Accounting Standards in India

What are the challenges companies face while ensuring that necessary regulatory compliances are completed?

Managing compliances in today’s highly complex economic and regulatory environment is no easy task. Companies face many challenges, including:

• Rapid globalization;
• Ongoing developments in tax and other allied laws;
• Changes in accounting standards;
• Increased demand from regulatory authorities for greater transparency and cooperation;
• Acute shortage of qualified professionals;
• Obtaining accurate data in an efficient manner;
• Global trends towards centralization of compliances; and
• An ever-evolving technology ecosystem.

Can you list a few common laws and legislations that are applicable to companies in India?

The following laws are applicable to companies in India.

• The Companies Act 2013 and Rules thereof.
• Labor and Employment Laws
• Environmental Laws
• Tax and Stamp Duty

Can you explain the scope of compliances under Companies Act, 2013?

The scope of compliances under the Companies Act covers but is not limited to the following:

The Companies Act, amongst other provisions, lays down detailed guidelines regarding qualification and appointment/ removal of directors, retirement of directors, their remuneration, passing board resolutions, arranging board and shareholders meetings, oversight on related party transactions, timely maintenance of books of accounts and the preparation and presentation of annual accounts (matters that must be included in the annual reports of the companies), filing of forms with the Registrar of Companies periodically, etc.

Subsequent to the completion of all legal formalities required for incorporation, and the issuance of the certificate of incorporation, the company is recognized as a separate legal entity in the eyes of the law, distinct from its members who have incorporated the entity.

Whether it is a private or a public company, various things are supposed to be dealt with post incorporation. There are matters that must be undertaken in the first board meeting immediately post incorporation, and then there are tasks that are required to be carried out on a periodical basis.

A company conducts its business through its Directors who are accountable in the event of failure to comply with the above compliances.

Soon after a company is incorporated, but no later than 30 days, an appointed director is under  obligation to call the First Board Meeting by issue of notice (together with the agenda) of the meeting at least seven days prior to the meeting or at any such shorter notice. Several important matters need to be resolved in this first board meeting including Statutory Auditor appointment.

A company must also place its sign board outside the registered office address, with its name, registered office address, company identification number, e-mail ID, and phone number (mandatory fields as per the current mandate), Website address and fax number, if any, stated on it. These details must also be printed on all business letters, billheads, and all other official publications.

As mentioned under section 173(1) of the companies act of 2013, a company must convene at least four board meetings, in addition to the first board meeting, with a gap of no more than 120 days between two consecutive board meetings in a calendar year. Detailed minutes of the meetings should be prepared, recording the important actions taken by the Board of Directors and the same must be maintained as a permanent document by the company. Within 30 days from the meeting, the minutes must be prepared, duly signed, and maintained as per the provisions of the Indian Companies Act and Secretarial Standards of ICSI. 

Similarly, on allotment of shares, the company must issue share certificates to those who have been allotted the shares and must maintain both a members register and a shares allotment register.

A company is required to file its financial statements, along with the auditor’s report and annual return, with the Registrar of Companies within the prescribed time limits after the close of the financial year, in accordance with the Companies Act, 2013. 

Additionally, there are several instances wherein a company has to intimate the concerned Registrar of Companies (Department), on a timely basis, about the appointments/ removal of directors and certain other changes in a prescribed manner.

The above-mentioned compliance requirements under the Companies Act is not an exhaustive list.  Companies may also be required to ensure several other additional compliances such as registration under the Goods and Service Tax, Professional Tax, Shops and Establishment Act and other labour laws. It is important to understand that the responsibility of complying with the central and state by-laws is indeed, a continuous process.

What is the scope of compliances under Labor and Employment Legislation?

The scope of compliances under Labor and Employment Legislation covers, but is not limited to, the following:

Businesses with production lines, factories, must consider and comply with a host of statutes such as:

• The Employees' State Insurance Act, 1948
• The Maternity Benefits Act, 1961
• The Industrial Disputes Act, 1948
• The Contract Labor (Regulation and Abolition) Act, 1970
• The Trade Union Act, 1926
• The Equal Remuneration Act, 1976
• The Payment of Gratuity Act, 1972
• The Workmen’s Compensation Act, 1923
• The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, etc.

The above statutes govern pressing issues such as duration of work, conditions of employed workers, minimum wages and remuneration, rights and obligations of the trade unions, insurance cover for employees, maternity benefits, employment retrenchment, payment of gratuity/provident fund, payment of bonus, and regulations of the contract labor, amongst other issues concerning employees.

