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Broad overview of the new law and some key aspects relevant to
different stakeholders
Directors:
Duties of Directors clearly laid down Higher accountability.
Requirement of independent directors for a wider group of companies (and not only
listed entities).
Obligations to undertake Corporate Social Responsibility activities.
Nominee directors of financial institutions not deemed independent.
Shareholders:
Ability to initiate class actions on account of mismanagement/fraud etc.
Ability to execute legally enforceable contracts relating to transfer of securities in a
public company.
Auditors:
Rotation of Auditors (maximum term of 5 years for individuals and two terms of
five years for auditing firms) for certain classes of companies. Network firms not
allowed to replace an outgoing firm.
Bar on providing non auditing services to a company, where it is appointed as an
auditor.
Disqualifications on a number of grounds - holding of securities in the company by
relatives, engaged in business relationship with the company etc.
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Evaluation of
Certain Draft Rules
Draft rules propose financial threshold for investment in securities by relatives upto face
value of INR 1 Lakh.
The term relative has been widely defined to include a number of independent relatives
(e.g. brother, sister, son-in-law), over whom the auditor may have no control whatsoever.
Issue:
If a direct interest or a commonality of interest in the investment of auditor is the basis of
disqualification these limits should be revised to reflect separate limits for different
category of relatives:
Draft rules provide that Board/Audit Committee are mandated to consider completed and
pending proceedings against auditor.
To ensure compliance with the same, Auditor should certify details of completed and
pending proceedings to Companies, (in relation to pending proceedings, of which such
auditor has received notice), as part of the auditor certificate prescribed under the rules
which currently only requires the auditor to certify that he is eligible and not disqualified.
Draft rules under Section 143 (12), only provide for reporting of fraud by officer or
employees on a Company that the auditor is aware of.
Currently under CARO 2003, fraud reporting is not limited to any specific category of
frauds. Considering the similar impact even other frauds may have on a company,
suitable provisions may be made in orders to be issued under Section 143(11) for
reporting of frauds by third parties (like vendors) involving the Company, which the
auditor has notice of even where the officer or employees may not be fraudulently
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involved.
Statutory Provision - Section 135(1) of the Act states that Net Profit shall be
calculated in accordance with Section 198 of the Act, which provides for a number
of adjustments like exclusion of profits from sale of undertaking, etc.
Draft Rules - net profit for Section 135 (1) to be profits before tax and exclude net
profit of branches outside India.
Issue - Rules should clarify that the profit before tax be computed under Section 198
only. Further exclusion of profit of branches may not be in conformity with Section
135 which provides for profits to be calculated under Section 198 only.
CSR Spends: Draft rules provide that 2% of average net profits during every block of 3
years.
At the risk of being in conflict with the Act, the draft rules may consider clarifying
the manner of computation of net profits if the Company has losses in one or more
years in the past 3 yrs.
Statutory Provision Schedule VII provided for a specified list of activities which
may be included by companies in their CSR Policy, which only included the Prime
Minister National Relief fund or other Central / State Govt. funds as 3rd parties
which could undertake CSR activities
Draft Rules Now clarify that CSR contributions can be made by Companies to
various organizations with atleast 3 years track record in related areas.
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