[aaykarbhavan] Business standard updates and Legal digest

New Companies Act drives demand for forensic audits

RAJESH BHAYANI Mumbai, 23 March Forensic audit is emerging as a big- ticket business for accounting firms. Two developments are responsible. One, some high- profile frauds in the limelight over recent months. Two, changes in the approach of regulators, allied to provisions in the new Companies Act, which put more accountability on both independent directors and auditors. So, all big accounting companies are strengthening their forensic audit teams and investing more into these. Ernst & Young ( EY), for instance, has very aggressive plans on this. It already has one of the largest teams for this, of 450 people; it plans to add 150 in 2014- 15. PricewaterhouseCoopers ( PwC) has a team of nearly 200 people for this, raising its headcount fourfold in the past six months. Its spokesperson said: “ We are looking at hiring another 75- 100 people over the next one year to strengthen our team further.” PwC has picked Dinesh Anand as its leader for forensic services, from KPMG. BDO India and Grant Thornton were also strengthening their forensic teams or retraining their internal strength of chartered accountants, said their spokespersons. Forensic audit has also come into public discussion after the payments scam at NSEL, the spot exchange promoted by Financial Technologies Indian Ltd (FTIL). The Forward Markets Commission had ordered forensic audits of NSEL and one special audit of Multi Commodity Exchange, also promoted by FT; the economic offences wing of the police here are getting the books of brokers thought to be involved in the NSEL scam forensically audited. As the probe gets wider, more of such audits are possible. Turn to Page 7 > Accounting entities strengthen personnel and expertise WHO ARE PREPARING TO CASH IN? |The big four accounting firms are already into forensic audits. Others like BDO India and Grant Thornton are also strengthening their forensic divisions FINDING FRAUDS WHY IS THE SCOPE WIDENING? |After the NSEL crisis, promoters are ordering forensic audits of their firms to ensure there is no NSEL- like employee fraud |Independent directors, now seen as watchdogs, prefer firms to go for these |Rising bad loans will make banks want forensic audit of defaulters to ensure promoters haven’t siphoned off funds |To comply with the Foreign Corrupt Practices Act, foreign companies might go for forensic audit of the books of their Indian arms or firms they intend to invest in

 

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An old- time forensic auditor, now a mentor for upcoming certified fraud examiners, said on condition of anonymity that he’d came across several cases where companies or promoters were approaching audit firms for getting their accounts forensically audited, to ensure an NSEL- like fraud was not happening in their own firm. The new Companies Act also directs companies and independent directors ( IDs) to increase the safeguards against fraud. These have also been defined for the first time in this Act. Arpinder Singh, head of forensic practices at Ernst & Young Global, says: “ With these provisions, every company would have to have pro- active fraud risk management policies.” He also advises IDs, also seen as having a whistle- blower role, to document all that they don’t find in order, and to document all the objections they raise. Piyush Vora, the partner heading forensic practices at BDO India, says we might also be seeing an increase in forensic audits because more and more banks would order these on the books of companies that had approached them for corporate debt restructuring. For, they need to check if the losses are because of genuine commercial reasons or because promoters have played around with funds. Vora sees 2014- 15 as a year of non- performing assets, which means more debt restructuring and so on. Dolphy Dsouza, partner in a member firm of E& Y, said: “ The auditors’ role is also coming under scrutiny because they will now be regulated by the new National Financial Reporting Authority and heavy penalties have been prescribed for auditors if they fail in their duties.” All these things mean IDs will tilt towards getting forensic audits of the accounts and auditors shall have to be vigilant.

