Sebi panel mulls curbs on promoter trades
SAMIE MODAK & SACHIN P MAMPATTA
Mumbai, 17 November
Promoters and top executives intending to buy or sell shares of their
companies might soon have to inform the market well in advance for
such transactions. The Securities and Exchange Board of India ( Sebi),
as part of an overhaul of its insider- trading rules, is considering
this, to clamp on misuse of share- price- sensitive information.
The proposal has been made within a high- level 19- member committee
set up by Sebi in April to review the country's two- decade- old
insider- trading regulations.
At present, promoters and other company insiders have to make
disclosures with the stock exchange within five days of such trades.
The thinking at the Sebi committee was that post- trade disclosure put
minority shareholders in a disadvantageous position.
Once Sebi changes the rule, promoters and insiders might have to
specify a window — possibly of up to three months before the
transaction —during which they would buy or sell the shares of their
companies, said people with direct knowledge of the development.
Insider trading refers to purchase or sale of a company's shares by
its insiders — promoters, senior management and directors — on the
basis of information not available to public shareholders.
The Sebi committee, headed by NK Sodhi, former presiding officer at
the Securities Appellate Tribunal, is also looking at revamping other
disclosure requirements to ensure price- sensitive information reaches
the public in a more symmetric way.
"The more effective methods being looked at will ensure companies
don't give out information selectively to fund managers or brokers and
make it available to the general public," said a source familiar with
the matter.
Proxy advisory firms said improving disclosure standards alone could
not help tackle the insidertrading menace.
"Improving disclosure standards is a positive. But that, by itself,
cannot curb insider trading. There should be a stricter punishment,
such as jail, that acts as a deterrent. Today, that's not happening,"
said InGovern Research Services Managing Director Shriram Subramanian.
Insider trading was often tough to prove and Sebi should improve its
surveillance, so that the guilty were caught, he added.
The US had last year jailed former Goldman Sachs Group director Rajat
Gupta and billionaire hedge- fund manager Raj Rajaratnam in one of the
biggest insider trading crackdowns by the American government.
Gupta had been found guilty of passing on confidential information to
Rajaratnam.
Turn to Page 7 >
Might ask for insiders to inform bourses of share sales in advance TELL AND SELL
|Insiders may have to specify a window for dealing in shares |Aimed at
transparency, move to curb misuse of insider information |Market will
know in advance if a promoter has plans to buy or sell shares
|Proposal made by insider trading committee set up by Sebi in April
|Committee also looking at ways to optimise new powers to tackle
insider trading |19- member committee to file its report next month
Raids on Aditya Birla, BK Birla firms; ₹ 77- lakh yarn seized
PRESS TRUST OF INDIA
Thane, 17 November
Godowns of the Birla Group- owned companies at Bhiwandi were raided by
the officials of the Controller of Legal Metrology and yarn worth ₹ 77
lakh was seized for want of proper packaging on the material, an
official statement said on Sunday. The release stated that the raids
were conducted under the direct guidance of the Controller of Legal
Metrology, Ashok Dongre.
The seized goods comprised yarn manufactured by Century Rayon of the B
K Birla Group, worth ₹ 43,92,500 and Aditya Birla Nuvo, worth ₹
33,00,000. According to the release, the seized goods did not have any
declaration as stipulated in the Weights and Measures Act and also the
Legal Metrology Act and Rules, 2009 and 2011.
A spokesperson of the Aditya Birla Group said the company was fully
compliant with the packaging norms and was not aware of any new
packaging stipulation as the seized goods were packed according to the
existing industry norms.
"We are fully compliant with the existing packaging regulations and we
are sure to convince the authorities about the same. We dont know of
any new packaging norms. The seized yarns are industrial raw materials
for textile manufacturing to be marketed to institutional clients.
The quantities are in 50 kg cartons, which is the industry size
packaging," the spokesperson said.
According to the industry practice, raw materials are not mandated to
carry packaging labels, said an industry analyst. B K Birla group
could not be contacted for reaction.
Cases of violation under the said rules and Act have been registered
against the concerned for having failed to make declarations on the
packages, the release said. Further probe and action into the case is
being carried out by the office of the Controller of Legal Metrology,
the release said.
