Section 128(1) of the Companies Act, 2013 ("Companies Act") requires all companies to prepare and keep books of account, other relevant books and papers and the financial statements of every financial year at their registered offices. However, the second proviso to Section 128 (1) of the Companies Act permits companies to maintain such books of account or other relevant papers in electronic mode. The operational modalities in relation to the maintenance of books of accounts and other relevant papers in electronic mode has been detailed in Rule 3 the Companies (Accounts) Rules, 2014 ("Companies Accounts Rules").

Prior to the Amendments, Rule 3 of the Companies Accounts Rules provided that:

  • electronic records shall remain accessible in India so as to be usable for subsequent reference;
  • back-up of the electronic records must be kept in servers physically located in India on a periodic basis; and
  • companies are required to notify details of the service provider for maintenance of electronic records to the Registrar of Companies on an annual basis at the time of filing of financial statements. Such details include:(a) name of the service provider; (b) the internet protocol address of the service provider; (c) location of the service provider; and (d) where the books of account and other books and papers are maintained on cloud, such address as provided by the service provider.

Rule 3 of the Companies Accounts Rules was amended on August 05, 2022, in terms of the Companies (Accounts) Fourth Amendment Rules, 2022, by the Ministry of Corporate Affairs, Government of India ("Amendment"). The practical implications of the changes have been examined below.

Changes to Rule 3 pursuant to the Amendments

The changes brought about by the Amendment are as follows:

  • electronic records are required to remain accessible in India at all times so as to be usable for subsequent reference;
  • back-up of the electronic records (whether within or outside India) are required to be kept in servers physically located in India on a daily basis; and
  • where the service provider is located outside India, the name and address of the person in control of the books of account and other books and papers in India is additionally required to be provided.

The implications of the changes are discussed below:

  • Books and papers maintained in an electronic form must remain accessible in India at all times. This would mean ensuring accessibility 24/7 and 365 days in a year.
  • The expression 'periodic basis 'was vague and ambiguous. This ambiguity has now been addressed by requiring a 'daily' back-up of such records.
  • The requirement to provide the name and address of the person in control of the books of accounts and other papers in India is to affix accountability and make it easier to initiate potential regulatory and legal action, if required.

The implication of the changes is that companies will be required to align their technical and physical infrastructure with the new legal requirements. In the event that a company does not have the necessary technical capabilities to make changes to the systems and processes, they would have to hire external service providers.

Maintenance of electronic records and back-ups

As mentioned above, the proviso to Rule 3(5) of the Companies Accounts Rules mandates that the backed-up electronic records is required to be kept in servers physically located in India on a daily basis.

Section 128(5) of the Companies Act states that books of account of every company relating to a period of not less than 8 (eight) financial years, immediately preceding a financial year together with vouchers relevant to any entry in such books of account, are required to be maintained in good order. In this context, it is important to note that Rule 3 of the Companies Accounts Rules has been enacted pursuant to Section 128 of the Companies Act. Hence, by implication, the backed-up records must also be maintained for at least 8 (eight) financial years.

Documents that require back-ups

The proviso to Rule 3(5) of the Companies Accounts Rules, 2014 uses the expression "books of account" and "other books and papers". The terms 'books of paper' and 'books of accounts' have been defined in Section 2(12) and Section 2(13) of the Companies Act respectively.

  • Books of accounts means: (a) all sums of money received and expended by a company and matters in relation to which the receipts and expenditure take place; (b) all sales and purchases of goods and services by the company; (c) the assets and liabilities of the company; and (d) the items of cost as may be prescribed under section 148 of the Companies Act in the case of a company which belongs to any class of companies specified under that section.
  • Books and papers mean books of account, deeds, vouchers, writings, documents, minutes and registers maintained on paper or in electronic form.

The Madras High Court in the case of K. Kanagasabapathy v. T.M. Shanmugham1 ruled that:

"In the expression "books of account and other books and papers" occurring in section 209(4)(a) of the Companies Act, the words "other books and papers" are more general, whereas the words "books of account" are less general. But the more general words take their colour from the less general and become restrictive in meaning. Even if the ejusdem generis Rule is applied, the general expression is to be read as comprehending only things of the same kind as that designated by the preceding particular expressions, unless there is something to show that a wider sense was intended--vide R. v. Edmundson. It would then follow that the expression "other books and papers" must be construed as referring to other books and papers of the same kind as the books of account.. In my view, it would be dangerous to construe the words "other books and papers " to embrace every scrap of paper in the office of the company, whether it is in the nature of a book of account or not."

Similarly, in CV Karuppunni and Ors v. Joint Director, Inspection, Company Law Board, and Ors2, the Kerala High Court ruled that:

"the principles of ejusdem generis have to be applied in deciding the question as to the type of books and documents the inspecting officers are entitled to inspect. In other words, the documents and papers referred to in Sub-section (1) of the section must be those which have the character of books of account".

While both the above judgements were pronounced in the context of the Companies Act, 1956, it provides valuable judicial guidance that can also be applied in the context of the new corporate law regime. Therefore, 'books and papers' must be interpreted to mean those documents which are connected with the preparation of books of accounts and financial statements as per Section 128(1) of the Companies Act.

Concluding thoughts

The Ministry of Corporate Affairs, Government of India ("MCA") has borrowed a leaf out of the books of other Indian regulators such as the Reserve Bank of India with an increased focus on localization and accountability. While the requirement to maintain copies of the electronic records on servers in India was originally included in Rule 3 of the Companies Accounts Rules, the Amendments have clearly tightened the norms by introducing timelines. By including a disclosure of the person in whose control the books and papers are in India, the MCA has provided a clear indication of where the buck stops for ensuring compliance with the Amendments. Based on market feedback, it appears that the cost of compliance for companies in India is likely to go up in the coming months and years.

Footnotes

1 K. Kanagasabapathy v. T.M. Shanmugham, [1972] 42 Comp. Cas. 596 (Mad)

2 C.V. Karuppunni v. Joint Director, Inspection, Company Law Board, [1986] 59 Comp. Cas. 814 (Ker).

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