 

MCA ‘ advised’ against prosecuting Radia firms

PRESS TRUST OF INDIA New Delhi, 23 March The corporate affairs ministry might not initiate prosecution against some entities of former lobbyist Niira Radias Vaishnavi group in a case of alleged falsification of financial statements, as these charges might not stand judicial scrutiny. This follows aprobe conducted by the SFIO ( Serious Frauds Investigation Office) into alleged violations by certain Vaishnavi entities. After its probe, SFIO is believed to have recommended prosecution proceedings for falsifying financial statements, as also for various other charges. However, the ministrys legal division has advised against prosecution proceedings under Section 628 of the Companies Act under which the punishment could include two years of imprisonment, sources said. Section 628 pertains to providing false information in financial statements by a company. The ministry had earlier granted permission to begin prosecution for certain other violations as well. The SFIO had recommended initiating prosecution proceedings against four entities — Vaishnavi Advisory Services, Vaishnavi Corporate Communications, Vitcom Consulting and Neucom Consulting — under Section 628. These four companies mentioned certain transactions (rent payments) as professional fee in their balance sheets and this amounts to falsifying statements, the probe found. However, in its opinion given earlier this month, the ministrys legal division said that the “findings of the investigating officer( s) do not meet the basic ingredient( s) of the violations under Section 628 of the Companies Act, 1956 and may not withstand the judicial test in the Court of Law”. After finding various violations of other sections, the SFIO had recommended prosecution under Section 628 citing cumulative effect of these violations. The legal division has also observed that findings of the investigating officer are based on presumptions and assumptions whereas the fundamental principle of the criminal jurisprudence is that " prosecution or proposed prosecution has to stand upon its own legs and must establish the culpability beyond all reasonable doubt". Last month, Vaishnavi Corporate Communications wrote to corporate affairs minister requesting him to examine the SFIO report dispassionately on the allegations made against them. “If necessary, we are ready to offer a complete explanation on any matter at any stage either to the government or in the public domain," the group had said and also requested for a copy of the probe report. “We continue to be victimised by the vested interests which has resulted in irreparable damage to us and many investigations, none of which have led to detection of any illegality on our part,” it had said.

