| Start- ups struggle with company law |
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Portea Medical, a Bangalore- based home healthcare firm, is KGanesh's fifth start- up venture. However, the entrepreneur, who successfully exited four greenfield projects, appears flummoxed when it comes to raising fresh funds for his new venture, under the new company law. "To get investment, we have been battling Companies Act requirements for the last three months," says Ganesh, chairman and co- founder, Portea. In March, Portea had finalised a term- sheet for fresh follow- up funding. However, the new rules and compliance requirements have delayed the closing. "We are still two- four weeks away," says Ganesh. In December 2013, Portea had raised ₹ 48 crore from venture capital funds. Ganesh says though Portea can take the delay in its stride, most earlystage start- ups might not be able to. Sombodhi Ghosh, cofounder of social enterprise Aakar Innovations, which helps rural women manufacture and market low- cost bio- degradable sanitary napkins, agrees. His three- year- old start- up has been raising its first round of funds from angel investors. So far, along with Aakar's other cofounder, he has bootstrapped the venture through personal funds, help from friends and family and some government grants. " Our compliance budget, which includes fees to accountants and lawyers, has already risen 50 per cent," says Ghosh. The two co- founders expect fresh funds only by Julyend, against the initial plan of March this year. Where the shoe bites Almost all provisions of the new company law apply to private limited companies, a departure from the previous Act. This has significantly increased start- up promoters' time, bandwidth and costs on compliances. The more stringent filing requirements also come with stiff penalties for delay in filing returns. Typically, a start- up entrepreneur performs several roles; this might lead to inadvertent delay in compliances, says Ganesh. Therefore, many startupfriendly governments, such as those in the US and Singapore, have fewer filing requirements for similar private limited companies. What seems to be hurting early- stage start- ups most is the provision that doesn't allow companies to borrow money from any individual other than promoters. More, promoters have to prove the amount lent to the company is only from his/ her own income sources, not from borrowings, says Harinderjit Singh, partner, PricewaterhouseCoopers India. "Friends and relatives are an important source of funds while bootstrapping a start- up," says Pranay Gupta, partner, 91springboard, a plug- and- play hub for start- ups. When a start- up raises capital through private placement, it has to file a valuation report. While this was a requirement earlier for raising funds from abroad ( under Fema guidelines), this is now mandatory for all private placements, making the route cumbersome, say entrepreneurs. Some entrepreneurs fear officials in the Registrar of Companies may question differences in valuations by different investors, leading to compliance issues. Any allotment of shares to a new investor has to be followed by at least three board meetings, as opposed to just a resolution earlier. The cost and time spent on each round of fundraising will increase 25- 30 per cent, even before the company gets on its feet, says Ganesh. The way out Most start- up founders Business Standard spoke to felt there should be separate rules for start- ups under the company law. " The government should not bracket a company raising ₹ 50 lakh with one raising ₹ 50 crore," says Ganesh. Also, many say there is a need to bring back some exemptions granted to private limited companies, as under the earlier regime. Suggestions also include substantial exemption from company law provisions for all private limited companies with paid- up share capital below ₹ 10 crore or revenue below ₹ 30 crore and summarised annual returns on matters relating to issue of capital, shareholder meetings, and appointment of directors. "There could be a monetary ceiling of up to ₹ 10 crore per company to avoid misuse of this provision," says Ganesh. Also, the valuation requirements should be limited for funds from public sources. While entrepreneurs and investors agree the Indian startup ecosystem will gain from stricter corporate governance in the long run, the pain in the short to medium term is here to stay. " We have come across several tech start- ups looking to register their ventures in more business- friendly environment such as Singapore or even Vietnam," says Vijay Anand, founder- chief executive of a Chennai- based tech accelerator for early- stage companies. With the ministry of corporate affairs reviewing the provisions of the law, the ball is now in its court. Stricter rules, rise in compliance costs affect fund- raising
Significant increase in the time, bandwidth and spend by the promoter on compliances Suggestion: Exempt private companies from some provisions of the company law Companies cannot borrow money from any individual other than promoters. Promoters have to prove that the amounts lent are from his or her own sources of income, and not from borrowings Suggestion: There could be a monetary ceiling per company of up to ₹ 10 crore to avoid misuse of this provision CHALLENGING TIMES |
