Saturday, September 14, 2013

Companies Act 2013 and the draft Rules: towards better corporate Governance

The Companies Act 2013 has already been passed by both the houses of the Parliament and has also received the assent of the President. The government is expected to announce the date from which the specific section of the new Act will come in force. The government has also notified on 9th September, 2013 the draft rules for 16 chapters of the Companies Act, seeking public comments by 8th October, 2013, so that the Rules can be notified, probably simultaneously to the notification of relevant section. The Government has notified certain sections already. It is important for the chartered accountants fraternity and the society to appreciate the major challenges and opportunities arising out of the new law:


  1. Consolidated Financial Statements have been made mandatory for all companies having one or more subsidiaries.
  2. Cash flow now mandatory for all companies.
  3. A new Schedule-III has been prescribed in the Act for preparation of financial statements and consolidated financial statements, in place of currently prevailing Schedule-IV.
  4. Appointment of Chief Financial officer in specified companies.
  5. Limit of 20 maximum number of companies a CA can Audit
  6. Every listed Company, every Public Company having a paid up capital of Rs10 crore or more or Public company having loans from banks / financial institutions of Rs 25 crore or more shall mandatory appoint an Internal Auditor.
  7. The auditors will be appointed for a period of 5 years subject to annual ratification. Even an LLP can also be appointed as Auditor.
  8. In case of listed companies and the specified class of companies mandatory auditors' rotation will apply. In case of an auditor who is holding office as auditor prior to commencement of this act, such holding period shall be taken into account in calculating the period of 5 years or 10 years as the case may be, as has been provided for mandatory rotation of individual or firms of auditors respectively. The break in terms for a continuous period of 5 years is required, after rotation.
  9. Audit firms working under the same network or are operating under the same trade mark or brand or associated with outgoing auditors will not be allowed to perform non audit services.
  10. The auditors once appointed for a period of 5 years can be rotated or retired only with prior approval of Central Government and prior special resolution of the shareholders.
  11. The auditors and their relatives or partner should not be indebted to the company or subsidiary or associate company in excess of Rs One lakh. The relatives should not hold security of face value or interest in the company in excess of Rs One lakh.
  12. Auditors report shall mandatory include the views and comments on:

  • Impact of any pending litigation on financial position
  • Foreseeable losses on long term contracts/ derivative contracts;
  • Delay in depositing money in Investor Education and Protection Fund (IEPF) of the Company
  • Auditors have been mandated to report any offence involving fraud which is likely to be reported to the Central Government
  • Material fraud has been defined, even immaterial fraud need to be reported in case the Audit committee or Board is not taking any action. Such report should be submitted by the auditor by registered post or email to the Govt. in the prescribed format.
The desire of the Government is to improve corporate Governance by increased compliance's and heavy penalties and punishments in case of fraud. The growth of corporate sector will pave the way for sustained growth of Indian economy. We welcome the new law.

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