also envisages one-person companies for small entrepreneurs to enable them to have a corporate structure, and faster processes for dealing with such companies.

The new Companies Bill has provisions for dealing with inactive and dormant companies and the Registrar of Companies has the power to deal with such companies including striking them off in cases of default. The ease of compliance regime reiterates the focus on this flavour of change.

What do you see as the other key improvements?

The other two pillars on which the Companies Bill stands are the providing for of norms which will be codified by law on governance, and protection of rights of public, and accountability based on self-regulation.

The law leans towards the Government moving out of the realms of controlling the internal corporate processes, and instead have those processes now governed by the decisions of shareholders.

The new sections which reinforce this transformation include the articulation of rights of the minority stakeholders, transition of companies operating under the Act of 1956 to the new Act, and also the ability to change from one type of company to another, relaxation of the maximum number of persons in a partnership to facilitate the functioning of large non-corporate bodies, etc.

How different is the oversight by the regulators going to be?

The third leg in the Bill is about oversight by the regulators. The Bill brings in criminal liability for insider trading for key management personnel, provides for shareholder groups to take part in `class action suits' for fraud perpetrated by the company or its management, and provides guidelines for an effective regime of inspections and investigations of companies, even while laying down the maximum and the minimum penalties for non-compliance by the company, its directors, CEO, CFO, etc., including provisions for recovery and disgorgement for fraudulent acts.

The Bill provides for the number of independent directors in a listed company to be one-third, though SEBI requires 50 per cent, and states that the norms relating to independent directors for public companies will be released later.

How far have technology developments been considered?

The Bill recognises changes that have happened in the technology area; it provides for electronic filings to be done for compliance and even speaks of board meetings (which now need to be physically done) over video-conferencing or other electronic modes as may be prescribed. The Bill also provides for voting in a shareholders' meeting through email.

On the changes of relevance to accountants and auditors.

There are a number of critical changes in accounting and audit; the National Advisory Committee will advise the Central Government on the manner of laying down accounting and auditing standards that companies or their auditors would need to follow. Consolidation of subsidiaries is expected to be mandatory even for unlisted companies. And roles, rights and duties of auditors are defined for maintaining the integrity and independence of auditors.

In countries such as the US, a distinction is made on the services an auditor can offer to clients based on public interest in that client. The independence rules for an auditor of SEC-listed company are significantly more stringent than those for a small private company.

The ICAI and the Government may evaluate whether the permitted services an auditor may offer should be on the same level of stringency for a small company and a listed behemoth given the shortage of professional skills available today, or they be graded for different classes of companies.

Is the responsibility of the accounting professional getting more onerous?

The Bill requires an auditor to make observations or comments on matters which will have an adverse effect on the functioning of a company, which is similar to the earlier Act. The brush of this section is wide and the section increases the responsibility of the auditors from reporting on the financial state of affairs and extends it to make comments on the functioning of the company in areas which could include operations and sales and marketing.

The legal interpretation of how this responsibility is to be discharged along with how the ICAI will deal with this will be critical for the profession.

This clause along with some of the existing clauses relating to compliance with internal controls including reservations on the maintenance of accounts and adherence to the policies set by the directors of the board casts one of the highest degrees of responsibility on auditors.

Additionally, members of the ICAI will be required under this Bill to make judgment on matters of functioning of companies which are outside the realms of their expertise.

The key change which makes this provision onerous is that the Bill provides for criminal and civil liability, including liability to any person who may claim to be relying on the report, for auditors who might contravene the provisions of adequate reporting including those on controls and functioning of companies.

Similar liabilities also exist for auditors who deliver services which are prohibited like internal audit, management services, investment advisory services, design and implementation of financial reporting systems and book-keeping.

These services are very broad and nebulous and hence need to be clearly defined, especially when they have punitive civil damages and imprisonment and third-party liability for contravention.

In most countries, if the independence of an auditor is impaired for providing prohibited service, the auditor automatically vacates his office. In such a case, criminal sentence or civil punitive damages will be extremely harsh.

Self-regulation always comes with a strict penal consequence for non-compliance. However, if the gravity of the offence and its consequence are not clearly articulated for various responsibilities of the directors, CEO, CFO and auditors, we might open ourselves to a number of interpretations and consequent litigations. This would clearly be self-defeating.

With the ICAI talking of IFRS convergence by 2011, are there issues that the company law may have to address in this regard?

India will transition to, or converge with, the IFRS in 2011, and to facilitate such convergence, significant changes to the existing Companies Act of 1956 would have to be made.

Let us take an example - of preference shares which are redeemable; under the IFRS, these need to be split into equity and debt. This would affect the rights of the preference and equity shareholders if the instruments retain the characteristics of the classification. The laws for issue of these instruments are also to be adhered to.

There are 10 accounting standards under the IFRS which need change in the Companies Act. Inclusion of provisions in the existing Companies Bill to deal with substantive changes of law and not merely accounting standards would have helped manage the process of convergence better.

D. MURALI

(Illustration by R. Rajesh)?

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