IMA India’s CFO Forum Sheds Light on Shifting Regulatory Landscape

Recent amendments to the Companies Act deserve attention since they affect businesses across sectors. MNCs, in particular, face complexities arising from a shared global infrastructure.

When it comes to regulatory compliance, change is the only constant. In recent years, the Companies Act has been entirely transformed with the inclusion of CSR provisions, Ind AS standards, CARO reports and new financial-accounting requirements. Yet, despite a decade of streamlining of the law, there are fresh burdens to contend with. Recent amendments to the Act deserve attention since they affect businesses across sectors. MNCs, in particular, face complexities arising from a shared global infrastructure. Even entities in the US, with extensive cloud-based networks, will grapple with implementation issues. At a recent India CFO Forum session in Bangalore, Govind Ahuja, Partner and Professional Practice Director-India at SR Batliboi & Associates, walked us through the amendments and additional compliance requirements that businesses must watch out for.

CSR AMENDMENTS

Currently, the CSR rules – which are no longer a mere ‘moral obligation’ but a comprehensive framework – apply to companies with a net worth exceeding Rs 500 crores or annual profits exceeding Rs 5 crores. Three recent changes deserve attention:

• Rule 3(1) and deletion of rule 3(2): Companies with unused CSR funds at the end of the year must comply with all provisions, including constituting a CSR committee. The earlier provision allowing companies to exit CSR obligations after three years has been removed, meaning once covered, there is no exit from CSR obligations.
• Rule 4(2): Registered Public Trusts and registered societies exempted under the Income Tax Act can now undertake CSR activities.
• Rule 8(3): Companies with an average CSR obligation of Rs 10 crores or more in the preceding 3 years must undergo an impact assessment by an independent agency for projects completed within the past year that exceeded Rs 1 crore in expenditure.

The fee threshold for CSR-related activities has been revised to 2% of CSR spend or Rs 50 lacs, whichever is higher, adding a new dimension to financial considerations. Additionally, the CSR 2 form must be filed by the 24^th of March, covering crucial details like expenditure, project specifics, CSR committee composition, meetings held and unspent CSR amounts.

ELECTRONIC BOOK-KEEPING RULES

The MCA has enacted several amendments focusing on electronic book-keeping practices:

• Accessibility: Electronic books of accounts must always remain accessible within India for subsequent reference. The broad definition of ‘books of account’ under Section 2(13) of the 2013 Act encompasses all records related to financial statements.
• Daily back-ups: Back-ups of electronic books and relevant documents, whether maintained within or outside India, must now be stored in servers physically located in India on a daily basis, as opposed to the earlier periodic basis.
• Annual disclosure: Companies are mandated to annually disclose to the RoC the name and address of the person controlling the books of account and other relevant documents in India, especially when the service provider is situated outside India.

Failure to comply with these regulations will result in penalties as outlined in Section 128(6), applicable to specified persons like the MD, WTD in charge of Finance, CFO, or any other person designated by the Board for compliance duties. If the penalty is material, the company must recognise the amount in its financial statements. Additionally, the Reporting Auditor is mandated to report exceptions under Section 143(3)(b) with the heading ‘Report on other legal and regulatory requirements’ of the Act.

AUDIT TRAILS

Companies that use accounting software to maintain books of account must now ensure their accounting software has:

• An audit trail recording feature covering every transaction
• An edit log of each transaction including the date and changes made
• No mechanism to disable audit trail

In order to comply with the new regulations corporate leadership must be cognisant of the following:

• The leadership is primarily responsible for selecting appropriate accounting software, ensuring compliance with laws, and establishing policies for audit trail adequacy.
• Accounting software may be hosted and maintained globally, including on-premises, on the cloud or in Saas (Software as a Service) form.
• Books of account can also be maintained at a service organisation such as a shared service centre, which may use its own software to process payroll for the company.
• All software used to maintain records is covered, including web-portals, databases, and cloud infrastructure.
• A minimum audit trail retention of 8 years is mandatory.
• Implementing specific IT controls, such as ensuring the audit trail feature remains active; assigning unique User IDs; authorising configuration changes; restricting administrator access; and regularly backing up audit trails.

Looking ahead, corporates should:

• Conduct a comprehensive inventory of the software utilised throughout the year.
• Identify processes crucial from a financial statement perspective.
• Identify critical elements in each process requiring IT logs for changes/trails.
• Discuss data requirements with software vendors, exploring the feasibility and costs of data generation and maintenance.
• For outsourced processes, communicate with service providers, align expectations and modify contracts accordingly.
• Discuss the MCA compliance approach with the Board/Audit Committee and auditors.
• Identify and assess areas or processes where creating a trail may not be feasible.
• Assess reporting implications in financial statements and engage early with auditors.
• Assess the need for new software systems, weighing the cost of compliance against potential investments.

The contents of this paper are based on discussions of the India CFO Forum in Bangalore with Govind Ahuja, Partner and Professional Practice Director – India, SR Batliboi & Associates in in January 2024. The views expressed may not be those of IMA India.

This paper is available on the Knowledge Centre of the IMA website. Additionally, a podcast version is available here and can be heard on the podcast platform of your choice.