Source Moneylife
Speedy justice needed for conviction in corporate frauds, says Arvind Datar
Speaking at a Moneylife Foundation seminar, noted lawyer Arvind P Datar, who took market regulator SEBI through its battle with Sahara, spoke about the many ways in which companies evade the long arm of the law to dupe people and the necessity of speedy justice to convict the culprits
"After practising for three decades, one thing that I was repeatedly struck was the enormous delay in bringing the guilty to book. One almost has paid a premium on defaulters," lamented Arvind P Datar, senior advocate of the Madras High Court, and also a prolific writer and the author of several seminal works.
Landmark judgments like the one in August 2012 order ordering two companies of the Sahara group to refund Rs24,000 crore to investors, are rare cases where the trial has moved fast. "But the fact of the matter remains that a group can raise Rs24,000 crore outside the purview of Securities and Exchange Board of India (SEBI), take money from three crore depositors and call it a 'private placement'," said Mr Datar, who represented SEBI in the case. He further said, "Ultimately what started in 2008 is at the final stages in 2014. But this case is an exception and has moved faster than other cases which have lingered for a number of years."
"I can keep multiplying examples where people have committed frauds but nothing has happened. This is the unfortunate part where corporate frauds are concerned," said Mr Datar who practices in the Supreme Court of India with taxation, company law and constitutional law as his specialisation.
The Sahara case was constantly stone-walled right from the beginning—issues whether the regulator SEBI has jurisdiction to whether the scheme was a private placement or public placement and so on and so forth. After the Supreme Court ruled that a refund should be paid to depositors, Sahara claims that out of the Rs24,000 crore that need to be refunded, Rs22,000 crore has already been repaid. The Supreme Court has now asked Sahara to reveal the source of the Rs22,885 crore with which it claimed it had refunded its investors, or be ready to face inquiry by the Central Bureau of Investigation (CBI) and the Registrar of Companies (RoC).
When the case started, Mr Datar contested Sahara Group's claim that its OFCD (optional fully convertible debenture) were not a public issue and therefore, cannot be regulated by SEBI. "Does SEBI have powers under Section 55A (of the Companies Act)? My answer is yes. If OFCD is a security under the Securities Act, then it comes under the SEBI Act. And if it comes under the SEBI Act, then SEBI has jurisdiction. SEBI can (therefore) pass aspecial order to regulate unlisted companies," Mr Datar claimed before the Securities Appellate Tribunal (SAT). Sahara had been ordered by SEBI to refund the money its twogroup companies had raised from the public through an OFCD issue. Mr Datar further explained how the Sahara companies' OFCDs that were issued to the public were actually "a public offer dressed up as a private placement".
Speaking on the sordid state of the judicial system, Mr Datar said, "On one hand you do not prosecute known cases of fraud and easy cases of fraud, don't reach convictions, and therefore you generate contempt for the law. How does the industry survive? On one hand you penalise the productive sector and on the other hand you keep ignoring corporate frauds. At the end of the day things must improve, but a change will only happen if we mobilise a change."
Far too many Indians, who have burnt their fingers in the capital market, are losing enormous sums of money in seemingly safe investments that turn out to be mere ponzis. Mr Datar gave examples of numerous cases of corporate frauds such as the Rajat Gupta insider-trading episode in the US, the teak plantation scam, the Nidhi schemes in Maharashtra, the Satyam scam and several other such cases.
Mr Datar spoke about Rajat Gupta, who became the managing director of McKinsey & Co at an age of 48, and was later on the board of Goldman Sachs, Procter & Gamble and several other companies. "He was a spectacular achiever in every sense of the word. But just three phone calls finished his entire career," narrated Mr Datar. Being a director, Gupta was privy to confidential information and he used this insider information to conduct trades on which he made enormous returns. Post-this, 70 prosecutions and 55 convictions took place against Gupta, sending his career crashing down. What is more important to note is that the charge-sheet was filed in October 2011, the trial started in October 2012 and on 8 January 2013 he was sentenced to two years prison. "That is the speed in which the conviction happens. And there are several such high-profile cases, like the Enron scam, where there were speedy trials," explained Mr Datar.
