[aaykarbhavan] Business standard updates 5-3-2014

Reebok fraud: Two top execs let off SUDIPTO DEY New Delhi, 4 March The Serious Fraud Investigation Office ( SFIO) hasn't named Claus Heckerott, Adidas India managing director ( from March 2012 to January 2013), and Shahin Padath (then director of finance) in the list of the accused in a complaint filed on the ₹ 1,477- crore Reebok India fraud case filed with a Gurgaon court. Citing a directive from Ministry of Corporate Affairs, SFIO's parent ministry, the complaint said the agency had been asked " not to include the names of Heckerott and Padath". This was done on the basis of the law ministry's opinion, as sought by the corporate affairs ministry, the complaint added. In the complaint, SFIO said both Heckerott and Padath were aware the accounts were falsified. In May 2011, Padath had signed the company's financial statements for FY10, despite being aware it contained intentional fraud transactions. This, the complaint said, made him liable for prosecution for violating various sections of Companies Act, punishable with imprisonment and fine, if found guilty. However, in May 2012, Padath had filed a First Information Report (FIR) on behalf of the company against the fraud committed by then Reebok India managing director Subhinder Singh Prem and chief operating officer Vishnu Bhagat. In response to a Business Standardquery, Adidas Group said: "At this stage, we want to reiterate Reebok India is a victim of the fraud described in the report. Company officials Claus Heckerott and Shahin Padath originally discovered the fraud and were whistleblowers to government authorities. We are pleased the ministry of corporate affairs has taken cognisance of our representation and recognised the responsibility taken by the whistleblowers." Apart from seeking prosecution against Prem, Bhagat and some other employees, the complaint seeks prosecution against noted lawyer Jyoti Sagar, an independent director on the board of Reebok India who had signed the financial statements of the company in 2007, 2008 and 2009. In response to an email seeking comment on the SFIO complaint, Sagar said: " Not having access to the complaint, it would not be appropriate to comment." Praveen Agarwal, an advocate representing Prem, said anybody filing an FIR didn't become a whistleblower. " Indians on the board have been made the accused, while foreign directors and nominees of Adidas group have been let off," he added. On lapses by internal and external auditors N N & Company and BSR & Co, SFIO has sought a criminal case against the partners of the audit firms. " We are not the statutory auditors and we refute all the allegations," said a BSR & Co spokesperson. According to SFIO's complaint, the modus operandi of the fraud involved filing fictitious invoices to show inflated sales, recording fictitious sales by raising prices of goods sold, premature recognition of revenue and bills raised but goods not dispatched, etc. SFIO investigations reveal Reebok India ran a " franchisee referral programme", through which it collected ₹ 88.11 crore from 60- odd high networth individuals, including former attorney general Soli J Sorabjee, promising interest of 16- 20 per cent. The SFIO investigators say these funds were recycled by Reebok India employees as part of effort to boost cash flow. SFIO said there was a lapse in corporate governance practices at Reebok India by the Adidas group, citing instances of Section 58A of the Companies Act being violated, forensic reports ignored, internal control failure and no heed to Foreign Investment Promotion Board norms. SFIO didn't state a final figure for the fraud at Reebok India. It relied on the figure of € 221 million (₹ 1,477 core) cited by Adidas as its stated losses in its 2012 annual report. WHOS ON TRIAL On direction from the corporate affairs ministry, under which the Serious Fraud Investigation Office ( SFIO) functions, the investigation agency has not named Claus Heckerott, managing director of Adidas India from March 2012 to January 2013, and Shahin Padath, the then director finance, in the list of the accused in a complaint filed in the ₹ 1,477- crore Reebok India fraud case SFIO has sought prosecution against: |SUBHINDER SINGH PREM, ex- managing director |VISHNU BHAGAT, ex- chief operating officer |JYOTI SAGAR, a noted lawyer who was an independent director on the board of Reebok India and signed the financial statements in 2007, 2008 and 2009 REVISED BIPPA MODEL

 

