January 2, 2017

Legal and regulatory compliance may prove to be one of the biggest challenges for India Inc in 2017 when a slew of legislations including the goods and services tax (GST), Insolvency Code, and Benami Amendment Act come into force.

Sectors such as real estate, automobiles, banking and pharma would be the most impacted with the regulations kicking in to bring about structural shifts.

“Since several of these are sweeping changes, it will require significant efforts and also increase compliance costs, at least in the short term,“ said Sai Venkateshwaran, head of accounting advisory services at KPMG India.

Increased thrust on compliance has not been an overnight phenomenon. “In the past four years, we have seen most corporate reporting requirements undergoing a change,“ Venkateshwaran said.

“The new Companies Act (implemented in 2013) changed the requirements on areas, ranging from corporate governance and internal controls to investor protection,“ he said.Then, the new Indian accounting standards, Ind-AS changed the way companies report their financial performance to investors, and Income Computation and Disclosure Standards (ICDS) changed how financial performance is reported to the tax authorities, Venkateshwaran said. “GST brings in one of the biggest reforms we have been  awaiting,“ he said.

Further, recent developments of demonetisation, the Tata Group controversy over Cyrus Mistry's dismissal as its chairman, and the government's push to curb black money underscore the need to be on the right side of the law.

The regulatory changes are likely to be most sweeping for the auto industry. A slew of regulations encompassing emission norms, fuel efficiency, electric vehicles, stringent crash tests and scrapping policy are likely to ensure cars become cleaner, safer and perform better, albeit dearer too.

Real estate is another sector that may undergo some structural changes in the post-demonetised environment. The Real Estate (Regulation and Development) Act passed this year involves higher transparency , increased penalties for delays and defaults and improvement in accountability of developers.

“Real estate players in India are staring at a substantial increase in their compliance,“ said Bhairav Dalal, partner at PwC India. “This should lead to increased transparency and better corporate governance, which should positively fuel investor confidence. There will be additional costs in the short to medium term to meet the increased compliance requirements,“ he said.

The pharmaceutical industry has historically borne higher than average cost of regulations due to its high exposure to regulated markets. With increased scrutiny by the US Food and Drug Administration (FDA) accompanied by price control regulations enforced by the Indian government, top companies' legal costs have quadrupled in the past five years.The top five drug makers in the country spent nearly Rs 3,500 crore in legal costs in 2015-16.

“Indian pharma companies are taking regulatory risks emanating from US FDA, US Foreign Corrupt Practices Act and Indian government's Uniform Code of Pharmaceutical Marketing Ethics very seriously,“ said Sujay Shetty, pharma leader at PwC India. “This is especially critical given the issues in China that took place a couple of years ago. Another reason is the tightening of scrutiny by US FDA on Indian plants and Indian government's moves to tighten up selling practices,“ he said.

With the escalating stress of bad loans, banking sector has been under the radar of reforms for a while now. Financial institutions need to ensure compliance with international regulations such as Fatca (Foreign Account Tax Compliance Act of the US) and the CRS (common reporting standards).

The entire demonetisation exercise has again brought to the fore a host of compliances related to anti-money laundering, concurrent audits and knowyour-customer (KYC) norms.

On the anvil is the Insolvency and Bankruptcy Code 2016, governing insolvency resolution in the country. Thanks to the Basel III norms on capital adequacy that are set to kick in by March 2019, banks in India need to maintain a minimum capital adequacy ratio of 11.5%.

 All these regulations are going to increase the cost of compliance for companies in the short term, which may well be passed on to the final consumer.

[The Economic Times]