First Notes - 08 July 2016
First Notes - 08 July 2016
The MCA amends certain provisions relating to auditor’s rotation and managerial remuneration
Background
The Companies Act, 2013 (2013 Act) became largely effective from 1 April 2014. The Ministry of Corporate Affairs (MCA) has been issuing various amendments and clarifications to the 2013 Act and to the corresponding Rules to remove practical challenges faced by companies while implementing certain provisions of the 2013 Act. Recently, on 30 June 2016, the MCA amended certain provisions relating to:
- Auditor’s rotation, and
- Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014.
New developments
Auditor’s rotation
Existing requirements
The existing requirements of the 2013 Act are as follows:
- Section 139 of the 2013 Act provides appointment of auditors for a five-year term which is to be ratified annually by an ordinary resolution.
- Listed companies and certain prescribed classes of companies cannot appoint or re-appoint an audit firm for more than two consecutive terms of five years each.
- Further, term prior to 1 April 2014 will be retrospectively reckoned for computing the five to ten years validity.
- Every company, existing on or before the commencement of the 2013 Act is required to comply with these provisions within three years from 1 April 2014 i.e. from 1 April 2017.
Amendment
Many companies are facing difficulties regarding the period within which companies must comply with the above mentioned provisions. Accordingly, MCA has clarified that companies should ensure compliance of the new provisions of Section 139 within a period which shall not be later than the date of the first annual general meeting of the company held after 1 April 2017.
Therefore, for companies with 31 March as the year-end should hold annual general meeting latest by 30 September 2017 to appoint auditors.
The Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 (the Rules)
The MCA through its circular dated 30 June 2016 has made certain key amendments to the Rules which are as follows:
Amendment in Rules |
Overview of the amendments |
Rule 3 | Filing of return of appointment: A company is no longer required to file a return of appointment of
Related amendment has also been made in Form No. MR. 1. |
Rule 5(1)(v),(vi)(vii) and (ix) to (xi) |
Disclosure in Board’s report: Number of disclosures in the Board’s report has been reduced by MCA. The Clauses that have been omitted are as follows:
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Rule 5(2) | Disclosure regarding employee remuneration: The amendment requires disclosure of names of the top 10 employees in terms of remuneration drawn’ and the name of every employee, who:
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Form No. MR.1 | Return of appointment of managerial personnel: This form has been revised to include a declaration/certificate by a practicing professional (Chartered Accountant/Cost Accountant/Company Secretary) to state that the information contained in this form is true, correct and complete and no information material to this form has been suppressed. The revised Form No. MR.1 has also been provided by MCA in the circular dated 30 June 2016.
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The amendments related to the auditor’s rotation and the Rules are applicable from 30 June 2016 i.e. the date they have been published in the official gazette of India.
Our comments
- Auditor’s rotation: The Report of the Companies Law Committee carries a recommendation on the auditor’s rotation that the Rules should provide clarity that three years’ transition period should be counted from AGM to AGM and not from the commencement of the 2013 Act. Therefore, the clarification on the auditor’s rotation is a welcome step by MCA and shows the regulator’s efforts to ensure a smooth transition of the 2013 Act.
- Disclosures in the Board’s report: Amendments to the Rules would lead to further rationalisation of the Board’s report and will help to provide stakeholders important and relevant information only. The Report of the Companies Law Committee carries similar recommendations to rationalise the Board’s report.
To access the text of the MCA circulars
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