In the previous year, the Ministry of Corporate Affairs (MCA), through its notification dated 5 August 2022, had amended certain provisions under Rule 3 of the Account Rules. The amendments were related to the bookkeeping requirements for companies in India. Section 128 of the Companies Act 2013 (‘Act’) requires every company to prepare and keep books of accounts, other relevant books and papers at its registered office. These can be kept in an electronic mode subject to compliance with the requirements prescribed under Rule 3 of the Companies (Accounts) Rules, 2014 (‘Accounts Rules’).
Key amendments are highlighted below:
Amended Rule 3(1) provides that the books of accounts and other relevant books and papers maintained in an electronic mode should remain accessible in India at all times to be usable for subsequent reference. ‘At all times’ is the emphasis added to the rule relating to the accessibility of electronic books of accounts.
Amended Rule 3(5) requires companies to maintain the backup of the books of accounts and other relevant books and papers in an electronic mode on servers physically located in India on a daily basis (earlier periodic basis), even in cases where such backups are maintained at a place outside India. The amendment draws reference to maintaining backups on a daily basis.
Amended Rule 3(6) requires the company to intimate to the Registrar on an annual basis, at the time of filing of financial statement, about (a) the name of the service provider, (b) the internet protocol address of the service provider, (c) the location of the service provider (wherever applicable) and (d) where the books of accounts and other books and papers are maintained on the cloud, such address as provided by the service provider.
The amendments made then were intended to bring strict guidelines on the rules relating to the accessibility and availability of books of accounts and documents kept in electronic mode, especially for entities that use service providers located outside of India. In addition, the statutory auditors are required to report under Section 143(3)(b) if proper books of accounts as required by the law have been kept by the company.
Not much importance was given to this amendment by entities, and there seems to be a burning issue with many of them during the year-end. It is pertinent to note that the requirement was made effective on 11 August 2022. Critical considerations which need to be addressed in this context include:
- Systems to be deployed in place to automate the backup process on a daily basis
- Extent of backups required on the books of accounts and relevant books and papers
- Leverage the existing IT infrastructure and process of backup from the existing group entities in India (e.g. captive centres)
- Need for a third-party service provider
- Necessary IT, management and group company approvals