Companies Bill: Devil could be in the fine print

Industry experts worry duplication and cumbersome rules might defeat the objective of simplifying things

When Congress General Secretary Rahul Gandhi says India is a “complex” place to do business, he is right. Even as the Companies Bill, which seeks to simplify doing business in India and make financial reporting more transparent, has been passed by Parliament, industry is worried.

While the Bill is well-meaning and seeks to bring sweeping changes to how companies do business, the Ministry of Corporate Affairs has left a lot unsaid. The working rules, which would throw more light on the operative provisions, would be prescribed later.

In its new avatar, the Companies Bill now has only 470 sections, instead of 700 in the Companies Act, 1956. However, a lot of the working rules have been left outside the Bill. If the rules, along with the existing sections, are more than the 700 sections in the Companies Act, 1956, and the rules seek to micro-manage, the purpose of simplification would be defeated.

Harinderjit Singh, partner at Price Waterhouse, says: “An attempt has been made to reduce the content of the substantive portion of the related law in the Bill, as compared to the Companies Act, 1956. In the process, a lot of the aforesaid content has been left ‘to be prescribed’ in the Rules (340+) which are yet to be seen. It is pertinent to note that for the complete understanding of the implication of various clauses of the Bill, the related rules would need to be read.”

While the creation of a super regulator for the auditors and financial standards is a step in the right direction, experts are worried about duplication of rules.

According to an expert, if the financial accounting standards already specify what the norms on depreciation are, it would lead to complication and duplication if the Companies Bill comes out with rules on depreciation.

With the creation of the National Financial Reporting Standard Authority, the Accounting Standards Board is subsumed into it. Similarly, the definition of a subsidiary or associate would be specified by the Ministry of Corporate Affairs.

The Companies Bill also mandates companies to have a uniform financial reporting year. All these are issues that should have been left to companies, experts said.

Questions remain on why the ministry wants to define a financial year and draft norms on depreciation.

Vishesh C Chandiok, national managing partner at Grant Thornton India LLP, says, “Obviously, the intent is towards simplification, which is critical for India to become more competitive on the ease of doing business against indices. Whether this objective is finally delivered will depend on two things — the rules that supplement the Act and what they look like, and the change in attitude on enforcement.”

The new Companies Act will also increase compliance for companies.

For instance, as far as following the mandated norms of corporate social responsibility (CSR) is concerned, a company that doesn’t follow the rules would have to explain why.

Industry experts said this should have been recommendatory, not mandatory. India would be the only place to have compulsory spending on CSR.

David Jones, partner and practice leader, Walker Chandiok & Co, says, “The Act will also mean a transformation of the audit profession in the country, with thousands of listed companies needing to change their audit relationships. I certainly hope auditor rotation doesn’t become a sham and this is where audit committees will have a critical role to play to ensure due opportunity is been provided to multiple service providers to pitch for the work.”