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Body to monitor accounting & auditing
November, 26th 2011

To have quasi-judicial powers, levy penalty for misconduct; may clash with ICAI.

The government proposes to establish a National Financial Reporting Authority (NFRA) for better monitoring of corporate financial management, going by the revised Companies Bill, 2011.

NFRA is, in fact, the renamed version of the earlier proposed National Advisory Committee on Accounting and Auditing Standards. Such an authority, says the Bill which the Cabinet cleared yesterday, will have the mandate to ensure scrutiny and compliance of accounting and auditing standards. It will also ascertain the quality of the service of professionals associated with the compliance.

* Financial reporting body for better monitoring of corporate financial management
* Provisions for speedy mergers, amalgamations, and liquidation
* Concept of dormant companies to facilitate inactive companies to have minimum compliance requirements
* Norms for key managerial personnel (KMPs) for enhanced accountability
* SFIO with wide-ranging powers including arrest 
* Enabling CSR provisions to inculcate corporate social responsibility
* Nomination of director by small shareholders; recognition of class action suits
* Databank of independent directors maintained by central government notified body

NFRA will have quasi-judicial powers. It can order investigation, levy penalty and bar professionals from practice in case of their indulgence in professional or other misconduct. The creation of this body may create a problem with the Institute of Chartered Accountants of India(ICAI), a senior expert associated with a leading CA firm pointed out on condition of anonymity.

The Bill also has provisions for a short form of merger and summary liquidation so as to ensure speedier action in certain cases. It has outlined simplified procedure, through confirmation by the central government, for compromise or arrangement, including for merger or amalgamation of holding companies and wholly-owned subsidiary/subsidiaries, between two or more small companies and for other class of companies prescribed.

This is expected to ensure faster decisions on approvals for mergers and amalgamations. For other companies, these matters would be approved by the Company Law Tribunal.

The Bill, to be tabled in the ongoing winter session of Parliament, has also introduced the concept of dormant companies, to facilitate inactive companies to have minimum compliance requirements and to keep track of vanishing companies. It has also brought in the idea of key managerial personnel (KMP) for enhanced accountability in corporate functioning. The Bill has provisions for the bigger companies to have whole-time KMPs.

Further, there will be a serious fraud investigation office, or SFIO. It will be a statutory body with enforcement powers, including arrest, focus on protection of investors with recognition of class action suits and provision for nomination of directors by small shareholders and stricter role for auditors including rotation.

The investigation report of SFIO, filed with the court for framing of charges, would be treated as a report from a police officer.

Also, it is as enabling provisions that corporate social responsibility (CSR) norms have been introduced in the Bill. So, they are not mandatory. Thus, every eligible company one having net worth of Rs 500 crore or more, or turnover of Rs 1,000 crore or more or net profit of Rs 5 crore or more during any financial year will have to constitute a CSR committee of the board to formulate any companys CSR policy. The policy will have be included in the boards report; it would be placed on the companys website.

The company board will ensure that activities included in the CSR policy are undertaken. At least two per cent of the companys average during three immediately preceding financial years will have to be spent in every financial year on the policy.

In case the company fails to comply, it will give suitable reasons in its boards report.

The Bill, in a bid to ensure independence and protection of interests of non-promoter shareholders, has provided specific attributes, numbers, tenure and liability of the independent directors. A data bank has been proposed to be maintained by a body or institute notified by the central government to facilitate appointment of such directors.

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