Enhanced Disclosure and Accountability under The Companies Act, 2013

In his address to the students, Mr Ketan Mukhija, Managing Associate, Luthra & Luthra, discussed the topic of increased disclosures under the 2013 Act.

He elaborated on the age-old problem of ensuring compliance with rules and laws put in place by the legislature, highlighting that there were around 420 rules put in place by the Central Government by way of delegated legislation regarding The Companies Act. 1956 that were facing a severe implementation deficit by virtue of being blatantly ignored or subverted by companies

Mr. Mukhija opined that while the 2013 Act attempts to improve compliance, it may not have done enough. Mr. Mukhija proceeded to explain how the provision stipulates a mandatory expenditure of 2% of a company’s profits of the past 3 financial years towards CSR activities and how easily these provisions can be misused by companies. For example, a company may manipulate its accounts in such a way such that it shows no profits, thereby easily avoiding expenditure on CSR. Even if the company does possess profits but still does not undertake the required expenditure, the penalty imposed is negligible thereby making no monetary difference to large companies with larger turnovers. Further, there remains a question of whether a company would be liable to pay towards CSR in cases where a company has been in existence for less than 3 financial years.

Owing to the impossibility in laying down rules for every conceivable situation that may arise under a provision, Mr Mukhija proceeded towards explaining the Legislature’s realization of self-regulation through an enhanced compliance and disclosure mechanism. An enhanced disclosure mechanism essentially attempts to give the possible shareholders a bird eye view into the company’s functioning.

For instance, as per the 2013 Act, listed companies in capital markets are required to disclose all additional liabilities, high risk factors, exact amount of promoter contributions, rules not complied with, names of all important office bearers, etc. in their prospectuses, thereby increasing disclosure of information. Another mechanism by which shareholders can be given maximum information are through the three instruments of disclosure which are: annual returns, the board report and explanatory statement.

The 2013 Act also introduces various compounding mechanisms where defaulting companies can approach the Registrar of Companies regarding their non-compliance and voluntarily pay a penalty for the same and also defines certain new terms which were earlier left ambiguous such as ‘associated company’, to prevent attempts by companies to subvert legal provisions by using their subsidiaries, chit funds, etc. as pawns to do so.

Therefore, according to Mr. Mukhija, although it is too early to say for sure how efficient these provisions would be in ensuring compliance, the inclusion of enhanced disclosure mechanisms in the 2013 Act is certainly a step in the right direction and helps fill the lacunae that existed under the old Act.

Note: This post is part of the report on a conference titled 'Reflections on The Companies Act, 2013' organised by the Michigan-Jindal Centre for Global Corporate and Financial Law and Policy on the 24th of October, 2013