Proposed Amendments in COMPANIES (ACCOUNTS) RULES, 2014

Location of servers for keeping backup of books and papers

9.1 The proviso to Rule 3 (5) of the Companies (Accounts) Rules, 2014 states that the backup of books of account and other books and papers of company maintained in electronic mode, including at a place outside India, if any, shall be kept in servers physically located in India on a periodic basis. It has been argued that it may cause difficulties in compliance with the requirements where an Indian company maintains its books of accounts electronically outside India in a shared IT infrastructure and may find it difficult to segregate the data for the purpose of back-up. Major ERPs like SAP and Oracle do not allow for partial data back-up i.e. back up of data belonging to only one company or set of books of an entity, as it would increase IT costs and thus may negate benefits derived initially by centralizing IT processing. Further, it was felt that this provision might conflict with territorial laws of various countries as the data protection or privacy laws in Europe and US impose many restrictions on cross border sharing, storing and revealing of data. On the other hand, there are several jurisdictions across the world, for example UK, Belgium and other European countries where accounting records are required to be maintained locally for inspection, and therefore might lead to regulatory concerns with regard to grant of access to data maintained outside the country. In view of the need to ensure access for regulatory requirements, the Committee recommended that the said proviso with regard to maintenance of local servers be retained. However, in case where free data access to all regulatory agencies of the country are allowed under a bilateral or multi-lateral treaty, in those cases, data servers may be allowed to be kept in the specific countries with which such treaties have been entered into.

Accounts & manner of consolidation of Accounts

9.2 Rule 6 of the Companies (Accounts) Rules, 2014 deals with manner of consolidation of accounts. The third proviso to Rule 6 states that this Rule shall not apply in respect of consolidation of financial statement by a company having subsidiary or subsidiaries incorporated outside India only for the financial year commencing on 1 April 2014 and ending 31 March 2015. The Committee deliberated on extending this exemption perpetually, as demanded, and decided that this exemption was only a facilitative provision for transition and it should not be extended beyond 2014-15. Further, in case the company does not have subsidiaries but only associates and joint ventures, the Committee suggested that the exemption to consolidate the accounts of joint ventures and associates not be extended perpetually as AS 21 requirement are being suitably modified.

9.3 The Committee also deliberated on providing exemption from consolidation of accounts by one person companies, small companies and private companies. The Committee recommended that there is no justification in giving exemption, whatever the size of a company, wherever it has one or more subsidiaries etc. RBI suggested that the unhedged foreign exchange exposure of companies should either be disclosed in the annual financial systems, or captured through AOC-4. The Committee recommended for appropriate changes to capture the required information.

Disclosures in the Director’s Report

9.4 Rule 8(1) of the Companies (Accounts) Rules, 2014 requires the Board of Directors’ Report to contain a separate section on performance and financial position of each of the subsidiaries, associates and joint ventures. The Committee recommended that the requirements under Rule 8(1) may be captured to the extent feasible in the statement under Rule 5 and therefore reduce the reporting requirement under Rule 8(1).

9.5 Rule 8(3) of the Companies (Accounts) Rules 2014 mandates disclosure of certain information with respect to conservation of energy, technology absorption etc. The Committee observed that as compared to the disclosure requirements of these items under the repealed rules i.e. Companies (Disclosure of particulars in the Reports of Board of Directors) Rules, 1988, there has been a substantial scaling down in these disclosures and hence, decided against dispensing with the same. Moreover, these disclosures are required for statistical purposes also. Hence, no amendment was recommended in this regard.

Form AOC 2: Disclosure of Related Party Transactions (RPTs)

9.6 Section 134(3)(h) of the Act requires companies to disclose particulars of contracts or arrangements with related parties referred to in Section 188(1) in the prescribed form, AOC 2 read with Rule 8(2) of the Companies (Accounts) Rules, 2014. Section 188 of the Act applies to RPTs, which are not entered in the ordinary course of business or not on arm’s length basis. However, Form AOC-2 (form for disclosure of related party transactions in the Board’s Report) extends the requirement of disclosure also to material RPTs that are entered on arm’s length basis, which goes beyond the requirements of the Act. The Committee has already recommended that Form AOC-2 may be omitted as long as the required disclosures are made in the Financial Statements. It has also been recommended that the Board’s Report should specifically discuss and refer to these disclosures (paragraph 9.10 of Part I of report may also be referred to). Consequential changes in the Rules may be required.

