‘When in Rome, do as the Roman do’ is what the Ministry of Corporate Affairs (MCA) seems to be telling the corporate world — small and big alike.
The MCA recently tweaked the accounting rules under the company law and mandated that if accounts are maintained outside India, backup of accounts is required to be kept in a server physically located in India and that the accounts need to be updated daily instead of the earlier periodic basis. Further, the amendment also requires that in case accounts are maintained outside India, the name and address of the person in India in whose control such books of accounts are, need to be disclosed.
This new rule clearly means that the government intends to tighten the regulatory regime around maintenance of books of accounts in the electronic mode. Under this rule, corporate entities are required to ensure that the books of accounts and papers, when maintained in electronic mode, are accessible at all times to law-enforcement authorities for reference.
On the face of it, it does make sense, as it will ensure that the entities which are outside India and having operations here, cannot take shelter under the fact that their accounts are in the country of origin, therefore restricting access for Indian enforcement authorities.
As Past President ICAI Ved Jain puts it: “These amendments in Rules are regarding maintenance of accounts in electronic mode . The Companies Act mandates every corporate to maintain true and correct accounts at the registered office or such other place with intimation to the Registrar of Companies. The issue has arisen about location of accounts in the electronic mode on cloud where server is at a different place. The Rules notified in 2014 were a little liberal in the sense allowing accessibility in India without specifying at all times.”
“Now, gaining from experience on these issues, the amendments have been made requiring all companies, in case accounts are being maintained in electronic mode on cloud, accessibility of such accounts in India at all times.”
The objective is to ensure accessibility of accounts of companies by various law-enforcement agencies in India, said Jain, adding that “now no company can plead that access to its accounts is not presently available or the accounts are still to be updated. Further, it can’t say the person in control is not in India. It has to specify the name and address of person in control in India.”
According to Mukesh Butani, Founder and Managing Partner BMR Legal, Rule 3 of the Companies (Accounts) Rules, 2004 stipulates manner of books of account to be kept in electronic mode. This provision is in sync with the times where e-governance is a norm, and hence the companies are provided with the facility of dispensing with a physical copy of the accounts by allowing them to retain statutory records only in e-mode.
“The reason sub-rule (1) insists that such books of accounts shall be accessible in India is in line with the territorial nexus standard that the provisions of the Indian laws govern all citizens and subjects of India. The August 5 amendment, which states that the books of accounts “shall be accessible in India, at all times”, is only clarificatory. Therefore, it cannot presumably be assumed that the books of accounts shall be partially maintained in India and outside India. This clarification only makes it obvious that a company cannot choose to keep the books of account outside India, even for a part of the year,” Butani adds.
In fact, the other amendment of August 5 only supplements this understanding. This amendment is to sub-rule (5), which relates to a cloud backup of books of accounts. Earlier the sub-rule provided that the companies could keep a backup of their financial statements on a foreign server and update them on a “periodic basis” on Indian physical servers. After the amendment, the provision provides that instead of a ‘periodic basis’, the e-accounts lying on the Indian server shall be updated on a daily basis.
Do these rules spell bad news for multinationals or corporate entities who operate from overseas? What do the signify for smaller companies?
“Firstly, it is in line with the underlying objective of ensuring that accounts of Indian companies are available in India throughout the year. Secondly, given the technological prowess, there appears to be no overwhelming concern about daily physical backup in India. In any case, most IT systems maintain a daily/periodic backup of their data. Therefore, there is no reason why the same should not extend to accounts of the Indian companies, which in any case is a statutory requirement,” says Butani.
“For these reasons, I see no concern or deterrence that these amendments may cause to investors. The changes are, at best, remedial to clarify the original intent, which is necessitated given the fast paced technology developments since the new companies code of 2014 was introduced. In any case, most Indian companies are already in compliance with these rules as their accounts are maintained on a real-time basis and stored on Indian servers,” he added.
Impact on MNCs
As regards whether it will impact MNCs, the answer will be yes, says Jain, adding: “Now all MNCs have to ensure the compliance of above Rules which means at all times access by Indian Law enforcement agencies of these accounts. At present there are many MNCs which are having centralised accounts outside India. There may be a few MNCs which may find it challenging to comply with these new requirements. To that extent investment by such MNCs may get impacted.”
While the move by the Ministry Corporate Affairs is to tie up the loose ends to ensure that the law of the land is not misinterpreted, it also points to the time taken to provide clarity on this front. “I will not say there was a lack of clarity in Rules notified in 2014. It is learning from experience in ensuring compliance of Indian laws including taxation, etc., and also to some extent security concern, so as to have access at all times about the activities of all corporates, both Indian and MNCs,” said Jain.
A better approach would be to ensure that when making Rules there are no gaps for corporates to interpret to their advantage.