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Compliances are a set of rules and requirements dictated by legislation that are compulsory to adhere to.
Ignorance of the law is not an excuse. Failure to adhere to legislation can become a costly exercise that can normally be avoided.
The responsibility for compliance of the regulations under various statutes is with the directors, company secretary and some of the senior officers of the Company who have been designated for specific compliances. In case of any non-compliance, the laws are very specific in terms of the liabilities which could be civil or criminal. The penalty if found guilty, could be in the form of a substantial fine or an imprisonment or both.
The strictness with which the courts view the responsibility and the sacredness of the trust reposed in the directors and its authorized persons had been emphasized in many cases. Their position has further changed in the era of Corporate Governance to the extent that the directors have to protect the interests of not only the shareholders but also other stakeholders.
Company Law and other related Statutes
Companies Act, 1956 ("Act")
A managing and/or whole-time director as well as the company secretary is an officer-in-default liable for penal action in case of any defaults under the Act.
- Under Sec 45 of the Act, if a company carries on business even if the number of its members is reduced below seven in the case of public company or two in the case of a private company for more than six months then every director cognizant of the fact shall severally liable for the payment of the entire debts of the company contracted during that time, and may be severally sued therefor.
- Under Sec. 69(5) of the Act, if the application money of those applicants to whom no shares has been allotted is not repaid within 130 days of the date of issue of the prospectus, then the Directors shall be jointly and severally liable to repay that money with the prescribed interest @ 6% per annum from the date of expiry of 130th day.
- Under Sec 299 of the Act, a director is required to disclose his interest (direct or indirect) in any contract or arrangement, at a meeting of the Board of Directors held immediately after the execution of such contract. The director who fails to comply the said proviso is punishable with fine, which may extend to Rs. 50,000/-.
- Under Sec. 147 of the Act, if an officer of a company signs on behalf of the company any contract, bill of exchange, hundi, promissory note, or cheque, such person shall be personally liable to the holder if the name of the company is not fully or properly mentioned in the instrument.
- Under Sec.58 A of the Act, the Company can accept deposits from the Public on compliance of certain terms and conditions. The non-compliance penalizes every officer of the company who is in default with imprisonment for a term which may extend to five years and also a fine.
Sub-clause I(c)(iii) of Clause 49 of the Listing Agreement provides that "The Board shall periodically review compliance reports of all laws applicable to the company, prepared by the company as well as steps taken by the company to rectify instances of non-compliances." Thus it is now mandatory for the directors to have a proper compliance management in place to ensure that they comply with the requirements of the listing agreement not only in law but also in its true spirit.
Foreing Exchange Management Act, 1999 (FEMA)
Any foreign exchange transaction, such as the inflow and outflow of money, property, securities etc., attracts the compliance requirements of the various provisions under FEMA.
Non-compliance of FEMA attracts penal consequences under Section 13 of FEMA up to thrice the sum involved in such contravention where the amount is quantifiable or up to Rupees two lakh, where the amount is not quantifiable and where the contravention is a continuing one, further penalty which may extend to Rupees five thousand for every day after the first day during which the contravention continues as well as confiscation of the currency, security or property in respect of which the contravention has taken place.
Labour Laws Here are a few examples of compliance under the labor laws, the noncompliance of which attracts severe penal liabilities:
Under the Contract Labour (Regulation & Abolition) Act, 1970: It is obligatory on every contractor not to undertake or execute any work through contract labor without obtaining a valid license
Under the Minimum Wages Act, 1948: To make payment of overtime in excess of number of hours constituting normal working day at the rate fixed under the Act or any other law whichever is higher.
Under the Maternity Benefit Act, 1961: Nursing Breaks should be given to every women delivered of a child who returns to duty after such delivery shall be allowed in the course of her daily work two breaks for nursing he child until the child attains the age of 15 months.
Under Sec 93 of the Factories Act, 1948: In case of any non-compliance, a director is punishable with imprisonment for a term which may extend to two years or with fine which may extend to one lakh rupees or with both, and if the contravention is continued after conviction, with as further fine which may extend to one thousand rupees for each day on which the contravention is so continued.
Environmental Laws There is a growing concern regarding environmental protection under various laws and regulations. Environmental protection and various compliance measures are being drawn up and those held liable for failure to adhere to the regulations attract severe penalties.
