kpmg - companies act 2013

Companies Act 2013

May 2014

A significant shift in the governance framework

1 © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Roll out roadmap

Companies Act receives Presidential assent

Draft Rules released for public comments

Vast majority of Act effective 1 April 2014

• Draft Rules released in phases in 2013 for public comments

• 98 Sections made effective 12 September 2013

• 184 sections made effective 1 April 2014

• Final Rules released for most chapters. Several changes from the draft rules.

• Consent of both Houses received- Lok Sabha (December 2012)

• Rajya Sabha (Aug 2013)

• Presidential Assent (Aug 2013)

• Key sections and rules still to be notified include those related to NCLT, NFRA, Registered Valuers, IEPF/ Unpaid dividend

Final Rules released

NCLT, NFRA related provisions to be notified


Companies Act 2013: Key focus points for management

01

04

02

03

06

05

Change in

Reporting Framework

Higher

Auditor Accountability

of Board, Independent Directors and Audit Committee

Increased Responsibility

of companies

Ease in Restructuring

Emphasis on

Investor Protection

Push on

Inclusive Agenda (CSR)

Focus on six critical

themes

Sweeping changes that raise the bar on the governance framework

Aligns with international best practices

Brings in corporate democracy


Change in ‘Reporting Framework'

Preparation of consolidated financial statements mandatory even for unlisted companies

Change in definition of subsidiaries & associates – total share capital v. voting equity share capital; Total share capital also includes convertible preference capital

Directors report for listed and certain unlisted public companies to include discussion on adequacy and effectiveness of “Internal Financial controls”. Covers all operational areas as well.

Greater flexibility to depreciate assets over their ‘useful lives’ instead of standard minimum rates


Higher ‘Auditor Accountability'

Mandatory auditor firm rotation – ten years ; applicable retrospectively. Appointment for five years

Prohibition on certain non-audit services – similar to Sarbanes-Oxley

Auditor to report on internal financial controls, and financial transactions and other matters that that have a adverse effect on functioning of the Company

Reporting of all frauds to the Central Government within 60 days; including immaterial frauds.


Change in requirements for Board composition

12 15 >15

Limits on number of Directors

New Act Special Resolution

Independent Directors also required for certain unlisted companies

Independent Directors liable to mandatory rotation- prospective application

Transition period of one year for reconstitution of the Board of Directors

Mandatory appointment ≥ 1 Director

Resident in India for 182 days

Minimum of 2 Independent

Directors

Audit Committee

Nomination and remuneration

committee Women Director

Listed *

Unlisted (All) - - - -

Public Companies with Share Capital ≥ INR 10cr (INR 100cr for Women Directors) -

Public Companies with Turnover ≥ INR 100cr (INR 300cr for Women Directors) -

Public Companies with Loan/Debentures/ Deposits ≥ INR 50cr - -

*1/3rd Directors to be independent in case of listed companies


‘Increased Responsibility' of Board, Independent Directors and Audit Committee

• No pecuniary relationships and stock options • Nominees of financial investors are not independent • Compliance with Code of Professional Conduct • Mandatory rotation of independent directors – max 10 years

Independent Directors

• Appointment and monitoring of auditors • Approval of all related party transactions • Monitoring of inter-company loans and investments • Evaluation of internal controls over financial transactions

• Compliance with all laws and regulations • Balance interest of all stake holders and not mere shareholders • Monitor framework for enterprise risk management • Responsible for internal controls over financial transactions

Penalties for non-compliance

Audit Committee Responsibilities

Board Responsibilities


Push on ‘Inclusive Agenda' (CSR)

CSR contribution - 2 percent of average net profit before tax for last three financial years

Board to provide oversight on CSR activities and to appoint a three-member CSR Committee

Spend or disclose approach – for now

Group-wide CSR and allocation approach

No clarity on tax deductibility of CSR contribution


Steps for constituting CSR Committee

CSR compliances to be completed at earliest to ensure any spend from 1 April 2014 qualifies as eligible CSR spend

1 2 3 4 6 5

Board to constitute CSR committee

CSR committee to formulate CSR policy

CSR committee to develop internal operating structure and transparent

monitoring mechanism

CSR Committee to form Core CSR team

CSR committee to recommend amount of CSR spend for FY 2014-15

Board to approve CSR Policy, including CSR spend and

monitoring mechanism

1

2

3

4

6

5


Universe of related parties

SEBI definition enhanced to cover additional parties (for eg. Person/entity having control, joint control or significant influence on the company and fellow joint ventures / associates, etc)

!

