| Just catch- up or an opportunity for true change? |
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Numerous provisions contain the clause " as may be prescribed". Companies fear this mightallowtoo much discretion for the ministry Comply or explain Introduction of the ' comply or explain' principle in the case of corporate social responsibility, instead of a mandatory rule, is one such example. A mandatory rule to spend on social responsibility wouldn't be different from a tax; it would only encourage those with no intentions to comply to find ways to comply in form but not in substance. In any case, our regulators do not have the bandwidth to monitor whether hundreds of thousands of companies have spent money to the 'appropriate' end- use on something as ambiguous as social responsibility. The UK regulatory framework has long used this ' comply or explain' approach and while every system has its weaknesses, this principles- based approach is one of the many reasons why the UK is number seven on the ease- of- doing- business index, while we stand at 132 out of 185 countries. I hope we enhance the use of principles and the ' comply or explain' approach in our regulatory framework, as opposed to rules and consequences, as a balancer between best practices and something critical. National financial reporting authority ( NFRA) Globally, the issue of enhancing auditor independence has been high on the regulatory agenda through the last decade. The basic principle of independence is being seen as independent by a third party, not whether one considers oneself independent. Globally, the audit profession started as a self- regulated one by the socalled audit profession- led institutes —the American Institute of Certified Public Accountants in the US, the Institute of Chartered Accountants in England and Wales in the UK, the Institute of Chartered Accountants of India ( ICAI) in India. India was once at the forefront in this space, as a founder member of the International Federation of Accountants, where all such institutes came together to help improve global standards. Over the last decade, about 30 countries have seen regulatory powers shift from these self- regulated institutes to independent regulators such as the Public Company Accounting Oversight Board in the US and the Financial Reporting Council in the UK. Emerging markets such as South Africa and relatively smaller economies such as Liechtenstein have also preferred to adopt independent regulation of the profession, so that the profession is seen as truly independent and the answer to the question of " who audits the auditor?" can be " an independent regulator", not "another auditor!" Before investing in a company, would you prefer to rely on audited financial statements in a jurisdiction where the auditors' work is subject to review by an independent agency or where the their work is checked by someone from their own fraternity? Obviously, the NFRA, the proposed independent regulator, would see opposition from ICAI, just like its counterparts did in developed and developing markets. However, there is no doubt the formation of the NFRA is a step towards where the rest of the world has already moved. Mandatory audit firm rotation ( MFR) Now, an audit firm is supposed to rotate off an audit if it has completed 10 years. The intent of the Bill is through the next three years, any audit firm that completes 10 years with a client is expected to be replaced by a new one. Globally, MFR has been actively discussed as a potential solution to break the so- called auditor- client nexus and the threat posed by the long- term association between firms and clients. Every step that provides the perception of enhancing auditor independence should be tried. To this extent, I welcome the leadership shown by India in becoming the first major economy to legislate MFR. At the same time, the ability to monitor its implementation in spirit is what we need to focus on while framing the phases in which MFR should be extended. A one- size- fitsall approach, through which all listed companies would have to rotate auditors over a three- year period in acountry with about 7,000 listed companies and about 1,000 firms that serve such companies, has the potential to create hurdles for companies in finding a suitable new audit firm. Also, the regulators would find it difficult to monitor compliance in substance and many audit firms would find it difficult to remain commercially viable. Therefore, a phased implementation of MFR, using a publicly- available list ( possibly based on the size of public interest involved), is something that should be encouraged by all stakeholders. The regulators should review the results from MFR and to what extent it served its purpose, before extending it to the next phase of large and listed companies. Class- action law suits Generally, penalties in India have been found to be inadequate in serving as deterrents, let alone the slow pace of enforcement. The Bill has corrected this by providing shareholders the opportunity to challenge companies and auditors with class action law suits. A class action suit, by definition, is one brought by a person/ small group, as representative of a larger class, to file for claims against erring parties. This would effectively enable small investors to pursue legal routes against companies, directors and auditors for wrongful acts. This cannot be anything but good in a place where penalties need to be enhanced multifold across almost all laws. At the same time, while we adopt Westernstyle laws, we need to boost the capacity of our legal system to fairly and reasonably implement such laws. In summary, the Bill provides an opportunity to catch up and make our corporate regulatory framework amodel for other economies with similar characteristics to emulate. We all have a part to play in enabling this change. I hope the significant initiative taken by the minister and the Ministry of Corporate Affairs is supported without self- interest, so that we can achieve both the objectives in the wider public interest. That is an obligation on every regulator, citizen, shareholder, financial investor, promoter, manager and, yes, auditor, if we are to fully achieve the immense potential our entrepreneurs have. As with all good things, corporate India had to wait a long time for a reporting framework that's current and, with some work, could even be considered visionary India gets its companies ' act' together The new set of laws governing companies, which was passed by the Rajya Sabha on August 8 and is awaiting the President's signature before getting notified, introduces rules to bring clarity and ensure investors' interests are protected. Implementation could, however, throw up challenges. Business Standard presents a couple of experts' views on the new law VISHESH CHANDIOK National managing partner, Grant Thornton India LLP EASE OF BUSINESS |The comply or explain principle is welcome as regulators would not be able to monitor all companies' CSR |This framework is one of the major reasons why the UK is number seven on the ease of doing business index |Setting up the National Financial Reporting Authority will help India reach global standards |India is the first major economy to legislate mandatory audit firm rotation |But the one- size- fits- all approach would not be suitable; phased implementation would be best |Class- action law suits will protect small shareholders but legal system must be strengthened How long it took Four years since itwas first introduced as Companies Bill, 2009, in the LokSabha on Aug 3, 2009 Key changes Rewritten extensively; newprovisions for investor protection, better corporate governance and corporate social responsibility; newterms defined Why? The Companies Act, 1956, though amended 25 times, was not in sync with the new economic and corporate realities The course it took The LokSabha passed it in December 2012, after a Parliamentarystanding committee gave its second report in Augustlast year New corporate terms defined The Bill prescribes 33 newdefinitions, including those of CEO, CFO, etc Antifraud measures Prohibition on forward dealings in companies' securities bykeymanagerial personnel; insider trading rules; restriction on non- cash transactions involving directors Business- friendly measures Provision for single- person company, woman directors; cap on number ofpersons in a private companyraised to 200; e- voting recognised Investorprotection measures Class action suit, better disclosure in financial statements and disclosure ofinterests of directors, etc; procedures related to disclosure of transactions with parties related to directors, promoters, etc, streamlined What now? The Bill goes for Presidential assent. The draft rules on the Companies Act will then be made public and the Act come into effect, with a notification bythe corporate affairs ministry A PRIMER All you wanted to knowabout the new companies law |
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Company Secretary, Chennai
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