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Cos Act 2013: Implementation Challenges

Published on Fri, Mar 28,2014 | 21:54, Updated at Fri, Mar 28 at 21:54Source : Moneycontrol.com 

By: Yogesh Sharma, Partner - Assurance, Grant Thornton India

 

Companies Act 2013 is going to become effective soon. The MCA has already notified 281 sections out of 470 and rules relevant for some of these sections. That means that several significant key requirements of the new Companies Act become effective as early as 1 April 2014. While it is indeed a positive step forward by the MCA in implementing the reformative new company law, it also creates some significant challenges for the India Inc. and the auditing profession to adopt the new requirements in such a short time.

Some significant challenges arise from the short prep time to India Inc. for implementation – effectively five days to start complying without all the rules/ guidance in place. For example, the new company law requires that outstanding public deposits shall be repaid within one year from the implementation of new Companies Act. Non-compliance can attract penalties on the companies of up to ten crore rupees and on officers of up to two crore rupees. This is a significant new requirement and is not just procedural. Affected companies would have to act now.

Another set of challenges arise from lack of infrastructural preparedness. For example, a big challenge that can have chaotic repercussions is the requirement limiting the number of audits per auditor and number of companies in which an individual can be a director. These requirements coupled with the requirement for auditor rotation and further restrictions on number of directorships by an individual in public companies, respectively, create a huge gap in the number of professional auditors and directors that are available and that may be required for complying with these requirements.

Further, practical challenges will be posed by lack of implementation guidance for auditors by the relevant regulatory bodies. For example, there is no guidance on how to comply with the new requirement imposing responsibility on auditors to report on adequate internal financial controls system in place and the operating effectiveness of such controls. Without sufficient guidance on the auditing procedures needed to be followed, the effectiveness of the new legislation cannot be ensured. Similarly, there is lack of clarity on the procedure to be followed by the auditors for reporting frauds to the central government.

A few challenges also arise from lack of clarity in interpreting the new Companies Act at certain places where it not worded with sufficient clarity. For example, the new Companies Act provides that no member of a company shall be eligible to vote in a special resolution to approve a related party transaction if such member is a related party. It is not clear if the members of a company shall be ineligible if they are a related party concerned with the transaction being approved or by virtue of being a related party to the company simply by definition. Also, until the new Companies Act is fully notified along with all the rules, it will have to be read together with the Companies Act, 1956 for respective parts of the legislations in force for the time being which could cause confusion.

We hope that the MCA and the concerned regulatory bodies will soon address such challenges to truly make the new Companies Act, an exemplary reformative step forward in empowering India Inc.

Attachments : Tracking_changes-Companies_Act_2013.pdf
 
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