| Act leaves India Inc in a tizzy Phased rollout of new Companies Act |
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New Delhi On August 30, when the government notified the new Companies Act, 2013, exactly aday after the Presidential assent — replacing a nearly six- decade legislation that governs companies in the country — it inadvertently left many auditors, legal experts, and finance teams across corporates in a tizzy. While the government has notified 98 sections of the new Companies Act, 2013, where rules were not required, it has failed to notify various sub- sections linked to the 98 sections, leading to utter confusion. The Ministry of Corporate Affairs ( MCA) tried to address the issue by bringing in two separate clarifications, on September 12 and 18. It was belatedly clarified that the provisions of the old Act corresponding to the notified provisions of the new Act have " ceased to be effective" ( in advance of the formal repeal of such provisions), but the problem largely pertains to the overlapping areas between the two legislations. "This was bound to happen, as the government chose to notify those sections, which did not require any rules, thinking that these sections are on a standalone basis," says Harinderjit Singh, partner, PricewaterhouseCoopers. For instance, MCA has several definitions including those for associates, controls and subsidiaries. However, it has not defined joint ventures and not notified sections related to consolidating two financial statements. Similarly, while the ministry notified Section 185 on loan to directors, a related section — Section 186 on loan to any person — has not been notified. According to Pavan Kumar Vijay, managing director of financial consultancy firm Corporate Professionals, any law which is not fully notified is legally not implementable. "The industry has started discussions and consultations on the matter and the ministry should now take proactive measures to address the issue," says Vijay. The situation of having two legislations in force on the same subject matter is certainly peculiar and creates administrative burden for corporates. For instance, a " subsidiary" is defined differently in the old Act and the new Act. As a result, one may have to refer to the definition of " subsidiary" under the new Act to apply to provisions under the old Act. Also, while the definition of a " foreign company" has not been made effective under the new Act, the provisions applicable to foreign companies are in effect. In such a situation, it is unclear whether one would need to look at the old Act for the definition of " foreign company" and apply this to the new Act. At the moment, corporates and their consultants have to be mindful of both legislations, as well as the draft rules published by the MCA to ensure compliance with the law. However, this could have been avoided by notifying all the provisions of the new Act. " A delayed effective date before the provisions became effective would also have made the transition much easier," says Rajat Sethi, partner, S& R Associates. Mehul Modi, senior director, Deloitte Touche Tohmatsu India, points out that the 2013 Act requires the financial year ( FY) to uniformly end on March 31. Under the 1956 Act, freedom was given to companies to determine the FY. In the new Act, all the definitions are yet to get notified, so the 1956 Act needs to be followed in those cases. In any case, transition of two years is available to meet the 2013 Act provisions related to FY. But there are people in favour of the method of rollout. " It will make it easier for companies to absorb the implications of the notified sections more thoroughly and then get ready for the next notification," says Vijaya Sampath, senior partner, Lakshmi Kumaran & Sridharan. When the new Companies Act was introduced in the United Kingdom, it was done in phases and it took a long time to implement the entire Act. The new Act has introduced many new concepts and nuances, too. "This is the first time that the MCA has sought public consultation in such a web- friendly and open manner," points out Sampath. Timing is also an issue. If the government had waited for all the draft rules to become final and then released the Act and the rules at the same time, it might have been difficult for companies to comprehend the implications. Phasing the Act, in that sense, is a good way to allow corporates to understand the impact of the notified sections and make necessary changes in the companies. ICAI President Subodh Agarwal says, "Having both the Acts in place will help faster implementation of the new Act." MCA officials plan to notify all the rules before the year- end and the Act, in its entirety, will be in place by early next year. However, the full import of the new Act may come into effect from the next financial year (2014- 15). Till then, India Inc has to live with some confusion. ILLUSTRATION: BINAY SINHA BIG PICTURE Govt chose to notify sections which did not require any rules, thinking that these are on a standalone basis |
| Women get upper hand in property disputes |
