companies act 2013 raising the bar on governance - kpmg

8/10/2019 Companies Act 2013 Raising the Bar on Governance - KPMG

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Companies Act 2013

Raising the bar on Governance

Focus on 6 critical themes

Inclusive CSR AgendaIncreased Reporting FrameworkWider Director and management responsibilityHigher Auditor Accountability

Easier restructuringEmphasis on Investor Protection

The recently enacted Companies Act, 2013 (the New Act) is a landmark piece of

legislation and likely to have far reaching consequences on all companies incorporated in India.The erstwhile Companies Act, 1956 was in existence for well over fifty years and was lately

seeming quite ineffective at handling present day challenges of a growing industry and the

complexities related with the growing stakeholders interests.The New Act promises to substantively raise the bar on governance and in a

comprehensive form purports to deal with some very relevant themes. On the flip side, it appears

to be quite pervasive and thrusts greater responsibility and obligation on the Board of Directors

and Management in Indian companies.The KPMG in India team takes a closer look at the important changes and developments to

help companies assess the impact and develop a clear strategy on compliance and governance.

Theme 1: Increased Reporting Framework

New definition of subsidiary, associate, Joint Venture company [sections 2(6) and 2(87)]

Holding company

1. Owns/controls > 50% total share capital or exercises control of boardsubsidiarycompany

2. Owns/controls at least 20% total share capital or business decisions under an agreement

associate company

Financial year to be uniforma. All companies to follow uniform FYE 31 Marchb. Exemptions (subject to conditions and approval process) if a company is:- A holding/subsidiary of a company incorporated outside India; and- Required to follow a different FYE for consolidation of its accounts outside Indiac. Transitional compliance phase: Two years

Mandatory requirement for Consolidated Financial Statement (CFS) [section 129]

a. In addition to standalone financial statements, every company to prepare CFS if it has a:- Subsidiary; or- Associate; or- Joint Venture company

b. No exemption for intermediate holding companies for preparing CFS

Penalty for violation:

Officer in default:Imprisonment one year;


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Fine between INR 50,000500,000

Revision in Financial Statement [sections 130 and 131]

a. Pursuant to an order made by a court or Tribunal on an application for revision of financial statements madeas under:by the Central Government, Income-Tax, SEBI etc. in the following casesFraudulent financial reporting; or

Mismanaged affairs casting doubt on financial statements; or

by the Directors of a company only in the following cases:Financial statements and Board Report arenon-compliant; and

Voluntary restatement by Directors possible only for the past three years

Changes in Depreciation regulation [section 123(2) and Schedule II]

a. Concept of Useful Life takes prominence over standard mandated rates

b. Justification required where Useful Life Schedule II for prescribed companies. Othercases Useful Life < ScheduleII

c. Applicability of Component Accountingd. Transitional provision: Depreciate carrying value less residual value over balance life. Adjust net worth if useful lifehas been exhaustedMandatory Internal Audit and reporting on Internal Financial Controls [section 138]

a. Assurance on adequacy and effectiveness of Internal Financial Controls (which includes orderly and

efficient conduct of business, and prevention and detection of frauds and errors) to be given: in Directors and Auditorsreport for all listed entities; and

only in Auditors report for all other entities

b. Internal Audit made mandatory for:all listed companies; and

public limited companies with: loans/deposits INR 250 mn ; or

paid up capital INR 100 mn

c. Internal audit to be done only by CAs; or CWAs; or other professionals decided by the Board


1. Company: Fine between INR 50,0002,500,0002. Officer in default: Imprisonment up to three years; fine between INR 50,000500,000

Theme 2: Higher Auditor AccountabilityAuditor Appointment and Rotation

a. Maximum 20 audits permitted per individual Auditor/Partner of a firmb. Instead of reappointment at each AGM, Auditor to be appointed for a block of five years:- Individual Auditor eligible for appointment of single block of five years; and partnership audit firms to be eligible forappointment of additional consecutive block of five years- Auditor to be subject to a five-year cooling period post completion of his previous term- Incoming Auditor cannot be an associate or a network firm in relation to the outgoing Auditor- Transitional compliance phase: Three years- As per draft rules, pre-commencement term to retrospectively apply for computing balance validity of current Auditorstenure prior to rotation

c. Significant restrictions on non-audit services that can be provided by Auditors. All non-audit services to bepre-approved by the Board or Audit Committeed. National Financial Reporting Authority (NFRA) to be the new regulator for Auditors and will have powers torecommend, enforce and monitor compliance of accounting and auditing standards

