Importance of statutory compliances in business

Concept of statutory compliance

Statutory compliance implies adherence to requisite laws and regulations by an entity. Statutory compliance as the name suggests - ‘Statutory’ means ‘related to statutes/legislation/law’, while ‘compliance’ means complying with, adhering to or obedience. In other words, statutory compliance refers to functioning in accordance with prescribed rules and regulations as codified in various statutes. Every nation has its own existing set of laws and policies, and entities must operate within the legal framework set out in applicable state and central laws. Statutory compliance, therefore, essentially means following relevant statutory mandates as applicable to the respective business organization.

Business entities operating in India, in general, must ensure compliance with interalia the following categories of statutory mandates and regulations:

• Labour laws
• Employment laws
• Tax laws
• Financial and Corporate laws
• Competition and antitrust laws
• Advertising laws
• Environmental regulations
• Data privacy
• Intellectual property rights
• Industry specific laws
• Foreign Exchange laws

Furthermore, the Companies Act, 2013 has made it mandatory for the Directors to certify in the Directors’ Report annually that the directors have devised proper and efficient systems to ensure the compliance with the provisions of applicable laws and that such systems were adequate and operating effectively. 

Risks of statutory non-compliance

The most common risks of statutory non-compliance in businesses include:

• Imposition of fines on the business
• Incurring penalties, thereby causing huge financial losses to the business
• Loss of reputation, goodwill and integrity of the organization
• Jeopardising customers’ loyalty
• Suspension or cancellation of operational licenses
• Imprisonment/penal liabilities against top management officials of the company
• Negative impact on the productivity of the company since business operations get affected due to consequences of non-compliance.
• Withdrawal of relevant applicable fiscal benefits
• Civil and criminal liabilities
• Loss of faith by investors and other stakeholders of the company
• Work stoppage
• Shutdown of business (in extreme cases)

Steps to ensure compliance

Businesses may take the following steps in order to ensure statutory compliance:

• Understand, acquaint and educate professionals about applicable legal, regulatory and statutory compliance requirements.
• Identify the relevant business locations whose legal and statutory landscapes are to be complied with.
• Enlist all the statutory compliance requirements at each business location, including the overseas establishment/s.
• Map compliance responsibilities to concerned personnel/departments.
• Conduct a compliance review.
• Identify gaps in compliance through preparation of an exception report.
• Update and monitor.