Enhancing governance with Companies
Act 2013
www.pwc.in
January 2014
The much awaited Companies Bill, 2o12 was passed by the upper house of Parliament on 8 August 2013. The law has been revised extensively to usher in a new era of corporate governance and transparency in the corporate sector. The well determined efforts of Sachin Pilot, Minister of Corporate Affairs have ensured several provisions for investor protection and anti-fraud measures. This forward looking bill has introduced several new chapters on enhanced corporate accountability and corporate social responsibility.
Salient features1
Definition of fraud: Fraud has been defined as, “Fraud in relation to affairs of a company or any body corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss. ‘Wrongful gain’ means the gain by unlawful means of property to which the person gaining is not legally entitled and ‘wrongful loss’
means the loss by unlawful means of property to which the person losing is legally entitled.”
It is the first time that the Act defines fraud and also imposes civil and criminal liability on the fraudster for non-compliance.
Establishment of Serious Fraud Investigation Office (SFIO): The SFIO is empowered to initiate investigation at the direction of the central government and has been vested with additional powers that empower the former to collect information from other regulatory authorities such as the income tax authorities, the state government, etc. Additionally, the SFIO shall have the power to arrest in respect of offences which attract the punishment for fraud. The central government will appoint its director and members from experts in the fields of banking, corporate affairs, taxation, forensic audit, capital market, IT or law.
The SFIO can investigate into the affairs of a company on receiving a report from the registrar or inspector, on intimation of any special resolution passed by the company, in public interest or on request from any department of the central or state governments. Another important feature states that if the investigation has been handed over to the SFIO by the central government, no other investigative agency is allowed to initiate or proceed further with such investigation. Moreover, punishment and imprisonment extending up to 10 years with fine has been enforced for fraudulently inducing persons to invest money. An empowered SFIO may act as an important impetus to curb economic crime.
Related party transactions: Changes to the related party transactions clause has shown a shift from a ‘control-based regime’ to a ‘disclosure-based regime’. The proposed measures include the following:
• No company shall enter into any contract or arrangement with a related party without the consent of the board of directors.
• Transaction exceeding a certain prescribed threshold limit shall be entered into only after prior approval of the company in a general meeting by a special resolution.
• No interested member shall vote on such special resolutions.
• The ambit of related party transactions has been widened to include leasing of property of any kind, appointment of any agent for the purchase and sale of goods, material, services or property, related party’s appointment in the company, its subsidiary and associate companies.
Additionally, ‘cash at prevailing market price’ has now been substituted with ‘arm’s length transaction’.
• Every related party transaction shall be reported in the board’s report to shareholders.
1Companies Bill 2012 and Press Information Bureau, Government of India, August 8 2013, “Parliament Passes the Historic Companies Bill 2012”
The above measures will place increased responsibility on the board of directors to ensure that the related party transactions are at arm’s length. In addition, transactions with related parties in the ordinary course of business that are not at
‘arm’s length’ will require shareholder approval at the general meeting. These measures will give shareholders and investors a better idea of the company’s related-party transactions, its monitoring and governance.
Prohibition of insider trading: Insider trading by any director or key managerial personnel of a company is punishable by imprisonment of up to five years and fine up to 25 crore INR or three times the amount of profits made out of insider trading, whichever is higher, or both.
Audit accountability: Some of the key features ensuring audit accountability include the following:
• An individual auditor cannot be reappointed for more than one term whereas an audit firm cannot be reappointed for more than two terms of five
consecutive years.
• An auditor is not allowed to render any prohibited service either directly or indirectly to the company, its holding or subsidiary company. Services prohibited include accounting and book-keeping, internal audit, design and implementation of any financial information system, actuarial services, investment advisory services, investment banking services, rendering of outsourced financial services and management services.
The central government may by notification establish a National Financial Reporting Authority to make recommendations to the central government on the
formulation of accounting and auditing policies and standards, monitor and enforce compliance with accounting and auditing standards, oversee the quality of service of the professions associated with ensuring compliance with such standards and suggest measures required for improvement in quality of service. Enhanced accountability of management
• The maximum limit of directors has been increased to 15 for a public company and additional directors can be added without approval from the central government.
• Every company (private and public) is required to have at least one director who has stayed in India for a total of 182 days in the previous calendar year.
• Penalty to the tune of 1 lakh INR extending up to 5 lakh INR for a company (private and public) and 50,000 INR for every defaulting director or key management personnel will be imposed on a company for non-appointment of key management personnel.
• One of the significant features is the effort towards incorporating the salient requirements mandated by the SEBI in clause 49 of the Listing Agreement in the Bill itself.
To this effect, the Bill requires every listed public company to have at least one-third of its total number of directors as independent. Further, the central government may prescribe the minimum number of independent directors in case of any class or classes of public companies.
The Bill also states that there are Rules to be prescribed to in relation to this and that the companies will have a year to ensure compliance with the Act and the Rules, if any, that are framed.
• Every listed company is required to establish a vigil or whistle blowing mechanism to encourage good ethical conduct. The mechanism should be accessible by directors and employees. Additionally, the mechanism shall provide for adequate safeguards against the victimisation of persons who use it and make provision for direct access to the chairperson of the Audit Committee.
• Directors and key management personnel are also prohibited from forward dealings in company securities.
Enhanced disclosure norms
• The board’s report has been made extensive to include disclosures such as company policy on director
appointments and remuneration, a statement of declaration by independent directors, explanations and comments by the board on every qualification and reservation or adverse remark or disclaimer made by the auditor or audit committee, particulars of loans and guarantees or investments made, particulars of contracts entered into, statements indicating the company’s risk management policy and identification of risk elements.
• All companies except one-person companies and small businesses are required to have their annual return signed by either a company secretary in employment or in practice.
In case of one-person companies and small businesses, the annual return is to be signed by one director. In case of non- compliance or a company secretary in practices certifying the annual return will be liable for a fine which may extend up to 5 lakh INR.
Contacts
About PwC
Dinesh Anand
Executive Director and Leader, Forensic Services
+919818267114
Darshan Patel Executive Director +919920202999
[email protected] Arpita P Agrawal
Executive Director +919811156161
Gagan Puri Executive Director +919818756955 [email protected]
Murali Talasila Executive Director +919958439996
[email protected] Dhruv Chawla
Executive Director +918130166550
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