Subsidiary

Holding

Fellow subsidiary

Associate, Joint venture company

1 Company level

Company

Children and Spouses

Relatives

Spouse Members of HUF Parents

Individual 3

Siblings

Firm

Key Management Personnel + Relative

Private company

2 Management level

Public company

Partner

Director or member (excludes relatives)

Director & owner >2% share capital

Several /Joint Direct / Indirect Influence

Director / Manager + Relatives

Restricted to company and its holding company only

Body corporate Board, MD, Manager accustomed to act on directions of director or manager (excl relatives)

Person influencing in non-professional capacity


Emphasis on ‘Investor Protection'

Transactions at ‘arms length’ in the ‘ordinary course of business’ – Audit committee approval will suffice

Transactions that do not meet the ‘arms length’ and ‘ordinary course’ criteria – Board and shareholder approval required. Super-majority of minority shareholders to vote in favour

Vigil mechanism, Whistleblower policy mandatorily required

Restriction on loans and guarantees to certain companies over which the Directors have influence: Exemption for wholly owned subsidiaries ‘Ordinary course of business’ loans

Class action suits against the company, Directors and auditors


‘Ease in restructuring’ of companies

Rationalising multi-layered structures

Changes in the merger approval process

Cross-border mergers, fast-track mergers, and capital reduction

Buyback of shares-made more stringent

Largely unoperationalised pending NCLT formation


Suggested approach


Suggested structured approach

Understand ‘As Is’ processes

Analyse impact of the new Act

Develop project plan

Present findings to management

• Do a section-by-section evaluation of the new law.

• Analyse and provide risk weightage to impacts and develop a detailed project plan

• Based on areas impacted, put in place systems and processes to address impacts

• Conduct interviews with process owners and understand current compliances and policies

• Prepare a report of high-level impacts to be discussed with management

Implement changes

Important to involve all constituents of the organisation through the project

Review implementa-tion

Phase 1 - Diagnostic assessment Phase 2 – Implementation and review

• Review of the areas that are implemented and track progress of other areas


Detailed scope and approach

Phase I – Diagnostic review Phase II – Implementation and review

• Carry out diagnostic study in Phase I with an aim to identify gaps and highlight the priority of impacted areas. Based on our experience, the following activities could be covered in Phase I − Form a multi-disciplinary team from various parts of the

organisation

− Map the current compliance and policies with the requirements of the Companies Act 2013

− Identify key areas of impact and classify them based on the criticality to the company

• Assign tasks of implementation to identified teams and establish a process to track the implementation progress, specially for areas identified as critical such internal controls, related party transactions, Corporate Social Responsibility, Corporate Governance

• Review progress of implementation at regular intervals and make necessary changes to the framework / documentation / processes, as required

Phase I Phase II

Focused to conduct comprehensive analysis and development of roadmap to prioritise impact areas.

Focused on implementation and tracking of progress for impacted areas which are critical from compliance and reporting perspective. This will be based on the outcome of Phase I.

Based on our experience, Companies Act compliance exercise should be split into two-phases, as mentioned below:


Why KPMG?

Our products and services customised for Companies Act

Impact assessment tool on Companies Act 2013 have been developed to conduct

comprehensive impact study

Extensive experience in Ethics Helpline services in India and experience of more

than 30 ongoing engagements

We have developed a compliance tracking tool that will help companies to put in place a framework for compliance with more than

700 laws

We have active advisory team on Corporate Social Responsibility comprising senior professional from the Development Sector, Sustainability and Tax practice of

KPMG

End to end solutions for whistleblower initiatives which includes managing operations,

awareness campaigns, development of policies, reporting frameworks to handle complaints and benchmarking in-house

whistleblower mechanism

Specialised team focusing on preparing financial statements under various GAAP

as well as dedicated team that help companies structure their finance function

We have worked with several large companies in setting their internal control

over financial reporting framework for reporting under Sarbanes Oxley Act

We can assist companies in developing a framework for evaluation of board of

directors and various committees

We have worked with several companies in establishing a code of conduct for the

board of directors and other committees

Contact information:

Sai Venkateshwaran Head, Accounting Advisory Services, KPMG in India M: +91 9820345741 E: [email protected]

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The KPMG name, logo and ‘cutting through complexity’ are registered trademarks or trademarks of KPMG International Cooperative (KPMG International).

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