[aaykarbhavan] Business standard news updates and legal digest 29-10-2012

TAS will be cumbersome for companies, say experts

INDIVJALDHASMANA New Delhi, 28 October The tax accounting standards (TAS) recommended by a finance ministry-appointed panel will increase the burden of companies in the initial years, say experts. The panel, appointed by the Central Board of Direct Taxes (CBDT), suggests assessees need not keep two books of accounts — one for accounting standards and the other for TAS. Analysts warn that complying with the new standards will be a cumbersome process for companies, particularly smaller ones. "While the stated objectives are to provide more certainty and less chances of litigation, the TAS is likely to increase the tax burden on payers (at least in the initial years) due to a shift away from the concept of prudent or conservative outlook in accounting," Neeru Ahuja, partner in Deloitte, Haskins &Sells, told Business Standard . The panel seeks to prepone the income side items on the one hand, while seeking to postpone or not allow expenses, compared with traditional accounting standards currently used, said Ahuja. In its final report, the panel has recommended that notional losses will not be allowed to be deducted from income for tax purposes, a norm different from accounting standards. Accounting standard (AS 1) allows recognition of expected losses. However, the same standard does not recognise anticipated profits. The CBDT panel says as the accounting standard amounts to differential treatment for recognition of income and losses, the tax accounting norms will not recognise expected losses or mark-tomarket losses. The same rule will apply for forward exchange or similar contracts entered into for trading or speculation purposes. Accounting standard AS-11 says these contracts be marked-to-market at each balance sheet date, and the resultant exchange differences should be recorded in profit or loss. As such mark-to-market gains or losses are unrealised in nature, the CBDT panel recommended that tax accounting standards recognise all gains or losses on such contracts only on settlement. Analysts said revenues are sought to be preponed in case of inventories. Currently