Holding company concept likely to be scrapped

SURAJEET DAS GUPTA & NAYANIMA BASU New Delhi, 4 March Stung by its vexed tax dispute with Vodafone, the government plans to do away with the concept of investment made by a ' holding company' under the revised model of Bilateral Investment Promotion and Protection Agreements (BIPPAs) and Comprehensive Economic Cooperation Agreements ( CECAs). A committee of secretaries working on the revised model has suggested that investments made only by the ' corporations' that come directly into the country, and not those coming through holding companies, be protected. A BIPPA is meant to promote and protect the interests of investors of one country in the territory of the other. The new BIPPA text, to be included in the investment chapter of CECA, will seek to change the definition of ' investment'. Under the new definition, investments of only those corporations that have " real and substantial business" operations in their own countries will be protected. The revised text also seeks to define the difference between the Central and state governments to iron out differences. The current text doesn't define government; this has led to a spate of disputes, especially in the telecom sector. The first dispute of a foreign investor was one involving British telecom major Vodafone. Its Dutch subsidiary, Vodafone International Holdings BV (VIHBV), had in April 2012 served a notice of dispute on the government under the India- Netherlands BIPPA. It had asked the government to abandon the retrospective amendments to the IncomeTax Act that could make it liable to pay a tax of over ₹ 12,000 crore. The government had told Vodafone the notice was premature. Vodafone again served a supplementary notice on India in January this year, invoking the India- Netherlands BIPPA on a dispute in respect of a transfer- pricing case between Vodafone India Services and VIHBV. Later, Sistema, Telenor and Etisalat also tried to ringfence their India investments by citing India's various BIPPA with other countries. After this, the government decided to review the BIPPA and CECA texts, especially on litigation. The revised text also seeks to lessen the importance of international laws in settling disputes between two parties. The government had in 2012 formed an inter- ministerial group to revise these agreements. The committee, set up by the Department of Economic Affairs, had representatives from the departments of commerce, industrial policy and promotion and telecommunications, besides those from the ministries of home and external affairs. To date, India has signed 83 BIPPAs, besides some CECAs, which include an investment chapter on the lines of BIPPAs. The government believes BIPPAs or CECAs have not helped augment foreign equity inflows, except gaining some access in services. It said bilateral commitments, on the contrary, resulted in tightening of the market for domestic Indian manufacturers. The government believes some provisions in bilateral agreements have allowed foreign investors to have their say on sovereign policy matters.  Insurers not yet ready for Solvency- II MSARASWATHY Mumbai, 4 March Solvency- II norms, which call for riskbased capital in insurance, may take longer than expected to be implemented in India. This is because not all players in the Indian insurance sector are ready for a solvency mechanism based solely on risk. Last February, the Insurance Regulatory and Development Authority ( Irda) had proposed a lower solvency margin for insurers — at 145 per cent against 150 per cent currently —after including a risk charge. In an exposure draft on a risk- based solvency approach, Irda had said it has constituted an expert committee to suggest the roadmap to move to Solvency- II norms was in the process of deliberations. Solvency- II is a European Union (EU) legislative programme to be implemented in all 28 EU member states. It introduces a new, harmonised EU- wide insurance regulatory regime. Its key objective is to have auniform policyholder protection across countries through a robust system. This will enable a regime that will have sharper pricing and better allocation of capital, since solvency will be based on the risks. A senior life insurance executive explained that India does not have the requisite statistical database to adopt Solvency- II norms. " At present, Indian insurers use factor- based processes for arriving at the solvency margin and hence moving into a completely different system will take time," said the executive. Irda had earlier said that the requirement would be applicable from 2013- 14 and a certificate needed to be furnished on March 31, 2014. It has proposed to impose a risk charge for debt investments of insurers. According to the Irda ( Investment) Regulations 2000, a majority of funds need to be invested in government securities and approved investments, and no risk charge is imposed on insurers which invest in riskier instruments. "The regime will take four- to- five years more to be implemented in the country. Only some large private and state- owned insurers are ready for the transition, whereas several newer players are not," said the chief financial officer of a private general insurer. Solvency- II norms are to insurers what Basel- III norms are for banks. These norms are made up of provisions related to