Some breakthrough, some impasse likely at Shillong GST meet
VRISHTI BENIWAL
Shillong, 17 November
The contentious issues in the way of the Constitution Amendment Bill
for the proposed Goods and Services Tax (GST) are not likely to be
fully resolved at a two- day meeting of the Empowered Committee ( EC)
of state finance ministers here, beginning on Monday.
The Centre, whose officials would also take part in the meeting, might
agree to the states' demand for keeping entry taxes on goods out of
GST but would insist that petroleum products and liquor be subsumed in
the unified indirect tax regime.
The stand- off between the Centre and the states over constitutional
changes for the introduction of GST, however, may not end. States are
also insisting on an in- built permanent mechanism to compensate
losses arising out of revenue loss from GST.
The Centre is willing to soften its stance on the issue of entry tax
but it is not ready to budge on the other two issues. Though some
states might agree to keep petroleum and alcohol out of the
Constitution Amendment Bill, the issue of automatic compensation
mechanism could be the spoiler. " We are not averse to the levy of
entry tax by local bodies in lieu of octroi. Since the Standing
Committee on Finance of Parliament had proposed subsuming it, we also
went ahead with that… But in the case of petroleum and alcohol, it is
not possible to keep these out of GST. We have spoken to the states
and some of them have agreed to reconsider their views," said a
finance ministry official, who did not wish to be identified.
The biggest bone of contention could be GST compensation.
After a bad experience with the Centre on Central Sales Tax
compensation, the states now want to make sure they don't have to
plead before the Union government for their dues. The standing
committee had suggested providing for a GST Compensation Fund in the
Constitutional Amendment Bill, to address revenue concerns of states.
Although the Centre has assured the states that it would adequately
compensate them for any losses arising due to a switch to the new tax
regime, it is not ready to make this provision in the Constitution.
Unless an agreement is reached on all these issues in the Shillong
meet, the Centre would not be able to table the Bill in the winter
session of Parliament. This means the new government will have to
start afresh the talks with states, furthering delaying roll- out of
GST.
Simultaneously, committees of central and state officials are also
working on design and structure of GST. Committees on the " revenue
neutral rate" ( RNR) and ' taxes on inter- state movement of goods'
have not seen much progress. While not much deliberations have gone on
deciding RNR, as it could be done at a later stage by the GST Council,
many states are not agreeing to an Integrated GST ( IGST) model, where
the Centre would collect the tax and pass on to the destination state.
IGST is to be imposed on inter- state movement of goods and services.
The committee on " dual control, threshold and exemption" has reached
some consensus on a threshold of ₹ 25 lakh for the levy of GST. On the
issue of dual control, there are wide differences.
It was proposed earlier that traders with an annual turnover of less
than ₹ 1.5 crore could come under the administrative control of
states, while those above this limit or involved in inter- state
movement of goods should be controlled by both the Centre and the
states.
The EC will also discuss the road ahead for GSTN, the IT platform for
the new proposed tax, in the two- day meeting.
The committee on 'dual control, threshold and exemption' has reached
some consensus on a threshold of ₹ 25 lakh for the levy of GST
FIPB eases defence FDI norm
SURAJEET DAS GUPTA
New Delhi, 17 November
The Foreign Investment Promotion Board ( FIPB) has decided not to
reject proposals from a foreign company only because it or any of its
group companies or their parent is under investigation in the country
or abroad. The move is expected to pave the way for many foreign
companies in the defence sector to make a comeback. They had not
pushed plans in India for a joint venture or had even withdrawn from
one because of the earlier bar.
For instance Selex ES, the defence technology arm of Finnmeccanica,
which is under investigation, had withdrawn an application to set up a
JV with Hyderabad- based Data Patterns. After the change in the
government's stance, it is mulling a return to the FIPB.
Also, Pune- based Bharat Forge had set up Elbit Advanced Systems Pvt
Ltd in a joint venture with Israel- based Elbit Systems Land C41 Ltd.
This was to make artillery guns, howitzers, ammunition and tactically
protected vehicles. The Israeli company was to put in a 26 per cent
stake and invest $ 6 million over three years. The proposal was first
discussed at FIPB in March this year and then deferred thrice, due to
lack of clarity on the earlier policy.
