CORPORATE COMPLIANCES – FOCUS AREA IN NEW COMPANIES ACT, 2013

[Dr. Sanjiv Agarwal]

Compliance generally means compliance with laws and regulations or any other applicable law or rule or regulation or guideline or a practice which is deemed to be a rule by virtue of practice. These laws can have criminal or civil penalties. There are a number of Acts and regulations besides SEBI guidelines, such as Information Technology Act 2000, Companies Act etc. which mandate the corporate -both in public and private sectors to maintain and conduct periodic review of the regulatory functions and processes in the organizations to ensure that the company’s goal, structure and ongoing operations are consistent and compliant with corporate laws and regulations. This could lower the compliance risk profile, reduce fines, reassign headcounts, enable a better and higher use of the limited resources, save measurable cost and improve effectiveness and ensure due diligence.

Complying with India’s vast array of laws and regulations is a task that cannot be taken too lightly and requires every company to carefully examine the laws applicable to them and devise internal systems to see that they are complied with. Typically, this starts with an analysis of their business and the range of activities they engage in. Once this is mapped out, the next phase is to identify the laws that are applicable to those activities and to devise methods to ensure that they are complied with and routinely checked.

Exposure to Various Laws

The legal compliance can be thus divided into various sub categories to cover entire legal spectrum namely -

Corporate Laws

(a) Companies Act, 1956 / Companies Act, 2013

(b) Securities contract (Regulation Act), 1956

(c) Securities & Exchange Board of India Act, 1992

(d) Depositories Act, 1996

Tax Laws

(a) Income Tax Act, 1961

(b) Service Tax Rules, 1994

(c) Central Excise Act, 1944 and Central Excise Rules, 2002

(d) Central Sales Tax Act, 1956

(e) The Customs Act, 1962

 (f) State VAT Acts

Labour Laws

(a) Employees State Insurance Act, 1948

(b) Factories Act, 1948

(c) The Payment of Gratuity Act, 1972

Forex Laws

(a) Foreign Exchange Management Act, 1999

(b) Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000

(c) Foreign Exchange Management (Export of Goods and Services) Regulations, 2000.

(d) Foreign Exchange Management (Borrowing or lending in foreign exchange) Regulations, 2000

(e) Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004

Environmental Laws

(a) The Water (Prevention and Control of Pollution) Act, 1974

(b) The Air (Prevention and Control of Pollution) Act, 1981

(c) The Environment (Protection) Act, 1986

(d) The Manufacture, Storage and Import of Hazardous Chemicals Rules, 1989

(e) The Noise Pollution (Regulation and Control) Rules, 2000

General Laws

(a) Information Technology Act, 2000

(b) Micro, Small and Medium Enterprises Development Act, 2006

Other Regulatory Framework

• Listing Agreement of Stock Exchanges
• Accounting Standards and Auditing Standards
• Secretarial Standards
• Cost Accounting Standards

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.

Compliance and Risk Management

Compliance with statutory provisions and risk management go hand in hand. Compliance in itself is a risk management tool. Proper system of risk management, risk identification, measurement, mitigation and control should be in place. While non-compliance may lead to risks including business risk and reputation risk, risk management becomes important part of compliance function. At times, non-compliance may distort the picture so much so that even the survival of the organization could be at stake. In fact, any organization ought to have a compliance policy to ensure that compliance function is given priority like any other management function and there exists a proper team and budget for such function.

Compliance Policy

Every company should have a compliance policy in place which should ensure that -

a)   There exists a proper set-up and resources for ensuring compliances.

b)   Adequate financial resources are made available.

c)   Areas of compliances should be identified.

d)   Proper system of risk management, risk identification, measurement, mitigation and control should be in place.

e)   Control over all tangible and intangible assets, safeguarding of assets and their disposal is properly exercised.

f)    System for control, detection and prevention of frauds is in place.

g)   There exists proper checks, balances and controls for all business transactions.

h)   Continuous monitoring system exists.

i)     Company secretary or some competent officer is designated as Compliance Officer of the company to discharge compliance related obligations effectively and efficiently.

In fact, it is desirable that companies should have a board level Compliance Committee to ensure true compliance with various laws and provisions.