Whatthe RajatGupta trial teaches us

PRATIP KAR When the District Court for the Southern District of New York convicted Rajat Gupta on June 15, 2012, on one count of conspiracy and three counts of substantive securities fraud, insider trading had claimed perhaps its most honourable victim. Since the conviction, the argumentation had centred on what would be the appropriate punishment for him. Should he serve aprison sentence "to reflect the seriousness of Gupta's crimes" and to deter "other corporate insiders in similar positions of trust from stealing corporate secrets"? Or, should the good works prior to his wrongdoing and the weighing of the good with the bad of the defendant be the important sentencing factors? On October 24, when the District Court Judge Jed Rakoff sentenced Gupta with a two-year prison term and afine of $5 million, he sought to strike a balance between the polar extremes. Gupta's trial holds several lessons for us that are far too significant to ignore. First ,there needs to be a serious appreciation, not only among the regulators but also all the market participants, intermediaries and the corporate world, that insider trading is a major offence. It is a seemingly simple truth, surprisingly not always obvious. Second ,successful detection of insider trading needs overwhelming circumstantial evidence and voluminous data analysis for any reasonable person to reach an irrefutable conclusion. This is a painstaking exercise. But insider trading is easy to commit and difficult to catch; its rewards are great enough to lure people again and again to take the risk of getting caught. That is why the track record of detection and prosecution of insider trading in most countries, except the United States, is poor. No doubt technology as well as free access to private data are required. But more than that, perhaps a strong and reliable information network, ability to call for and ferret out information, supplemented by forensic accounting, a deep understanding of the stock market, corporate world and securities laws, and a knowledge of the behaviour of the market participants and various cohorts. These must be predicated on an uncanny expertise to connect the dots. Technology certainly makes detection easy and wiretapping facilitates it further. Indeed, without the wire taps, the Galleon hedge fund manager Raj Rajaratnam's indictment would have taken much longer and Gupta's crime may have been difficult to detect. But Rajaratnam's case was the first wiretap for an insider trading investigation in the 75-year history of US securities laws. Wiretaps were not used in any of the 67 cases that pleaded guilty of insider trading between 2008 and now. Dennis Levine, Martin Siegel and Ivan Boesky – speculators and symbole de jour of Wall Street greed in the 1980s – were indicted of insider trading and pleaded guilty between 1986 and 1989, without wiretapping evidence, with low levels of technology and despite the Securities and Exchange Commission being equipped with fewer powers than it has now. Third ,if insider trading is viewed as a serious white-collar crime, then only a determined, concerted effort on the part of the government, the regulatory agencies and the legal system can successfully fight it. In the five-year, focussed crackdown in the US, all of these entities joined hands. It began in 2007 with the conviction of a hedge fund manager David Slaine. The investigations against him led to the sequential unravelling of a wide web of insider trading woven by Rajaratnam. As a part of the crackdown, the US Attorney Preet Bharara charged 72 people with insider trading since late 2009, 69 of whom pleaded guilty or have been convicted. Twenty-one of them were part of Rajaratnam's insider trading web. The last one in the web was Gupta. Fourth ,formidable reputation and powerful global connections did not come in the way of a just sentencing. In his sentencing order, Judge Rakoff observed, "He [Rajat Gupta] is a good man,… But the history of this country and the history of the world are full of examples of good men who did bad things." His lenient sentence was determined as a "just punishment", "sufficient, but not greater than necessary" to comply with the provisions of Crimes and Criminal Procedure in the US Code. Fifth ,a determined and focussed pursuit of a case to its denouement in a fair and transparent manner is necessary. But unlike Javert in Les Miserables , this pursuit was without any vindictiveness and to serve a larger economic goals — to preserve the sanctity of a financial system and to rescue the market system which is so central to a large, free market economy. Sixth ,what is the appropriate deterring punishment for white-collar crimes? Since 1986, the US has successfully been able to impose large fines and prison terms ranging from a couple of years to 11, on illegal insider traders. The US Congress has also tightened the laws. But the number of illegal insider traders has only grown. Should this engender a debate on what is the appropriate deterring punishment for white-collar crimes? Many economists and legal scholars, Henry Manne, Thomas Sowell and Milton Friedman among them, have relentlessly argued in favour of revoking the laws which make insider trading illegal. Their protestations are not shared by securities market regulators and the legal systems in most countries. Maybe abold action against a globally respected person like Gupta will send the right message to the market. At least for sometime, till even this shall pass. In the end, one question and one unresolved dilemma remain. The question is why did Gupta challenge the administrative proceedings and opt for acourt trial when administrative proceedings would have involved only civil liabilities and monetary penalty. The dilemma is what made Gupta share confidential information with someone he knew was a Wall Street trader? It is difficult to imagine that a brilliant man like Gupta was naive not to know that his actions were wrong and unethical. Only Gupta would be able to answer the question and resolve the dilemma. Gupta now has legal recourse to appeal in the Second Circuit, as Rajaratnam has done, to challenge the wiretap. Maybe he will choose to wait for that verdict. Has Gupta met his denouement ?Clearly not. We must not forget that even a ferocious dacoit, Ratnakar, through penance and realisation became Rishi Valmiki and gave India the Ramayana . The writer is a former Executive Director of the Securities and Exchange Board of India and Consultant and Member, Advisory Council, Global Corporate Governance Forum, International Finance Corporation pratipkar21@gmail.com When important people are involved in insider trading, only quick and firm action against them sends a powerful message LOOKING BACKIN WONDER Itis notclear whatmade RajatGupta ( pictured )share confidential information with someone he knewwas a Wall Streettrader REUTERS

