News in Brief
Exodus of good independent directors?
New penal provisions to enforce accountability and expanded responsibilities have made independent directors jittery. One such example is Related party transactions. The Companies Act stipulates that the Audit Committee's approval will be required if the RPT is not entered into in the ordinary course of business and on an arm's length basis. Thus, the Audit Committee has been made responsible for an executive function. Like in some other provisions, if the company is not following proper compliance, then Independent Directors will be held responsible.
NEW LAWS FOR CURBING ILLEGAL MONEY POOLING
Time to curb illegal money pooling and the New Companies Act has made put lot of restrictions for raising of public deposits i.e credit rating, pass special resolution etc.
It is time for new government to look into provisions to adequate steps to curb illegal money pooling.
| Exodus of good independent directors? |
|
The new provisions might expose them to the high risk of being accused of not carrying out their duties diligently, even if they do perform diligently in the given corporate eco system. The Companies Act and the new Code of Corporate Governance have made independent directors responsible for protecting the interest of minority shareholders and other stakeholders. There is nothing new in it. However, new penal provisions to enforce accountability and expanded responsibilities have made independent directors jittery. Concentration of ownership is a rule, rather than an exception, in the Indian corporate sector. It is dominated by family businesses, public sector enterprises and joint ventures and subsidiaries of multinational companies. In companies that are controlled and managed by the promoter or a shareholder group, independent directors, at best, can provide checks and balances, but cannot shoot down proposals put forward by the dominant shareholder, except those that are fraudulent, or are blatantly against the interest of minority shareholders. Therefore, the premise that the institution of independent directors will get strengthened with the codification of duties and enforcing accountability may not be correct. We shall take two examples to demonstrate how difficult it would be to implement some new provisions in companies that have concentrated ownership. One, is the provision concerning related party transactions ( RPT). It is quite common for companies to enter into RPTs. Abusive RPTs hurt minority shareholders. Therefore, it cannot be over emphasised that independent directors must review RPTs to protect minority interest. The new Corporate Governance Code, which is applicable to listed companies, requires every RPT to be approved by the Audit Committee. The Companies Act stipulates that the Audit Committee's approval will be required if the RPT is not entered into in the ordinary course of business and on an arm's length basis. Thus, the Audit Committee has been made responsible for an executive function. Even if we leave aside the question whether the Board should have any executive function, we need to examine whether the responsibility is onerous for independent directors. Sometimes, it is difficult to form ajudgment on whether an RPT is abusive. In those situations the controlling shareholder will take the position that is favourable to it and an MNC will take a position that is favourable to the parent company. It would be difficult, rather impossible, for independent directors to induce the management not to enter into those RPTs, which are borderline. Moreover, on hindsight an RPT might appear abusive while in earlier evaluation it was considered non- abusive. If, at a later date, a court takes the view that a RPT was abusive, the Audit Committee members might be held guilty of not acting diligently while approving the RPT. The provision also has the potential to develop an adversarial relationship between the independent directors and the management. This harms the company and minority shareholders. The second example relates to succession planning. The new Code of Corporate Governance stipulates that one of the responsibilities of the board is to oversee succession planning. It also stipulates that the board will satisfy itself that plans are in place for orderly succession of appointments to the board and to senior management. This is again an onerous responsibility. In family- managed business, succession plans for board- level appointments are formulated at the family governance forum and those are usually kept secret to avoid dysfunctional effects on family governance and corporate governance. Similarly, the parent usually manages board level appointments in the subsidiary of an MNC. It is unlikely that these practices will change. Even in appointments at senior levels, the dominant shareholder would like to have the final say and might not allow the board to intervene in succession planning. If, at some point in time, it is found that the company was hurt due to lack of proper succession planning, independent directors would find it difficult to defend their position. Obtaining an assurance from the controlling shareholder that succession plans are in place might not be considered adequate. These are just two examples of how well intended provisions would expose independent directors to the reputation risk. There are a number of such provisions in the new Companies Act and the new Code of Corporate Governance. Apprehensions of independent directors cannot be ignored. Such apprehensions might drive away good independent directors, particularly those who have nothing to gain from directorship, except continuing learning and self- satisfaction. The government should address the issue to avoid exodus of good independent directors. Email: asish. bhattacharyya@ gmail. com Affiliations: 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 K BHATTACHARYYA ACCOUNTANCY The Companies Act, 2013, and the new Code of Corporate Governance have made independent directors jittery Audit Committee has been made responsible for an executive function |
|
NEW LAWS FOR CURBING ILLEGAL MONEY POOLING Apart from more stringent laws, regulators need to come together to fight Saradha- like scams |
|
Barely a fortnight ago, the Rose Valley group's Joint Forum of all Registered Field Trade Unions organised a meeting of 1.5 million agents at Eco Park, a 480acre plot on the northeast fringes of Kolkata. Such a show of strength by a company accused of money- pooling by the Securities and Exchange Board of India ( Sebi) points to the fact that depositraising companies are still flourishing, owing to loopholes in regulations. In the past five years, West Bengal, Odisha, Assam and Tripura have seen a major surge in the number of private companies raising deposits. But last year, the model crashed after West Bengalbased Saradha went bust. Recently, the Supreme Court ordered the Central Bureau of Investigation to probe the Saradha scam. It also pulled up regulators for failing to check financial scams by deposit- taking companies. Regulators have, however, expressed inability to prevent scams of this nature on the grounds of jurisdiction. In the aftermath of the Saradha episode, there were two regulatory changes in this regard — the Companies Act, 2013, was passed; and Sebi was vested with new powers ( for search, seizure and