Industry wants more on Companies Act

Even as various amendments to the Companies Act legislation were passed by Parliament in the Budget session last month, industry still has concerns over some provisions of the Act.

Since its inception, the government has brought in more than 40 notifications and circulars to solve issues concerning the Companies Act, 2013, in a piecemeal manner. It set up a committee of eight members last week. The panel will give its recommendations in six months.

Take the issue of regulations concerning related-party transactions (RPTs). According to experts, the definition of 'relatives' in the Act is too wide. "The definition of relatives should be restricted to only those who are financially dependent on the person concerned," said Sai Venkateshwaran, partner - advisory and India head - accounting advisory services at KPMG. Another issue with RPTs is that Audit Committee pre-approval has been extended to even routine transactions. "This may hamper the functioning of the company concerned. It would be better if it focuses only on those transactions that are not at arm's length or not in the ordinary course of business. Further, shareholders' approval may be restricted to material transactions," he added.

STORY SO FAR

• Companies Act was enacted in August, 2013
• Various provisions came into effect from April 1, 2014
• Before enactment, it was vetted twice by Parliament’s standing committee
• Over a period of time, industry has raised various issues on it
• Government has given periodic clarifications through notifications, circulars etc
• Amendments relating to commencement certificate, easing of related party norms were clubbed and came into effect from May 26
• Industry still has grievances
• To address these, MCA formed a panel last week, headed by company affairs secretary Anjuly Chib Duggal

Such provisions have been introduced with the intention to curb profit shifting practices and improve corporate governance standards, said experts. "But open-ended provisions have left much to interpretation of the companies to implement the change," said Neville Dumasia, deputy advisory and risk leader, Ernst & Young. For example, under clause 49, the threshold RPTs are based on the consolidated financial statements, whereas the same under the Companies Act, 2013 is based on the stand-alone financial statements, said V Balaji, partner, Deloitte Haskins and Sells.

In the new Act, the government has also increased the auditor's responsibility manifold. According to Venkateshwaran, the auditors' reporting responsibilities should also be suitably modified to align it with his primary responsibility of expressing a view on the financial statements of the company.

He added that penal provisions against auditors should be suitably clarified or amended to avoid any unintended consequences and abuse of these provisions, which could impact the functioning and development of the audit profession and audit quality in the long run.

The government has also made it compulsory for the companies' subsidiaries to file their financial statements with Registrar of Companies (RoC). "The financial statements of subsidiaries contain sensitive information intended only for desiring shareholders and not for the public at large. Making them public may disclose competitor sensitive information to the public," said Balaji.

These grievances should be taken up by the committee soon, experts said.