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India’s new companies law of 2013, most provisions of which take effect from 1 April, has thrown up more issues than solutions for corporations and professionals. The spate of circulars and removal of difficulties orders which have been issued after notification of the sections by itself indicate the need for clarity in the new requirements. One of the drawbacks of the manner in which the law has been implemented is the lack of time given between issuance of the final rules and the effective date. The relevance of rules with respect to this law, which has delegated a substantive portion of it to the rules, has been one of the most discussed topics.

Requirements regarding directors are an issue that is among the top-most concerns of companies. The threshold for appointing a woman director and independent directors, in case of unlisted public companies, is considerably low and many companies are finding this a challenging compliance requirement, given the practical difficulty of finding a suitable pool of candidates. The role of a director requires a diverse range of skills, experience and knowledge of the particular business being an absolute necessity.

Similarly, in defining independent directors, the law prohibits pecuniary relationship between such a director and the company, its holding, subsidiary or associate company, among others. It is unclear what the term pecuniary stands for and if remuneration received from a subsidiary would jeopardize the independence vis-à-vis the holding company. This is a serious concern for larger groups where it is quite common to have common independent directors among group firms. The recent revision to the listing agreement by stock market regulator Securities and Exchange Board of India, in fact, mandates an independent director of the holding company to be present on the board of a material Indian subsidiary company. Similarly, the thresholds for constituting various committees such as audit, nomination and remuneration committees for unlisted public companies are again quite low and need a review.

While the law and rules have provided transitional provisions in case of certain provisions, they have not been consistent. For example, appointments of key managerial personnel are effective 1 April, which do not take into cognizance of the fact that companies that do not have such positions will need adequate time to comply with this requirement. Similarly, there is no transition period for applicability of the new reporting requirements by the auditors and these are expected to be applicable to reporting periods ending 31 March 2015. It is relevant to note that professional guidance relating to these requirements is yet to be issued by the Institute of Chartered Accountants of India, and this is likely to result in lack of adequate time for creating awareness and understanding.

Another aspect that requires a relook is with respect to the requirements of the rules extending beyond the requirements of the law. For example, the mandatory spend on corporate social responsibility (CSR) is with respect to Indian companies. However, the rules have expanded the scope to include foreign companies as well. Such lack of alignment between the law and rules makes its implementation a lot more difficult and results in ambiguity about the validity of the requirement.

Any new law is likely to result in additional cost of compliance. But this additional cost is not expected to overburden the corporate world beyond a reasonable limit. Requirements regarding deposit insurance, mandatory appointment of key managerial personnel, mandatory rotation of auditors for private and smaller unlisted public companies, mandating consolidated financial statements for private companies are just a few instances of additional, and in most cases significantly higher, costs to be incurred by companies to ensure compliance. The need is to rationalize the requirements: whether there is really a need for smaller companies in which public is not or is marginally interested to be subjected to these requirements or not.

To conclude, a thorough review is needed of the law and rules beginning with a relook at whether sufficient transition period has been provided where necessary. Though the companies law is here to stay, there is still an opportunity for the government to bring in changes to ease out implementation issues since a wide latitude is available to the ministry in using its powers to change or issue rules, circulars and removal of difficulties orders. It is hoped that these are put to good use and soon, so that companies and professionals are better able to ensure compliance with a new law.

The author is Partner, PricewaterhouseCoopers India.

With inputs from Madhuri Ravi, senior manager, PricewaterhouseCoopers

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