In the above case, the ministry of home affairs had at an FIPB meeting
some weeks earlier, said Elbit Systems had acquired the assets of
Israeli Military Industries (IMI) Aircrafts Division through a
subsidiary. It mentioned that IMI had been blacklisted by the Ministry
of Defence for 10 years in March 2012. It also brought to the notice
of the board that Soltam Systems, another wholly owned subsidiary of
Elbit Systems since 2010, was blacklisted by the Philippines
government in July 2012 for a year, for failure to deliver goods.
Also, Soltam was allegedly involved in some questionable deals in
Kazakhstan.
The board, however, took the view that the proposal in question was
not the issue which was investigated.
The law would take its course and the current FIPB consideration was
without prejudice to any existing or future civil or criminal
proceedings against the foreign investor or its parent company. On
that basis, it cleared the proposal, subject to the usual
considerations.
FIPB took a similar decision on a JV between AW and Tata Sons which
undertakes final assembly of both the civil and military version of
the AgustaWestland 119 Ke helicopter, through Indian Rotocraft Ltd.
The new proposal had sought permission from the government to give
permission for assembly of an upgraded version of the AW119 Kx model.
The ministry of defence told FIPB it had no objection to the specific
proposal but AW was a wholly owned subsidiary of Finnmeccanica, being
investigated for alleged corruption. FIPB, however, decided the issue
being investigated related to the AW101 helicopter model, not to the
new proposal. It said the law would take its course and their
clearance would be without prejudice to any existing or future civil
or criminal proceedings against the foreign investor or its parent. It
also opined that the request by the applicant for achange in the name
of an upgraded model was only technical in nature and approved the
proposal.
No rejection of a proposal only because applicant or group company
under investigation anywhere; clears applications on new basis
BREATHER FOR INVESTORS
|FIPB not to reject FDI proposals in defence just because any of the
group companies or their parent is under investigation in the country
or abroad |Clearance will be given without prejudice to any existing
or future civil or criminal proceedings against the foreign investor
or its parent |Elbit Advanced Systems Pvt Ltd, ajoint venture between
Bharat Forge, and an Israeli company, was cleared by FIPB, despite
questions that the foreign group has bought a company which has been
blacklisted by Indian defence ministry for 10 years |Tata and
AgustaWestland joint venture also cleared by FIPB, saying the
helicopter sought to be assembled in India is not under investigation.
Augusta is part of Finnmeccanica, being investigated for alleged
corruption
BRIEF CASEN [1] M J ANTONY
Contract labour issue splits SC bench
The status of contract labour in commercial establishments continues
to divide the judges. Last week, two judges in a division bench of the
Supreme Court hearing the appeals of workers in the Hotel Corporation
of India, which runs the canteen facilities for Air India, differed on
their entitlements. The grievance of the workers was that they were
employed by Air India, but they were not regularised by keeping them
temporary for long periods by devious means. They argued that they
were working with Chef Air, a unit of the government- owned Hotel
Corporation, which in turn was a subsidiary of Air India. They raised
an industrial dispute and the tribunal held that they were deemed
employees of Air India and their real status was " camouflaged" by
corporate veils. Air India moved the Delhi High Court against the
tribunal's verdict. Both the single judge bench and the division bench
of the high court gave findings in favour of the national carrier. The
employees carried the dispute to the Supreme Court in the appeal,
Balwant Rai vs Air India. The judges again differed on the status of
the workers. One judge held that the workers of Chef Air cannot claim
to be employed by Air India and dismissed the appeal. On the other
hand, another judge restored the order of the tribunal and ordered Air
India to reinstate them with consequential benefits like back wages.
Since the judges have given contrary orders in their separate 150-
page judgment, the issue will have to be decided by a larger bench, or
it may even go to a constitution bench.
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Sarfaesi disputes must go to DRT
The Supreme Court has ruled that a secured creditor aggrieved by
measures taken by the borrower under the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security
Interest Act ( Sarfaesi) may approach the Debt Recovery Tribunal, or
its appellate tribunal, but not the civil court.
