Companies Act 2013 May 2014 A significant shift in the governance framework
Companies Act 2013
May 2014
A significant shift in the governance framework
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Roll out roadmap
Companies Act receives Presidential assent
Draft Rules released for public comments
Vast majority of Act effective 1 April 2014
• Draft Rules released in phases in 2013 for public comments
• 98 Sections made effective 12 September 2013
• 184 sections made effective 1 April 2014
• Final Rules released for most chapters. Several changes from the draft rules.
• Consent of both Houses received- Lok Sabha (December 2012)
• Rajya Sabha (Aug 2013)
• Presidential Assent (Aug 2013)
• Key sections and rules still to be notified include those related to NCLT, NFRA, Registered Valuers, IEPF/ Unpaid dividend
Final Rules released
NCLT, NFRA related provisions to be notified
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Companies Act 2013: Key focus points for management
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Change in
Reporting Framework
Higher
Auditor Accountability
of Board, Independent Directors and Audit Committee
Increased Responsibility
of companies
Ease in Restructuring
Emphasis on
Investor Protection
Push on
Inclusive Agenda (CSR)
Focus on six critical
themes
Sweeping changes that raise the bar on the governance framework
Aligns with international best practices
Brings in corporate democracy
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Change in ‘Reporting Framework'
Preparation of consolidated financial statements mandatory even for unlisted companies
Change in definition of subsidiaries & associates – total share capital v. voting equity share capital; Total share capital also includes convertible preference capital
Directors report for listed and certain unlisted public companies to include discussion on adequacy and effectiveness of “Internal Financial controls”. Covers all operational areas as well.
Greater flexibility to depreciate assets over their ‘useful lives’ instead of standard minimum rates
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Higher ‘Auditor Accountability'
Mandatory auditor firm rotation – ten years ; applicable retrospectively. Appointment for five years
Prohibition on certain non-audit services – similar to Sarbanes-Oxley
Auditor to report on internal financial controls, and financial transactions and other matters that that have a adverse effect on functioning of the Company
Reporting of all frauds to the Central Government within 60 days; including immaterial frauds.
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Change in requirements for Board composition
12 15 >15
Limits on number of Directors
New Act Special Resolution
Independent Directors also required for certain unlisted companies
Independent Directors liable to mandatory rotation- prospective application
Transition period of one year for reconstitution of the Board of Directors
Mandatory appointment ≥ 1 Director
Resident in India for 182 days
Minimum of 2 Independent
Directors
Audit Committee
Nomination and remuneration
committee Women Director
Listed *
Unlisted (All) - - - -
Public Companies with Share Capital ≥ INR 10cr (INR 100cr for Women Directors) -
Public Companies with Turnover ≥ INR 100cr (INR 300cr for Women Directors) -
Public Companies with Loan/Debentures/ Deposits ≥ INR 50cr - -
*1/3rd Directors to be independent in case of listed companies
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‘Increased Responsibility' of Board, Independent Directors and Audit Committee
• No pecuniary relationships and stock options • Nominees of financial investors are not independent • Compliance with Code of Professional Conduct • Mandatory rotation of independent directors – max 10 years
Independent Directors
• Appointment and monitoring of auditors • Approval of all related party transactions • Monitoring of inter-company loans and investments • Evaluation of internal controls over financial transactions
• Compliance with all laws and regulations • Balance interest of all stake holders and not mere shareholders • Monitor framework for enterprise risk management • Responsible for internal controls over financial transactions
Penalties for non-compliance
Audit Committee Responsibilities
Board Responsibilities
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Push on ‘Inclusive Agenda' (CSR)
CSR contribution - 2 percent of average net profit before tax for last three financial years
Board to provide oversight on CSR activities and to appoint a three-member CSR Committee
Spend or disclose approach – for now
Group-wide CSR and allocation approach
No clarity on tax deductibility of CSR contribution
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Steps for constituting CSR Committee
CSR compliances to be completed at earliest to ensure any spend from 1 April 2014 qualifies as eligible CSR spend
1 2 3 4 6 5
Board to constitute CSR committee
CSR committee to formulate CSR policy
CSR committee to develop internal operating structure and transparent
monitoring mechanism
CSR Committee to form Core CSR team
CSR committee to recommend amount of CSR spend for FY 2014-15
Board to approve CSR Policy, including CSR spend and
monitoring mechanism
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Universe of related parties
SEBI definition enhanced to cover additional parties (for eg. Person/entity having control, joint control or significant influence on the company and fellow joint ventures / associates, etc)
!
