These Reports Indicate That Budget 2020 Might Have Some Big Ideas In Store For Corporate Governance And Taxation 

The Companies Law Committee (CLC) has submitted its recommendations to the Ministry of Corporate Affairs.

The recommendations include a need to decriminalise several of the provisions of the Companies Act.

The report further includes a greater role for an in-house adjudication framework, systematically increasing the threshold for corporate social responsibility (CSR) compliance and adding exceptions to the definition of listed companies.

It further proposes to give exemptions to non-banking financial companies.

This won’t be the first exercise in decriminalisation as a similar one happened in 2018 where the government changed violation in 16 compliances from criminal to civil offenses.

The new law is likely to introduce provisions to further decriminalise offences where criminal liability is already imposed by other acts.

These provisions are important as India moves towards a rules-based regime that celebrates its entrepreneurial spirit. This change is further in line with a push towards improving India’s ease of doing business.

The new law that decriminalises the provisions under the Companies Act should additionally provide a framework for revelation of violations by commercial organisations.

Offering relaxed penalties, deferred prosecution in many cases would go a long way in ensuring compliance with the act. There is also a need to bring parity of rules applicable to limited liability partnership, private limited firms and proprietorships.

The budget process has just started, and therefore, one doesn’t know what is likely in store in February. Two important reports with the government are those of the High-Level Advisory Group (HLAG) and the Direct Tax Code (DTC).

While the HLAG report has been made public, we are yet to see the detailed DTC report.

However, media leaks seem to suggest that DTC report is bold in its recommendations and the general feeling post corporate tax cut has been that the Revenue Department finally recognises the possibility of improved compliance due to reduction in tax rates.

This recognition is important as it suggests that high rates do dissuade people from paying taxes, and therefore, the problem of compliance is one to do with tax policy along with other issues.

Both these reports appear to be extremely progressive and this suggests that we may be looking at further reforms to our taxation policy combined with the laws that govern our corporate sector.

While we are at these reforms, it is also important to recognise the failing standards of corporate governance. This has emerged as a challenge not just in India but elsewhere as companies, auditors, ratings agencies and even regulators have failed simultaneously over the last few decades.

A key element of further reforms should focus on considering auditors, rating agencies and other such institutions as key elements of our regulatory infrastructure. Therefore, they must be offered incentives to discharge their fiduciary duties to the best of their abilities.

As we decriminalise provisions, we must try to ensure self-compliance if not by the company then by the auditors. Such a system which is based on incentives is likely to perform better than one based on high penalties.

Regulators need to recognise the importance of auditors and consultants, thereby working together to enable the growth of individual sectors. The focus should not be on forging ties to trap companies but instead to understand pain points and remove them from our regulatory environment.

In 2020, we will take a lot of bold reforms throughout the year, but as we undertake them, it is important to keep in mind the kind of corporate structure and culture we wish to establish in India.

Improving our standards of cooperative governance is extremely critical to ensure long-term sustainability of our businesses and maximising shareholder wealth.