Introduction

Section 128 of the Companies Act, 2013 (2013 Act) requires every company to prepare and keep at its registered office, books of account, other relevant books and papers and financial statements for every financial year which give a true and fair view of the state of the affairs of the company. Further, a company may keep its books of account or other relevant papers in an electronic mode subject to compliance with the requirements prescribed under Rule 3 of the Companies (Accounts) Rules, 2014 (Accounts Rules).

As per the requirements of Rule 3, the books of account and other relevant books and papers maintained in an electronic mode should remain accessible in India so as to be usable for subsequent reference. Additionally, Rule 3 requires there should be a proper system for storage, retrieval, display or printout of the electronic records and to maintain back-up of the books of account and other relevant books and papers in electronic mode in India. 

The Ministry of Corporate Affairs (MCA), through its notification dated 5 August 2022 has issued the Companies (Accounts) Fourth Amendment Rules, 2022 to amend provisions under Rule 3 of the Accounts Rules relating to the manner in which books of accounts are to be kept in an electronic form.

This issue of the First Notes aims to provide an overview on these amendments.

Overview of the amendments

The key amendments are as following:

  • Availability of books of accounts: Rule 3(1) of the Accounts Rules has been amended to provide that the books of account and other relevant books and papers maintained in an electronic mode should remain accessible in India, at all times so as to be usable for subsequent reference.
  • Maintaining of backups: Rule 3(5) of the Accounts Rules requires every company to maintain proper system for storage, retrieval, display or printout of the electronic records as the Audit Committee, if any, or the Board of Directors may deem appropriate and such records should not be disposed of or rendered unusable, unless permitted by law. Additionally, companies are required to maintain the back-up of the books of account 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.
  • Service provider: Rule 3(6) of the Accounts Rules requires disclosure by a company to the Registrar of Companies (ROC) in case a service provider has been used for maintenance of books of accounts in an electronic form. The amendments require an additional disclosure relating to the name and address of the person in control of the books of account and other books and papers in India, where the service provider is located outside India.
    The revised requirements to be disclosed to the ROC on an annual basis at the time of filing of financial statement are:
    • The name of the service provider
    • The internet protocol address of service provider
    • The location of the service provider (wherever applicable)
    • Where the books of account and other books and papers are maintained on a cloud, such address as provided by the service provider
    • Details of 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.

(Emphasis added to highlight the changes)
Effective date: The amended Rules are effective from 11 August 2022.

Our comments
The MCA amended the Accounts Rules to mandate availability of books of accounts and maintenance of backups of such accounts in a server physically located in India and on a daily basis. Further, the amendment extends the disclosure requirements as per Rule 3(6) of the Accounts Rules to include situations where accounts are maintained outside India by a service provider.

These amendments add strict compliance requirements around maintenance of books of accounts in the electronic mode for situations where books of account and other relevant books and papers in electronic mode outside India. Companies would be required to make sure that the books of accounts and other documents, when kept in an electronic mode, are always accessible in India in case a regulatory authority requires its verification.

These amendments are applicable from 11 August 2022. However, they do not provide any transition time to the companies to make arrangements for such data and backups to be available in India. Additionally, these requirements are likely to increase the compliance cost of maintaining backups in India especially for companies in large groups that use centralised servers maintained outside India at the group level. To ensure compliance with these requirements such companies need to undertake required steps on a urgent basis.

To access the text of the MCA notification, please click here.

You can reach us for feedback and questions at aaupdate@kpmg.com.