Auditors Reporting Responsibilitya. Audit report to cover1. Observations, comments on financial transactions and adverse matters2. Qualification or adverse remark on maintenance of accounts3.Adequacy of internal financial control system and effectiveness4. Disclosure of effect of pending litigation on financial position5. Provisions for foreseeable losses on long term/derivative contracts


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6. Delays in depositing money into IEPF

b. Report to Audit Committee or Board on fraud committed against company by officers or employees and escalate toCentral Government if:- happening frequently; or- amount is material at 5 percent of net profits or 2 percent of turnover; or- if dissatisfied with action by audit committee or Board on immaterial frauds

Theme 3 Easier RestructuringRationalizing Multilayered Structuresa. Maximum of only two Investment SPV company levels permitted between investor company and investee companyPenalty for violation:

1. Company: Fine of INR 25,0005,00,000

2. Office in default: Imprisonment upto two years; fine INR 25,0001,00,000

b. Exemption:

- Acquisition of overseas subsidiary with existing multiple layers allowed under foreign law; or

- Multi-layering required under any law in force

Simplifying Procedures for Merger [section 232]a. National Company Law Tribunal (NCLT) to approve schemes of restructuring companies in place of High Courtb. Auditor to certify that accounting treatment specified in the Scheme conforms with Accounting Standard for listed,unlisted and private companies

c. Consent of majority Members/ Creditors >75 percent (in value)d. Merger of listed company into unlisted company allowed subject to:

- Exit opportunity being provided to public shareholders; and

- Valuation is done as per SEBI guidelines

Minority buy-out [section 236]a. Acquirer holding 90 percent share capital (in value) may notify intent to buy-out balance equity sharesb. Exit valuation to be done by Registered Valuer [section 247]c. No opportunity provided for minority to dissent

Cross-border Merger [section 234]

a. Merger of Indian company with foreign company and vice-versa now permittedb. Central Government to make necessary Rules in consultation with RBI and notify permitted jurisdictionsc. Merger to be approved by NCLT

d. Consideration only in cash or Depositary Receipts

Fast-track Merger [section 233]a. Merger between the following entities possible without NCLT approval:

- Two or more small companies; or- Holding and wholly owned subsidiary; or- Prescribed types of companies (list awaited)

b. Declaration of Solvency required to be submittedc. Consent required from:- Members owning > 90 percent of total number of shares- Majority creditors owning 90 percent in value

Share capital reduction [section 66]

a. No share capital reduction permitted in companies that have overdue deposit /interestb. No buy-back permitted until after three years from remediation of defaults on deposits; preference shares; or term

loansc. Multiple buy-back within a year not permittedd. Schemes of arrangement involving buy-back/capital reduction to require Auditors certificate and comply withconditions of section 66/68

Theme 4: Emphasis on Investor Protection


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Related Party Transactions [section 188]a. Transactions in ordinary course of business on arms-length basis permissible. Central Government approval notrequired anymoreb. Board approval required where transactions are either not in the ordinary course of business /not at arms length:c. Special resolution, where no related party can vote, required for non-arms length transactions or transactions not inthe ordinary course of business where- Share capital > INR 10 mn; or where

- Sale, purchase of goods, services, leasing of property transaction value exceeds 5% of annual turnover or 20 percentof net worthPenalty for violation:i. Contract may be rendered as voidii. Directors concerned to indemnify the lossiii. Director / employee involved can be fined and imprisoned (in case of a listed company)- Appointment to any office or place of profit in company, subsidiary or associate

monthly reummuneration > INR 100,000- Remuneration for underwriting subscription of any securities or derivativesremuneration >INR 1 mnInsider Trading [sections 125, 194, 195]a. Director/Key Managerial Personnel (KMP) to refrain from forward dealing/ buy options in shares or debentures ofcompany/ holding company/ subsidiary/ associateb. No company person (incl. any Director/KMP) with access to non-public price sensitive information to indulge in anyform of insider trading/counseling.

