Companies Act draft rules bring clarity on auditor rotation, CSR spending

Sep 10 2013, 09:55 IST
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The new companies law, which was recently passed by Parliament and also got the President's assent, will replace the current Companies Act, 1956. The new companies law, which was recently passed by Parliament and also got the President's assent, will replace the current Companies Act, 1956.
SummaryAll public companies with paid-up share capital of +Rs 100 cr may have to induct one-third independent directors.

All public companies whose paid-up share capital exceeds Rs 100 crore or which have in aggregate outstanding loans or deposits exceeding Rs 200 crore may soon be required to have one-third independent directors on their boards.

Also, auditors may need to directly report to the government, within 30 days, if they are satisfied that material fraud is happening in the company. Further, India Inc will also have to put the income from ongoing CSR activities into its corporate social responsibility (CSR) fund in addition to the 2% of net profits of the preceeding three years.

These are among the important clarifications that have been brought by the ministry of corporate affairs (MCA) by the way of rules to the new Companies Act, 2013. The new companies law, which was recently passed by Parliament and also got the President's assent, will replace the current Companies Act, 1956 once the rules are finalised and notified. The MCA has asked stakeholders, including the public, to respond to the first set of draft rules, covering 16 out of total 29 chapters of the Companies Act 2013, covering over 240 clauses, by October 8.

Auditor Rotation: As per the draft rules, auditors will directly inform about a fraud or potential fraud in the company where the amount involved or likely to be involved is not less than 5% of the net profit or 2% of turnover of the company for the preceding financial year.

"Auditors will get 30 days to bring any fraud/potential fraud to the notice of the government but only with regards to material fraud. This is a relief," said Dolphy D'souza, National Leader & Partner in a member firm of Ernst & Young Global . This is because, the relevant clause in the Companies Bill 2012 had put the entire onus of reporting any fraud on the auditors.

On the issue of mandatory rotation of auditors, the draft rule makes it clear that the 5-year period (for individual auditor) and 10-year period (for audit firm) will be calculated retrospectively Ė that is from a specified date before the commencement of the new Companies Act, 2013.

The rules also make it clear that as part of the rotation of auditors, the companies cannot appoint a auditor from a network firm. Reacting to this draft rule, N Venkatram managing partner (audit), Deloitte Haskins & Sells said: "So far the auditors

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