Remember to read exclusions in critical illness covers

NEHAPANDEY DEORAS Life insurance policies with critical illness riders sell the idea of complete payment in case an illness is detected. These companies say as the entire payment is made at a go, this helps one recoup expenses in case of a serious illness, even if it results in job loss. However, claiming the amount isn’t easy. So, before buying a policy, read the exclusions. Policyholders could be ignorant or information could be hidden from them. Sometimes, insurance companies and their agents don’t explain or clarify certain clauses to buyers. The solution: Buyers need to read the fine print carefully. If this is not done, a policy holder is bound to face claim rejection, especially in the case of policies covering special health issues such as critical illnesses plan and disability benefits. Especially for covers/ riders/ top- ups given by life insurance companies, which are bought on a term plan and are indemnity plans that pay a lumpsum on disease diagnosis. In comparison, covers by health insurance companies are benefit or reimbursement plans that pay the amount you spend on hospitalisation. MS Kamath, a medical practitioner and general secretary of Consumer Grievance Society of India ( CGSI), says, “ While policy holders are to be blamed for not reading the documents they sign on, there is a problem of no standardisation of the definitions of illnesses. Though many insurers are now defining diseases, others still use terms such as stroke and paralysis very loosely. For instance, only two fingers could be paralysed but that is not the definition for insurers.” A few examples of misleading coverage in policies: Survival period clause: Most critical illness policies or riders pay the claim for any listed critical illness if the policyholder survives for at least 30 days after diagnosis of the illness. Typically, critical illness rider or policies cover at least eight and up to 20 diseases — heart attack, coronary artery bypass surgery, stroke, cancer, kidney failure, major organ transplant, paralysis, etc. Consumer activist Jehangir Gai says an individual covered under a group critical illness policy pays benefits for treatment of certain diseases only if the insured survives for 30 days after the illness. This condition is never communicated to the insured. Renal failure: While a policy holder might think the failure of akidney amounts to renal failure, this isn’t true in insurance parlance. For renal failure, a claim will only be accepted if both kidneys of a policyholder stop functioning. “ That is because an individual can live and function on one kidney, too. Therefore, it is not a critical situation,” says an insurance broker. The policy document of SBI Life Insurance’s Sampoorn Suraksha Rider says, “ Endstage renal disease presenting as chronic irreversible failure of both kidneys to function, as a result of which either regular renal dialysis (hemodialysis or peritonealdialysis) is instituted or renal transplantation is carried out.” This is the definition given by the insurance regulator in Guidelines of Standardisation in Health Insurance. According to the claims data by ICICI Lombard General Insurance, the past three years have seen a notable rise in kidney ailments. In 2013, insurance claims for kidney ailments rose 46 per cent compared to 2012. In 2012, the growth was 12 per cent vis- à- vis 2011. Deafness and blindness: In case an eye or an ear stops functioning, it might not be enough to secure a claim under a critical illness rider. The policies state complete blindness or deafness are required for such claims. Aviva Life Insurance’s critical illness rider brochure defines blindness as “total, permanent and irrecoverable loss of sight in both eyes, as a result of illness or accident”. Deafness is defined as total and irreversible loss of hearing in both ears. The diagnosis must be supported by audiometric and soundthreshold tests, provided and certified by an ear- nose- throat ( ENT) specialist. Total deafness is defined as the loss of at least 80 decibels in all frequencies in both ears. Permanent disability: ICICI Prudential Life Insurance’s accidental death and disability benefit rider’s brochure says, “ If you have an accident that results in total and permanent disability, 10 per cent of the rider sum assured will be paid each year from the end of the first year after the disability date, for the remainder of the base policy term or 10 years, whichever is less.” While one of the conditions for the payment of accidental death or disability benefit is the death or disability due to accident must be caused by violent, external and visible means. The benefit won’t be paid if one loses a hand or a leg. “ Going by the condition of violent, external and visible means, even sprains should be allowed to be claimed for under this policy, but insurers mostly refuse. But we have helped people get claims for sprains under such policies,” says Kamath of CGSI. ICICI Prudential Life’s brochure says for accidental death and disability benefits, a person will only be regarded as ‘totally and permanently disabled’ if he/ she, due to accident or injury, suffers a loss such as: a) Loss by physical separation of two limbs or the complete and irremediable loss of sight in both eyes or loss by physical separation of a limb, accompanied by the complete and irremediable loss of sight in an eye (where limb means an entire hand or foot) or b) has been continuously disabled for a period of six consecutive months and incapacitated to such an extent as to render the person unlikely to resume work or attend any gainful employment or occupation”. Pre- existing diseases (PEDs): Most health insurers and policies cover PEDs after a waiting period of two to four years. However, there is no guarantee any other disease linked ( even remotely) to a PED will be covered during the waiting period. For instance, one has a PED of blood pressure, the waiting period is four years and the policy holder is diagnosed with some kidney- related problem during the waiting period. While kidney ailments could arise due to blood pressure, this isn’t always the case. In this case, insurers might refuse claims for kidney- related problems because these could be linked to blood pressure and the waiting period isn’t over. While such riders claim to give the entire amount, the definitions of illness are very stringent

 

