If a list is made of the most difficult things to achieve in India, passing an amendment to the Companies Act would find a place. The other piece of complicated legislation — the Income Tax Act — uses the Annual Finance Bill as a passport to amend itself, a luxury that the Companies Act does not have. In this context, the news that the Companies Bill was passed by the Rajya Sabha should be widely welcomed.

Initially inked in 2009, the Bill went through its own trials and tribulations before being passed by both Houses of Parliament. It now goes through an administrative routine of getting the Presidential assent following which it will be notified. The Bill removes 188 sections and 7 Schedules from its predecessor in its attempt to make life easier for companies.

Revised Schedule VI

It is not that the gargantuan Companies Act has remained untouched in these four years. In 2009, a roadmap was drawn to encourage companies to move over to the global norm in accounting standards — International Financial Reporting Standards (IFRS).

While The Institute of Chartered Accountants of India (ICAI) prepared the Indian equivalents of these standards and termed them Ind-AS, implementing the roadmap seems to have been forgotten in the conversion process.

In 2012, the Ministry of Corporate Affairs (MCA) took a step towards this convergence by revising the iconic Schedule VI to the Companies Act, which effectively forced companies to figuratively split their Balance-Sheets into current and non-current assets and liabilities and enhanced the disclosure norms — the latter were, at best, need-based till the revision. Post the amendment, the Revised Schedule VI will be known as Schedule III.

CSR

While the expert comments, critical analysis and books on the Bill will follow, the spotlight has already fallen on Clause 135 of the Bill which mandates Corporate Social Responsibility (CSR) activities by a certain class of companies — companies with a net worth of Rs 500 crore or more, turnover of Rs 1,000 crore or more or net profit of Rs 5 crore or more have to, every year, spend at least 2 per cent of their average net profits in the preceding three financial years on CSR activities.

Schedule VII to the Bill tabulates 10 activities that would constitute CSR. These include the well-known ones such as eradication of hunger and poverty, promotion of education, promoting gender equality and mother/child healthcare. One entry that would take away the entire seriousness of the CSR initiative is that a contribution to the Prime Minister’s National Relief Fund or any other notified fund would also be considered as CSR — companies with a turnover of Rs 1,000 crore and average net profits of Rs 5 crore can now meet the CSR norms by issuing a cheque for Rs 10 lakh. While CSR as a concept is a laudable initiative, it should not turn out to be a public deposit campaign for a specific relief fund. The turnover criterion of Rs 5 crore seems to be a mathematical typo when compared with the bigger net worth and turnover benchmarks — this should be fixed at Rs 50 crore at the very minimum.

IFRS

IFRS accounting standards thrust a lot of responsibility on the management for the contents of the financial statements and their related disclosures — a case in point being Property, Plant and Equipment — commonly known as Fixed Assets in India. The standards force the management to determine the useful lives of assets — and these useful lives have to be reviewed every year and can be changed if the cash flows from the asset are not what they seemed to be when acquired. A change in the depreciation policy is considered to be a change in accounting estimates and not a change in accounting policy. The Companies Bill seems to have missed an attempt to meet IFRS norms by prescribing rates in Schedule II to the Bill — companies would now prefer to toe the line and apply these rates for fear of incurring discontent of the auditors.

Post Satyam, the role of independent directors is being investigated with a fine-toothed comb and their supply is becoming scarce. The Bill adds to the literature on the subject by prescribing a Code for Independent Directors — which could make them even scarcer since many clauses would not find a place in the offer letters issued to candidates.

Having come this far, the Government would do well to take a final look at the clauses in their entirety and seek a quick amendment to the Bill. The final product should be a Bill which will stand the test of time and any amendments by way of notifications and circulars should only be decorative in nature.

(The author is Director, Finance, Ellucian)

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