| 'The new Act may add to the discomfort level of doing business in India' | |
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Industry has always been in favour of bringing the ( company) law in sync with the need of the times. We provided inputs at every stage of the evolution of the new Companies Act, 2013, to help create an enabling regulatory environment for growth. Even while welcoming the law, industry had represented that new provisions should be introduced cautiously, its applicability thought out carefully, and time for evolution of practices be provided. A major part of the law is contained in the form of Rules – which have been issued in haste. As all the sections of the new law have not been notified, and the current law has not been repealed, both co- exist, adding to the confusion. Currently, industry's advocacy for amendments and clarifications is aimed at ensuring that implementation does not disrupt existing business practices. We have raised very specific issues with respect to enhancing retrospective application of rotation of auditors, providing exemptions to private companies from selective sections, and reinstating exemptions for Section 8 Companies and finally allowing corporates flexibility to conduct corporate social responsibility beyond the prescribed Schedule VII. Has the industry arrived at some sort of cost for compliance to the new company law? We are currently only in the third month of implementation of the new Act – where the entire focus is on legislative intent, industry interpretation and transition to the new regime. On the issue of cost, we feel that complex rules, formation of various board committees, approvals from shareholders, additional record keeping, would certainly add to the cost of compliance. CII is planning to conduct a detailed ' Survey on cost of governance compliance' which will give us a fair idea of the monetary aspect of the implementation of the new law, and international benchmark in the area. However, apart from cost, it might add to the discomfort level of doing business in India. One perception gaining ground is that the industry is trying to wriggle out of a stricter corporate governance regime. We have always been a proponent of the highest standards of corporate governance in India. In fact, a number of requirements of the new law were already being followed by listed companies to comply with SEBI requirements. However, to enforce the requirements across all companies (private and closelyheld) with no public stake has swung the pendulum to the other extreme. There needs to be a balance between minority and majority shareholders. Being the structural law for the operation and functioning of companies, it is very important for the new Act to regulate corporate procedures in a way that enables business growth. The implementation of provisions should be better planned, structured and staggered, instead of being thrust on industry. This will ensure wilful compliance, as opposed to a tick- box approach. Shouldn't the industry focus more on issues that help " ease of doing business" in India? We have been focusing on improving ease of doing business. Despite being one of the fastest growing economies in the world and a potential investment hub, India lags behind in terms of ease of doing business. CII has recently released a report aimed at improving India's position in the World Bank's Ease of Doing Business rankings, where India has repetitively been ranked low compared to 189 other economies. The report highlights that if we were to adopt existing best practices in different states uniformly, India's ranking would improve significantly. These are quick wins that need to be pushed. CII is currently putting together highimpact suggestions for consideration by the government. These would be short, medium and long- term. The objective is to place India in top 50 economies in the World Bank's rankings in shortest time frame possible. Another piece of legislation that industry seems to be unhappy with relates to the issue of land acquisition. Any specific measures that may help ease the logjam? While we have welcomed the Right to Fair Compensation and Transparency in Land Acquisition and Rehabilitation &Resettlement Act, as it strives to improve the quality of life of affected families, an important aspect that seems to have been overlooked is the cost of land acquisition. According to our calculations, with current provisions, the cost of land acquisition is bound to increase by 3– 3.5 times. AJAY SHRIRAM, president, Confederation of Indian Industry, and chairman & senior managing director of DCM Shriram, shares with Sudipto Dey his concerns about the new company law. Edited excerpts: AJAY SHRIRAM President, Confederation of Indian Industry | |
| Nayak Committee report: Spotlight on PSE governance | |