BRIEF CASEN [1] M J ANTONY  A weekly selection of key court orders Late objection to arbitration invalid If a party to an agreement joins arbitration proceedings without raising objections, it cannot question the jurisdiction of the arbitration tribunal at a later stage. It would be deemed that the party had waived its right to object to the jurisdiction of the arbitration panel, the Supreme Court has stated in the judgment, Union of India vs M/ s Pam Development ( P) Ltd. In this case, the government had entered into an agreement with the works contractor to construct an electric loco shed. Later it terminated the contract alleging delay on the part of the contracting firm and inferior quality of work. This led to disputes and the contractor moved the Calcutta High Court to appoint an arbitrator. The high court appointed a retired judge as the sole arbitrator. He decided in favour of the contractor. The government then moved the high court to set aside the award. The court dismissed the application, leading to the appeal in the Supreme Court. In the apex court, the government argued that the arbitration tribunal was not properly constituted as the appointment was against the terms of the contract. The Supreme Court rejected the contention and stated that when the government did not object to the appointment of the arbitrator, the order became final. Moreover, the government filed its statement of defence and even raised counter claims before the arbitrator. Therefore, it was too late in the day for the government to question the jurisdiction of the arbitrator. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Sale must followSARFAESI rules The Supreme Court last week set public auction. The judgment in the case, J Rajiv vs M/ s Pandiyas, stated that “ there were no terms settled in writing between the parties that the sale can be affected by private treaty.” Moreover, the borrowers who could not repay the loans were not called at the meeting between the creditor bank and its agent for conducting the sale. Though the property was bought in 2006, the court directed that it shall be returned to the borrowers on certain conditions to protect all parties. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Labour pain in mergers When there is merger or amalgamation of units, the incoming employees cannot be kept for all times as a different cadre and denied promotion while those in the parent cadre enjoy that benefit. The Supreme Court stated so while setting aside the judgment of the Madhya Pradesh High Court in the case, Panchraj Tiwari vs MP State Electricity Board. A junior engineer of the Rural Electricity Cooperative Society was aggrieved when he was denied promotion after the society was merged in the board. The board interpreted the terms of the merger with regard to staff as denying promotion to the employees of the absorbed society. The Supreme Court stated that though courts do not normally interfere with the principles of integration unless it was shown as arbitrary, unreasonable or unfair, in this case, the denial of promotion was unconstitutional as it was discriminatory. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Negligence in road accident claims lakh. The high court reduced the compensation on the assumption that the youth who was riding a scooter was driving rashly when he hit a bus. He also contributed to his fate. However, on the appeal of his mother, the Supreme Court stated that there was no evidence on record to show that the youth was driving negligently. It restored the tribunal’s compensation in the case, Meera Devi vs HRTC. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Penalty on chemist cartel The Competition Commission of did not obey were forced to shut down. This was brought to the notice of the commission, which took suo motu notice and initiated an inquiry by its Directorate General. It largely confirmed the allegations and reported collusive action so that trade margins did not get determined on a competitive basis. The commission, therefore, imposed penalty on the association and 78 persons directly responsible for running its affairs at the rate of 7 to 10 per cent of their respective turnover/ income/ receipts based on the financial statements. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Injunction against trademark argued that it has registered the mark and the adoption of a similar name will confuse the market. Genesis Infratech defended its mark stating that Sky is a common descriptive word and, therefore, it could not be a subject of registration. The marks and the products are also different which would not be confused by consumers. Rejecting these arguments, the court stated that it was not sky which is the trademark, but Skyon which is not a dictionary word. “ A mere look at the trade marks will show that essential features are akin. The trademark of Genesis is deceptively similar,” the court said.     