Subsidiary
Holding
Fellow subsidiary
Associate, Joint venture company
1 Company level
Company
Children and Spouses
Relatives
Spouse Members of HUF Parents
Individual 3
Siblings
Firm
Key Management Personnel + Relative
Private company
2 Management level
Public company
Partner
Director or member (excludes relatives)
Director & owner >2% share capital
Several /Joint Direct / Indirect Influence
Director / Manager + Relatives
Restricted to company and its holding company only
Body corporate Board, MD, Manager accustomed to act on directions of director or manager (excl relatives)
Person influencing in non-professional capacity
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Emphasis on ‘Investor Protection'
Transactions at ‘arms length’ in the ‘ordinary course of business’ – Audit committee approval will suffice
Transactions that do not meet the ‘arms length’ and ‘ordinary course’ criteria – Board and shareholder approval required. Super-majority of minority shareholders to vote in favour
Vigil mechanism, Whistleblower policy mandatorily required
Restriction on loans and guarantees to certain companies over which the Directors have influence: Exemption for wholly owned subsidiaries ‘Ordinary course of business’ loans
Class action suits against the company, Directors and auditors
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‘Ease in restructuring’ of companies
Rationalising multi-layered structures
Changes in the merger approval process
Cross-border mergers, fast-track mergers, and capital reduction
Buyback of shares-made more stringent
Largely unoperationalised pending NCLT formation
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Suggested approach
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Suggested structured approach
Understand ‘As Is’ processes
Analyse impact of the new Act
Develop project plan
Present findings to management
• Do a section-by-section evaluation of the new law.
• Analyse and provide risk weightage to impacts and develop a detailed project plan
• Based on areas impacted, put in place systems and processes to address impacts
• Conduct interviews with process owners and understand current compliances and policies
• Prepare a report of high-level impacts to be discussed with management
Implement changes
Important to involve all constituents of the organisation through the project
Review implementa-tion
Phase 1 - Diagnostic assessment Phase 2 – Implementation and review
• Review of the areas that are implemented and track progress of other areas
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Detailed scope and approach
Phase I – Diagnostic review Phase II – Implementation and review
• Carry out diagnostic study in Phase I with an aim to identify gaps and highlight the priority of impacted areas. Based on our experience, the following activities could be covered in Phase I − Form a multi-disciplinary team from various parts of the
organisation
− Map the current compliance and policies with the requirements of the Companies Act 2013
− Identify key areas of impact and classify them based on the criticality to the company
• Assign tasks of implementation to identified teams and establish a process to track the implementation progress, specially for areas identified as critical such internal controls, related party transactions, Corporate Social Responsibility, Corporate Governance
• Review progress of implementation at regular intervals and make necessary changes to the framework / documentation / processes, as required
Phase I Phase II
Focused to conduct comprehensive analysis and development of roadmap to prioritise impact areas.
Focused on implementation and tracking of progress for impacted areas which are critical from compliance and reporting perspective. This will be based on the outcome of Phase I.
Based on our experience, Companies Act compliance exercise should be split into two-phases, as mentioned below:
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Why KPMG?
Our products and services customised for Companies Act
Impact assessment tool on Companies Act 2013 have been developed to conduct
comprehensive impact study
Extensive experience in Ethics Helpline services in India and experience of more
than 30 ongoing engagements
We have developed a compliance tracking tool that will help companies to put in place a framework for compliance with more than
700 laws
We have active advisory team on Corporate Social Responsibility comprising senior professional from the Development Sector, Sustainability and Tax practice of
KPMG
End to end solutions for whistleblower initiatives which includes managing operations,
awareness campaigns, development of policies, reporting frameworks to handle complaints and benchmarking in-house
whistleblower mechanism
Specialised team focusing on preparing financial statements under various GAAP
as well as dedicated team that help companies structure their finance function
We have worked with several large companies in setting their internal control
over financial reporting framework for reporting under Sarbanes Oxley Act
We can assist companies in developing a framework for evaluation of board of
directors and various committees
We have worked with several companies in establishing a code of conduct for the
board of directors and other committees
Contact information:
Sai Venkateshwaran Head, Accounting Advisory Services, KPMG in India M: +91 9820345741 E: [email protected]
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
The KPMG name, logo and ‘cutting through complexity’ are registered trademarks or trademarks of KPMG International Cooperative (KPMG International).
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