Have yoursay: E-vote foryourrights

TANIAKISHORE JALEEL Few retail shareholders think it is important to attend annual general meetings (AGM). "Our participation does not matter, anyway," many lament. So, the cost of attending, including travel and time, is just not worth the physical presence for many. For instance, Nikhil Pise, a 22year-old investor from Mumbai who owns shares in Hindalco who thinks his shares, worth only ~5,000, will not make a difference. But the market regulator, the Securities and Exchange Board of India (Sebi) thinks even minority shareholders have their rights. Hence the recent guideline that makes it mandatory for the country's top 500 companies on the Bombay Stock Exchange (BSE) to offer the e-voting facility to its shareholders. Tata Metaliks, an arm of Tata Steel, started using this mechanism when it initiated the e-voting process last year. The take-off has been slow. Cyrus Khambata, executive vice-president, CDSL, says only 35 companies have registered for the e-voting facility so far. "This is because companies will only register as and when they have a postal ballot coming up. However, not many retail investors have signed up. This is because of the lack of awareness in the investor community," he adds. He feels this will become a popular mode with time. The process: Depositories, such as CDSL and NSDL, will create a database of investors of companies opting for e-voting. Once an investor sends a request, the depositories will communicate his user address and password through post or email. After the investor receives this login address and password, he can go to the depository website and register for the e-voting facility. He will be prompted to change his password when he logs in the first time. In future, if an investor wants to use the e-voting facility for another company, he just needs to login with his registered password and vote. The e-voting platforms have prefilled forms where shareholders only have to cast their votes. As a retail investor, you might think only institutions with large shareholding could influence the decisionmaking of a company. There are many such deals where institutional investors have voted against big company proposals. For instance, Satyam had to withdraw its proposal to buy majority stake in Maytas after larger investors turned down the proposal. Prime Database Chairman and Managing Director Prithvi Haldea says shareholder associations can get stakeholders together and urge them to use the e-voting route when it comes to important decisions. Haldea had worked closely in deliberating on and implementing the e-voting process. Though e-voting is not a substitute for an AGM, it will be useful when companies want to pass special resolutions. By removing the aspect of physical presence, Sebi is ensuring the process is made easier for investors to participate. Investors' Grievances Forum VicePresident Hinesh Doshi says not many are comfortable voting online so far. "They feel even if they vote, the results will only be announced at the AGM. Even now, people ask for the hard copy of the annual reports when soft copies are easily available." If there is any important decision to be taken, retail investors can vote for or against a proposal, as a group. This, Doshi says, can be achieved if more investors take to e-voting. According to shareholding data as on June 30, among the BSE 500 companies, Reliance Industrial Infra has the highest number of retail investors. Of the total free float of the firm, 42.09 per cent of the shares are with retail investors. In the BSE 500 list of companies, 170 stocks have retail investors participation of between 42.09 per cent and 10 per cent. "Now, even Non-Resident Indians can take part in important decisions that have to be taken through the evoting route," says CJ George, managing director, Geojit BNP Paribas Financial Services. "There will be accurate counting of votes, elimination of postal ballots getting lost in-transit and sufficient time for shareholders to vote till the end of the voting cycle," says Haldea. This is a system that may take time to take off, but it is up to shareholders to make efficient use of it. Till now, as a small stakeholder, you put off participating in decision making, since the process was tedious. But, now that you have an easier way, you could make full use of it. Who knows, your vote might stop a company from going ahead with something that might erode your money invested with it. THE PROCESS BIG vs SMALL Retail shareholding as on June 30, 2012 Companyname in % Reliance Industrial Infra 42.09 Shri Ashtivinayak 41.24 KSOils 40.79 Vikas WSP 36.65 Tata Elxsi 33.68 IFCI 33.29 CityUnion 32.66 Karnataka Bank 31.13 Punj Lloyd 30.28 DevelopmentCreditBank 30.09 1 Depositories such as, CDSL and NSDL create a database of investors of companies opting for e-voting 2 They communicate a login addresses and password to investors through post or email 3 On receiving login address and password, an investor can go to the depository website and register for e-voting facility 4 On first login, an investor is prompted to change the password. The new password remains permanent for future use 5 An investor can use the facility for another firm too. All he needs to do is logging in with his registered password & vote ILLUSTRATIONS: BINAY SINHA Small stakeholders' participation matters, could help stop firms from taking bad calls

 

