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The Companies Act, 2013, made effective from April 2014, in its objective of bringing transparency and protection of minority shareholders has put enormous responsibilities on the directors, which includes a comprehensive ‘Directors Responsibility Statement’ as part of the Directors Report sent to the Shareholders and filed with the Ministry of Corporate Affairs and other Government Departments.

The new Directors Responsibility Statement now requires the directors to clearly state that – “the directors had devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively”.

Therefore, the directors are now mandated to not only (a) devise proper systems to ensure compliance of applicable laws, but also ensure that (b) such systems were adequate and (c) operating effectively.

The above duty cast on directors means that the directors can now no longer take the shelter under the past practice of receiving a certificate of statutory compliance from the Company Secretary. Perhaps the intent of legislature is to bring focus of the directors on implementing proper systems and ensuring its adequacy. While functions of the Company Secretary under Section 205 of the Companies Act, 2013 include reporting by Company Secretary to the Board about the compliance of the provisions of the Companies Act as well as other laws applicable to the company, clear omission of the expressions like ‘devising the system’, ensuring ‘adequacy of the system’ and their ‘effective operations’ from the functions of the Company Secretary possibly means that the directors themselves have to, through the management, discharge the responsibility of devising proper systems for compliance of applicable laws and in the absence of which, the directors may not pass the test of compliance under Section 134(5) (f) of the Companies Act, 2013.

Patanjali Associates has developed its proprietary software tool under the name ‘Argus’ to enable the Companies, Directors and the Company Secretaries to meet the obligations cast upon them under the Companies Act, 2013. It may be stated that implementing proper systems for statutory compliance not only fulfills the requirement under Companies Act, 2013, but also strengthens corporate governance. Argus, in addition, enables the organization to manage and mitigate the risks and act as a repository of statutory compliance records. The tool has an inbuilt escalation, alert matrix and dashboards for ensuring timely compliance.

Let us now examine the complexities of the above onerous responsibility on the directors in the retail sector. A sample study done by Patanjali Associates, Law Firm & Corporate Advisors ascertained that a retail outlet employing more than 25 workmen and engaged in selling food products and operating only in the state of Maharashtra has to undertake compliance of more than 35 statutes. If this number is multiplied by the rules, then, one is talking of more than 50 statutory compliances for a food retail business operating only in the state of Maharashtra. Now increase the number of states to 28 and also increase the number of products sold at the retail outlet and one can only imagine the plethora of compliances the business has to comply. Adding on to this is the fact that compliance is not a ‘one-time’ event, organizations have to continuously develop and modify their policies to keep up with the statutory requirements and the directors have now been made responsible to devise proper systems and ensure that such systems are adequate for managing this gigantic volume of statutory compliance.

Devising adequate systems becomes more compounded and complicated in a corporate as the responsibility for statutory compliance usually lies with several functions. So, while Finance function is responsible for compliance of Taxation and Accounting laws, HR & Admin could be responsible for Personnel and Labour laws, etc. Hence, there is no single function managing statutory compliances. Even the Company Secretary usually collects reports of compliances from other functions and cannot therefore be held responsible for management of all statutory compliances, given the size, complexity and vastness of the function. The directors, therefore, have to depend on technology which can integrate the responsibilities discharged by various functions in the organization to discharge the duty cast upon them effectively and efficiently.

Besides the recent incidents of alleged statutory non-compliance by certain FMCG companies in India and Consultancy organizations overseas have demonstrated that non-compliance of applicable laws can result in adversely affecting the reputation and growth of the business, besides subjecting the management and directors to penal proceedings.

Apart from the aspect of profit and loss to the business, by keeping in track the statutory compliances and taking regular steps to avoid non-compliance enlightens the employees too about the necessary compliances being followed by their organization. In addition to the obvious ramification that the employees prefer working in an organization which is compliant to legal requirements, such employee awareness also increases congruity in an organization.

Therefore, it is rightly said that statutory compliance is the invisible pillar of the business foundation in the current era and the management, in addition to focusing on business growth, needs to give vital importance to this area for the success of business.

Originally posted on Patanjali Associates.