Penalty for violation:i. imprisonment up to five years; orii. fine up to INR 250 mn or three times profits made, whichever is higher; oriii. both of the above

Oppression and Mismanagement

a. Members or Depositors may notify Tribunal if company conduct is prejudicial to their interestsb. For fraudulent, unlawful or wrongful act; or improper or misleading statements, Class Action Suit can be filed on:- Company or its Directors; or- Auditor/audit firm; or- Expert/advisor/consultant

c. Who can file Class Action Suit:- 100 or 10 percent of total number of members- 100 or 10 percent of total number of depositors- Member(s) holding 10 percent of issued share capital

- Depositor(s) holding 10 percent of outstanding value of deposits

Fraud Risk Mitigationa. Fraud defined/referred to under various sections and includes:- Act; or- Omission; or- Concealment of fact; or- Abuse of position- Considered fraud whether or not there is any wrongful gain or loss

b. Senior Fraud Investigation Officer (SFIO) made statutory body with significant powersc. Mandatory establishment of vigil-mechanism for directors/ employees to report concernsPenalty for violationImprisonment [3-10 years]; cognizable offence without bail

Theme 5: Wider Director and Management ResponsibilityAdditional Responsibility on Independent Directors [section 149]

a. Code of Professional Conduct imposing stringent responsibility and accountabilityb. Maximum term of five years extendable by another five years subject to a special resolutionc. Retirement by rotation not applicabled. Liable only for acts with knowledge of and attributable through Board Process and with his consent or connivance ornot having acted diligentlye. Direct/indirect pecuniary/other relationships through relatives not permittedf. Declaration of Independence mandatory each year.g. Stock options not permitted. Only sitting fees and profit related commission.


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h. Independent directors to hold one annual meeting where no non-independent director, KMP or Senior Managementcan attend.

Audit Committeea. Composition:- Mandatory for prescribed companies to constitute an Audit Committee- three directors (majority should be Independent Directors)

b. The Chairperson and majority of the Audit Committee members should have the ability to read and understandfinancial statementsc. Responsibilities:- Recommend appointment, remuneration of auditors and monitor their independence and effectiveness- Examine financial statements and auditors report thereon- Approve related party transactions- Scrutiny of inter-corporate loans and investments- Undertake asset valuation- Evaluate internal financial controls and risk management systems- Monitor end use of funds raised through public offers

Penalty for violationi. Company: Fine between INR 100,000500,000ii. Officer in default: Imprisonment upto one year; fine between INR 25,000100,000

Content of Directors Report [section 134]

a. All companies to, inter-alia, state:- Devised proper systems to ensure proper compliance with all applicable laws in India and that this system is operatingeffectively.- Taken proper and sufficient care for maintenance of adequate accounting records for safeguarding assets andpreventing and detecting fraud and other irregularities.- On development and implementation of a risk management policy

b. Listed and prescribed companies to state:- Internal financial controls have been laid down and they are operating effectively.- Manner in which performance evaluation of the Board members have been conducted

Penalty for violationi. Company: Fine between INR 50,0002,500,000ii. Officer in default: Imprisonment upto three years and /or fine between INR 50,000 to INR 500,000

Theme 6: Inclusive CSR Agenda

Obligation Trigger and Calculation

a. Covers all companies in India meeting any one or more of the following conditions:- Turnover INR10 bn- Networth NR 5 bn- Net Profit INR 50 mn

b. CSR contribution to be 2 percent of average net profit before tax for last three financial yearsc. Contributions to be made towards causes listed under Schedule VII

Administration and Reportinga. Board to appoint a three-member CSR committee including one Independent Director- Committee responsibility:- Formulate CSR policy;- Recommend CSR activities;- Monitor CSR expenditure

b. Mandatory reporting on CSR under section 135c. Even where companies are not required to appoint Independent Directors underPenalty for violationi. Company: Fine between INR 50,0002,500,000


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ii. Officer in default: Imprisonment upto 3 years and / or Fine between INR 50,000 to INR 2,500,000

Impact on various stakeholders

Board of Directors

Accountability to stakeholders well beyond only shareholdersReporting beyond traditional SOX coverageLiability on Class Action SuitsSignificant penalties on Insider Trading and restatementsPublic scrutiny on CSRCompliance on Related Party TransactionsMandatory roll-out of whistle-blower vigil mechanismMandate on gender diversity

PromotersMulti-layered structures to be collapsedCross-border transactions allowed

Mandatory CSR contribution will affect cash flowsWider definition of Related Party TransactionsHeavy penalties introduced on Insider TradingLower consolidation threshold may invite greater scrutiny [PE Firms to be impacted]New depreciation rules may affect profitability