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As chartered accountant Rana Shukla ( name changed) and brother Raju Shukla were jointly running their late father's business, they acquired many properties together. Now, they are busy running from one law firm to another, evaluating the various options of splitting the business and properties they own jointly. RN Gupta, managing partner of law firm S N Gupta and Company, is handling a similar case in which the client is paying a substantial amount of money as stamp duty and registration cost. " That's why we suggest it is always better to avoid owning properties jointly. Splitting it becomes complex," Gupta says. And, in case the property owned jointly was bought on a joint loan, the problem is aggravated manifold. Or, if one of the joint owners passes away while holding a property jointly and the legal heirs become involved in the issue, there is little surety on when the matter would be resolved, Gupta cautions. The issue or a resolution to it depends on many factors, such as the relationship between the joint owners of the property, the kind of property held jointly and the kind of owners who hold the property. Matrimonial lawyer Mrunalini Deshmukh says the legal course for splitting a property held jointly depends on the share a joint owner has in the property. For instance, does the joint owner hold a stake, that is, did he/ she pay a percentage of the cost of acquisition of the property? Or, was the name added merely for convenience. Or, was the property created in the name of the joint owner to be passed on to him/ her in the event of death of the other owner? Say a married couple that owns a property jointly wants to separate. "If the wife had also paid ( a percentage of the cost of the house) at the time of buying the property, at the time of splitting she will have to be paid her share if the husband wants to keep the property. The wife will have to prepare a sale or gift deed in favour of the husband and move out of the ownership of the house. This deed will have to be a registered one, for which the wife will have to pay stamp duty as well," says Gupta. Women have an upper hand when acouple split. So, it is likely the wife would secure the ownership of the house. As a result, she might have to pay the husband's share to him. Lawyers say often, though the wife earns more or is richer than the husband, she may still get an upper hand. If the joint property was bought on a joint home loan, the party moving out of the ownership would have to secure a no- objection certificate (NOC) from the bank showing he/ she is no longer liable for the loan. Anil Harish, partner of law firm DM Harish and Company, says if A and B jointly own a property on a joint home loan and B decides to move out of the ownership by selling his/ her share of the property to A, B would have to contact the bank and inform it of this. It is likely the bank would ensure the loan repayment wouldn't be affected by this, that is, A would be able to repay the loan. Only then would it issue an NOC to B. For joint loans, if an owner stops repaying, the other is asked to repay the share of both parties. This may be through rental income from the property or by selling the property, depending on the severity of the case. "If the property is held by the husband and the wife's name is added as aco- owner only for convenience, then, too, the wife has a right over the house —the right of residence in the matrimonial home. In this case, if the wife has to leave the matrimonial home, the husband would either have to pay rent to her every month for renting another house or pay a lump sum to buy another house. It depends on how they want to split," says Deshmukh. In this case, the wife not only has half the right on the matrimonial home, but also a right in the husband's share of the property. As such, she has more rights over the matrimonial home, say law experts. Say, a father buys a property in the name of his daughter. In this case, the daughter would retain her right over the property and can claim her stake. The case would be the same if the property was inherited by the father and the daughter had been named in it. In such circumstances, women get more protection, Deshmukh says. In case of separation due to domestic violence, irrespective of whether a woman has stake or has been named in the property, she has the right of residence in the matrimonial home and the husband would have to pay for it. Harish says the distribution of the property also depends on the type of property held — residential property where the joint owners are living, jointly held let- out property, jointly held vacant property, commercial property, a plot of land, etc. " If both parties stay in a residential property, either may sell his/ her share to the other and get paid for it. Or, the parties could sell the property to a third party and share the proceeds according to the ownership pattern," says Harish. Let- out properties need not be sold. Instead, the rent can be shared according to the ownership of the two parties. If the two parties hold a property that can be divided, such as an office with two rooms, both parties can get a room each. Similarly, a plot of land can be divided between two parties. WAYS TO RESOLVE PROPERTY ISSUES Types of property |Residential property where joint owners live: One of the owners can sell his share to the other or sell the property and share the proceeds as per ownership |Let- out property: Rent can be shared between the owners |Vacant property: Sell and share the proceeds according to ownership pattern |Plot of land & commercial property: These properties can be divided, like an office with two rooms can be divided into one room per owner, and so can a land parcel be divided Pattern of joint owner |Jointly bought the property: The owner moving out of the ownership will have to sell the property to the other by way of a registered sale deed |Joint owner' s name added for convenience: Between a husband and wife, the wife has a right over the matrimonial home. If she has to leave the home, the husband will have to pay her monthly rent for another house or a lump sum to buy another house. Even a daughter has rights over a property held with her parent( s) |Asset created in the name of joint owner: Say, a father buys a property in the name of his daughter. In this case, the daughter would retain her right over the property and can claim her stake. The case would be the same if the property was inherited by the father and the daughter had been named in it A resolution depends on the the kind of property held jointly and the ownership pattern THINKSTOCK |
