Mar 14,2019 | 20 min read

Importance of statutory compliances in business

Author - Advocate Jyoti Ravi Sachdeva and Associate Debasmita Haldar

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. 

Benefits of statutory compliance in a business

When a business is statutorily compliant, not only does it saves itself from serious legal troubles, but also leads itself to a sustained growth. Some of the major benefits of statutory compliances in a business are as follows:

  • Avoiding legal problems and penalties: Complying with requisite statutory requirements helps a business avoid obvious consequences of non-compliance such as disqualification of directors/officers, imprisonment or penal liabilities against its directors/officers, payment of fines and/or penalties, suspension/revocation of licenses, lawsuits, work stoppages and in extreme circumstances, complete shutdown of businesses.
  • Improved business operations: When a business has successfully complied with every applicable statutory compliance requirements, it frees up time and resources to focus on its core business innovations and activities which inevitably leads to improved business operations resulting into the business growth.
  • Quality improvements: Adhering to statutory compliance helps businesses improve quality of their products and services, by enabling businesses to focus on their core business activities instead of expending time and resources on effecting the compounding of offences (where applicable), paying penalties, defending the litigation/ imprisonment or penal liabilities against its directors/officers, retaining the talented employees, etc. Statutory compliance prevents occurrence of potential risks related to non-compliance, and helps businesses prevent or detect failures or errors at early stages. This, in turn, results in greater operational efficiency.
  • Boosts employee morale: When a business observes statutory compliance, it boosts its good reputation and goodwill, which, in turn, positively influences its employee performance. A fully compliant business is highly likely to attract and retain talented and principled employees as compared to its non-compliant counterparts, and by proving its commitment to good business ethics, is likely to positively impact, rather boost employee morale. This leads to better and improved productivity of employees, which further leads to reduced attrition rates, and therefore, improved efficiency of the entity.
  • Brand loyalty: Businesses, which have efficient compliance management tools and program in place help them achieve compliance with necessary statutory requirements, signalling to key stakeholders and investors that compliance is a top priority for their organization. Good compliance not only demonstrates a business’ commitment to high ethical standards, but also reflects their expertise and awareness about relevant statutory mandates. It shows their intention to perform their business operations in a fair, just and transparent manner. This, in turn, fosters trust in customers, employees and vendors, and such trust promotes and strengthens brand loyalty and equity, ultimately leading to sustained growth of the business organization.
  • Better public relations: A fully compliant business benefits from better and improved public relations, since employees, customers, investors and other stakeholders are assured of the business’ commitment and adherence to highly ethical business conduct and practices.
  • Improved business opportunities: Entity’s investing in effective compliance management systems helps its to preserve and promote goodwill of the Entity, thereby places it in a higher bargaining position to negotiate and secure favourable business contracts. Investing in an advanced compliance regime also attracts better and more investments, thereby improving business prospects and opportunities of the organization. 
  • Competitive differentiation: Good compliance is a differentiator that helps businesses gain competitive advantage over rival companies, while producing more efficient outputs, preserving the entity’s goodwill and integrity, and reducing compliance related risks.
  • Higher employee retention: Compliance with various labour and employment laws assures employees of the organization of a safe, professional, fair and just working environment. It signals the organization’s willingness to provide an employee-friendly work environment, as well as the organization’s capability and readiness to address and resolve any labour and employment law issues, should they arise. When a business complies with all its labour and employment law requirements including data privacy compliance, it instils confidence among employees that the organization they are working for, is concerned about their well-being and welfare, and has taken necessary steps towards ensuring the same. This fosters a healthy work environment leading to happier and increasingly satisfied employees, which means that they are highly likely to stay with the entity, thus leading to higher employee retention by the business entity.
  • Risk management: All entities irrespective of their nature, face crucial operational, financial, strategic, reputational, process, and various other types of risks, including compliance risk. In highly regulated industries such as healthcare and finance, compliance risks usually persist throughout the lifecycle of the entity, and tend to multiply when such businesses operate internationally. When a business conforms to requisite statutory compliance requirements, it avoids unnecessary legal troubles and various other risks associated with non-compliance such as payment of fines, cancellation/suspension of licenses, or even criminal liabilities. Therefore, statutory compliance helps businesses efficiently manage and prevent compliance risks.

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)

Challenges in statutory compliances

Some of the major challenges faced by businesses in statutory compliances include:

  • Segmented compliance initiatives: Most businesses operate in fragmented organizational silos, meaning, several different departments are in charge of various functional activities of the organization, including a separate compliance team/department. This methodology of segmented compliance initiative is not an effective method of ensuring compliance in a business. Compliance should be made integral throughout the organization and the business entity as a whole, as opposed to only one designated team for observing compliance, must enforce a common, fluid compliance strategy spanning the entire organization.
  • Lack of awareness: Often professionals of a business entity lack adequate knowledge and expertise in applicable legal, regulatory or statutory compliance requirements. The compliance risk multiplies multi-fold when a business has multiple locations including overseas establishments. This implies knowledge and adherence to multiple state legislations as well as statutory and legal regime of foreign locations of the business.
  • Dynamic statutory landscape: Statutory requirements are ever-evolving and constantly emerging, in increased numbers and complexities. This makes it difficult for a business to keep up with such a rapidly evolving and dynamic statutory regime.

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.

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JRS ASSOCIATES

JRS Associates is a Full Service law firm and our major practice areas combines aspects relating to Banking & Finance, Corporate (Competition, FEMA, Employment laws), Information Technology (Cyber laws, e-commerce) Mergers and Acquisitions, Infrastructure & Real Estate, Intellectual Property laws; Strategic advice/support in Dispute Resolution, Litigation & Arbitration; Corporate transaction advisory, documentation and general legal consultancy

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