Every company that we know of today maintains books of accounts in electronic form, given the digital evolution and increase in the volume of transactions across boundaries.
The Government has always been suspicious of multinational organizations conducting business in India falsifying their books of accounts, or manipulating their books of accounts to not depict a true and fair view of the company’s real transactions. Although there was a regulation in place mandated by the Companies Act, 2013 regarding the storage of books of accounts; there was a need to have a stricter law in place to ensure that foreign companies do not indulge in income diversification or money laundering activities.
To address this cause, on 05th August 2022 the Ministry of Corporate Affairs (MCA) notified the Companies (Accounts) Fourth Amendment Rules, 2022. The amended rules require the company registered under the Act to maintain a back-up of the books of accounts, other books & papers maintained in electronic mode, including at a place outside India, to be kept in servers physically located in India on a ‘daily basis’ – replacing the earlier periodic basis.
Why so, one may ask.
Well, since the past recent times there has been an increase in the number of companies involved in various fraudulent offences – ranging from showing lesser profits in the Indian subsidiary to evading taxes and shifting profits to branches in countries that charge lesser or no income tax. Uploading financial records daily shall now keep the Government updated in real-time about the whereabouts of the company’s various streams of finance and keep it vigilant.
Let’s have an overview of the provisions with relevant amendments in Companies (Accounts) Rules, 2014, and their significant impact explained herewith:-
Provided that the back-up of the books of account and other books and papers of the company maintained in electronic mode, including at a place outside India, if any, shall be kept in servers physically located in India daily.
Earlier it was required to be uploaded periodically, but the servers of the company’s storage systems now have to remodify to such an extent that a daily update of the company’s financial transactions is sent to the Registrar of Companies (RoC) portal.
Let’s try to dissect the legal jargon and its significant implications on companies in India hereafter.
According to the above point of the amendment, the companies are required to mention the above details in form AOC-4 of the person authorized in India for the control of books of account and other books of papers maintained in electronic mode.
Earlier, corporates in India – especially multinational companies operating in India used to deny real-time access to their account books to officers authorized by the Government agencies because they claimed that the accounting records were maintained in the electronic mode under a cloud infrastructure with servers located outside India.
With the advent of this amendment’s applicability, the companies can no longer decline access to the above during any procedure of search or investigation. The daily backups would have to be strictly maintained in servers physically located in India. This step-up of regulations was mandated so that there shall be no loss of crucial time during procedures of search, seizure, and investigation where the authorities require access to books of accounts to be verified or seized, as the case may be.
These new requirements are likely to increase the compliance cost and add to the burden of maintaining backups in India. Companies in large groups that use centralized servers maintained outside India at the group level are most likely to bear the brunt by having to incur additional costs for setting up such required infrastructure and technology. To be compliant with these additional requirements, the companies need to undertake the aforementioned steps on an urgent basis.
The regulatory agencies under the various authorities of various Acts now shall be the beneficiaries of this added ease of investigation and monitoring, so that the key operational and financial details of companies shall be made available with just a few clicks and taps. This rule permits a greater level of hassle-free access and increased scrutiny by authorities. It will also enable the authorities to pinpoint accountability on the persons responsible to maintain data in India when the company’s location is outside India.
Concluding the above, the rules are hereby amended to aid the accessibility of papers and books maintained in electronic mode by companies. The amendment notification came after an earlier CBDT notification that had similarly prescribed detailed records and books to be maintained by charitable institutions in India. These amended rules have interrupted the status quo for foreign companies, especially those dependent on third-party cloud service providers located outside India for maintaining their books of accounts.