CXO and Key Management Personnel

Ease of restructuringReporting beyond traditional SOX coverageWider definition of Related Party TransactionsLower consolidation threshold may invite greater scrutinyNew depreciation rules may affect profitabilityLiability for Class Action SuitsSignificant penalties on Insider Trading and restatements

Independent Directors

Oversee implementation of best corporate governance practicesSafeguard interests of all stakeholdersEnsure adequate and functional vigil mechanismDetermine appropriate levels of remuneration for Directors and KMPCompliance on Related Party TransactionsPrime accountability on CSR complianceLiability on Class Action Suits

Audit Committee

Additional rigour on financial reportingMandatory internal auditReporting beyond traditional SOX coverageSignificant penalties on Insider Trading and restatementsCompliance on Related Party TransactionsMonitoring inter-corporate loans and investmentsEvaluation of internal financial controls

Multi National Corporation

Lower thresholds for financial consolidation


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Mandatory contribution to local CSRWider definition of Related Party TransactionsEase in cross-border restructuringFacility of minority buy-outLiability for Class Action SuitsBoard meetings through video conferenceOne Resident Director mandatory

Additional reporting responsibilities in Boards Report


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Imprisonment [3-10 years]; cognizable offence without bail


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Oppression and Mismanagement [section 241-246]


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Oppression and Mismanagement [section 241-246]a. Members or Depositors may notify Tribunal if company conduct is prejudicial to their interests

b. For fraudulent, unlawful or wrongful act; or improper or misleading statements, Class Action Suit can be filedon:Company or its Directors; or


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Oppression and Mismanagement [section 241-246]a. Members or Depositors may notify Tribunal if company conduct is prejudicial to their interests

b. For fraudulent, unlawful or wrongful act; or improper or misleading statements, Class Action Suit can be filedon:Company or its Directors; or


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i. Contract may be rendered as voidii. Directors concerned to indemnify the lossiii. Director / employee involved can be fined and imprisoned (in case of a listed company)


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Penalty for violation:i. Contract may be rendered as voidii. Directors concerned to indemnify the lossiii. Director / employee involved can be fined and imprisoned (in case of a listed company)


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As per draft rules, pre-commencement term to retrospectively apply for computing balance validity of current

Auditors tenure prior to rotation

c. Significant restrictions on non-audit services that can be provided by Auditors. All non-audit services to bepre-approved by the Board or Audit Committee

d. National Financial Reporting Authority (NFRA) to be the new regulator for Auditors and will have powers to

recommend, enforce and monitor compliance of accounting and auditing standardsAuditors Reporting Responsibilitya. Audit report to cover:


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3. Company: Fine between INR 50,0002,500,0004. Officer in default: Imprisonment up to three years; fine between INR 50,000500,000


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d. Transitional provision: Depreciate carrying value less residual value over balance life. Adjust net worth if useful lifehas been exhaustedMandatory Internal Audit and reporting on Internal Financial Controls [section 138]

a. Assurance on adequacy and effectiveness of Internal Financial Controls (which includes orderly andefficient conduct of business, and prevention and detection of frauds and errors) to be given: in Directors and Auditorsreport for all listed entities; and

only in Auditors report for all other entities

b. Internal Audit made mandatory for:all listed companies; and

public limited companies with: loans/deposits INR 250 mn ; or


c. Internal audit to be done only by CAs; or CWAs; or ot


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a. Pursuant to an order made by a court or Tribunal on an application for revision of financial statements made

as under:by the Central Government, Income-Tax, SEBI etc. in the following casesFraudulent financial reporting; or

Mismanaged affairs casting doubt on financial statements; or

by the Directors of a company only in the following cases:Financial statements and Board Report arenon-compliant; and

Voluntary restatement by Directors possible only for the past three years

Changes in Depreciation regulation [section 123(2) and Schedule II]

a. Concept of Useful Life takes prominence over standard mandated rates

b. Justification required where Useful Life Schedule II for prescribed companies. Other cases Useful Life < ScheduleII

c. Applicability of Component Accounting


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Theme 5: Wider Director and Management Responsibility

Theme 6: Inclusive CSR Agenda

Mandatory Director AppointmentObligation Trigger and Calculation Administration and Reportingsection 149, in case a company does

a. Covers all companies in India meeting a. Board to appoint a three-member CSR

meet the criteria under section 135, it Company parameters1 Director11/3rd

Audit

Nomination and


New definition of subsidiary, associate,d. Transitional provision: Depreciate carryingResident inWoman