the capital requirements of companies, regulatory assessment of a specific firm's risk, and the regulator's broader supervision of the entire market. According to industry experts, Solvency- II has not yet come into force in the EU and hence, it would be wrong to assume that India will adopt it immediately. Discussions are underway on whether Solvency- II should be implemented in several of the EU markets and the transition phase to be followed. Only after clarity emerges on it, will it be enforced in India. Irda's expert committee will take reference from the study of risk- based capital approach of advanced nations such as the US, Japan and Singapore and study of Solvency- II approach followed by some Indian life insurers. The committee is also expected to suggest the methodologies for market risk arising from interest rate risk, equity risk, property risk, spread risk and concentration risk. Irda said all mandated and non- mandated assets of insurers would have risk charge applicable to them. Assets of nonlinked businesses would be considered for risk charge for life insurers, as risks for linked businesses are borne by the policyholder. According to Irda, loans and advances should be categorised according to the ratings of counter parties. For non- performing assets (NPAs), Irda said if insurers followed the provisioning norms required by them, no separate risk charge would be applicable. |Solvency- II is a European Union ( EU) legislative programme to be implemented in all 28 EU member states |Solvency- II norms are to insurers what Basel- III norms are for banks |It introduces a new, harmonised EU- wide insurance regulatory regime |Its key objective is to have a uniform policyholder protection across countries through a robust system WHAT'S SOLVENCY- II Haven't filed tax returns? In an effort to meet the revenue targets, the Income Tax ( IT) department will be sending letters to 2.3 million assessees who have not filed returns. It has already issued letters to 2.45 million individuals. Therefore, if you haven't filed taxes for the financial year 2012- 13 ( FY13), you still have time in hand. The I- T department will accept returns till the end of the assessment year, that is, till March 31, 2014. Importantly, if all your taxes are paid, you will not even be levied a penalty or get a notice for not filing returns for 2012- 13, if you do so by March 31. For FY13, you can file late returns till March 31, 2015. However, if returns are not filed till March 2014 and there is no outstanding tax, you can be charged a penalty of ₹ 5,000. But, if you have an outstanding tax liability, you will be levied an interest at one per cent per month above the penalty. There can be another chargeable interest component under Section 234( B). It deals with delay in depositing advance tax and charges one per cent interest every month starting April 1, 2013, till such time the outstanding amount is paid. " Advance tax provisions are applicable only to those who have an outstanding advance tax liability of ₹ 10,000 or more annually ( under Section 234( B)). However, if such an individual has paid 90 per cent of the outstanding tax liability, then Section 234( B) is not applicable," says Vineet Agarwal, director at KPMG. If the tax due is more than ₹ 10,000, you pay an advance tax. Advance tax is payable in three tranches — 30 per cent is to be paid by September 15 of the relevant financial year, next 30 per cent or 60 per cent of the total liability by December 15 and the remaining 30 per cent or 100 per cent of the amount due by March 31. Those who haven't filed returns for FY12, can also file late returns till March 31. There could be a penalty of ₹ 5,000 for late filing, depending on the assessing officer. Experts say penalty is invoked largely when there is an additional tax liability. The tax department considers genuine reasons for not filing returns, such as serious illness or injury. Though the tax laws give a grace period for late returns, it also takes away some of your rights. For instance, you cannot revise your tax return if it has been filed after the due date ( July 31). If you have filed by the due date, you can alter it any number of times before the end of the assessment year ( March 31), or till the return is assessed. However, thereafter you are not allowed to change it. So, if you miss out on any deduction or exemption, you can't claim it later. "You also cannot carry forward any short- term or longterm losses if you have filed after the due date," says Kuldip Kumar, executive director ( tax & regulatory services) at PwC. Taxpayers, who have filed by the due date, can carry forward capital losses and adjust them against future capital gains. You can carry forward such losses up to eight financial years. So capital losses suffered in 2012- 13 can be adjusted against gains till 2020- 21 if you file returns on time. NEHA PANDEY DEORAS Those who missed the July deadline can still file by March 31 >YOUR MONEY I- T department will accept returns till the end of the assessment year, that is, till March 31, 2014. If all your taxes are paid, you will not even be levied a penalty or get a notice for not filing returns for 2012- 13, if you do so by March 31

 

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CS A Rengarajan

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