Government to enforce Companies Bill in phases

One of the top priorities of the ministry of corporate affairs (MCA) is to facilitate the setting up of the National Company Law Tribunals (NCLTs). In parallel, the draft rules of the new companies bill will be finalized through a process of consultation with all stakeholders.

The provisions of the Companies Act, 2013, which recently got Presidential assent, will be enforced in phases. While 98 sections of the new act are now in force, for which a notification for commencement was issued on September 12, the remaining sections will be notified in a phased manner.

"The new act is comprehensive with 470 sections. Those sections which require functioning of new bodies - such as the tribunal, or prescription of relevant rules/forms - will be brought in force after the preparatory action is completed. By 2013 end, a majority of the sections will be notified and the balance will be notified by the end of the fiscal year - March 31, 2014," said Sachin Pilot, minister of corporate affairs, replying to a question raised by TOI.

He further added that the relevant provisions pertaining to these newly notified sections, as contained in the earlier Companies Act, 1956, will stand repealed.

Many professionals are puzzled with the parallel existence of the earlier act of 1956 with the new act of 2013. "The main objective of notifying the 98 sections, which incidentally did not require any preparatory action, was to put the entire process of implementation of the new act on a fast track mode," M J Joseph, additional secretary, MCA, told TOI. Sections notified so far also cover the constitution of the NCLTs.

Pilot, addressing a CII conference in the city on Monday, sought to alleviate apprehensions raised by India Inc on some of the more stringent provisions of the new act, by calling for a consensus-based approach in finalizing the draft rules of the Companies Act, 2013.

MCA will, after suggestions from stakeholders, revisit the threshold in terms of share capital, turnover and other criteria, set down for compliance by the corporate sector, across a wide range of provisions. These also include provisions relating to appointment of independent directors and rotation of auditors.

Currently, draft rules require public companies with a paid-up share capital of Rs 100 crore or more, or a turnover of Rs 300 crore or more, or having outstanding loans or borrowings or debentures or deposits exceeding Rs 200 crore or more to have a composition of which at least a third are independent directors. These thresholds are open for discussion.

India Inc is apprehensive that rotation of auditors introduced by the new act would apply in all instances to all companies irrespective of their size, including private companies. Thresholds would also be set under a consultative approach to determine which companies would be required to implement auditor rotation.

"The new act and rules will ensure less regulation, more voluntary compliance and will facilitate doing business in India more efficiently," summed up Pilot.

Meanwhile, MCA Govt gets RoC report on NSEL Mumbai: The ministry of corporate affairs (MCA) on Monday obtained a technical report from the Registrar of Companies ( RoC) on the National Spot Exchange Limited ( NSEL) crisis. The report will be examined and action will be taken against NSE and its group companies for any violation. of the companies act, said Sachin Pilot., corporate affairs minister. NSEL has defaulted on payments totalling more than Rs 5,500 crore.

Pilot added that the government has already set up two committees to look into the irregularities. Agencies such as commodity market regulator Forward Markets Commission, Enforcement Directorate and tax authorities were also looking into the issue. On being quizzed on a key factor behind the irregularities, wherein produce traded through warehousing receipts allegedly did not exit, Pilot pointed out that this aspect is governed by a separate regulator, the Warehousing Development and Regulatory Authority.

 

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Rotation of auditors: Inconsistency between new Companies Act and Draft Rules

The new Companies Act has enhanced scope of auditors by mandating internal audit for such class of companies as may be specified, while by imposing civil liability on the auditors, the Act requires auditors to be more cautious and careful while auditing
 

Following the trend in the US, which replaced its 37 year old Companies Act in 2006, India is also replacing its nearly six decades old law (Companies Act, 1956) with the new Companies Act, 2013 (the Act). The New Act has already been assented by Lok Sabha and Rajya Sabha on 18 December 2012 and 8 August 2013, respectively. It received the nod from the President on 29 August 2013. The Companies Bill, which was in pipeline since five years, has now been enacted as Act no: 18 of 2013 that will replace the 1956 Act.

 

 The 1956 Act had some 658 sections and 14 schedules and the new Act has 470 sections and 7 schedules. This does not mean that the Act has now been made smaller or simpler. The words ‘as may be prescribed’ is appearing at 416 places in the Act, which means a huge amount of law will be enacted by way of rules to be issued by the government in process.

As the Act has already got the assent of the President last month, the Ministry of Corporate Affairs (MCA) has placed on its portal, the draft rules for public comments on 6 September 2013 (Draft Rules) inviting comments till 8 October 2013.

Here are some conflicting provisions in the Draft Rules and the Act relating to rotation of auditors in listed and in certain class of companies to be specified.