Independent

Committee

remuneration


i. Company:Fine between

Joint Venture company [sections 2(6)value less residual value over balance life.

any one or more of the following

committee including one Independent

will have to mandatorily appoint one India 182 days

Director

Director

committee

Officer in default:INR 100,000500,000

and 2(87)]conditions:

Director

Independent Director on the Board

Imprisonment one year; Fine betweenAdjust net worth if useful life has been Listed

ii. Officer in default: Imprisonment INR 50,000500,000exhausted


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Turnover INR10 bn

Committee responsibility:

d. In case of failure to spend, reasons to be upto one year; fine between

Holding company

Networth NR 5 bn

Formulate CSR policy;disclosed. Penalties for non disclosure Unlisted (All)

INR 25,000100,000

Mandatory Internal Audit and reportingRevision in Financial Statement [sections

Net Profit INR 50 mn

Recommend CSR activities;

Share Capital INR 1 bn

Owns/controls at least

on Internal Financial Controls [sectionContent of Directors ReportOwns/controls >50%

b. CSR contribution to be 2 percent of

Monitor CSR expenditure

Penalty for violation:20% total share capital or 130 and 131]total share capital or

138]i. Company:Fine betweenTurnover INR 3 bn

[section 134]average net profit before tax for last b. Mandatory reporting on CSR under

exercises control of board

business decisions under

a. Pursuant to an order made by a court or an agreementINR 50,0002,500,000

a. All companies to, inter-alia, state: a. Assurance on adequacy and

three financial yearssection 135


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ii. Officer in default: Imprisonment Loan/Debentures/

Tribunal on an application for revision of

Devised proper systems to ensure

effectiveness of Internal Financial

c. Contributions to be made towardsc. Even where companies are not required upto 3 years and / or Fine betweenDeposits INR 2 bn

Subsidiary company

Associate companyfinancial statements made as under:INR 50,000 to INR 2,500,000

proper compliance with all applicable

Controls (which includes orderly and causes listed under Schedule VII

to appoint Independent Directors under

by the Central Government, Income-

Additional Responsibility on IndependentAudit Committee [section 177]laws in India and that this system is Financial Year to be uniform

efficient conduct of business, andTax, SEBI etc. in the following cases Directors [section 149]

a. Composition:

operating effectively.

prevention and detection of frauds and a. All companies to follow uniform FYE

Fraudulent financial reporting; or errors) to be given:

31 March

Mismanaged affairs casting doubt

6a. Code of Professional Conduct imposing

Mandatory for prescribed companies to

Taken proper and sufficient care for stringent responsibility and accountability constitute

an Audit Committee

maintenance of adequate accounting

in Directors and Auditors report for all Increased

Inclusiveb. Exemptions (subject to conditions and b. Maximum term of five years extendable


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three directors (majority should be records for safeguarding assets and

on financial statements; or

Reportinglisted entities; and

CSR Agenda

approval process) if a company is:Frameworkby another five years subject to a special Independent Directors)

preventing and detecting fraud and

by the Directors of a company only in

only in Auditors report for all other

A holding/ subsidiary of a company Focus on

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resolutionb. The Chairperson and majority of the Audit other irregularities.

the following cases:

entities

incorporated outside India; and

Financial statements and Board

b. Internal Audit made mandatory for: 1c. Retirement by rotation not applicable Committee members should have the ability

On development and implementation

d. Liable only for acts with knowledge of and to read and understand financial statementsof a risk management policy

Required to follow a different FYE for Report are non-compliant; and

Wider

all listed companies; andattributable through Board Process and with c. Responsibilities: b. Listed and prescribed

companies to consolidation of its accounts outside Director

Voluntary restatement by Directors Higher

andhis consent or connivance or not having

Recommend appointment, remuneration

public limited companies with:

state:India


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Auditor

Managementpossible only for the past threeacted diligently

of auditors and monitor their

Internal financial controls have been

loans/deposits INR 250 mn ; or Accountability

Responsibilityc. Transitional compliance phase: Two years years

Mandatory requirement for Consolidated


Changes in Depreciation regulationFinancial Statement (CFS) [section 129]c. Internal audit to be done only by CAs; or

[section 123(2) and Schedule II]a. In addition to standalone financial CWAs; or other professionals decided by 6

e. Direct/indirect pecuniary/other relationships independence and effectiveness

laid down and they are operating

through relatives not permitted

Examine financial statements and

effectively.f. Declaration of Independence mandatory auditors report thereon

critical Themes

Manner in which performancea. Concept of Useful Life takes prominence statements, every company to prepare the

Board

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each year.