However, many provisions of the existing labor laws trace their origins to the time of the British Colonial era, and with changing times, many of them have either became ineffective or do not have any contemporary relevance. Rather than protecting the interests of workers, these provisions ensured unwarranted difficulties for them.

The web of legislations back in the British colonial era were such that workers had to fill four different forms to claim a single benefit. Therefore, the present Government has repealed the outdated Labor Laws and has codified 29 of such labor Laws into four new Labor Codes.

For ensuring workers’ right to minimum wages, the Central Government has amalgamated 4 laws in the Wage Code, 9 laws in the Social Security Code, 13 laws in the Occupational Safety, Health and Working Conditions Code, 2020 and 3 laws in the Industrial Relations Code. By getting these Bills passed in the parliament, the Central Government has made significant headway in changing the standard of living of workers.

These labor reforms will enhance ease of doing business in the country. Employment creation and output of workers will also improve. The benefits of these four Labor Codes will be available to workers in both the organized and unorganized sector. Now, the Employees’ Provident Fund (EPF), Employees’ Pension Scheme (EPS) and coverage of all types of medical benefits under Employees’ Insurance will be available to all workers.

Companies must put consistent effort to ensure that proper compliance of these various statutes vis-à-vis the working condition for its employees are in order, and that the HR policies are formulated in accordance with the guidelines mentioned in the central and state by laws.

What is the scope of compliances under Environmental Laws?

Environmental and pollution control matters fall under the ambit of various statutes such as:

• The Environment (Protection) Act, 1986;
• The Water (Prevention and Control of Pollution) Act, 1974;
• The Air (Prevention and Control of Pollution) Act, 1981;
• Hazardous Wastes (Management, Handling and Trans boundary Movement) Rules, 2008;
• The Manufacture, Storage, and Import of Hazardous Chemicals Rules, 1989;
• The Indian Forest Act, 1927;
• The Forest (Conservation) Act, 1980;
• The National Environment Tribunal Act, 1995; and
• The Public Liability Insurance Act, 1991, etc.

Companies are required to comply with the provisions of these environmental laws to the extent specifically applicable to their business operations. The consequences of non-compliance with the provisions of any such statutes and rules are provided in the respective statutes.

What is the scope of compliances under Tax and Stamp Duty related laws?

The scope of compliances under the Tax and Stamp Duty related laws covers, but is not limited, to the following:

There is a federal tax structure in India and taxes are levied by both the Central and State Governments, along with other local regulatory authorities. These taxes are broadly classified as:

• Direct Tax (which includes income tax, dividend distribution tax, minimum alternate tax (MAT), share buy-back tax),
• Indirect Tax (which includes GST, Excise Duty, Customs Duty, Entry Tax, R&D Cess), and
• Charges on transactions (including stamp duty, securities transaction tax, and commodity transaction tax).

All Indian companies are subjected to payment of tax and stamp duty for their business transactions undertaken during any financial year and on the income generated from such operations. Delayed/ non-payment and inadequate payment of tax and stamp duty may attract moderate to heavy penalties, cause enforceability issue of the documents and, in some cases, impounding of the documents by the authority.

Apart from the ones mentioned above, are there any other enactments that are applicable for companies in India?

Whilst the above explained laws and enactments lays down the general laws governing a company in India, local state laws also play a very important role. Therefore, the need for companies to be mindful of adhering to local state laws in which they are registered and conducting their business must not be overlooked.

What are the consequences of non-compliance of the provisions of Acts and Enactments as mentioned above?

The policy and procedures regulating, and governing Indian corporations have been progressively liberalized and simplified over the last few years. However, there are several compliance mandates that must be adhered to, failure to do so could trigger various compliance risks such as disqualification of directors, attracting of penal provisions and in some cases even imprisonment of the directors and key management personnel.

What is compliance risk and how can companies manage it?

Compliance risk refers to an exposure to legal penalties, financial forfeiture, and the material loss an organization faces when it fails to act in accordance with industry laws and regulations, internal policies, or prescribed best practices. Compliance risk can also be referred to as integrity risk. Several compliance regulations are enacted to ensure that companies operate ethically and in a fair manner.

Compliance risk management constitutes the widely known collective governance, risk management, and compliance (GRC) discipline. The three fields have been known to overlap frequently in the areas of internal auditing, incident management, operational risk assessment, and compliance with regulations such as the Sarbanes-Oxley Act of United States. Penalties for compliance violations include payments for damages, fines, and voided contracts, which can lead to a loss of reputation and business opportunities for organisations, as well as devaluation of its franchises.