Promoting a Responsible Business Environment

The Indian legal and regulatory landscape has continued to change significantly, more so in the recent past. The latest changes reflect a dynamic attempt to achieve two seemingly mutually exclusive objectives – ease of doing business, and better regulation & legislation. Considering the size and diversity of our nation as well as the size and breadth of Indian businesses, this is no mean task.

An analysis of the recent changes indicate a clear thought – remove the shackles but strengthen the laws and regulations to promote a more responsible business environment.

The capital markets, the financial markets, the insurance and other sectors in India have been under independent regulation for some-time now. The laws and regulations for these sectors have evolved and adapted to the needs of the economy and industry. In line with this and the provisions of the companies act, 2013 (CoAct), the National Financial Reporting authority (NFRA) has been constituted. The challenge, however, is, to achieve a harmonious, business enabling regulation and oversight by the NFRA – for example, how to distribute the responsibilities and duties among: (a) the NFRA; (b) the Securities and Exchange Board of India (SEBI); and (c) and the Institute of Chartered Accountants of India (ICAI).

With NFRA being an independent regulator, potential concerns expressed by the markets on self-regulation should get addressed. Merely having an independent regulator itself cannot help the industry and the nation. A combined effect of the revised laws and regulation should help in furthering the twin objectives referred to above.

The following are the key amendments to the companies act, 2013 in the recent past:

  • A welcome change has been the easing of the approval process for paying managerial remuneration. For many organizations, attracting top talent is not easy – more so when attractive remuneration may be conditioned on receiving Government approval. Companies can now pay managerial remuneration beyond the applicable thresholds with shareholder approval.
  • Giving loans, providing guarantee or security in relation to loans to any director of the company or its holding company or the director’s relative or a related firm, are now prohibited. Loans to a newly identified category of ‘interested persons’ is possible, with shareholder approval.
  • The universe of ‘related party’ expanded significantly by including investing company and venturer, thus covering transactions with such related parties.
  • Disclosure requirements relating to ‘significant beneficial ownership’ should lead to transparency of shareholding structures and help the Government identify ‘benami’ transactions and prevent money-laundering activities.
  • The recent ordinance amending the CoAct makes it necessary for directors of a company to file a declaration confirming receipt of subscription money before the company borrows money. This should give better comfort to lenders.
  • Mandatory verification procedures for directors seek to eliminate shell companies and avoid the issue of directors holding multiple Director identification Numbers.
  • Enhancement of penalties and punishment, with the obvious intent of deterring wrongful behaviour.
  • Before the recent amendments, many items of non-compliance attracted criminal prosecution under the CoAct. Criminal jurisprudence requires ‘mens rea’ (i.e. guilty mind) for someone to be considered guilty of having committed an offence. But when it comes to managing corporate entities, it is not hard to ascribe ‘mens rea’ to even honest judgement calls. The penalties and prosecution under the CoAct (before the recent amendment) meant that those in charge of the management as well as other relevant Key Managerial personnel (KMP), could be subject to prosecution even where the infraction may be due to a good faith interpretation of law to their individual circumstances. The recent changes to the CoAct decriminalizing several of the infractions, herald a welcome move. These should pave for a more vibrant and a less shackled corporate sector. This should also have a corollary impact of reducing the burden on the Indian courts.

In the light of these changes, companies must strengthen their governance culture, and bring more transparency in the conduct of their businesses. We may thus expect to see better corporate governance.

The recent regulatory and legal changes are expected to not just reduce the burden of the Indian courts, but also the burden of the National company law tribunal (NCLT).

The Reserve Bank of India (RBI) has recently eased the reporting processes for foreign investments into India, by implementing the Foreign investment Reporting and Management System. Under this system, a Single Master Form needs to be filed in place of, currently 5 forms. The system is expected to be extended to 4 more forms.

To deal with those who after having committed an economic offence have fled the country, a new law has been introduced, namely, Fugitive Economic offenders act, 2018. This law provides for attachment of properties of those who have fled the country after having committed an economic offence.

The SEBI continues to review the regulations for the capital markets. SEBI has now mandated that listed companies appointing statutory auditors which are part of a network of firms, must disclose the total fees paid to such statutory auditors and all entities in the in the network firm/network entity of which the statutory auditor is a part.

The SEBI has in a consulting paper published in July 2018 sought views on, among other things, its proposal to categorize chartered accountants as fiduciaries in the securities market (this would enable the SEBI to take direct action against chartered accountants of listed entities). The ICAI has objected to the proposal. Treating chartered accountants as ‘fiduciaries’ perhaps unintentionally, puts them in a conflict situation. ‘Fiduciary duty’ towards the company would require them to treat the interests of the company as paramount, thereby conflicting with the performance of their professional responsibility towards shareholders and other stakeholders, considering that there may be times where an auditor must take actions (or perform duties required under the law) which may have an adverse impact on the company.

Bribery and corruption have a devastating effect on any economy.  Bribery and corruption typically impact the weaker sections of the society and result in a skewed distribution of economic wealth, resources and opportunities. a key change in the recent amendment to the prevention of corruption act, 1988 makes giving bribes a direct offence. This makes it imperative for organizations to review their policies such as anti-bribery and corruption policy, gifts and entertainment policy, etc. While the intent of the legislators in making a tectonic shift in the mindset of people is well-appreciated, the move needs to be backed up by impartial and consistent prosecution of offenders.

These and several other changes seek to simplify the law, eliminate redundancies, provide clarity for provisions which were considered ambiguous, address specific concerns of stakeholders and rationalize penal provisions. The changes in the legal and regulatory landscape lay emphasis on the Government’s philosophy of ‘less government and more governance’. The outlook of the adjudicating authorities too, seem to reflect a more business enabling approach (e.g. a recent NCLT ruling permitting the amalgamation of an LLP with a private limited company). The success of any law or regulation depends not just on the legislators and regulators. It is up to all stakeholders to play by the rules of the game and continue to help to build a strong and vibrant economy and nation where everyone plays fair and by the rules.

 

Written by
Mr. P R Ramesh
Chairman, CII National Committee on Financial Reporting and Chairman, Deloitte Haskins & Sells LLP

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