The concept of Corporate Compliance Audit:
The Corporate Governance Voluntary Guidelines 2009, published by Ministry of Corporate Affairs, Government of India, recommend the introduction of Secretarial Audit (SA). It is stated:
"Since the Board has the overarching responsibility of ensuring transparent, ethical and responsible governance of the company, it is important that the Board processes and compliance mechanisms of the company are robust. To ensure this, the companies may get the Secretarial Audit conducted by a competent professional. The Board should give its comments on the Secretarial Audit in its report to the shareholders."
The Concept Paper on Secretarial Audit emphasises the need for Secretarial Audit as follows:
"Today, in India, the corporate sector is governed by a complex web of laws, rules and regulations. However, the experience so far shows that enactment of various laws is not enough and the desired results cannot be achieved unless their implementation is geared up. In fact, lack of implementation of laws with no mechanism of audit to check their compliances have resulted in various frauds/scams like the Satyam fraud, the Harshad Mehta Scam, the NBFC Scam, the Teak Equity Scam to name a few. There have also been a large number of cases of mismanagement and misuse of public funds by several listed companies. Governments, multilateral institutions, banks and companies all have realized that the eye of the storm lies not in the inadequacy of legislation but in its implementation and compliance.
The frauds and scams, which have been detrimental not only to capital market but have been a set back to the economy as a whole, have occurred despite and in spite of financial audit. The law enforcement agencies have not been able to tackle these problems and ensure effective enforcement of laws. It is also on record that several companies that have fallen sick had committed violations of various legal provisions and shown utter disregard for the various statutory compliances.
A need of the hour is therefore felt to ensure compliance of laws in letter and spirit on continuous basis by an independent professional."
Benefits and Beneficiaries of Secretarial Audit
The Secretarial Audit is an effective tool for faultless corporate law compliance management. The benefits of Secretarial Audit are manifold, and its beneficiaries are many. They include, the promoters, directors, investors, lenders, employees, Government and government agencies, and last but not the least, the public at large. Ever-increasing complexities of laws and the widening role of directors (especially, part-time or independent directors) makes it imperative that an independent professional expert agency goes through the company's books and records to verify whether various requirements under the applicable laws have been complied with or not and whether there is a need for corrective action or system improvement.
Scope of Secretarial Audit
The Concept Paper has indicated the compliance of the following statues to be covered by the independent professional as part of the Secretarial Audit:
The Companies Act, 1956 and the Rules made under that Act;
The Depositories Act, 1996 and the Regulations and Bye-laws framed under that Act;
The Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997;
The Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992;
The Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000;
The Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999 and
The Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2008;
The Securities Contracts (Regulation) Act, 1956 ('SCRA') and the Rules made under that Act; and
The Listing Agreement.
While the above scope is limited to only Company's Act, SEBI regulations and listing compliance, a corporate compliance audit can have a far wider scope and also cover compliance of other statutes such as
- Factories Act
- Provident Fund Act
- Employee State Insurance Act
- Bonus Act
- Other applicable Labor Laws
- STPI Regulations
- Foreign Exchange Management Act and RBI guidelines
- SEZ regulations
- Pollution Control Laws
- Economic Laws
- Other Industrial Laws
The concept of Secretarial Audit is not to burden the corporate sector with another audit but to provide the following benefits:
- Ensure due compliance of legislations other than financial or costing aspects.
- An assurance to the board of directors that the company is compliant with various laws.
- Enable the Company to have eminent personalities on the Board as Non-executive Directors thereby enhancing their brand value.
- A strong internal control mechanism and compliance management system.
- It can relieve the company and their directors from consequences of unintended non compliance of law.
- Independent Directors and Nominee Directors can be assured that the affairs of the company are being conducted as per law.
- Ensures timely correction and rectification of any lapses in the compliance of the provisions of various statutes.
- It is salutary as it instills professional discipline and signifies law abiding nature of the promoters.
- It gives a necessary confidence to the investors with respect to proper disclosures in regard to the business and conduct of the affairs of the company
Disclaimer: The entire contents of this document have been developed on the basis of relevant provisions and are purely the views of the authors. Though the author has made utmost efforts to provide authentic information however, the authors and the company expressly disclaim all and any liability to any person who has read this document, or otherwise, in respect of anything, and of consequences of anything done, or omitted to be done by any such person in reliance upon the contents of this document