Approve related party transactions evaluation of the Board members

g. Stock options not permitted. Only sitting

Scrutiny of inter-corporate loans and have been conducted.over standard mandated rates

Emphasis onCFS if it has a:

Easierfees and profit related commission.

investments

Investorb. Justification required where Useful Life Penalty for violation:


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Restructuring

Protection

Subsidiary; or

h. Independent directors to hold one annual

Undertake asset valuation

Penalty for violation:1. Company: Fine between

Associate; or

Schedule II for prescribed companies.

INR 50,0002,500,000

Other cases Useful Life < Schedule II 3meeting where no non-independent

Evaluate internal financial controls and i. Company:Fine betweenINR 50,0002,500,000

Joint Venture company

2. Officer in default: Imprisonmentdirector, KMP or Senior Management can risk management systems

ii. Officer in default: Imprisonment b. No exemption for intermediate holding c.

Applicability of Component Accounting up to three years; fine betweenattend.

Monitor end use of funds raised through upto three years and /or fine

between INR 50,000 to INR 500,000companies for preparing CFS

INR 50,000500,000

public offers3

Theme 3: Easier RestructuringRationalizing Multilayered Structuresd. Merger of listed company into unlisted

Holding and wholly owned subsidiary; 4

a. Maximum of only two Investment SPV

company allowed subject to:or

Theme 4: Emphasis on Investor Protection2

company levels permitted between

Exit opportunity being provided to

Prescribed types of companies (list Related Party Transactions [section 188]


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Remuneration for underwriting

Auditor/audit firm; or

Theme 2: Higher Auditor Accountabilityinvestor company and investee company

public shareholders; and

awaited)a. Transactions in ordinary course of business subscription of any securities or

Expert/advisor/consultant

Valuation is done as per SEBI

b. Declaration of Solvency required to be on arms-length basis permissible. Central

derivativesremuneration >INR 1 mn c. Who can file Class Action Suit:


Auditor Appointment and Rotation

As per draft rules, pre-commencement guidelines

submitted

Government approval not required anymore

100 or 10 percent of total number of 1. Company: Fine of INR 25,000

Insider Trading [sections 125, 194, 195]a. Maximum 20 audits permitted perterm to retrospectively apply for

3. Adequacy of internal

4. Disclosure of effect

5,00,000

Minority buy-out [section 236]c. Consent required from:

b. Board approval required where transactions membersfinancial control system

of pending litigation on

a. Director/Key Managerial Personnel (KMP) to individual Auditor/Partner of a firmcomputing balance validity of current 2. Office in default: Imprisonment

Members owning > 90 percent of total and effectiveness

financial positiona. Acquirer holding 90 percent share are either not in the ordinary course of

100 or 10 percent of total number of upto two years; fine INR 25,000

refrain from forward dealing/ buy options in b. Instead of reappointment at each AGM,Auditors tenure prior to rotation

business /not at arms length:

depositors1,00,000


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capital (in value) may notify intent to buy-number of shares

shares or debentures of company/ holding Auditor to be appointed for a block of five c.

Significant restrictions on non-audit

Majority creditors owning 90 percent c. Special resolution, where no related party

Member(s) holding 10 percent of issued 5. Provisions forout balance equity shares

company/ subsidiary/ associate

years:services that can be provided by Auditors.

foreseeable losses on

6. Delays in depositing

b. Exemption:b. Exit valuation to be done by Registeredin value

can vote, required for non-arms length share capital

b. No company person (incl. any Director/KMP)

Individual Auditor eligible for

All non-audit services to be pre-approved long term/derivative

money into IEPF

Acquisition of overseas subsidiary Share capital reduction [section 66]

transactions or transactions not in the

Depositor(s) holding 10 percent of contracts

Valuer [section 247]with access to non-public price sensitive appointment of single block of fiveby the Board or Audit Committee

with existing multiple layers allowed c. No opportunity provided for minority to a. No

share capital reduction permitted in ordinary course of business whereoutstanding value of deposits

information to indulge in any form of insider years; and partnership audit firms

d. National Financial Reporting Authority under foreign law; ordissent

companies that have overdue deposit /

Share capital > INR 10 mn; or where trading/counseling.