LEGAL DIGEST Conflictof interestin powerpanel The appointment of the chairperson of the UP State Electricity Regulatory Commission has been struck down by the Supreme Court as the selection committee did not follow the rule that "such person does not have any financial or other interest which is likely to affect prejudicially his functions as chairperson or member." This is a condition under Section 82(5) of the Electricity Act. In this case, Rajesh Awasthi vs Nand Lal, the allegation was that the chairperson was vice president of JP Power Venturs Ltd at the time of his selection. It was also alleged in the petition before the Allahabad high court that he had approved higher tariff right to favour that firm in 2010. The high court found that there was violation of the rules by the selection committee. On appeal by the chairperson, the Supreme Court upheld the high court view and stated that the question of conflict of interest was an issue which the selection committee ought to have considered. Since this was not done, the appointment was in clear violation of Section 85 and, consequently, he has no authority to hold the post. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Bench to resolve puzzle In view of conflicting views expressed by various benches of the Supreme Court in the past on a constitutional question, a new bench has referred the issue to a larger bench. The difference is over the maintainability of a review petition in a high court after the disposal of the special leave petition (SLP) by the Supreme Court, without granting leave. In this judgment, Khoday Distilleries Ltd vs Mahadeshwara SSK Ltd, such a situation arose before the Karnataka high court. It ruled that a review petition cannot be moved after approaching the Supreme Court. On appeal, the Supreme Court said that a large number of review petitions are being filed in high courts after the Supreme Court dismissed the SLPs. Therefore, an authoritative pronouncement by a constitution bench is necessary to resolve contrary opinions of the apex court for proper guidance to the high courts. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Three ways of computing loss The Supreme Court has declared that in motor vehicle accident cases, compensation must be granted for both permanent disability consequent to the mishap as well as loss of earning capacity. The Madras high court, in the case, K Suresh vs New India Assurance Ltd, had held that no compensation can be granted towards permanent disability once compensation is computed for the loss of earning capacity. On appeal, the Supreme Court overturned the high court view. Otherwise, it would result in unjust decisions. "It cannot be disputed that apart from the fact that the permanent disability affects the earning capacity of the person concerned, undoubtedly, one has to forego other personal comforts and even for normal avocation they have to depend on others," the judgment explained while revising the compensation under different heads. The tribunal had arrived at the figure of Rs 25 lakh. The high court recalculated and reduced it to Rs 9.78 lakh. The Supreme Court, invoking the principle of "just compensation" finally arrived at the figure of Rs 13.48 lakh. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Arbitration award setaside A division bench of the Bombay high court has set aside the arbitral award in a dispute between Central Railway and Shyam Constructions because the arbitrator acted contrary to the terms of the contract between them. The tribunal had directed the railway to pay certain amounts with interest and compensation. The railway challenged the award before a single judge of the high court on the ground that in awarding interest and compensation for delay, the tribunal had acted contrary to the express conditions of the contract under which the award of such claims was prohibited. The judge rejected the contention. But on appeal, the division bench accepted the argument of the railway. MJ ANTONY One withdrawal from Provident Fund can cost you ~21 lakh NEHAPANDEYDEORAS Very few are prompt enough to transfer their employee provident fund (EPF) corpus within a year of changing their job. Most leave their EPF corpus untransferred for years. The reasons: Some don't think that's important, as, being a percentage of basic pay, it may not be a huge corpus. Withdrawing the money takes three to six months, while transferring an account turns out to be more difficult. Sometimes, applications get misplaced or it gets difficult to follow up with human resource executives in previous companies (being an ex-employee does not help). Some think the cumbersome process it entails may not be worth their time. As a result, a large chunk of such individuals prefer withdrawing the corpus rather than transferring. But, nowadays, not transferring is also not a great option, as the EPF Organisation does not allow paying interest on inactive accounts. That is, there is no interest