A time to fine-tune

Despite the enactment of the Companies Act, 2013, central public sector enterprises (CPSEs) can retain exemptions that were available to them under the Companies Act, 1956. The department of public enterprises (DPE) has recently written to various ministries, seeking to know exemptions they would like to maintain under the new regime.

?We have asked administrative ministries to tell us which exemptions from the Companies Act, 1956 they want to maintain so that we can get them included under the exemption clause 462 of the new Act, ? DPE secretary OP Rawat told FE.

The replaced Companies Act, 1956, empowered the central government to modify the laws in relation to government companies from time to time. But most provisions of the new Act will be uniformly applicable to companies, including CPSUs.

According to experts, two matters of immediate concern to central PSUs could be rotation of auditors and restatement of accounts.

By the Companies Act, 2013, the Comptroller and Auditor General (CAG) of India will appoint the statutory auditor for all government companies. This appointment must be ratified by the shareholders every year in the annual general meeting. This practically means appointment of auditors every year, said N Venkatram, managing partner (audit), Deloitte, Haskins & Sells.

?The appointment of an auditor for a continuous period of five years under the new Act gives the audit firm more independence and understanding of the auditee, and could arguably result in a higher quality of audit than in an annual appointment. This is the argument being made for non-government companies, and there should be no compelling reason to make an exception here for the PSUs?, Venkatram said.

Experts said the new Act has provisions for restatement of financial statements and reopening of books of accounts of companies, a move that would help government companies, if their financial statements are either qualified by auditors or modified to highlight matters of uncertainty.

?Earlier, the continuing qualifications and modifications in the auditors reports of large government companies made it difficult for ordinary investors to fully comprehend the audit opinion and its implications. The new law may just change that,? said a compliance officer in a government-owned company.

The financial statements of government companies tend to highlight significant matters of uncertainty that require decisions by the government or the courts. ?With the enhanced responsibility of the board of directors and audit committees in relation to the accounts and controls over financial reporting, it would not be surprising if at some future date, government companies would elect to restate their financial statements rather than carry on qualifications in perpetuity?, Venkatram told FE.

According to Lalit Kumar, partner in law firm J Sagar Associates, the central government will have to prepare a detailed annual report along with audit report and comments from CAG for every company in which it is a stakeholder. ?After such preparation, annual reports will have to be laid before both Houses of Parliament and in the state legislature and assembly in case the state government is a stakeholder?, Kumar said.

Boards of government companies also need to factor in changes in the corporate social responsibility (CSR) norms. The CSR policy mandates 2% sharing of average net profits by certain class of companies whereas the CSR policy for PSUs and government companies stipulates between 1% and 5% sharing. ?Not many government companies were successful in using their CSR budgets. As per the new law, government companies will be compelled to comply with or disclose any shortfall in CSR spends in their board reports. This would require direct attention on identification and monitoring of CSR activities,? said Venkatram.

The new law makes it mandatory for CPSUs to set aside 2% of their average net profit for preceding three years for CSR expenditure. But experts have pointed to several issues that crop up due to the new CSR norms. For example, rules do not substantiate whether the unspent (surplus) amount rolled over to the next financial year will yield any credit to the company in the next fiscal, said Kumar.

Sources said the government is also exploring options of levying a financial penalty on profit-making CPSEs which do not utilise their CSR corpus for two or three years in a stretch. Also, if CSR funds remain under-utilised, the leftover amount will go to a central corpus fund, which will be used at the discretion of an apex board on CSR.

?If private sector companies are being mandated to spend on CSR and report reasons why they could not spend, the public sector companies should also be up to the mark. I will study the spending patterns of PSUs and see what more can be done,? corporate affairs minister Sachin Pilot told FE.

As part of the multi-step strategy, first the top earning CPSEs like Coal India (CIL), Indian Oil Corporation (IOC), ONGC and SAIL, among others, will have to mandatorily spend a minimum of 2% of their average net profit on CSR. So far, the CPSEs generating profit in excess of R500 crore were obligated to spend a minimum of 0.5% of profits on CSR.

Rajiv Chugh, tax partner at EY, said the manner of computation of average net profits needs to be simplified to ensure that there is no controversy for corporate India. Chugh said: ?The CSR rules link 2% CSR spending amount to be computed with reference to average net profits (before tax) akin to the manner in which managerial remuneration is to be computed, as per section 198, but using the block concept of profits of preceding three years. The rules also clarify that profits arising from branches outside India are to be excluded. The manner of computation needs to be simplified.?

According to Kumar, one of the rules provides that CSR activities may generally be conducted as projects or programmes (either new or ongoing), however, it excludes activities undertaken in pursuance of the normal course of business of a company.