Fraud Risk Mitigationto be eligible for appointment of

(NFRA) to be the new regulator for

b. Report to Audit Committee or Board on

Multi-layering required under any law Cross-border Merger [section 234]

interest


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Sale, purchase of goods, services, leasing a. Fraud defined/referred to under various

additional consecutive block of five Auditors and will have powers to

fraud committed against company byin force

a. Merger of Indian company with foreign b. No buy-back permitted until after three of

property transaction value exceeds Penalty for violation:sections and includes:years

recommend, enforce and monitor

officers or employees and escalate to Simplifying Procedures for Mergeri.imprisonment up to five years; or company and vice-versa now permitted years from remediation

of defaults on 5% of annual turnover or 20 percent of

Act; orii. fine up to INR 250 mn or three times

Auditor to be subject to a five-year compliance of accounting and auditing CentralGovernment if:

[section 232]b. Central Government to make necessary deposits; preference shares; or term networth

profits made, whichever is higher; or

Omission; or

cooling period post completion of his standards

happening frequently; or

a. National Company Law Tribunal (NCLT) Rules in consultation with RBI and notify

loans

Penalty for violation:iii. both of the above

Concealment of fact; or

previous term

c. Multiple buy-back within a year not Auditors Reporting Responsibility

amount is material at 5 percent of net to approve schemes of restructuring

permitted jurisdictions

i. Contract may be rendered as void Oppression and Mismanagement

Abuse of position

Incoming Auditor cannot be anpermitted

ii. Directors concerned to indemnify a. Audit report to cover:

profits or 2 percent of turnover; or companies in place of High Courtc. Merger to be approved by NCLT


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the loss

[section 241-246]

Considered fraud whether or not there is associate or a network firm in relation

if dissatisfied with action by audit b. Auditor to certify that accounting d. Considerationonly in cash or Depositary d. Schemes of arrangement involving buy-iii. Director / employeeinvolved can be a. Members or Depositors may notify Tribunal any wrongful gain or loss

to the outgoing Auditor

1. Observations,

2. Qualification or

committee or Board on immaterial

treatment specified in the Scheme

Receiptsback/capital reduction to require Auditors fined and imprisoned (in case of a

if company conduct is prejudicial to their b. Senior Fraud Investigation Officer (SFIO)

Transitional compliance phase: Three comments on financial

adverse remark on

frauds

certificate and comply with conditions of listed company)transactions and

maintenance of

conforms with Accounting Standard for interestsmade statutory body with significant powers years

adverse matters

accounts

listed, unlisted and private companies Fast-track Merger [section 233]section 66/68

Appointment to any office or place of b. For fraudulent, unlawful or wrongful act; or c.Mandatory establishment of vigil-mechanism c. Consent of majority Members/ Creditors a.

Merger between the following entities profit in company, subsidiary or associate improper or

misleading statements, Class for directors/ employees to report concerns>75 percent (in value)

possible without NCLT approval:


Two or more small companies; or

monthly reummuneration > INR 100,000

Action Suit can be filed on:

Imprisonment [3-10 years]; cognizable

Company or its Directors; or

offence without bail 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG


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network of independent member firms affiliated with KPMG International Cooperative (KPMG

International), a Swiss entity. All rights reserved.

2013 KPMG, an Indian Registered Partnership and a member firm of the KPMGnetwork of independent member firms affiliated with KPMG International Cooperative (KPMG

International), a Swiss entity. All rights reserved.

2013 KPMG, an Indian Registered Partnership and a member firm of the KPMGnetwork of independent member firms affiliated with KPMG International Cooperative (KPMGInternational), a Swiss entity. All rights reserved.