| Value of vehicle in the policy cannot be disputed by insurer |
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Sher Singh Shobta had purchased aTata truck on a high interest loan. This truck was insured by National Insurance Company. The policy for the period of November 1, 1996, to October 31, 1997, stated the sum insured was ₹ 3.80 lakh. The truck met with an accident on April 30, 1997. It fell into a 1,700- feet gorge near Darlaghat in Solan district of Himachal Pradesh. The damage was extensive, resulting in total loss. Shobta immediately informed the insurer about the accident and lodged aFirst Information Report ( FIR) with the police. The insurer appointed a surveyor, who inspected the site, as well as the vehicle. Later, Shobta recovered salvage and transported it to Shimla at a cost of ₹ 50,000. Since it could not be used or repaired, he arranged for its storage. Shobta was deprived of his livelihood, yet had to shoulder the burden of paying back the loan, along with the interest and the storage charges. But the insurer did not settle the claim or even respond to the legal notice, which compelled Shobta to file a complaint before the Himachal Pradesh State Commission. He claimed the sum insured of ₹ 3.80 lakh for total loss, along with compensation and costs. The insurer contended that Shobta's failure to file the required documents, including the original driving licence, had caused the delay. The company also claimed the vehicle had been examined by a technical surveyor, whose report assessed the loss at ₹ 1.48 lakh. But Shobta insisted on getting the full sum insured for total loss. The State Commission observed the surveyor was an expert in loss assessment. Yet, a court or authority can consider an expert's report in evidence only if it is supported by some reason or logic. Here, the surveyor had disallowed most of the claim without giving any reasons and had even reduced the cost of the parts which required replacement. The Commission concluded the surveyor had acted like an employee of the insurance company than as an independent expert. The State Commission allowed 40 per cent depreciation on the sum insured and directed the insurer to pay the reduced amount of ₹ 2.28 lakh with nine per cent interest, and also compensation and costs. It further directed the insurance company to fix responsibility on the officer who had delayed settlement of the claim and recover the interest amount of ₹ 1.48 lakh from the defaulting officer. Both Shobta and the insurance company appealed to the National Commission against this order. The National Commission observed the survey report indicated almost every part of the vehicle was damaged, including the chassis, the engine and other key components. Since the vehicle had fallen into a deep ravine, the Commission accepted Shobta's stand that the vehicle was totally damaged and not repairable. The Commission observed that while insuring the truck, the insurer had accepted the value of the vehicle at ₹ 3.80 lakh. Yet when the accident occurred just nine months later, it applied 50 per cent depreciation, which was not justifiable. Relying on ajudgment of the Supreme Court in Dharmendra Goel v/ s Oriental Insurance, the Commission held that once the insurer accepts the value of aparticular vehicle, it cannot later disown that valuation on some pretext or the other at the time of paying aclaim. Such ' a take it or leave it' attitude is unwarranted, bad in law and ethically indefensible. The National Commission held that a maximum of 10 per cent depreciation could be considered reasonable for the period of nine months that the vehicle was used after it was insured. Accordingly, it directed the insurer to pay the balance ₹ 3.42 lakh, with nine per cent interest. While the claim amount was enhanced, the compensation was reduced to ₹ 50,000 but the order directing the recovery of this amount from the defaulting official was set aside. Litigation costs of ₹ 10,000 were also granted. Thus, the insurer is bound by the valuation stated in its policy. However, unless the guilty officials are penalised, there will not be any attitudinal change and the consumer will have to keep fighting for his rights. The author is a consumer activist CONSUMER IS KING JEHANGIR GAI |
| Cost of audit may go up by 25%' |