 

Provision under the Act

Among others, one of the major changes, which the new Act is proposing, is that it has now put a restraint on the terms of the auditors. Under the 1956 Act, statutory auditors were to be appointed by companies annually. However, section 139 of the new Act now requires appointment (which has been defined by way of an explanation under sub-section (1) to include re-appointments also) of auditors at every sixth annual general meeting (AGM) and the appointment is to be ratified at every AGM.

On the sixth AGM, the auditor is eligible for reappointment, in terms of section 139 (9), subject, however, to the mandatory retirement provisions of sub-section (2) of the said section.

Additionally, in terms of sub-section (2), in case of listed companies or companies of a class to be notified, there is a bar on reappointment of an auditor, if he has already held: (a) one term of 5 years in case of an individual; or (b) two consecutive terms of 5 years in case of a firm. Once the bar on reappointment applies, there is a mandatory cooling-off period of 5 years.

On one hand, where the Act has enhanced the scope of auditors by mandating internal audit for such class of companies as may be specified, on the other hand, by imposing civil liability on the auditors, the Act now requires auditors to be more cautious and careful while auditing.

Provisions under the Companies Rules, 2013

After the new and strict provisions relating to audit and auditors in the Act, the Draft Rules seems to be another challenge for the chartered accountants. Rule 10 of the Draft Rules deals with provisions relating to audit and auditors.

 

Rule 10.4 (4) of the Draft Rules reads as:

 

“For the purpose of the rotation of auditors:

(i) In case of an auditor (whether an individual or audit firm), the period for which he or it has been holding office as auditor prior to the commencement of the Act shall be taken into account in calculating the period of five consecutive years or ten consecutive years, as the case may be.

(ii) The incoming auditor or audit firm shall not be eligible if such auditor or audit firm is associated with the outgoing auditor or audit firm under the same network of audit firms or is operating under the same trade mark or brand.”

 

Para (i) above says that for the purpose of rotation of auditors under section 139 (4) (applicable to listed and other to be specified class of companies), the existing term of auditors shall also be taken into account. This is clearly contrary to the language of section 139(2) of the Act, which refers to "one term of 5 years" or "two terms of 5 years each".

Prior to the commencement of the Act, there may be no appointment of auditor for a term of five years at all. Even if an auditor has been holding his office for 5 years under the 1956 Act, it is not one term of 5 years, but 5 terms of one year each. If an auditor gets reappointed, it does not mean the term is any longer than annual. However, under the Act, before issue of Draft Rules, it was predicted that the ‘term’ will be new term starting after notification of the Act. The Draft Rules have, though divergent with the Act, made it clear, the existing term under the 1956 Act will also be counted for calculating the 5 years or 10 years term. It would mean that if the tenure of appointment of auditors under the Act will effectively be 4 years or 9 years and all related conditions are to be read with such term only.

As the Draft Rules are open for public comments till 8 October 2013 only, the chartered accountants should raise objection/ concern over this particular point to MCA.

 

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Companies Act 2013: Tough Norms for Auditors

The Union Government on Monday released draft notes for clauses of the Companies Act that replaces a six decade old legislation. Life is set to get tougher for auditors and audit firms, with the draft rules of the Companies Act proposing to not just make auditors, but even audit firms, liable for frauds. So far, chartered accountants were penalized but the new law also puts firms under the spotlight.  

In addition, the draft rules have proposed that in case of conviction, auditors will not only have to refund the remuneration received by them but also pay damages to authorities as well as individuals, who have been affected by incorrect or misleading statements in audit reports. The tighter rules for auditors, including rotation, are the result of the alleged lapses seen during the Satyam scandal.

As a result, the Companies Act has mandated rotation of auditors. The government in the draft rules has proposed that the existing audit assignments, which were taken up before the law was enacted, should also be counted, while calculating the maximum five-year term that has been prescribed. The so-called incoming auditor will not be eligible if he has been associated with the outgoing one by virtue of being part of the same network or is operating under the same brand. The draft rules have also proposed that where the company has two or more persons as joint auditors, it will have to follow the rotation policy in such a way that all the joint auditors do not complete the term in the same year.

The new rules have given some breather in terms of reporting on fraud by auditors to the Union government. Auditors are required to report material fraud within 30 days to the government. Materiality shall mean frauds happening frequently or those where the amount involved or likely to be involved is not less than five per cent of net profit or two per cent of turnover of the company for the preceding financial year. It has also introduced the concept of class-action lawsuits. For negligence in their duties, auditors are liable to pay damages to the company or any other person for losses arising from incorrect statements in the audit report.

Auditors also have to take indemnity insurance against third-party liabilities, likely to be highly expensive. Auditors fear only the larger firms will be able to afford higher insurance costs.

The Act also mandates that an audit firm and all its partners are jointly liable for any fraudulent action of even a single partner. Earlier only the partner in question had to face the consequences of negligence; with this new rule, an entire firm of auditors might have to down shutters for the errors of one partner.

The auditor is now also required to report on whether the company has adequate internal financial controls system in place and the operating effectiveness of such controls.

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