Making cost record relevant

Updated: Dec 20 2013, 07:40am hrs
The ministry of corporate affairs has showcased, across a broad range of relevant issues, a highly progressive and proactive approach by doing away with many archaic regulatory requirements which were hindrances to smooth working and growth of India Inc. These are much-needed steps at a critical time when, globally, efforts are directed to improve the ease of doing business. One such positive step has been the decision of the government, through the draft Companies (Cost Records and Cost Audit) Rules, 2013, to repeal the extant Cost Accounting Records Rules and Cost Audit Report Rules which were notified in 2011. To my mind, this is a matter of great relief for corporate India.

To go a little back in time, earlier the Cost Accounting Record Rules covered 44 specified industries, including those of national priority or industries which were controlled or regulated in some manner either through controlled/administered price mechanism or being recipients of various government and other subsidies. In such industries, the cost records served a useful purpose for determination and benchmarking of the cost of production and ensured that pricing of products was not detrimental to the public interest. Until 2011, business had no material issues with these regulations, as requirements were founded on rationale.

Through orders in June 2011 and November 2012, the field was suddenly widened to submit all manner of businesses, including of very small size, to keeping cost records in a formal way. Businesses protested the lack of rationality in this and actually found little value in what it was incrementally asked to do. The Indian economy has undergone a sea change and has become extremely competitive, not only domestically but also internationally. In such a globalised economy, industrial units can survive only by strong focus on competitive cost management. In this scenario, such collection of data will entail huge transaction costs to companies, and cause great hardship, particularly to small and medium companies besides the cost to the government to administer and make use of the data under these regulations.

Perhaps realising this futility, no other economy apart from Pakistan has mandated such maintenance of cost records and cost audits for business entities and even here we have not come across any direct evidence of great success. This only aggravates the disadvantaged position of Indian companies vis-a-vis other countries. Moreover, in direct conflict with the recent growth-oriented economic policies, the applicability of these rules to all products and services across industries through a statutory diktat carries a significant risk of being perceived negatively by global investors.

It may be recalled that while acknowledging that cost records and cost audit were important instruments for companies to make their operations efficient and that the corporate scenario included a sizeable component of government-owned enterprises or companies operating under administered price mechanism or a regime of subsidies where it would be relevant for the government to seek costing data, the Expert Committee on Company Law (headed by Dr JJ Irani) in 2005 concluded that legislative guidance had to take into account the role of management in addressing cost management issues in the context of the liberalised business and economic environment. I completely endorse this view. Maintenance of records explicitly to comply with the Act has wider ramifications and, therefore, requires careful thought on the part of lawmakers while specifying the scope.

As part of the public consultation process for Rules on Companies Act, 2013, the ministry of corporate affairs recently issued the draft Rules on Cost Records and Cost Audit for public comments. These rules propose to subject businesses to cost records and formalities not only where administered prices, subsidies, regulation or public interest are involved, but also where product revenues exceed a certain size for many industries considered relevant in the present context. Although many businesses would now be captured at low thresholds of net worth of R500 crore and turnover of R100 crore, it seems to be a broadly well thought out limit.

To my mind, the Indian economy is experiencing an increasing integration with the world economy resulting in increased interdependence and competition between economies. Such an environment demands higher levels of efficiency and more cost-cutting techniques for sustainable competitive advantage. In such a situation, a proposal to widen the net to enterprises where no public money or public interest is involved is simply unwarranted and possibly counter-productive. Clearly, the draft rules now capture every relevant and material business entity where cost records and cost audit is required. The rules are already exhaustive and more than sufficient to serve the intended purpose under law.

Sidharth Birla

The author is president-elect, Federation of Indian Chambers of Commerce and Industry (Ficci)