Better comply than pay

Satyavati Berera Pankaj Tewari | Updated on November 15, 2017 Published on January 15, 2012

Managements should focus on compliance to ensure uninterrupted operations.

Statutory compliance assures investors that their investment in the company is safe and properly accounted for.

The regulatory regime in India is evolving continuously. Compliance with laws begins right from inception and involves dedicated effort. It also poses challenges for companies. Regulatory violations can result in imposition of penalties and prosecution of senior management leading to irreparable damage to the reputation of a company.

Therefore, it makes business sense for the management to focus on compliance in order to ensure uninterrupted operations.

In India, all companies — public or private, listed or unlisted — have to ensure compliance with a plethora of laws. The voluntary corporate governance guidelines have extended a number of compliance obligations to unlisted companies as well. Listed companies are subject to stricter and more exhaustive disclosures, considering the involvement of public interest. Besides, companies have to adhere to the listing agreement which requires the board of directors (board) to review compliance reports at periodic intervals. This presupposes existence of a compliance monitoring and reporting mechanism.

Multiple State laws

The statutory compliance landscape in India can be described under these categories: corporate laws, tax laws, labour laws, environmental laws and industry-specific laws.

India is a union with federal features. The country's constitution empowers states to make laws and regulations within its territory and domain. The consequence is a large number of State laws (for example, Karnataka Value Added Tax Act, Maharashtra Private Security Guards Act, etc.) and Central laws that are read with State rules (for example, Factories Act read with West Bengal Factories Rules, etc.). Therefore, a company which is well spread out geographically and has multi-state operations is obligated to abide by a large number of legislations.

legislative amendments

Identifying the compliance landscape and establishing a framework is only half the battle won. Laws in the country change frequently and companies need to remain updated. This is particularly onerous for State laws as the information is not easily available in the public domain.

sector-specific regulations

Industries such as telecom and oil and gas have sector-specific regulators. Besides complying with a plethora of other laws, a telecom company is subject to the regulations of the Department of Telecom and the Telecom Regulatory Authority of India. Similarly, an oil and gas company has to additionally comply with the production sharing contract and ensure periodic reporting to the Director General Of Hydrocarbons.

international developments

Recently, the UK Bribery Act was amended to enhance its scope to cover Indian businesses that operate in or have dealings with the country. The law has extra-territorial reach as it seeks to deal with bribery at home and abroad. The Bribery Act creates risks of criminal liability for individuals (including not only the individual who bribes but also managers of that individual) and businesses. Indian companies need to educate their employees on their obligations as it can adversely impact goodwill and reputation of a company, besides having financial ramifications. In some cases, contracts with vendors and third parties contain clauses stipulating compliance with international laws.

Driving change management

Bringing about a cultural change is a daunting task. Since statutory compliance enhances accountability in the system, there is resistance from line managers and operating staff, who at times tend to prefer status quo and continue to function in a comfort zone. Senior management has a significant role to play in assuaging genuine concerns, educating all stakeholders and ensuring smooth transition. A company with robust compliance processes not only stands to benefit in multiple ways but also has a positive impact on the external environment.

Achieving respectable levels of compliance involves inculcating a compliant culture and acquiring the right set of tools. The tone of top management is critical to the success of any compliance initiative. While the approach may vary from entity to entity, depending upon the maturity level, the following cardinal steps are indispensable: draw the compliance landscape and make an inventory of compliance obligations, arm the right persons with the right tools, drive and promote a compliance culture, and have periodic trainings and refresher courses.

Manual processes can yield dividends only for a given scale of operations. Large companies, spread out geographically, have to make a paradigm shift in approach, from people-dependent to process-dependent and look at ways to automate their compliance processes.

Robust statutory compliance processes demonstrate the intent to comply. It will hold companies in good stead in difficult times. It may not be an insurance cover from statutory defaults, but it can save companies from many pitfalls. The circular issued by the Corporate Affairs Ministry granting limited immunity to independent and non-executive directors for offences under the Companies Act is based on the principle that prosecution should not be initiated if there is a due diligence on the part of directors.

In this era of economic liberalisation and strict regulation, statutory compliance is an area that corporate management can ignore only at its own peril. Compliance is not just about keeping administrators at bay; it can protect and enhance stakeholders' value as well. It was appropriately highlighted by an ex-chairman of the Securities and Exchange Board of India who said that failure to implement good governance procedures has a cost beyond mere regulatory problems. Clearly, the incentives and benefits of having efficient statutory compliance management far outweigh the costs.

(Satyavati Berera is executive director and Pankaj Tewari is senior manager at Internal Audit Services, PwC India.)

Published on January 15, 2012
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