FOCUS ON COMPLIANCES UNDER COMPANIES ACT, 2013

[Dr. Sanjiv Agarwal]

Statutory Provisions

Section 130 seeks to provide for the re-opening of books of accounts and recasting its financial statements on an order by the competent court or Tribunal if it was found that earlier accounts were prepared in fraudulent manner or financial statements are not reliable due to mismanagement of affairs of the company.

Section  131 allows the directors to prepare revised financial statement or a revised Board’s report if it appears to them that the company’s financial statement or the Board’s Report did not comply with the requirement of Section  129 or Section  134 after obtaining approval of the Tribunal. Tribunal shall take into account the representations, if any, of the Central Government and of the Income Tax Department. Such revised financial statements or report shall not be prepared or filed more than once in a financial year. Further, where copies of financial statements or report has been sent out to members or delivered to registrar or laid before general meeting, the revisions must be confined to specified limits provided in the Section. Such revised financial statement or report shall be subject to rules prepared by Central Government.

Section 132 seeks to provide that the Central Government may by notification constitute the National Financial Reporting Authority to provide for matters relating to accounting and auditing standards. It shall perform the functions as specified under the Section including monitoring the compliance and overseeing the quality of service of professionals associated with ensuring the compliance with such standards. The authority shall have the power to investigate the matters of misconduct committed by any member of Institute of Charted Accountants of India, Institute of Cost and Work Accountants of India or Institute of Company Secretaries of India or any other prescribed profession. The Section further provides for the members, their qualifications, terms and conditions of appointment, who shall constitute the Authority etc. The Section also provides maintenance of books of accounts and other books in relation of its accounts in the manner prescribed by the Central Government in consultation with Comptroller and Auditor General of India.

Section 134 seeks to provide that the financial statement including consolidated financial statements should be approved by the Board of Directors before they are signed and submitted to auditors for their report. The auditor’s report is to be attached to every financial statement. A report by the Board of Directors containing details on the matters specified including Directors Responsibility Statement shall be attached to every financial statement laid before the company. The Board’s report and every annexure has to be duly signed. A signed copy of every financial statement shall be circulated, issued or published along with all notes or documents, the Auditor’s report and the Board’s report. The Section also provides for penal provisions for the company and every officer of the company in case of any contravention.

Focus on Compliance in Companies Act, 2013

 Various provisions of the Companies Act, 2013 emphasize on compliance as under -

• If it appears to the directors that the financial statements do not comply with the provisions relating to financial statements or the Board report does not comply with such provision, Board may prepare revised financial statements or Board report of any of the three financial years after obtaining Tribunal's approval.
• The Tribunal either suo moto or on an application by the Central Government or any person, if is satisfied that the auditor has acted in a fraudulent manner or colluded in any fraud, it may by order direct the company to change its auditor. Such an auditor shall not be eligible to be appointed as an auditor of any company for 5 years and shall be liable for fraud.
• If an auditor contravenes the provisions of Section s 139-146, he shall be punishable with a fine of not less than Rs. 25,000 but which may extend to Rs. 5 lakhs. In case his intention is to deceive the company or its shareholders or creditors or any person concerned with the company, he shall be punishable with imprisonment for a term of upto 1 year and with a fine of not less than Rs. 1 lakh which may extend to Rs. 25 lakhs. The auditor so convicted shall be liable to refund the remuneration and shall have to pay damages to the company. In case it is proved that partner(s) of the audit firm have acted in a fraudulent manner, the partner(s) of the firm and the firm shall also be publishable jointly and severally.
• In certain situations, directors shall be disqualified to become directors which would arise when non-compliance with specified provisions is committed.
• Severe monetary penalties and imprisonment provisions exist in new Companies Act for companies, auditors, directors and other officers in default for contravention of various provisions of the Act. This lays emphasis on compliance with provisions.
• Establishment of Serious Fraud Investigation Office (SFIO) will check financial frauds and crimes and ensure prevention of such instances and encourage compliance. SFIO shall have powers to investigate matters.
• Prescribe number of member(s), depositor(s) or any class of them who are of the opinion that management or conduct of affairs of a company are prejudicial to the interest of company or them, they can file an application to the NCLT on behalf of the members / depositors, seeking certain orders to restrain such conduct. They can also claim damages from directors, auditors or expert / advisor / consultant or any other person for incorrect  and misleading statement(s).
• Wrongfully obtaining possession / withholding / applying for purposes other than authorized, of company's cash and property by any officer or employee of company , will be punishable.
• Compliance with provisions would be seen as indicator of good governance practices in the company.

Corporate compliance involves twin compliances – compliance with statutory provisions of the Companies Act, 2013 and other applicable statutes applicable to the company and compliance with Memorandum / Articles of Association, other binding agreements including Listing Agreement with stock exchange, joint venture partners, shareholders and other stake holders. It should also cover compliance of Board / general meeting decisions and resolutions in letter and true spirit. Compliance with corporate governance norms of all regulators shall also be in the ambit of corporate compliance management.

In the present business environment, companies are required to comply with various requirements under different enactments or laws, rules and regulations leading to compliance and management of compliances emerging as an important function of a company secretary. Compliance has to be considered as a change catalyst for growth, value enhancement and reputation or brand building. Compliance also becomes important as –

• businesses are subject to more laws and regulations, addressing a wider variety of issues;
• companies are being held to higher standards of compliance;
• whistle-blower regulations may increase the chances of compliance failures being noticed;
• penalties for compliance failures have become more severe, putting executives and Boards at greater potential risk.

It is the duty of company secretary or compliance officer to assess and monitor company's compliance with laws, guidelines etc. and reduce the risk of occurrence or recurrence. Compliance may be costly as well as challenging but one needs to understand that compliance failures are unacceptable.