However, in India, the scenario is different. All over the country there are several schemes which defraud consumers and investors. One such scheme was the teak plantation schemes. Giving another example, Mr Datar said, "In Chennai, four lakh families saw their savings wiped out in one such schemes which amounted to over Rs1,100 crore. Keeping in mind the magnitude of the fraud, the Madras High Court started what is called the Economic Offences Wing (EOW), to deal with such frauds. But after as many as 14 years, there has been not one conviction."
"What amazes me is this, if company fails to payback a deposit, the magistrate must fine twice the amount of the deposit, pay 100% to the investor and keep 100% for the state or sentence the defaulter to five years of prison. In my life, I have not seen anyone going to jail for not repaying depositors. Companies just find ways to delay the trials," he said.
One other case is that of Satyam. Elaborating on the case, Mr Datar said, "We have got the laws, we have got the regulations, but the basic sections are not implemented. Over the period of six to seven years of fudging the accounts, in the last year before Satyam went bust, the company showed totally Rs5,200 crore of fictitious income abroad. Just a few days back Ramalinga Raju, former founder-chairman of Satyam and his family members were convicted for IT fraud and it took seven years to do that."
Was there another route to speedier justice? Mr Datar said, "According to the Company Act, there is simple section of just three lines—Section 628, which says if there is false statement in any document, prospectus, balance sheet or profit and loss account, the person can be sent to jail for two years. Similarly Ramalingam Raju, could have been convicted for two years based on his submission in a letter to the board that the fixed deposits were non-existent. It was an open and shut case, but it was not done."
Answering a question on what amounts to fraud? Arvind Datar says "Fraud is defined under the Indian Contract Act as suppressing the truth, false suggestion, making a promise without intention of keeping and act of deceit." Does silence amount to fraud? "Even this is answered. Silence will amount to fraud if there is a duty to speak," Mr Datar told the audience.
Source Business Standard 19-1-2014
| Ensure that your will is watertight |
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If you have been putting off making a will, remember that your heirs could face problems after your death. In the absence of a clear will, questions can be raised about the stability of the testator ( the one making the will). There have been several cases where heirs have lost wealth that could have been theirs had the testator taken adequate care while drafting the will. Here is one that came up before the Chandigarh District Court and was decided in July 2013. Those keen to seriously implement succession planning should note the key features. In the case, Raja Harinder Singh, the erstwhile ruler of Faridkot state, died on October 16, 1989 leaving behind three daughters as his legal heirs. His only son had predeceased him ( in 1981). After his death, his registered will ( dated 1982) was produced before the legal heirs. According to this will, his entire estate devolved onto a trust, whose trustees had been appointed by the raja. The trustees included his two daughters and some of his employees. The primary purpose of the trust was to look after the buildings and other movable properties of the deceased raja. However, the will excluded any benefit to his eldest daughter. In the light of this, the eldest daughter filed a suit against her sisters and the other trustees claiming that the will was forged, fictitious and fabricated, that it did not inspire any confidence and its execution was replete with suspicious circumstances. The ruling pronounced by the district court brought out some remarkable facts. These should be noted by individuals for their benefit. Proof of validity Unlike other documents, a will takes effect from the death of the testator. Hence, when it is produced before a court, the testator ( who has already departed from this world) cannot say whether it is his or not. As a result, while dealing with proof of wills, the courts begin in the same manner as in the case of proof of documents. The producer of the will is called upon to show by satisfactory evidence that the will was signed by the testator, that the testator at the time was in a sound state of mind, and that s/ he understood the nature and effect of the dispositions and had affixed her/ his signature to the document of her/ his free will. Witness selection Witnesses to the will should have had a cordial relationship with the testator and should definitely not be complete strangers. Besides the relationship with the testator, sufficient evidence should exist to prove that the individual could have been chosen by the testator as his/ her witness. Witnesses to a will should not be direct or indirect beneficiaries, as that could be construed as undue influence on a testator. Maintain uniformity Although there is no legal requirement whether the will should be hand- written, typewritten or computer printed, whichever mode the testator opts for should be uniformly