attachment of properties, among other things). But that didn't stop money- pooling activities. From debentures to bonds, companies have dabbled in a range of instruments to raise public money. Amid a clampdown and more stringent laws, what has stood out is an instrument seldom heard of in financial markets — time share. The business of time share Time share is a common scheme in the tourism sector, through which hotels and resorts give long- term membership, or use rights, against a lump sum amount. However, the scheme is, in many cases, being used to raise crores of funds as advances for real estate and hospitality projects, on the promise of hefty returns, against cancellation of bookings. " Time share is a long- term holiday membership plan, and plans are purely meant for investment in a holiday scheme," said R S Rathor, chairman, All India Resort Development Association. Sebi: No firepower? Many new laws are aimed at making it easy for regulators to bring Saradha- like companies to light. Among the most important provisions in the Securities Laws ( Amendment) Ordinance, 2014, is it allows Sebi to conduct search- and- seizure operations. Further, it also brings all moneypooling schemes worth at least ₹ 100 crore under the market regulator's jurisdiction. Broadly, Sebi considers time share a collective investment scheme (CIS). Though CIS is a recognised financial tool, in the past decade, Sebi hasn't renewed CIS certificates. But companies have been operating through old certificates, claiming time share isn't within Sebi's purview. Companies Act, 2013 Under the Companies (Acceptance of Deposits) Rules, 1975, companies could raise deposits to meet any short term fund requirements. However, the Companies Act 2013, has made raising deposits more stringent. " The new law makes raising deposits extremely difficult. Companies have to go for credit- rating, pass a special resolution at a general meeting and have credit insurance for raising deposits," said Mamata Binani, former chairman, Institute of Company Secretaries of India (eastern region). At the same time, the Act gives relaxation to real estate projects. Therefore, the law allows deposits, which are taken as advances, to be adjusted against property, says Binani. Yet, money- raising companies don't agree they fall under the new law. " Basically, we are registered with the Registrar of Companies and doing time share business, according to the usual Companies Act, like others. There is no specific code of conduct to regulate time share in India," says Amit Banerjee general- secretary of Rose Valley union. Considering the complexity of the situation, regulators need to come together to fight possible Saradha- like scams. Key provisions in Companies (Acceptance of Deposits) Rules, 2014
Deposits to be repayable on demand, within 36 months Only public company with net worth not less than ₹ 100 cr or turnover not less than ₹ 500 cr can accept deposits from non- members Eligible company can accept deposit up to a maximum of 10% ( from members) and 25% ( from nonmembers) of paid- up capital and free reserves, including outstanding deposits, if any Separate regulations for NBFCs prescribed by RBI Key Provisions in Securities Laws (Amendment) Ordinance, 2014
Empowers Sebi with authority for search and seizure Recall and enhance the penalty imposed by the adjudicating officer. Allows the SEBI to supersede an order issued by an adjudicating officer, if it feels that the order is erroneous It also empowers the market regulators board to recall and enhance the penalty imposed by the adjudicating officer Seeks to empower Sebi to regulate all money pooling scheme worth ₹ 100 crore or more and also attach assets in cases of non- compliance |
| BRIEF CASE |
|
The turnover of an export firm would not include the proceeds from the sale of scraps in the local market. The Supreme Court has given aliberal interpretation of the term ' turnover' in its judgment in the appeal, Commissioner of Income Tax vs Punjab Stainless Steel Industries. The exporter of stainless steel utensils sold the scrap but did not include the proceeds in the total turnover. The revenue authorities insisted that it was part of the turnover. The firm objected to it because such an inclusion would reduce the amount deductible under section 80HHC of the Income Tax Act. Rejecting its argument, the court stated that turnover is sale proceeds of the commodity in which the business unit is dealing. "The intention behind the enactment of section 80HHC was to encourage exports," the judgment said, " So, the legislature would surely like to give more benefit to persons who are making an effort to help our nation. Once the government decides to give benefit to them, the revenue authorities should also make all possible efforts to encourage such traders or manufacturers by giving them more benefits contemplated under law." >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Receiver's power to file suit A courtappointed receiver assigned to preserve the assets of a sick company has a right to institute suits for the above purpose, the Supreme Court has stated in its judgment, Shree Ram Urban Infrastructure Ltd vs Court Receiver. In this case, the Bombay High Court appointed the receiver. He asked the tenant- firm of a prime property in Mumbai to pay compensation and vacate the premises. The firm challenged the right of the receiver to determine the tenancy and argued that he had not obtained the court permission for filing his suit. The firm's petitions and appeals were dismissed all along. Obtaining court permission to file suit was not mandatory, but at worst only an irregularity, the judgment said. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Order to revalue acquired land The Supreme Court has directed the land acquisition officer to re- compute the compensation for land acquired in 1969, but was caught in litigation till now. In this case, land belonging to M/ s Mahamaya General Insurance was acquired by the Uttar Pradesh Industrial Development Corporation at the rate of ₹ 1.33 per square yard. The firm contested the rate as a neighbouring plot was sold around the same time at the rate of ₹ 2 per square yard. The land acquisition authorities claimed that firm had sold some of its adjacent land at inflated price to outsiders without disclosing the acquisition and therefore that was not the correct base price. The Allahabad High Court had rejected the contention of the land owning firm. However, on appeal, the Supreme Court found substance in the argument of the firm and stated that there was no evidence to show that the firm had inflated the price of the land to get higher compensation. The sale of the neighbouring land appeared to be genuine transactions and therefore, that rate should be taken into account for recalculation. The payment must be paid within three months, along with solatium and interest. [1]M J ANTONY |
This mail and its attachments (if any) are confidential information intended for persons to whom the email is planned for delivery by the sender. If you have received this mail in error please notify the sender of the error by forwarding the email and its attachments (if any) and then deleting the mail received in error and the relevant email trail in this connection without making any copies or taking any prints.
__._,_.___
No comments:
Post a Comment