Governance in the centre stage

In its quest for better returns, a fair bit of global private equity (PE) capital has found its way into Indian firms. However, PE firms in India find that the domestic market presents unique issues such as the fact that PE investments in promoter-driven companies are subject to a different standard of governance. This, among other reasons, is responsible for putting governance at the centre stage. PE firms should be more proactive at

pre-closing stage with enhanced due diligence;

including clauses in agreements that provide clarity on the rights and liabilities of each party to the contract;

independent analysis and validation to ensure investments are made at the right value and the right time;

post-closing stage , draft and implement 100-day plans to fill the gaps identified during the pre-closing stage.

This could mitigate, though not eliminate, the risks of control lapses or frauds that may hurt returns and any eventual disputes between the parties.

Improving audit performance

The International Forum of Independent Audit Regulators (IFIAR) comprises members independent from the audit profession. Recently, it published its first global survey of audit inspection findings, summarising the issues identified by members. The findings were related to the audit of public companies.

The common findings include lack of auditor’s professional scepticism on audit engagements, group audits, revenue recognition, and the role of the engagement quality control reviewer.

It showed that the largest number of inspection findings in audits of public companies occurred in the areas of

Fair value measurements;

Internal control testing; and

Engagement quality control reviews.

Audit firms need to improve the consistency of performance in individual audit engagements, including remediating the inspection findings and determining the underlying root causes.

Wide scope of ‘fraud’ definition

Fraud has now been clearly defined in the new Companies Bill, and has a broad coverage. It includes any act, omission, concealment of fact or abuse of position, connivance in any manner with intent to deceive, gain undue advantage or injure the interests of the company or its shareholders or its creditors or any other person. The focus, clearly, is on intent and it is important to note that an act done with a wrong intention is punishable even if it has not actually resulted in a wrongful gain or loss. This is in line with mens rea , one of the oldest and time-tested principles of jurisprudence. The other noteworthy feature is the wide scope of the definition. Even professionals, consultants, experts and so on could be covered.

Deposit collection will get tougher

Even under Companies Act, 1956, norms for accepting public deposits are quite strict. The new Companies Bill, with the objective of enhancing protection of deposit holders, proposes to significantly tighten the regulations for accepting deposits. Only public companies that meet the eligibility criteria for net worth and turnover may be able to accept deposits from persons other than members.

Other companies that do not meet the prescribed criteria can accept deposits only from members. All deposit-taking companies should comply with the guidelines on issuance of circulars, obtaining credit rating and so on.

The Bill further mandates that all outstanding deposits should be repaid within a year from the commencement of the Bill or when such payment becomes due, whichever is earlier. Companies with existing public deposits that do not meet the prescribed criteria would have to address the possible financial impact.

— PwC India

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