Jurisdiction of the civil courts is entirely barred under Sections 13(
4) and 34 of the Act, the court stated in the case, Jagdish Singh vs
Heeralal, which involved a loan extended by Bank of India and property
disputed by members of a joint Hindu family. The court reiterated this
position while setting aside the judgment to the contrary delivered by
Madhya Pradesh High Court.
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Larger bench to decide insurer's liability
A two- judge bench of the Supreme Court has referred a question
involving insurer's liability in road accidents to a larger bench, as
it felt that some earlier judgments were wrongly decided. The present
judgment in the appeal, United India Insurance Co Ltd vs Sunil Kumar,
asserted that a person claiming compensation under Section 163- A of
the Motor Vehicles Act need not prove who is at fault for the accident
causing death or permanent disability. Some judgments had insisted
that the fault should be fixed before awarding compensation. In the
new judgment, that view was held to be wrong and therefore it should
be reviewed. The court asserted that this provision of ' no- fault
liability' was intended to provide immediate relief to the victim
instead of waiting to prove who was at fault. This was a beneficial
legislation. " If the owner of the vehicle or the insurance company is
permitted to prove contributory negligence or default or wrongful act
on the part of the victim, naturally it would defeat the object of
Section 163- A," the judgment said. Compensation after proving the
fault, which is a long process, is dealt with in another section. But
Section 163- A provides immediate relief to the victim.
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> BHEL dismissal of DGM ' too harsh'
The Supreme Court has quashed the dismissal of a deputy general
manager of BHEL, who was dismissed six days before his retirement
after 30 years of service. He was given all retiral and pensionary
benefits, setting aside the judgment of the Uttarakhand High Court in
the appeal, Girish Goyal vs BHEL. He was in charge of the canteen
where it was found that there were discrepancies in the stocks of tea
leaves and milk powder. He pleaded negligence and alleged that there
was a chain system involving his superiors and subordinates. They were
not punished, but he was dismissed. The Supreme Court stated that the
punishment was disproportionate to the negligence, apart from the bad
name it brought to him. The company was asked to pay him all the
benefits with interest.
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Judges must give reasons for order
A judgment must give reasons for its conclusions, the Supreme Court
reiterated in the case, Shree Mahavir Carbon Ltd vs Om Prakash. In
this case, the company alleged serious fraud by a financier who took
it over by gaining majority shares by offering it funds for expanding
its coke oven plant. The company filed a criminal case and the
magistrate took cognisance of the various offences. The accused
persons moved the Orissa High Court which quashed the magistrate's
order, stating that it was a civil dispute and not a criminal case.
The high court did so in a cryptic order, " with no discussion worth
the name as to how the high court accepted the pleas of the accused
persons." The high court was asked to hear the case afresh.
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> SAIL challenge to arbitration dismissed
The Delhi High Court last week dismissed two writ petitions opposing
the decision of arbitral tribunals, which rejected preliminary
objections and went on with the proceedings. In the first case, the
Steel Authority of India challenged the decision in its dispute with
Seaspray Shipping Co arguing that there was no arbitration clause in
the contract. A similar plea was made in the second petition, moved by
United Spirits Ltd in its dispute with Stitch Craft India. The high
court decided that if the arbitral tribunal decides to go ahead with
its proceedings, without ruling on preliminary objections, the parties
cannot always move the high court in a writ petition. The Arbitration
and Conciliation Act was meant to speed up decisions and "
interference with the arbitral proceedings, in exercise of writ
jurisdiction is bound to delay the conclusion of such proceedings,
thereby defeating one of the main objectives behind preferring
arbitration over litigation," the judgment said.
A weekly selection of key court orders
Regulatory norms in other Acts will have to get aligned with the new
Companies Act
NSUNDARESHA SUBRAMANIAN & SUDIPTO DEY
Corporate India is waking up to the implications of the new company
law. As sections get notified in tranches and the rules are put out
for public comments, several areas of overlap with other laws and
regulations are emerging, which need to be sorted out, say legal
experts.
Some of the key areas where the overlaps are seen include issues
related to taxation, related- party transactions, issue of
preferential shares, corporate social responsibility, revision in
financial statements, provisions related to securities in listed
companies, cross- border mergers, and auditor assignment, among
others. Unless clarified in time, the conflicting provisions may lead
to confusion.