Board of Directors Accountability to stakeholders well beyond only Promoters

shareholdersMulti-layered structures to be collapsed

Reporting beyond traditional SOX coverage

Cross-border transactions allowed KPMG in India Liability on Class Action Suits

Mandatory CSR contribution will affect cash flows

Significant penalties on Insider Trading and

Wider definition of Related Party Transactions restatements Heavy penalties introduced on Insider Trading Ahmedabad

Hyderabad

Public scrutiny on CSR Lower consolidation threshold may invite greater Safal Profitaire

8-2-618/2

Compliance on Related Party Transactions scrutiny [PE Firms to be impacted]

B4 3rd Floor, Corporate Road,Reliance Humsafar, 4th Floor

Mandatory roll-out of whistle-blower vigil

New depreciation rules may affect profitability Opp. Auda Garden, Prahlad NagarRoad No.11, Banjara Hills

mechanism

Ahmedabad380 015Hyderabad 500 034

Tel: +91 79 4040 2200

Tel: +91 40 3046 5000

Mandate on gender diversityFax: +91 79 4040 2244

Fax: +91 40 3046 5299

Bangalore

Kochi

CXO and Key Management PersonnelMaruthi Info-Tech Centre

4/F, Palal Towers Ease of restructuring


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11-12/1, Inner Ring Road

M. G. Road, Ravipuram,

Reporting beyond traditional SOX coverage Koramangala, Bangalore 560 071Kochi 682 016

Independent Directors

Wider definition of Related Party Tel: +91 80 3980 6000Tel: +91 484 302 7000 Oversee implementation of best corporate Fax: +91 80 3980 6999

Fax: +91 484 302 7001

Transactionsgovernance practices

Lower consolidation threshold may invite Chandigarh

Kolkata

Safeguard interests of all stakeholders greater scrutinySCO 22-23 (Ist Floor)

Infinity Benchmark, Plot No. G-1

Ensure adequate and functional vigil Impact on various New depreciation rules may affect Sector 8C, Madhya Marg

10th Floor, BlockEP & GP, Sector V

mechanism

profitabilityChandigarh 160 009

Salt Lake City, Kolkata 700 091

Determine appropriate levels of

stakeholdersTel: +91 172 393 5777/781

Tel: +91 33 44034000

Liability for Class Action Suitsremuneration for Directors and KMP

Fax: +91 172 393 5780

Fax: +91 33 44034199 Significant penalties on Insider Trading and

Compliance on Related Party Transactions restatements

ChennaiMumbai

Prime accountability on CSR compliance No.10, Mahatma Gandhi Road

Lodha Excelus, Apollo Mills

Liability on Class Action SuitsNungambakkam

N. M. Joshi Marg

Chennai 600 034

Mahalaxmi, Mumbai 400 011Tel: +91 44 3914 5000

Tel: +91 22 3989 6000

Fax: +91 44 3914 5999Fax: +91 22 3983 6000


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Multi National CorporationDelhi

Pune

Audit Committee Lower thresholds for financial consolidation Building No.10, 8th Floor

703, Godrej Castlemaine Additional rigour on financial reporting Mandatory contribution to local CSR

DLF Cyber City, Phase II

Bund GardenGurgaon, Haryana 122 002

Pune 411 001

Mandatory internal audit

Wider definition of Related Party Transactions Tel: +91 124 307 4000Tel: +91 20 3058 5764/65

Reporting beyond traditional SOX coverage

Ease in cross-border restructuring Fax: +91 124 254 9101Fax: +91 20 3058 5775

Significant penalties on Insider Trading and

Facility of minority buy-out

restatements Liability for Class Action Suits

Compliance on Related Party Transactions

Board meetings through video conference Monitoring inter-corporate loans and

One Resident Director mandatory

investments

Additional reporting responsibilities in Boards Report Evaluation of internal financial controls Key contact

The information contained herein is of a general nature and is not intended to address the

Sai Venkateshwarancircumstances of any particular individual or entity. Although we endeavour to provide

accurate Partner and Headand 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

Accounting Advisory

information without appropriate professional advice after a thorough examination of the

particular T:+91 22 3090 2020situation. The views and opinions expressed herein as a part of the Survey are those of the

survey respondents and do not necessarily represent the views and opinions of M:+91 98203

45741

KPMG in India.

E:[email protected]

2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG

network of independent member firms affiliated with KPMG International Cooperative (KPMGInternational), a Swiss entity. All rights reserved.


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The KPMG name, logo and cuttingthrough complexity are registered trademarks or

trademarks of KPMG International.

kpmg.com/inPrinted in India.

2013 KPMG, an Indian Registered Partnership and a member firm of the KPMGnetwork of independent member firms affiliated with KPMG International Cooperative (KPMGInternational), a Swiss entity. All rights reserved.

companies act 2013 raising the bar on governance - kpmg

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