Deloitte decodes disclosures made by Indian companies on new governance related norms as per Companies Act 2013

May 16, Mumbai: Deloitte Touche Tohmatsu India LLP has recently released a research report titled ‘Insights into Annual Reports FY2015’ which analyses disclosures made in the Annual Reports of leading Indian companies across five critical areas: Board Evaluation, Internal Financial Controls (‘IFC’), Enterprise Risk Management (‘ERM’), Related Party Transactions (‘RPT’), and Compliance with applicable laws and regulations.

The report attempts to describe key takeaways emerging from the first year of this transformational journey of the companies towards new provisions prescribed under the Companies Act 2013 (the Act) on governance. The document not only compares the reporting practices on the mandatory disclosures required under the Act in these five areas, but also draws attention to the additional disclosures made voluntarily (by some companies in these areas.

Elaborating on the report, Abhay Gupte, Partner, Deloitte Touche Tohmatsu India LLP said “A general observation on the disclosures in the five areas, is that a large section of the companies in the sample have approached the disclosures more as a compliance exercise. This could be because FY 2015 is only the first year of reporting under the Act. With better understanding of the Act and appreciation of the impact of effective disclosures and meaningful compliance on shareholder confidence and trust, companies may possibly be expected to adopt a more plenary approach in the ensuing years. But to realize the true spirit of corporate governance reform, Indian companies will have to pursue governance as an ever-evolving and constructive value accreting process.”

Some of the key highlights of the report include:


Board Evaluation

·         Majority (63%) of the companies in the sample did not disclose the manner in which they had conducted the annual evaluation of its Board, despite this being a mandate as per the Act. Hence, the disclosure of the methodology adopted could perhaps afford a better articulation with enhanced clarity and elaboration.
ERM

·         Most (96%) companies have disclosed that they had implemented a policy or framework for Risk Management. 74% of the companies in the sample have displayed cognizance of the potential business challenges by disclosing the elements of risks which in the opinion of their Boards may threaten the existence of the company. However, 52% of the companies have not disclosed their risk mitigation plans in their Annual Reports.
IFC

·         5% of the companies have disclosed that globally recognized internal controls framework like COSO, JSOX, Turnbull Report, etc. were referred for IFC, and 87% did not disclose if the technology tools support their IFC. Step up in the disclosures on IFC with voluntary detailing could, undoubtedly, instill greater degree of confidence among the stakeholders.

Compliance

·         Most companies (96%) in the sample have disclosed that their Directors had devised proper systems to ensure Compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively. However, 62% companies did not disclose if they had formed a committee for Compliance Management. There seems to be much scope for improvement in the voluntary disclosures on compliance management system so that the stakeholders stay more assured and informed.

Related Party Transactions

·         11% companies have gone above and beyond the mandatory requirements and have provided additional details on RPT mechanism, material RPT and/or transactions at arm's length basis. They have disclosed the development of an RPT Manual, Standard Operating Procedures for the purpose of identification and monitoring of such transactions and/or given a brief about the intent and content of the RPT policy in the report. However, unlike other areas, the companies have alluded to greater objectivity and clarity in the mandatory disclosures for RPT, perhaps because the Act itself is comparatively more prescriptive on RPT disclosures than in the other four areas listed above.

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