Companies Act, 2013 –Time for a change in the way compliances are perceived

Last week I had meeting with one of the prospective clients, which is an online startup. They were looking for a professional firm that can give them end-to-end solutions including accounting, tax, compliances and legal and the reason they approached us was precisely that. Promoters wanted the firm to manage all their routine procedural, compliance and advisory issues. IBA being the firm operating in that sphere for micro, small and medium enterprises fitted the bill.

While discussing the scope and fee estimate, they seemed ready to pay for tax structuring and other tax related procedures, however I could gauge reluctance in paying for statutory audit, Companies Act and other regulatory compliances.  It was only towards the end of the meeting did they mention their experiences in dealing with corporate laws under the erstwhile Companies Act which made them treat these compliances as just that and not having any material impact on the Company.

I thought it was just appropriate to let them know of their duties, responsibilities and penalties as directors and Key Managerial Persons (KMP) under the new Companies Act, 2013 (the Act) and I was not surprised to have them shocked after learning the fee for non-compliance and penalties stated in the Act.

The Act has brought about sea changes in the way corporate law compliances were perceived and now businesses have no choice but to treat the compliances at par with their tax planning since even a single lapse can seriously impact Company’s cash flows. Apart from the statutory requirement laid down by the Act for the Board to be on top of compliances, many of our clients have suo motu woken up to the need of getting their health check done to ensure there is nothing that can come to haunt them in the years to come.

Though it has earlier been discussed at length, it is pertinent to note that the new Act has enhanced the liabilities and obligations of the directors and KMP to ensure better and impeccable corporate management and governance. Some of the additional duties imposed on the board/directors/KMPs are:

  • Risk management policy to be made and updated
  • Internal Finance Control system to be put in place and reported on both by directors and auditors
  • Approval of Related Party transactions
  • Allotment of shares within 60 days of receipt of application money
  • Review of the loans to directors
  • Responsibility for devising proper systems to ensure compliance with the provisions of all applicable laws and to ensure that such systems are adequate and are operating effectively;
  • Mandatory appointment of Resident Director
  • Mandatory modification of Letter heads, bill heads, other official publications to contain CIN, e mail along with other details
  • Mandatory change in financial year
  • Mandatory rotation of auditors
  • Mandatory physical attendance at one board meeting
  • Board to authorise a person for authentication of documents, proceedings and contracts
  • Mandatory registration of all charges
  • Cash Flow Statement and Changes in Equity to be a part of Financial Statement
  • Significant disclosures made mandatory in the annual return
  • Detailed information requirements for the Board’s Report

The intent of the Act appears clear in the quantum of the penalties being imposed. For any contravention of the duties imposed under the provisions of the Act, the director/KMP shall be punishable with fine ranging between Rs. 50,000 and 2,500,000 with or without imprisonment upto 3 years. Even the filing fees have been increased manifolds

What is required is a change in the attitude towards compliances by the management. Keeping in view the heavy fees and penal repurcussions, earlier practised concepts of backdating compliances are on their way out leaving no choice but to get serious about the compliances.