The article is written by Mr. Rishi Agrawal, Co-founder and CEO, Avantis Regtech Pvt Ltd

Organisations in India are facing greater scrutiny than ever. In FY 17-18, 226,000 shell companies were deregistered. In addition, the government barred over 300,000 directors of companies that have defaulted on statutory compliances from serving on boards of other companies to improve corporate governance and compliance. Bank accounts of approximately 210,000 were frozen after they were struck off the ROC. Prime Minister in his Independent day speech noted that over 400 bogus firms were found to be operating from a single address. Section 248 of the Companies Act allows the removal of companies from the register on various grounds, including having been inactive for extended periods.

In addition, the economic environment has been challenging, budgets are tight and any expenditure is keenly scrutinised. It is tempting for companies to dismiss spending on Compliance Management as overheads or non-business expenditure.

However, Avantis has found that such an approach to Compliance Management could be costly and ultimately, dangerous, for any business, its shareholders and its employees. Prosecutions for non-compliance can impact business in a variety of ways, from direct fines, enforcement orders and even prison sentences for directors. Over the past year, enforcement activities around India have seen a marked increase. Effective Compliance management is becoming a necessity for businesses which operates in an increasingly global environment where previously it may have been seen as a luxury.

Here are the key challenges faced by a compliance officer.

♠ In-house availability of expertise

A mid or large sized business in India is typically structured as a group with entities, sub-entities, SPVs, JVs, Factories, Corporate Offices, Warehouses, Regional Offices among others. As a result, they operate in multiple states, cities, Zila Parishads and Gram Panchayats. They need to comply with central, state and local government regulations. The number of licenses, registrations, returns, registers, challans for such an organisation can be mind numbing.

Management of all the applicable compliances need deep functional expertise. Therefore organisations in India lack the depth and the breadth of required expertise to effectively manage all their compliance.

♠ Accurate list of Applicable Acts and Compliances

The number of acts and applicable compliances for an organisation in India range from a few hundred to a few thousand. These compliances span across seven different compliance categories, 1000+ Acts, 58,000+ compliances and 3,000+ possible filings. Compliance officers do not have one list of all applicable compliance for their business. In addition, businesses are highly dynamic and constantly add capacity, markets and equipment. They form new JVs, SPVs and grow inorganically via M&A. All such events affect applicability of compliance for their business.

As a result, the list of acts and compliances is highly dynamic and needs periodic refresh. 

♠ Increasing Penalties

Companies Act, 2013 introduced sweeping reforms in India. The act laid down provisions for criminal proceedings and potential jail term for KMPs (Key Management Personnel) and Directors for non-compliance. In addition, there have been several instances of loss of clients, board reprimand, severe financial penalties, lock down and business closure, frozen bank accounts among others for poor compliance.

Investors, Board, Shareholders, Customers and Employees are holding Companies increasingly accountable for Corporate Governance, Risk Management and Compliance.

♠ Fluid Regulatory Environment

India’s regulatory environment is highly dynamic. There are over 2,000 regulatory websites of Central, State, Regulators and Local Governments which can publish notifications, circulars, gazettes on any given day. These result in over 2,500 regulatory changes in a year to various compliance requirements such as forms, dates, calculations, procedures among others leading to critical changes to compliance obligations of a company.

Unfortunately, there are no proactive and automatic notifications from the government that compliance officer receive to quickly assess the impact of changes and make relevant corrections. 

♠ Manually Intensive Compliance Program

Compliance Officers in India lack the tools to digitise the complexity of their compliance burden. They continue to manage their compliance obligations in a highly manually intensive environment. At Avantis, we call it C&C 1.0 (Control & Comply) which refers to an ad-hoc, people dependent and paper based compliance management environment. They rely on preliminary office productivity tools such as spreadsheets, emails and phone to track their compliance status. There is hardly any reporting capabilities and they end up spending days to identify missed compliances and assess residual risk. when faced with notices and litigation they scramble for copies of historical compliance documents, working files, registers, returns, challans, receipts and acknowledgements. In a large number of instances they are unable to find them in a timely way. It leads to highly stressed and firefighting operating mode on a day to day basis. 

Where do we go from here?

Compliance Offices need the right tools to supervise their compliance programs effectively. It is time they migrate to C&C 2.0 (Control & Comply) which refers to predictable, process-based and digital compliance management.

Digitisation has taken the world by storm. Data is the ‘new Oil’. The power of cloud, mobile and analytics are transforming value chains and business models. They create the underlying plumbing for a smart enterprise. Digital tools help organising, managing, analysing data for greater transparency, accountability and timely decisions.

Digitisation in Compliances helps organisations migrate to a predictable and processes oriented compliance management. It enables a holistic and integrated view of compliance obligations across the enterprise and equips the compliance officers for smarter decision making. Access to data helps remove information asymmetry and tell the real story. A digital compliance program goes a long way in building trust and assurance with Board, Shareholders and Employees.

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