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Till date, only accounting standards were given legal backing by the law and the auditing standards were not within the ambit of standards and any addendum in consultation with the new regulatory authority ( National Financial Reporting Authority or NFRA). The impact is that auditing, which was a matter of opinion and judgement of the independent auditor will come under the monitor and supervision of What is the progress of your investigation in the NSEL case? We are collecting data from FT and NSEL. We will find out if there is any role of auditors and we will submit the report as soon as possible. Given the mandatory auditor rotation policy, could this be a game changer for Indian audit firms, especially the small and medium sized ones? Rotation of auditors could bring about achange in the mindset of the auditee and the auditor. The auditors also have to equip themselves to move from one client to another. The rotation policy will help attract freshers into the profession. This is also a professional opportunity for small and medium sized audit firms. But only the fittest will survive. But are the auditors equipped to embrace the change? Our auditors are fully equipped to handle the change, as our CA education system is such that it provides both theoretical, and practical training. Not only this, during their professional tenure, the auditors develop value judgment capacity too which is a part of the new Act. The new Act highlights trust on the auditors, and with trust comes a certain level of responsibility. With the heightened focus on ethics and good governance in the conduct of businesses, there is now greater expectation from the stakeholders with respect to information and assurance on the governance practices in the businesses. The auditors now have to be very careful in defining the extent of their role, responsibilities in the matters of attestation and giving reports or certificates. In addition, wherever required, we will provide additional guidance to the auditors. We have also planned a capacity building drive in a major way for our members. There have been allegations of auditors sharing a cozy relationship with clients. Do you see that changing? This is a myth. The so- called allegations are due to the vast expectation gaps. It was a misconception that an auditor is a part/ party to management and improper to claim that they enjoy cozy relationships. Now rotation, to an extent, will dispel the wrong notion of cozy or gory relationships. Anyway, auditors were always expected to work with independence and integrity in the best interest of investors and other stakeholders. From a companys perspective, will the cost of audit go up? Ifind audit fee, if you compare with other fees ( that companies pay) is very less. Even if it goes up by 15- 25 per cent ( there is) nothing wrong in that. The new Companies Act will have a positive impact in the longer run on the business and corporate environment. It will help in the growth of Indian corporates. Many see the creation of NFRA as an encroachment in the jurisdiction of ICAI. What are your views? There is no question of encroachment. The NFRA will be one of the regulators or one of the wings of the regulator. So we do not see any conflict. Yes, certain power has been given to NFRA. The rules of NFRA are yet to be made public. So once they are in the public domain, we will be able to comment on it. But if you see, the National Advisory Committee on Accounting Standards is already there for accounting standards. Auditing standard was with us, but under the new Companies Act it will be regulated by the NFRA. It should be borne in mind that a single authority cannot usurp the powers of all other investigating authorities. Though NFRA may be on the lines of the Public Company Accounting Oversight Board model as in the US, one must realise that the US and India vary in terms of regulating the accounting profession. We have to see how the structure and rules are proposed. Once we complete the internal evaluation of the entire set of the rules, we will come out with suggestions. Will the new Act help reinforce foreign investors confidence in Indian economy? The focus of the new Act is on corporate governance. This will bring a radical change in the working and overall governance of companies, with a positive impact on the business environment. With the country going for a new company law after over 50 years, the accounting regulator Institute of Chartered Accountants of India ( ICAI) has its hands full while embracing the change. In an interaction with Namrata Acharyaand Sudipto Dey, ICAI President SUBODH KUMAR AGRAWAL shares his assessment of the impact of the new Act on the audit business and the profession. Edited excerpts: |
| BRIEF CASEN [1] M J ANTONY |
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A developer who constructs flats and sells them undertakes a works contract. Therefore, he is liable to pay a turnover tax to the states on the transfer of goods involved in such a contract, the Supreme Court stated last week in a batch of 26 appeals against the builders had argued that the flats were to be sold as flats and not an aggregate of its component parts. No work is carried out for the purchaser who gets title to the property only after all work is complete. Rejecting this view, the Supreme Court ruled in the batch of petitions, led by Larsen & Toubro Ltd vs State of Karnataka, that " a contract may involve both a contract of work and labour and a contract of sale of goods. The distinction between contract for sale of goods and contract for work ( or service) has almost diminished in the matters of composite contract involving both a contract of work/ labour and a contract for sale." The judgment further stated that taxing sale of goods in an agreement for sale of flat, which is to be constructed by the developer/ promoter is permissible under the Constitution. When the agreement between the promoter/ developer and the flat purchaser is to construct a flat and eventually sell the flat with the fraction of land, " it is obvious that such transaction involves the activity of construction in as much as it is only when the flat is constructed then it can be conveyed," the court said, and added: " We, therefore, think that there is no reason why such activity of construction is not covered by the term ' works contract'. Such activity has all the characteristics of works contract." The judgment further stressed that whether the contract involved a dominant intention to transfer the property in goods was not at all material. It emphasised that the 46th Amendment to Article 366 of the Constitution left no manner of doubt that the states have the power to bifurcate the contract and levy sales tax on the value of the materials used. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Protection for bank depositors The Supreme Court has dismissed the petitions of former directors of Vasavi Cooperative Urban Bank Ltd, challenging the constitutional validity of certain sections of the Andhra Pradesh Protection of Depositors of Financial Establishments Act. A large number of complaints were received from the depositors stating that the board of directors of the bank had swindled money of the depositors by creating false documents, amounting to crores of rupees. On receipt of the complaints, an enquiry was conducted and they were charge- sheeted. They challenged their prosecution. The state government and the central government justified it. The accused persons argued that the state legislature did not have the competence to enact the Andhra Act since the subject "banking" is covered under Entry 45 of List I of Seventh Schedule. Hence, only the central government is entitled to enact the law relating to subject " accepting of deposit from the public and repayment of the same on demand". The court rejected the argument relying on earlier decisions on this point. It also pointed out that similar laws were passed by Tamil Nadu, Maharashtra and Pondicherry to protect the interests of small depositors from fraud perpetrated on unsuspecting investors, who entrusted their life savings to unscrupulous and fraudulent persons and who ultimately betrayed their trust. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Order to produce tax documents The Supreme Court last week dismissed the appeal of Delta Distilleries Ltd against the judgment of the Bombay High Court, which had allowed the arbitration petition of United Spirits Ltd in a dispute between the liquor firms. The dispute was over amounts due and retired judges had acted as arbitrators, according to the terms of the contract. United Spirits wanted certain documents regarding the sales tax assessments to be produced before the arbitrator. Delta opposed it. The arbitrator asked Delta to produce some documents demanded by the rival. The arbitrator, a former Supreme Court judge, resigned from the arbitration as Delta made certain allegations against her in certain correspondence. This led to the formation of a three- member arbitration tribunal consisting of two ex- judges of the Supreme Court and one from the high court. Delta maintained before the tribunal that it would not produce the documents as sales tax returns are confidential documents. The tribunal insisted on implementing the order of the previous arbitrator and allowed United to move the high court to implement it. The high court ordered Delta to produce the documents. Therefore, it appealed to the Supreme Court. Delta reiterated that the documents were confidential, and later that they were not traceable. The sales tax commissioner pleaded that the records were destroyed as they were old. The Supreme Court upheld the order of the high court. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Blacklisting of medical suppliers If a competent authority decides to blacklist a firm, the court will not normally interfere with the decision unless the firm was not given an opportunity to explain its stand. "Primarily it is for the authority competent to order blacklisting/ debarring to decide, whether the facts and circumstances of the case justify blacklisting/ debarring or not. The court cannot substitute its own views for the view of the competent authority in this regard," the Delhi High Court stated last week while dismissing the writ petitions of several firms, which were blacklisted by the Armed Forces Medical Services. These persons and firms are facing prosecution after aCBI inquiry for supply of medicines to army hospitals on the basis of fake tenders in the name of top pharmaceutical companies. They argued that the inquiry is not complete and, therefore, the blacklisting was premature. Rejecting this argument, the high court stated in its judgment, Sabharwal Medicos Ltd vs Union of India, that " if investigations are pending against the firm, the government cannot wait till the outcome of the probe for blacklisting it. It will pollute the tendering process itself. Once the investigation by a state agency is carried out and it culminates in filing of a chargesheet, the state cannot be expected to wait for the outcome of the prosecution and in the meanwhile, continue to deal with persons whose conduct has come under a serious cloud. To take a different view will place unreasonable fetters on the right of the state not to enter into contracts with persons, whom it finds to be undesirable." >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Foreign architect firm not barred The Delhi High Court last week dismissed the writ petition of some architects seeking the quashing of the award given by the National Building Construction Corporation Ltd to a foreign firm for providing consultancy services for a Delhi project. The Indian architects argued that the foreign firm was neither registered under the Architects Act nor has it taken permission from the government in terms of Section 37 of the Act. A weekly selection of key court orders |
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