DESTINATION FOR INTERNATIONAL ARBITRATION India plays catch- up game NAMRATA ACHARYA& SUDIPTO DEY In December last year two highprofile legal battles opted for arbitration of disputes originating in India to be taken to two different foreign locations. While Haldia Petrochemicals Ltd ( HPL) got a court clearance to settle dispute over ownership through International Chamber of Commerce ( ICC), Paris, global fast- food giant McDonald’s moved the London Court of International Arbitration ( LCIA) to resolve its dispute with Vikram Bakshi, its Indian venture partner over his appointment as managing director. What relates the two highprofile case is the place of dispute resolution —an international location for resolving local disputes. Arbitration as an alternative dispute resolution mechanism — vis- àvis court- bound litigation — is gaining popularity in India for resolving commercial disputes. An EY study in 2011 found that India has seen a growth of nearly 200 per cent in a number of disputes that have been referred to arbitration during the previous three years. However, bulk of arbitration cases have been ad hoc in nature, and most international companies operating out of India have preferred a foreign location — Singapore, London, Paris or Hong Kong — as a seat for arbitration. “The grip of ad hoc arbitration in India is one of the key reasons for companies to choose international destinations,” says N G Khaitan, president, Indian Council of Arbitration. This prevents institutional arbitration to kick- start in India, he adds. Ad hoc arbitration refers to a kind of mediation which is not administered by an institution, with the concerned parties responsible for framing all aspects of arbitration, like appointing arbitrators and deciding on applicable laws. On the other hand, institutional arbitration refers to mediation administered by specialised institution, according to set rules and procedures. Why foreign locations? The Indian law does not make a distinction between pure domestic disputes, with seat in India, where the parties are Indian and the governing law is Indian. Further, it treats international disputes, with the seat in India, where the parties are from different nationalities and the governing law not necessarily Indian, the same way. High level of legal intervention is regarded as another cause for lack of institutional arbitration in India. “Indian courts have historically been known to intervene in arbitrations. Previously, Indian courts have readily granted injunctions, preventing arbitrations from moving forward pending a complete hearing of the matter in India,” says Lye Kah Cheong, partner, Norton Rose Fulbright, a global law firm. “Some parties choose to arbitrate Indian disputes offshore to avoid delays often encountered with onshore arbitration,” says Nicholas Peacock, partner, Herbert Smith Freehills LLP. The preferred seats of foreign arbitration for Indian disputes are Singapore, followed by London and Paris. At Singapore International Arbitration Centre ( SIAC), the number of cases from India rose from 36 to 85 between 2010 and 2013, a rise of nearly 136 per cent. In 2011, India accounted for 1.5 per cent of total cases resolved through LCIA, which increased to 4.25 per cent in 2012. India accounted for sixth highest number of cases in LCIA in 2012. “The number of cases filed at the SIAC, involving at least one Indian party, has grown by an astounding amount in the past three years since 2009,” says Vivekananda N, deputy registrar & head ( South Asia), SIAC. These cases have emerged in sectors such as trade, construction, joint ventures, corporate disputes, telecommunications, maritime, shipping and shipbuilding, amongst others. A silver lining What gave a fillip to foreign arbitration in India was the landmark judgment by Supreme Court in 2012, which said that the Indian courts have no jurisdiction over international commercial arbitration held outside India (Bharat Aluminium vs Kaiser Aluminium Technical Service, September 6, 2012). “ The Balco case has been a game changer,” says Ajay Thomas, director & registrar, LCIA India. Legal experts say that this decision by the Supreme Court will lead the way in reducing the intervention of Indian courts in arbitrations seated outside India. However, application of the decision is restricted to arbitration agreements entered after September 6, 2012. Trouble with Arbitration Act, 1996 At present, arbitration in India is governed by the Arbitration and Conciliation Act, 1996. In 2010, the amendment in the Act with one of the objectives being reduction of interference of courts. This will promote international arbitration in India and align domestic law with international standards. Legal experts say the amendments, currently being vetted by the Law Commission once come into effect, would result in minimal court intervention, enhance institutional arbitration and disclosure of any interest by the arbitrator. Through these amendments, India would become a hub of international commercial arbitration, stated aPress Information Bureau ( PIB) release on the proposed amendment. However, this will only happen after general elections when Parliament is in session. This would mean that the new government would have to start afresh the process of bringing in fresh amendments to the Act. The real test is how Indian courts will react to the amendments after they become law, says Cheong. Legal experts point out that it could take some time to change India’s reputation of being an “ interventionist” in international arbitration circles. According to Sarosh Zaiwalla, senior partner, Zaiwalla & Co, a Londonbased law firm, India also needs to break away from its colonial mindset if it is to emerge as a destination for international arbitration. “ Indian arbitration is largely decided by retired Supreme Court and high court judges. We need specialist and experts to man the arbitration process,” he says. Absence of quality arbitration institutions facilitating and administering

 

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CS A Rengarajan

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