The Companies Bill 2012/ 2013 got its assent in the Lok Sabha on December 18, 2012 and the Rajya Sabha on August 8, 2013. Later on august 29, 2013 it got consent from the President of India and has become the much awaited Companies Act, 2013 (2013 Act).
Companies act, 2013 made an attempt to reduce the content of the substantive portion of the related law in comparison to the Companies Act, 1956 (1956 Act).
The Companies Act, 2013, envisages significant changes in the provisions related to governance, e-management, compliance and enforcement, disclosure norms, auditors and mergers. It also includes several new concepts like one Person Company, small companies, dormant company, class action suits, registered valuers and corporate social responsibility etc.
The changes in the 2013 Act have great far reaching implications and are all set to significantly change the manner in which corporates operate in India.
This paper will emphasize that how the internal control will improve after the enactment of the new Companies Act. It will provide more power in the hands of the shareholder and the government. It is an attempt to focus on the Tightening of the Internal Controls thru the measures below:
Implementation of Internal control via Self-Regulation
Widening the definition of Key Managerial Personnel Sec. 2 (51)
The definition of the KMP has been widened with the Companies Act, 2013. “KMP” in relation to a company means:–
KMP’s are largely responsible for majorcorporate actions and consequently liable topenalty or punishment in the event of defaultas an “officer who is in default”.
Inclusion of the definition of Independent Directors (IDs) Sec. 149
Every listed public company shall have at least 1/3rd of the total number of directors as IDs.
The Companies Act,2013 provides for class‐action lawsuits, which can allow a large number of people with common interest in a matter to sue or be sued as a group. Sections 245 and 246 of the Act contain these provisions. Under these, class‐action suits may be filed by investors if they are of the opinion that the affairs of the company are being conducted in a manner prejudicial to the interest of the company, its shareholders or depositors.
Appointment of Small shareholder’s Director
Listed Companies may have one director elected by small shareholders i.e. shareholders holding shares of nominal value of not more than Rs. 20,000/-.
Establishment of new mechanism/organizations to control over fraud
Whistle Blowing Sec. 177(9)
Every listed/ prescribed class of companies shall establish a vigil mechanism for directors and employees to report genuine concerns.
The vigil mechanism shall provide for adequate safeguards against victimization of persons who use such mechanism and for direct access to the chairperson of the Audit Committee inappropriate/exceptional cases.
Details of such mechanism shall be disclosed on company’s website and Board’s Report. It is an important provision to upgrade Indian legislative framework to global best governance practice and will make the corporate managements’ more accountable.
Establishment of the Serious Fraud Investigation Office (‘SFIO’)
The Central Government (CG) shall establish an office to be called SFIO to investigate frauds relating to a Company.
The CG refers matter to SFIO on receipt of:-
The SFIO shall be headed by a Director and consist of experts in the fields of corporate affairs, capital market, law, taxation, etc.
The Company Secretaries have an opportunity of occupying prestigious position as experts in SFIO and play vital role in important investigations.
Constitution of National Financial Reporting Authority (‘NFIO’)
The Central Government (CG) may constitute a NFRAto provide for matters relating to accounting/auditing standards which shall:-
a) Make recommendations to CG on the formulation ofaccounting and auditing policies and standards for cos. / Auditors.
b) Monitor and enforce compliance with accounting and auditing standards.
c) Oversee the quality of service of professionals.
d) Perform such others functions as may be prescribed.
NFRA shall have power to investigate into matters of professional or other misconduct committed by any member or firm of CAs.
Where professional or other misconduct is proved, NFRA shall have the power to make order for imposing penalty of not less than ₹10 lacs but which may extend to 10 times of the fees received in case of firms.
Higher transparency and more disclosures
Directors’ Responsibility Statement:
Internal financial controls have been laid:
If a Company contravenes the provisions –
E-Governance has been proposed for various company processes like maintenance and inspection of documents in electronic form, option of keeping of books of accounts in electronic form, financial statements to be placed on company’s website, holding of board meetings through video conferencing/other electronic mode, voting through electronic means etc.
Online services will be able to reduce the need of hard copy and have a positive impact in the direction of saving environment.
It will substantially improve the standards of disclosure and transparency, involve more stakeholders in the company processes and provide real time information and service to the shareholders and other stakeholders.
Audit & Auditors
Audit Committee / Board to consider Auditor on the basis of qualification and experience.
The auditor cannot provide the following services to the Company:
Auditor not to render certain services accounting and book keeping services;
Auditors Liability has been increased:
Secretarial Audit (SA) Sec. 204
Every listed and every public company having a paid-up share capital of ₹ 100 Cr or more shall annex with its Board’s Report, a SA Report given by a practiced company secretary (‘PCS’)
Secretarial Audit Sec. 143(12),(15) & 204
If a PCS conducting SA, has reason to believe that an offence involving fraud is being or has been committed against the company by its officers/employees, he shall immediately report the matter to the Central Government.
If a PCS does not comply with the above provision, he shall be punishable with fine of minimum ₹1 lac and may extend to ₹25 lac.
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