| Streetwelcomes RBI's dollar- rupee swap facility | ||
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Mumbai, 17 January The Reserve Bank of India ( RBI)' s move to introduce a dollar- rupee swap facility to support banks' incremental pre- shipment export credit in foreign currency ( PCFC) is set to boost export credit. On Monday, RBI had said banks would have the option to access rupee refinance to the extent of the swap with RBI through a special export credit refinance facility. The facility would be available from January 21 to June 28 for a fixed tenor of three/ six months. "It is a good and proactive move by RBI to open this window. It will enable exporters to get dollar finance at competitive costs. This would make exports competitive and ensure bankers start lending more to exporters at a cheaper rate. Assured liquidity is also there for exporters," said N S Venkatesh, chief general manager and head of treasury, IDBI Bank. For any particular month, the maximum US dollars banks would be eligible to avail of through swaps from RBI would be equal to the incremental PCFC disbursed, with reference to a base date ( November 30), subject to a limit, RBI said. It added the limits would be communicated to eligible individual banks separately and reviewed periodically, based on actual utilisation, as well as other relevant factors. The overall cap for the banking system was $ 6.5 billion, RBI said. According to S Srinivasaraghavan, executive vice- president and head of treasury, Dhanlaxmi Bank, in time, this would help control the movement of the rupee. The Street expects RBI to cut the repo rate at the third quarter review of monetary policy. IndusInd Bank's Moses Harding said in the absence of arate cut, the move would support the rupee and allow correction ( or unwinding of excessive gains) in bond/ equity markets. | ||
| Onsite software development eligible for tax sops: CBDT | ||
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Earlier, IT companies had received tax notices from the government to pay tax on gains derived from export of manpower for onsite software development. Many such cases went into litigation and the companies sought clarification from the government. The Central Board of Direct Taxes (CBDT), after examining a report by the N Rangachary Committee which was set up to address the issue, said profits arising out of the export of such services are eligible for direct tax benefits under Section 10A, 10AA and 10B of the Income Tax Act. BS REPORTER | ||
| Why private sector companies don't need CAG- style audits | ||
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In recent times, including an article* by S Murlidharan in Business Standard, a case has sometimes been made for audits of private companies by auditors appointed by a Central authority, such as the Comptroller and Auditor General ( CAG), in a manner that would parallel the appointment of statutory auditors of public sector undertakings ( PSUs). Such an extreme step is not warranted; there are ways in which private sector audits would be more effective. The system of appointment of statutory auditors by shareholders has functioned effectively for over 60 years since the Chartered Accountants Act was passed in 1949, and for 56 years since the Companies Act, 1956 came into effect. Apart from Satyam, there have not been many significant audit failures. A few audit failures cannot be construed to imply that the system itself is faulty and requires an overhaul. The role of CAG is to ensure that public resources ( particularly resources raised from the public in the form of taxes) are used for purposes that would further public welfare, and not be misappropriated. The potential for misappropriation is much higher in the public sector because bureaucrats managing PSUs can, in practice, be manipulated by politicians ( who more often than not have their own agenda). There could also be instances of collusion between bureaucrats and politicians to the detriment of public interest. In such a situation, the requirement for an independent and sufficiently empowered CAG is absolutely critical. Such compulsions do not exist in the private sector, since the management is directly answerable to shareholders, and indirectly to other stakeholders ( such as lenders and income tax authorities). Controls are also exercised by the Securities and Exchange Board of India for listed companies. Moreover, putting the onus of private sector audits on CAG would divert the auditor's attention from auditing the public sector which, after all, is the raison detre of CAG. It is also argued that auditors of companies in the private sector focus excessively on accounting matters without considering matters of propriety. This argument ignores the various tenets of the Companies ( Auditors Report) Order, 2003. These require auditors to comment on various matters of propriety, such as whether the company has an internal control commensurate with its size and nature of business, the efficacy of the internal audit system, whether loans and transactions with companies in which directors have an interest are made on reasonable terms, whether the company has defaulted in repayment of dues to banks and financial institutions, and whether frauds on or by the company have taken place. It is contended that auditors of private sector companies are not independent because they are appointed by the shareholders. Reference, in this regard, can be made to the specific powers and duties of auditors under the Companies Act, 1956 for which they are accountable under the law and to the fact that chartered accountants are also governed by a code of conduct under the Chartered Accountants Act, 1949. Over 50 years, the number of audit failures in India would perhaps not exceed even one per cent of the total number of audits performed, which indicates that the system has performed reasonably well. The legal framework needs to be made more conducive, so that auditors can report wrongdoings of companies without being victimised. One of the possible steps that might be considered is that it should not be possible to remove auditors for a period of time once the auditors' report has been qualified or once the auditors have identified improprieties in the company. While the new Companies Bill, 2012 intends to introduce mandatory rotation, more detailed reporting responsibilities and criminal liabilities for auditors, auditors receive little support from the legal framework in respect of their audit fees. A basic premise that requires to be accepted is that audit quality comes at a premium. A successful audit of a large manufacturing or service company requires a large audit team comprising suitably qualified and experienced personnel who would have to be paid competitive remuneration so as to attract the best of talent. Mandatory rotation of auditors could lead to a downward spiral in audit fees charged by competing audit firms, which would adversely impact audit quality. Another idea that requires consideration is an oversight mechanism to monitor the quality of audits performed in India on the lines