paid on your account with your previous employer, where no deposit happens after you quit. Also, withdrawing is not an option financial planners advise, as EPF forms the debt part of your portfolio and gives good tax-free returns. "We suggest individuals changing jobs transfer their EPF corpus and do not withdraw it. EPF is currently offering an unparalleled 8.25 per cent annually, which is not taxable. Hence, it is best to stay invested in," says Suresh Sadagopan, a certified financial planner. Withdrawing after each job can reduce the corpus significantly, while continuing with it can help earn a good amount on retirement. Here's why Assume a 30-year-old has accumulated ~1 lakh as EPF by contributing ~5,000 a month (employer+employee). It is assumed an individual's salary increases by 10 per cent every year, and, so does the EPF contribution, till he is 60. So, as mentioned, the deposit of ~5,000 a month into the individual's EPF account when he is 30 becomes ~5,500 the next year. The rate of interest payable on the EPF corpus is also assumed to be constant at the present annual rate of 8.25 per cent. As shown in the table, if the individual does not make any withdrawal throughout his career, he takes home a corpus of ~99 lakh (see table) . Now, say the individual withdrew 50 per cent of the corpus at the end of the fourth year. In this case, at the age of 34. So, the ~5.33lakh corpus at the end of the fourth year gets reduced to ~2.66 lakh. However, the individual continues contributing to the account thereafter. Hence, the corpus at the end of the fifth year stands at ~3.57 lakh. This would see the total EPF corpus dip to ~78 lakh at the time of retirement. This means, the individual lost ~21 lakh in 30 years because of one withdrawal of 50 per cent corpus early on in this tenure. And, there is the tax angle, too. If you withdraw the EPF amount without completing five years of service with an employer, the corpus withdrawn is taxed. The amount is added to your salary income and taxed accordingly. On the other hand, if left untouched, it is completely tax-free. Assuming the individual falls in the 30 per cent tax bracket, the amount he withdrew (~2.66 lakh) is reduced to ~1.86 lakh. If the person has to withdraw 50 per cent of the corpus at the end of the ninth year, that is, when he is 39, the EPF corpus is reduced from ~11.98 lakh to ~5.99 lakh. Given that the person continues contributing to the corpus and the contribution increases by 10 per cent every year, the total corpus in the 10th year (age 40) stands at ~7 lakh. As a result, the EPF corpus on retirement further drops to ~67.34 lakh. This means, had the individual not withdrawn from 50 per cent of the corpus, he would have had ~31.66 lakh more for his post-retirement days. Even if he had withdrawn in the earlier years, he would have had ~10 lakh more in hand. In this case, assuming the individual continued with the same employer for nine years, his withdrawal would not be taxed. However, if he had quit a job and taken another one in between, say at the end of the fifth year (that is, at the age of 35), he would be taxed at 30 per cent, lowering his withdrawal to ~4.19 lakh. EPF corpus should not be dipped into, unless it's a dire need and there is no other option. Sumeet Vaid, founder, Freedom Financial Planner, had earlier suggested that, if possible, the withdrawn EPF amount should be invested, and not used to meet expenses. If the amount is invested in a debt-equity ratio of 20:80 in mutual funds, assuming a debt return of eight per cent and equity return of 15 per cent, the corpus could be huge. However, Sadagopan reminds that debt and equity are much riskier asset classes and could never match the uninterrupted average return of eight per cent a year. Withdrawing the amount each time you move job(s), or otherwise, can make a huge dent in your retirement corpus APOT OF GOLD Contribution per month: ~ 5,000 Starting amountof Age accumulation (yrs) in the PFaccount Scenario 1 Scenario 2 Scenario 3 30 100,000 1,62,460 1,62,460 1,62,460 31 2,44,569 2,44,569 2,44,569 32 3,33,452 3,33,452 3,33,452 33 4,29,668 4,29,668 4,29,668 34 5,33,821 5,33,821 5,33,821 35 6,46,568 3,57,637 6,46,568 36 6,99,909 3,87,142 6,99,909 39 11,98,564 8,01,824 11,98,564 40 13,66,151 9,36,681 7,17,429 41 15,47,565 10,82,663 8,45,322 45 24,35,750 17,97,379 14,71,480 50 40,25,615 30,76,733 25,92,312 55 63,88,812 49,78,381 42,58,332 60 99,01,499 78,05,016 67,34,725 Note : We are starting with Rs.1 Lakh at age 30 in all scenarios; Rs.5,000/-pm is the contribution which increases every year @10% pa. Scenario1: PF amount not withdrawn & ~5,000 pm contribution going on Scenario2: 50% withdrawn at 35 & ~5,000 pm contribution going on since beginning Scenario3: 50% withdrawn at 40 & ~5,000 pm contribution going on since beginning

 

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CS A  RENGARAJAN,, B.Com ,FCS, LLB, PGDBM
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