Yogesh Sharma, partner, assurance, Grant Thornton India LLP, an
assurance, tax and advisory firm, says: " It is expected that other
regulatory requirements will have to get aligned to the provisions of
the new Companies Act. In case the alignment is not done in time, it
may leave corporate India confused." For instance, the Securities and
Exchange Board of India ( Sebi), which has drafted several regulations
and prescribed the listing agreement that governs the functioning of
listed firms, has already commenced the process by which the new Act's
provisions will be interpreted and aligned with the existing Sebi
regulations.
Sebi & the Companies Act
One of the areas of overlaps with Sebi is the issue of preferential
shares. The new Act has provided that preferential issues now require
a registered valuer to value the shares.
"Issue of preferential shares has got several dimensions, the key
being that pricing considerations are commercially driven. In any
case, you have Sebi guidelines for listed companies, RBI guidelines
for cross- border share issues, and several deeming fictions ( and
litigation) in tax legislation.
In this context, clearly, a regulatory overkill, not to speak of
confidentiality concerns where external parties are involved in share
valuation," says Ketan Dalal, joint leader (tax and regulatory
services), PricewaterhouseCoopers.
Another area where Sebi regulations will come into play is the insider
trading provisions. While Sebi already has insider trading provisions
for listed companies, now this will also cover unlisted companies.
Moreover, the new Act has included several key functionaries in the
definition of the insider. Sebi regulations need to be amended
accordingly. "Sebi can provide for stricter terms, thresholds and
penalty for listed firms, but these can't be lower than what is
provided in the companies Act," said a former Sebi official.
Similar issues are likely to come up with the Institute of Chartered
Accountants of India ( ICAI), say experts.
Accounting Standards and the companies Act
Dalal of PwC points to the stringent provisions provided for related-
party transactions. The earlier Act did not provide for any definition
of relatedparty.
But the new Act has provided for the widest possible definition of the
related- party transactions, he said. Another issue bothering many tax
experts while considering any related- party transactions is that the
threshold of ownership is different between I- T Act and the companies
Act. Transfer pricing regulations look at 20 per cent or more
ownership of voting power, whereas the companies law looks at control
of 20 per cent or more of total share capital ( including preference
share capital), say experts. Under the new Act, a company having one
or more subsidiaries will also prepare Consolidated Financial
Statement ( CFS) of the company, and of all the subsidiaries in the
same form and manner as that of its own. The draft rules issued by
Ministry of Corporate Affairs ( MCA) for this purpose states that the
consolidation of financial statements of the company shall be done in
accordance with the Accounting Standards. However, by the requirements
of the existing Accounting Standards and the Indian Accounting
Standards placed on MCA's website, there is no such requirement, which
has been so prescribed. Therefore, there is an inconsistency between
the two to that extent, point out experts.
Provisions relating to consolidated financial statements may also
clash with the listing agreement. Under the new Act, companies need to
prepare the consolidated statements using the applicable Accounting
Standards. However, under the listing agreement, currently, the listed
companies are given the choice of preparing the CFS either by Indian
Accounting Standard or under IFRS ( International Financial Reporting
Standards). Experts point out this may lead to a situation where
companies either prepare CFS additionally under IFRS on a voluntary
basis, or decide not to prepare these at all.
As per the new Act, the maximum number of audit assignments undertaken
by a chartered accountant cannot exceed 20. However, this Act, unlike
the old Act, does not prescribe the types of companies and other
assignments, which will be included or excluded for the purpose of
calculating this limit. The vagueness will remain till the time MCA
and ICAI clarify the combination, says audit experts.
Tax related implications
The new Act mandates spending for corporate social responsibility (
CSR) by companies. However the Central Board of Direct Taxes ( CBDT)
is still examining the issue of giving tax breaks on CSR spending.
Auditors point out that under Section 135 of the new Act, the CSR
committee in a Board shall have at least one independent director.
However, under Section 149( 4) and the Rules framed thereunder, a
private company is not required to have an independent director. This
dichotomy needs further clarity from the ministry, say experts.