of the Public Company Accounting Oversight Board in the US. If such an oversight board begins to examine the quality of audits performed on listed and other large private sector companies in India, it would automatically improve the quality of such audits by pointing out the shortcomings in audit processes as well as ensuring that such lacunae are duly addressed. At the end of the day, in a democratic country like India that believes in the virtues of free enterprise, it would be counter- productive if audits took on the guise of investigations. Statutory auditors also have a role to advise management regarding the quality of their internal controls and processes and efficient utilisation of resources. Such suggestions add value to the audit process and enhance the auditor- auditee relationship. An unduly aggressive approach on the part of auditors can lead to acrimonious relations between the auditor and the management. It can also have a negative impact on the innovative risk- taking spirit of entrepreneurs, which lies at the heart of free enterprise. An excessively conservative approach towards risk- taking, innovation and decision- making in the private sector would be detrimental to economic progress. While such conservatism (which is at least partially attributable to the rigorous audits performed by CAG) is perhaps necessary in the public sector; it is certainly not advisable in the private sector. The solution is to improve and strengthen the existing statutory audit framework in the private sector rather than pursuing impractical alternatives such as audits by CAG. *" Need for public sector audit in listed private companies", November 5, 2012 The author is a chartered accountant Failures account for just 1% of total audits and there are simple ways to improve accountability If a US- style Public Company Accounting Oversight Board examines the quality of audits performed on listed private sector and other large companies in India, it would automatically improve the quality of such audits | ||
| The CEO salary debate | ||
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All these, however, seem to have had no effect on the occupants of India Inc's corner offices. There are two reasons for this: one, the pay packets of all of them are well within the limit of five per cent of the net profit — as mandated by the Companies Act. A Business Standard Research Bureau analysis showed that the average salary of the 100 best- paid directors is only one per cent of their respective companies' net profit. So, legally, they are on sound footing. The second reason India Inc isn't losing sleep over the growing buzz against high salaries of CEOs is that promoters, who control most of the companies, treat shareholder activism as nothing more than a nuisance. Data show that India Inc has been hugely generous in rewarding its top brass. In fact, a study conducted by Aon Hewitt showed how compensation in India is inching closer to global executive pay, even though the size of Indian companies is still minuscule compared to global standards. The median pay for a CEO in India on a purchasing power parity basis was at nearly $ 3.5 million in 2011- 12 ( growing steadily at 15- 18 per cent in the past few years), in companies with more than $ 2 billion in revenues. In the US, the figure is nearly $ 7 million. Some of the leading lights of Indian companies say the " roadshows" against high CEO pay in India is meaningless, since companies know best what to pay their top executives. Demand for CEO talent far outstrips supply in the country and the availability of leadership talent in India, especially that high up the ladder, is very low, compared with mature markets. Also, unlike earlier years, organisations now have no issues with professionals making money as long as they perform and give the desired results. Moreover, Indian CEOs are spoilt for choice with most having at least three job offers or feelers coming their way at any given point in time. " It's preposterous to think that all of us are creating elaborate webs of deceit to mask big payouts or paying through our nose to our top executives just for fun," says the CEO of a large diversified firm. The CEO adds in any case, he has enough legal legroom to give higher pay to his top executives who are delivering the goods. He also argues say- on- pay ( right of shareholders to have a say on management compensation) takes away the fundamental right of every board — that is to determine the payment it wants to give to attract the best talent. Besides, it takes away the board's prerogative to manage. He has a point but it's also a fact that opposition to " obscenely high" CEO salaries is growing by the day, and India Inc just can't afford to dismiss the arguments against their opaque compensation practices. Here is one argument. Often top executives are given pay hikes that have no relation with the performance of the company or its stock price. For example, many CEOs received over 30 per cent pay hikes in 2011- 12 — the period during which the net profits of the companies they run went up by an average five to 10 per cent. This is precisely the reason that say- on- pay is gaining rapid popularity in the West. Impressions about unethical compensation practices by India Inc are also gaining ground by revelations that India has the widest gap between salaries of CEOs and entry- level graduates. Aon Hewitt, for example, has shown that in India, a CEO's compensation is on an average 675 times of the minimum wage earned by an entry- level employee. The US comes second with a 423 times' difference, while in China, the ratio is 268 times. The "social inequality" is prevalent within top management as well — for example, India's highest- paid executive. Jindal Steel & Power's Chairman and Managing Director Naveen Jindal gets around 25 times what the next highest- paid Jindal Steel director does. The other bone of contention is the link between pay and performance. While many Indian companies have moved to a higher variable pay component, there is enough anecdotal evidence on how senior executives are still insisting on at least 75 per cent fixed pay and fewer performance- linked benefits. And companies are giving in to these demands. The moot point is that India Inc should not have any problem in more disclosures regarding pay, since no one can argue in favour of askewed and non- transparent remuneration process. Consider the India Board Report by Hunt Partners, AZB and PricewaterhouseCoopers that says in many Indian companies, there is no real governance around how top managers were paid. Decision- makers and recipients are not at arm's length, and boards are unable ( or incapable) of judging remuneration decisions objectively. In that context, Sebi's insistence on a remuneration committee under Clause 49 of the listing agreement makes sense. Opinions heat up against a skewed and opaque remuneration process HUMAN FACTOR SHYAMAL MAJUMDAR | ||
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Company Secretary, Chennai
email csarengarajan@gmail.com
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