9.7 Rule 13 of the Companies (Accounts) Rules, 2014 requires certain class of companies to appoint an internal auditor or a firm of internal auditors. A plain reading of the Rule gives the impression that a “company” (which in turn deploys cross section of professionals) cannot be appointed as an internal auditor for the purposes of Section 138. This does not appear to be the intent of the legislature or the practice with regard to appointment of internal auditors. The Committee, therefore recommended that Rule 13 of the Companies (Accounts) Rules, 2014 be amended replacing the word ‘a firm’ with the term ‘an entity’ to avoid confusion.

Disclosure of Remuneration of Directors and KMP

9.8 Sections 134(3)(a) and 92(3) of the Act read with Rule 12 of the Companies (Management and Administration) Rules, 2014 requires the Board’s Report of a company to include an Extract of Annual Return in Form MGT-9. The said Form, inter alia, requires companies to disclose remuneration of Directors and key Management Personnel (KMP) and links the said remuneration to the salary and value of perquisites under the Income-tax Act, 1961. Further, Rule 5(2) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 requires disclosure of employees who are in receipt of remuneration not less than Rupees sixty lakhs per annum or Rupees five lakh per month. Disclosure of two different figures of remuneration in the Board’s Report may create confusion. The Committee has recommended for omission of MGT-9 requirements (paragraphs 7.5, 9.11 of Part I of the Report) In addition, the Committee recommended that the threshold of ₹ 60 lakh may be increased to Rupees One Hundred and Two lakh per annum, the requirements under the different Rules be harmonized.

Compliance of all applicable laws referred to under Section 134(d)(f)

9.9 Section 134(5)(f) states that the Directors Responsibility Statement should state that the directors had devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating efficiently. Further Form MR 3 of Companies (Appointment & Remuneration of Managerial Personnel) Rules 2014 also requires the secretarial auditor to certify compliance on all applicable laws. The Committee deliberated on restricting disclosure of compliance to important laws and felt that as the company has to comply with all applicable laws, restricting the Director’s responsibility to compliance of specific laws only would not be acceptable. Moreover, the requirement in Form MR 3 form is for the Secretarial Auditor to satisfy himself that the concerned company has proper systems and processes at the Board level to ascertain compliance of applicable laws and this is a reasonable requirement for the secretarial auditors to enquire into and report.

Corporate Social Responsibility

9.10 Rule 6 of the Companies (CSR Policy) Rules, 2014 states that the CSR Policy of the company shall deal with/disclose a list of CSR projects or programs which a company plans to undertake (which are listed in Schedule VII of the Act) specifying modalities of execution, implementation schedules as well as monitoring of such projects or programs. It was suggested that at the time of formulation of the Policy, it would be difficult for the CSR Committee to determine the exact list of projects or programs which a company plans to undertake. However, the Committee was of the opinion that, keeping in view the requirement of disclosures, and the fact that the projects and programs are to be decided by the Board on the recommendations of the CSR Committee, there should not be a difficulty in finalising the required details and disclosing these. No change, therefore was recommended.

9.11 Rule 3(2) of the Companies (CSR Policy) Rules, 2014 requires a company to spend on CSR for 3 financial years even when a company ceases to be covered under sub-Section (1) of 135. The Committee recommended that Rule 3(2) may be amended to the effect that a company which ceases to be a company covered under sub-section (1) for any financial year may not be required to spend on CSR for that financial year.

9.12 The High Level CSR Committee had recommended that the administrative overhead expenditure on CSR should not include expenditure on capacity building of the implementing agencies, and should be increased from 5% to 10%. The Committee endorsed these recommendation and accordingly, suggested necessary changes in the Rule.

9.13 The Committee also endorsed recommendation of the High Level CSR Committee as contained in paragraph 9.9 of that report for providing differentiated treatment for implementing CSR policy depending on the available funds for CSR expenditure to a company.