What is key to a progressive economy? Frauds have increased phenomenally; here is a solution

Published: November 16, 2017 4:11:13 AM

Steps like GST, demonetisation, app-based payment systems, encouraging digitalisation, and linking Aadhaar and PAN will lead to better governance.

GST, GST Council, GST Council meet, GST Council meeting, outcome of GST Council meet, winds of change, reforms, economic reformsFinancial and corporate frauds in the recent past have increased the need for more stringent laws.

By Kirti Shah

The implementation of the Companies Act, 2013, was considered one of the key significant reforms aimed at bringing Indian company law in line with global standards. The Act introduced substantial changes in terms of accounting, reporting, and protection of investors and stakeholders, etc. The financial and corporate frauds in the recent past in India have increased the need for more stringent laws and ballooned the role and duties of auditors, company secretaries and independent directors. Also, the aim is to bring a change in the mindset of people, making them aware of the repercussions from any wrongdoing or the lack of corporate governance. In order to oversee the company’s conduct from an independence perspective, it has been made compulsory to appoint an independent director in case of listed, unlisted and private limited companies under the Companies Act, 2013. To qualify for the post, a person must satisfy certain qualification criteria, including not to enter into any financial transaction with a company exceeding a specified amount in the past two years or holding shares of the company. These criteria have been specified so that independence of such a director is not compromised. Further, it seeks to hold independent directors liable for acts of omission or commission by a company which are approved by the board in the presence of independent directors. Now, independent directors will have to participate more actively in the decision-making process of a company.

The government has been quite active on keeping a check on financial irregularities and tracking down beneficial owners of suspected shell companies. In this regard, the ministry of corporate affairs recently abandoned registration of over 2 lakh defaulting companies and barred more than 3 lakh directors of various listed and unlisted companies who have defaulted annual statutory compliances like filing of annual reports, annual returns, etc, by disqualifying them. In addition, the amended Companies Act, 2013, provides for de-registration of companies that fail to file returns.

Moreover, directors have been barred from using a digital signature to sign any document. It has created a lot of ripples in the boardroom and several directors have approached courts seeking relief from such rigorous conditions imposed on them. This could lead to a lot of hardships for private limited companies and their directors, who are directors of other listed or unlisted companies and have been disqualified for non-compliance. The ministry should look into the grey areas and provide relief provisions by amending the law or issuing a circular to remove adversities faced by honest corporate groups.

In order to strengthen corporate governance and transparency further into the system and make the Indian economy robust and progressive, the government has been proactive in taking requisite measures. Numerous legislative changes like introduction of GST (single tax reform), demonetisation, use of several app-based payment mechanisms laying the foundation for ‘cashless economy’, encouraging digitalisation, linking Aadhaar and Permanent Account Number, etc, have been formulated, which are expected to lead to better governance. The recent World Bank report that reported India jumping 30 places on the Ease of Doing Business index will go a long way in attracting more and more foreign investment into the country.

The author is an Executive Director, Tax Deal Advisory, M&A and PE, KPMG in India
(With inputs from Amrita Bhatnagar, assistant manager, Tax, Deal Advisory, KPMG in India)

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