Aiming for the right balance between compliance and cost

Satyavati Berera Pankaj Tewari | Updated on December 30, 2013 Published on December 30, 2013

Compliance is essential if a company is to hold together. - V.V. Krishnan

The new company law has made the board of directors more accountable.

Compliance with applicable laws is innate to every business. In India, the regulatory compliance ecosystem is complex on account of the plethora of laws and multiplicity of regulators. The challenge is further compounded because of frequent changes in legislations. The Companies Act, 2013, has attempted to bring sharper focus on compliance by making the board of directors directly responsible and accountable for it.

The board of directors has to confirm that it has devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems are adequate and operating effectively.

The underlying intent is to draw the attention of the board and senior management to statutory compliance. Compliance issues tend to get relegated to the background only to later resurface in the form of a formidable challenge.

Currently, under clause 49 of the listing agreement, the directors of a listed company are required to periodically review compliance reports of applicable laws together with the corrective steps to rectify exceptions.

What’s new

There are significant changes in the new Companies Act, both in terms of coverage as well as impact. Disclosure on compliance framework in the board report has been made mandatory to all kinds of companies — listed, unlisted, public and private companies.

The board’s responsibility is two-pronged. Firstly, it has to put in place adequate compliance processes. While ‘adequate process’ is not defined, it would typically mean drawing up a comprehensive compliance landscape, a clearly defined responsibility matrix, and a robust reporting and monitoring mechanism. Secondly, responsibility is not limited to setting up a compliance framework. The board is further required to confirm that the framework is working effectively.

The board would have to get periodic compliance health checks done in order to get a reality check before confirming that the compliance framework is working effectively.

Under the Companies Act, 2013, in case of a contravention in the report of the board of directors, both the company and the defaulting officer would be held liable. ‘Officer in default’ has been defined to include key managerial personnel which, in turn, includes CEO, CFO, MD and so on.

Therefore, the senior management of the company is equally responsible for the disclosures made in the board report. While the company secretary is the compliance officer for the purpose of listing agreement, there is no uniformity in the practices adopted by companies in general.

In a welcome move, the ambiguity around the compliance function has been settled by the Act. The functions of a company secretary include a mandate to report to the board on a holistic basis, on compliance status of all applicable laws. The point to be noted here is that while the board of directors gives an assurance around the structure of the compliance framework, the company secretary, who is also a key managerial personnel, is mandated to report to the board on compliance at an operating level. This is one of the striking features of the new Act — responsibilities are distributed and shared between various arms of governance. The board draws the design and structure, the executive management does the construction and implementation.

A tool for good governance

The new Companies Act can be used as an effective tool to drive a compliance culture. A robust compliance system is reassuring to the investors and all stakeholders. It creates a positive perception and builds the credibility of an organsation which is far beyond monetary value.

Compliance is a mantra for value protection and enhancement. With intense global competition for investment, there is added incentive for India Inc to have strong compliance management. The benefits far outweigh the costs.

(Berera is Executive Director and Tewari, Senior Manager - Risk Advisory Services, PwC India.)

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Published on December 30, 2013
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