followed. The individual should not keep blank spaces for important elements in the will such as the date of the will, values of certain bequests, etc. Registration isn't enough Merely because a will is registered does not make it sacrosanct. Many judicial precedents are available in which registered wills have not been acted upon. In these, it has been held that registration of a will may take place without the executors knowing the contents of what was being registered. If a will is to be registered, appropriate evidence must be made available to demonstrate that the testator had been to the office of the Registrar. Where registration is done at the testator's residence, aclear trail of the request to register the document at a place other than the Registrar's office should be maintained. Explain exclusions In the case mentioned above, as the eldest daughter was not conferred any benefits by her father in his will, it was contended before the Court by the daughter's legal counsel that the daughter enjoyed very good relations with her father, and vice versa, and had cared for him. There were no reasons recorded by the testator in the will to exclude her from any benefits. The judge accepted this contention while deciding the case. Although it is not legally required to quote reasons to exclude any beneficiary in one's will, if an individual wishes specifically to exclude any heir( s) or restrict benefits to them, it is advisable to clearly record the reasons. Based on the above factors in the said case, the Court ruled that the alleged will of the raja produced by his two other daughters did not appear to be a genuine document and had given rise to a large number of suspicious circumstances. From this, it could be inferred that the will was invalid. It took 20 for the eldest daughter to get justice. Ensure that your hardearned wealth passes on peacefully to the next generation without any delay. The author is a Chartered Accountant A recent judgement says the beneficiaries should prove the will is correct THINGS TO REMEMBER |Producer of the will must prove that the testator was in a sound state of mind while signing it |Witnesses should be known to the testator and they should have a cordial relationship |Will can be hand- written or typed, but should be uniform |Avoid blank spaces for elements like data, value of bequests |Even a registered will can be disputed |State proper reasons for excluding heir from the will |
Source Business line
Draft cost audit rules will hit revenue collection, says professional body
K. R. SRIVATS
NEW DELHI, JAN. 18:
The Cost Accountants Institute on Saturday slammed the Corporate Affairs Ministry for proposing to abolish the statutory maintenance of cost records and suggesting to do away with — in most cases — the requirement for cost audit.
Such a far-reaching, drastic step without going through a consultation process will hurt the Centre's revenue collection and not be in the interest of the Indian economy, said Rakesh Bhalla, Chairman of the Northern India regional council of the Institute of Cost Accountants of India (ICAI), here on Saturday.
The stance is at variance with a large section of corporate stakeholders who contend that cost audit is a relic of the controlled economy era and cannot be mandated in an open economy situation — especially when technology has displaced many manufacturing processes.
Few sectors
The Ministry has, through draft rules issued in November, sought to not only abolish maintenance of cost records by companies, but also do away with cost audits for most companies except a handful .
Currently, cost audits are mandatory for the entire manufacturing sector — the criteria for coverage being turnover above Rs 100 crore or a listed entity. All sectoral regulated entities above Rs 20-crore turnover are also covered under mandatory cost audit.
But the draft rules have removed the aspect of listed companies, thereby raising doubts on the validity of the SEBI requirement of mandatory cost audits in all listed manufacturing companies.
In the draft rules, major industries such as automobiles, paper, paint, and glass have been left out of the scope of cost audit.
It has been confined only to a few specified industries, such as those in the strategic defence sector, with the result that only a handful of companies will come under cost audit, said Chandra Wadhwa, former president of the cost accountants institute.
"Without applying our mind, we are going to abolish maintenance of cost records and doing away with mandatory cost audits", he said, adding that cost audit reports could be a useful tool for the Board of Directors of a company.
Wadhwa said there was a need to bring back the recommendations of the Ministry-appointed expert group in 2008.
Vijender Sharma, a practicing cost accountant, said the intention and mandate of the legislators has not been followed by the Ministry while framing the rules.
While the new company law seeks to bring both manufacturing and services under the cost audit ambit, the draft rules seek to narrow its scope to a few select industries.
(This article was published on January 18, 2014)
Keywords: Institute of Cost Accountants of India, statutory maintenance of cost records, cost audi
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