Book-keeping requirements for companies in India have been tightened with the recent amendment[1] to the Companies (Accounts) Rules, 2014 (“Accounts Rules”). With this, Indian government authorities seek to always have access to books of accounts of Indian companies, even if such books are maintained in electronic form in servers located outside India.
In recent times, certain multi-national companies[2] have refused to provide government authorities access to financial data of Indian entities stored in servers outside India, which may have prompted the government to amend the Accounts Rules.
Section 128(1) of the Companies Act, 2013 (“Act”), requires all companies to prepare and keep books of account and other relevant books and papers at their registered offices. However, this is subject to an exception allowing companies to maintain such records in electronic mode in a prescribed manner.[3] The mode of keeping books of account and other books and papers in electronic mode (“Electronic Records”) has been prescribed under Rule 3 of the Accounts Rules.
Prior to the amendment, the above-mentioned Rule 3 provided that (i) Electronic Records must remain accessible in India so as to be usable for subsequent reference; (ii) back-up of the Electronic Records must be kept in servers physically located in India on a periodic basis; and (iii) 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 statement.
The amendment makes the following changes to Rule 3 of the Accounts Rules:
(i) Electronic Records are now required to remain accessible in India at all times so as to be usable for subsequent reference;
(ii) back-up of the Electronic Records (whether within or outside India) are now required to be kept in servers physically located in India on a daily basis, instead of periodic basis;
(iii) in case the service provider is located outside India, the name and address of the person in control of the Electronic Records in India is also required to be provided, along with details of the service provider.
While the proviso to Rule 3(5), after the amendment, has mandated that back-up of all Electronic Records is required to be kept in servers physically located in India on a daily basis, companies would also need clarity on the time period for which such daily back-ups should be retained.
As per Section 128(5) of the Act, books of account of every company relating to a period of not less than eight financial years, immediately preceding a financial year together with vouchers relevant to any entry in such books of account are required to be kept in good order. Since Rule 3 of the Accounts Rules has been enacted pursuant to Section 128 of the Act, all requirements applicable to maintenance of books of account under Section 128 would also be applicable to Electronic Records maintained under Rule 3. Thus, back-up of the Electronic Records maintained under the proviso to Rule 3(5) should also be maintained for at least preceding eight financial years, in line with the aforesaid requirement under Section 128(5).
Additionally, listed companies will also need to ensure compliance with their respective policies for preservation of electronic documents framed pursuant to the listing regulations applicable to them.
Given the amendment, another point that needs to be discussed is which documents are required to be backed-up pursuant to the proviso to Rule 3(5). In this context, it may be noted that both the original Electronic Records and back-up pursuant to proviso to Rule 3(5) are required to be maintained in respect of “books of account and other books and papers”.
The terms ‘books and papers’ and ‘books of account’ are defined in Section 2(12)[4] and Section 2(13)[5] of the Act, respectively. While these definitions are wide and inclusive in nature, interpretation of “books of account and other books and papers” in Rule 3 should be limited to the usage of the phrase in Section 128(1) of the Act, since the said rule has been framed pursuant to the requirement under Section 128(1).
Under Section 128(1), companies are required to maintain books of account and other relevant books and papers and financial statement for every financial year, which give a true and fair view of the state of affairs of the company, including that of its branch office or offices, if any, and explain the transactions effected both at the registered office and its branches and such books are required to be kept on accrual basis and according to the double entry system of accounting.
Madras High Court in K. Kanagasabapathy v. T.M. Shanmugham,[6] while interpreting Section 209 of the Companies Act, 1956 (the corresponding provision to Section 128 in the Act), has held:
“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. [..] [applying the ejusdem generis rule] the more general words take their colour from the less general and become restrictive in meaning. [..] 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.”
A similar view has also been taken by the Kerala High Court in C.V. Karuppunni v. Joint Director, Inspection, Company Law Board,[7] where it accepted that the principle of ejusdem generis has to be applied in deciding on the matter of type of books and documents covered under Section 209A of the Companies Act, 1956 (which dealt with inspection of documents maintained pursuant to Section 209 of the 1956 Act).
In light of the above, only such ‘books and papers’, which are relevant for preparation of books of account and financial statements as per Section 128(1) of the Act, need to be extracted for the back-up and kept in servers physically located in India on a daily basis.
[2] See for e.g., Deputy Director of Income Tax (INX) v. Xiongwei Li (Delhi High Court, 20.09.2022), available at https://www.livelaw.in/pdf_upload/ama20092022crlmm44922022194246-435913.pdf.
[3] Second proviso to Section 128(1), Companies Act, 2013.
[4] ‘Books and papers’ include books of account, deeds, vouchers, writings, documents, minutes and registers maintained on paper or in electronic form.
[5] ‘Books of account’ include records maintained in respect of—
(i) all sums of money received and expended by a company and matters in relation to which the receipts and expenditure take place;
(ii) all sales and purchases of goods and services by the company;
(iii) assets and liabilities of the company; and
(iv) items of cost (applicable to companies who are required to maintain cost records under Section 148).
[6] K. Kanagasabapathy v. T.M. Shanmugham, [1972] 42 Comp. Cas. 596 (Mad).
[7] C.V. Karuppunni v. Joint Director, Inspection, Company Law Board, [1986] 59 Comp. Cas. 814 (Ker).
Megha has extensive experience in M&A, joint ventures, restructuring and other corporate matters. She can be reached at megha.bhargava@cyrilshroff.com
Associate in the General Corporate Practice at the Delhi NCR office of Cyril Amarchand Mangaldas. Udyan has experience in advising on various commercial and transactional matters. He can be reached at udyan.shrivastava@cyrilshroff.com