On restatement of financial statement, the reported profits of the
company are likely to undergo a change, if the restatement relates to
a profit and loss item. This could potentially impact the Minimum
Alternate Tax (MAT) calculations of the company. However, the ability
of the company to revise its MAT calculations could be restricted if
the tax laws are not suitably amended to permit revision of returns
for periods that match the periods for which financial statements can
be revised, points out Sai Venkateshwaran, partner and head
(accounting advisory services), KPMG India.
The MCA clearly has a task in hand aligning the provisions in the new Act.
Overlaps confound corporate India
COMPANIES ACT 2013 ON COMMON GROUND
Some of the provisions of the new companies Act overlap certain key
norms made by other financial sector regulators. They include
regulations in SEBI Act, I- T Act, competition law, accounting
standards and other sectoral regulations. Business Standard takes a
look at some of these overlaps in the companies Actwhich has left many
corporate lawyers, accountants, auditors, and CXOs confused. Some of
the points of concern are over:
|Insider trading regulations |Schemes of arrangement |Purchase of
minority shareholding |Related party transactions |Corporate social
responsibility |Definition of the term ' Control' |Consolidated
financial statements |Issue of preferential shares |Cross border
merger and its taxability or tax neutrality |Revision in financial
statements |Revision in depreciation |Stamp Act, state legilations
|Accounting standards / Indian accounting standards
CSR issues continue to remain unresolved
We have discussed a lot on 'why CSR'. Its time to discuss 'how',
rather than ' why'. Draft Rules are before us. The provision (section
135) of the Companies Act 2013 shall be applicable from the financial
year 2014- 15 and companies hardly have five months to formulate the
CSR policy. Certain issues are bothering those who are responsible for
formulating the CSR policy and implementing the same.
The Draft Rules state, " CSR projects/ programmes of a company may
also focus on integrating business models with social and
environmental priorities and processes in order to create shared
value." Michel Porter, the Harvard Professor, who introduced the term
'shared value' in a HBR (January- February 2011) article defines
shared value as, "policies and operating practices that enhance the
competitiveness of a company while simultaneously advancing the
economic and social conditions in the communities in which it
operates." An example of shared value initiative is the ' Project
Shakti' of Hindustan Unilever Limited (HUL). It enhances the direct
rural reach of the company while empowering women. Can we classify '
Project Shakti' as a CSR project? Whether training expenses on Shakti
entrepreneurs should be classified as CSR expenditure? The concept of
' shared value' blurs the boundary between pure business activities
and CSR activities. ' Shared value' strategies definitely serve the
CSR objectives, but they are closely intertwined with the business
strategy.
Clarification on this issue is essential, as companies and regulators
should have a common understanding on which items should be included
in calculating CSR spend. The Act ( schedule VII) stipulates that '
social business projects' may be included in the CSR policy. By
definition, surplus from those projects are ploughed back to improve
the product or service or to provide subsidy. For example, the '
agarbatti' (incense sticks) business of ITC started to provide
livelihood support to retired employees and then it was extended to
other members of the community located around ITC's manufacturing
facilities.
If ITC designates it as a 'social business project', it shall not
include surplus from this business in the net profit of the company.
A clarification is required on whether a part of general overheads and
the cost of service provided by employees, who are employed primarily
to work for the core business of the company, but spend some time on
those projects, should be considered as CSR spend.
The Draft Rules state, " Only activities, which are not exclusively
for the benefit of employees of the company or their family members
shall be considered as CSR activity." Companies build and operate
facilities ( e. g. educational institutions and health care
facilities) primarily for employees and their families. Members of the
local community also use those facilities. A clarification is required
on whether only proportionate expenditure that can be assigned to the
use of those facilities by local community members should be
considered as CSR spend. Allocation of expenditure will be an issue
that should be addressed by cost accountants.
Activities related to ' environmental sustainability' are also
classified as CSR activities. Companies undertake research projects to
improve existing products or processes to make them environment
friendly.
