How the new Companies Act will affect Tata Sons, Bharti Telecom

The provision requires greater financial disclosures by a certain category of unlisted companies.

Companies such as Tata Sons and Bharti Telecom, which are unlisted but have listed subsidiaries, may soon have to file periodic financial statements with the registrar of companies under the new provision of the Companies Act.

The provision requires greater financial disclosures by a certain category of unlisted companies.

“While disclosures are made by listed companies regularly, their holding firms only provide annual financial statements, with an 18-month gap at that. We want to address this information asymmetry,” a senior government official told Business Standard.

The ministry is also considering that the criteria to define this class should be based on borrowing.

Companies with certain levels of borrowing and their exposure to banks, deposits, and debentures are likely to be brought under the purview of the new provision.

"The idea is to increase accountability where public money is involved," the official added.

In the amended Companies Act, 2020, the corporate affairs ministry added a provision -- Section 129A -- which empowers the government to ask a certain class of companies to prepare financial results periodically and file a copy of those with the registrar within 30 days of completing the relevant period.

The provision also requires a company to “obtain approval of the Board of Directors and complete audit or limited review of such periodical financial results in such manner as may be prescribed”.

The move is a result of a lack of financial oversight, which was brought to light after the IL&FS case.

While the ministry is yet to decide on the class of firms, the idea is to bring in greater accountability.

The ministry has also not decided whether the frequency of such disclosures should be made quarterly or half-yearly.

“Investors will have more and timely information and in that sense it is good for businesses,” the official said.

Besides the unlisted holding companies with listed subsidiaries, the ministry is considering that the criteria to define this class should be based on borrowing.

Companies with certain levels of borrowing and their exposure to banks, deposits and debentures are likely to be brought under the purview of the new provision.

This would mean several public sector enterprises, insurers and banks would be affected by the change in the law.

The ministry is holding discussion with the Department of Public Enterprises and the Department of Financial Services to finalise the criteria.

According to people in the know, the government wants to wait for industry to tide over the Covid crisis before it implements this law.

The last amendments made to the Companies Act were to improve ease of doing business, with several sections decriminalised and compliances reduced.

The ministry is keen to launch the new version of its portal as announced in the Budget ahead of defining the class of companies required to file financial statements.

Experts say this should be restricted to public interest entities.

“This may include companies in the financial sector or those with large debt. This will provide early warning signs of any credit or systemic risks.

"Further, wholly owned subsidiaries may be exempted if their parents are providing consolidated financial information periodically,” said Sudhir Soni, partner, SR Batliboi and Co LLP.

Industry experts say the government needs to utilise the information at hand better before seeking even more.

“The problem is not whether compliances or the number of forms is increased or decreased.

"The problem is smart analytics. We need someone to do intelligent analysis of the papers that are filed.

"The registrar has the biggest repository of data, which should be used to understand the corporate sector,” said Anshul Jain, partner, PwC India.