A clarification is required on whether such research expenses will be
considered as CSR spend. The Draft Rules state, " CSR Policy would
specify that the corpus would include the following: 2% of the average
net profits; any income arising therefrom; and surplus arising out of
CSR activities." This implies that every year, companies should
transfer two percent of average net profit before tax ( calculated as
per section 198) of the previous three years to the CSR corpus and
then spend money for CSR activities from that corpus. A clarification
is required on whether companies should transfer the amount to the
corpus at the beginning of the financial year and invest the corpus
fund outside the business to earn an income that will form a part of
the corpus.
The Act mandates that every company having a net worth of ₹ 500 crore
or more, or turnover of ₹ 1,000 crore or more or a net profit of ₹ 500
crore or more during any financial year shall constitute aCSR
Committee of the Board consisting of three or more directors, out of
which at least one director will be an independent director.
A clarification is required on whether a company that is not otherwise
required to appoint independent directors is required to appoint an
independent director only to comply with the requirement under section
135 of the Act.
The government should come out with detailed clarifications as early
as possible to enable companies to formulate the CSR policy. In the
absence of clarity, unscrupulous companies will take advantage of
loopholes and honest companies will get harassed.
Affiliation: Professor and Head, School of Corporate Governance and
Public Policy, Indian Institute of Corporate Affairs; Advisor
(Advanced Studies), Institute of Cost Accountants of India; Chairman,
Riverside Management Academy Private Limited asish. bhattacharyya@
gmail. com
ACCOUNTANCY
ASISH K BHATTACHARYYA
In the absence of clarity, unscrupulous companies will take advantage
of loopholes and honest companies will get harassed
'Indian companies in reactive mode'
How do you assess Indian companies when it comes to compliance with
international and domestic laws and regulations?
Indian companies have a long way to go when it comes to compliance
with international and domestic laws. Most companies are still in the
reactive mode, and need to focus more on self- governance and
compliance. The new Companies Act is the right step in this direction,
which will help in strengthening the corporate governance framework in
the country.
How do you see the impact of the new Act on the CFO's role in the organisation?
Generally speaking, changes in the companies Act can have a direct
impact on the governance structure of the affected companies and
sometimes an indirect impact on existing ( legal) requirements and
mandates of ( non) executive directors.
As the regulatory requirements are increased, CEOs and CFOs must put
the necessary first- line procedures and controls in place to ensure
that compliance with the new Act is safeguarded.
The second line of defence to ensure compliance is typically performed
by the internal audit department ( validation role). Finally, the
external auditor should check this as well as part of their third line
of defence assurance role ( to the extent it impacts the external
financial reporting requirements).
All of the above can have a significant impact on the role of the CFO
as he or she is responsible for ensuring these changes are properly
embedded in the "business as usual" operations.
From a compliance perspective to the new Act, what dos and donts
should the CFOs keep in mind?
It is CFO's primary responsibility to ensure that awareness is raised,
and impact of the proposed changes on the company is understood. This
could be done through a quick impact assessment study that covers all
three lines of defence. For high- impact changes, sufficient
transition period has to be taken into account, and implementation
ownership for the required changes is clearly assigned to the relevant
people in the organisation.
Last, but not the least, try to look for new opportunities created by
introduction of such new regulations ( for example, need for
alliances, legal restructuring, improved controls, etc).
Do you think the impact of the change is yet to sink in in the CFO fraternity?
CFOs are aware about the changes on a broad level, but there is a huge
amount of uncertainty on the impact of these changes on the companies.
Many changes proposed in the Act are expected to have a wide ranging
impact in areas such as financial reporting, corporate governance,
holding structure of companies, appointment and rotation of auditors,
mergers and acquisitions, etc. CFOs are currently trying to decipher
the impact of these changes on their company.
Even as India Inc assesses the impact of the changes brought about by
the new Companies Act, MARTYN VAN WENSVEEN,
partner and global head of financial management, KPMG, says this could
have a significant impact on the role of the CFO within an
organization. Recognised as one of KPMG's leading financial management
experts, Wensveen tells Sudipto Dey, that Indian CFOs should look out
for new opportunities created by the introduction of such new
regulations. Edited excerpts:
--
CS A Rengarajan
9381011200
CS Benevolent Fund is a collective effort towards extending the much
needed financial support to the community of Company Secretaries in
times of distress Let us lend support and join for noble cause.
SHARING KNOWLEDGE SKY IS THE LIMIT
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