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The terms of reference of the committee included review of the regulatory compliance requirement of the boards of banks, the working of these boards, regulatory guidelines on bank ownership/ concentration, and an examination of board compensation guidelines. The report deliberates, at great length, the governance of public sector banks (PSBs). Although, the report deals with the banking business, which is a riskier commercial activity than nonfinance business, observations of the committee on the governance of PSBs are equally applicable to the governance of non- finance PSEs. PSEs were created as instruments for achieving development goals by investing capital in sectors that were of strategic importance and infusing capital in those sectors that could not attract private capital, or due to unattractiveness of the sector at that point in time. Similarly, private banks were nationalised to achieve development goals. The government continues to use PSEs, including PSBs, for achieving strategic and development goals. The report has revived the debate on whether government should engage in commercial activities. It has not recommended privatisation of PSBs. But adoption of the governance structure, which is recommended by the committee, will result in indirect privatisation. Any decision on privatisation should be based on proper evaluation of whether a PSE has lost its relevance as a development instrument. For example, it might be appropriate for the government to exit from the airlines industry but to continue to invest in airports that are of strategic importance but unable to attract private investment due to lack of commercial viability. The Nayak committee has recommended the government shareholding in PSBs be reduced below 50 per cent to allow more autonomy to banks and to distance the government from the governance of banks. The report argues that the reduction in government shareholding below 50 per cent will free the bank from external vigilance emanating from the Central Vigilance Commission, from the Right to Information Act ( RTI), and from government constraints on employee compensation. This will allow banks to function more efficiently and effectively on commercial considerations. The report states that more competitive public sector banks will enhance financial returns to the government with no effective dilution of control. Iam uncomfortable with these observations. Should the government stay invested in a commercial enterprise to earn attractive return on investment? The answer is no. The government should continue its investment in a PSE only if it serves public interest. The argument that the government's control will not get diluted with dilution of ownership is not tenable. If a PSE functions solely based on commercial consideration, the government will not be able to use it as an instrument to achieve strategic and development goals. A shareholder group with less than 50 per cent voting right cannot use the resources of a company to further its interest unless it is able to manage the composition of the board of directors and is able to induce the board to give primacy to its interest. This is against good corporate governance. The Companies Act and Sebi Corporate Governance Code aim to ensure that the interest of a particular shareholder group does not get primacy in corporate decisions. Decisions should benefit the company. It is absurd to assume that private investment will work to achieve larger public goals voluntarily, unless it is commercially expedient to do so. Vigilance and RTI mechanisms enforce accountability. Therefore, public derives benefits from those two mechanisms. The Nayak committee's observation implies the implicit costs of those mechanisms exceed benefits derived from them. This is a serious observation. If, those mechanisms are constraints for the efficient functioning of PSEs, they are constraints in the efficient functioning of the bureaucracy and other government departments. It is true that the vigilance mechanism often leads to harassment for genuine errors of judgment. Moreover, vigilance cases often drag on for years resulting in a huge damage to the professional career of honest employees. There is a case for reviewing the vigilance mechanism to reduce its dysfunctional effects. The report suggests that the board of directors should take the responsibility for implementing its own vigil mechanism. Theoretically, it is a sound proposition. But the board of directors does not have adequate incentive to implement an effective vigil mechanism. Only a large shareholder has sufficient incentive to implement the same. Therefore, dilution of accountability for the use of public money, which will remain invested in PSEs, is not desirable. The government should not reduce investment in a PSE below 50 per cent if it still serves public purpose. If a PSE has lost its relevance as an instrument to achieve development goals, it should be privatised. There is no mid- way. The author is a professor and head, school of corporate governance and public policy, Indian Institute of Corporate Affairs; advisor ( advanced studies), Institute of Cost Accountants of India and chairman, Riverside Management Academy Pvt Ltd The board of directors does not have adequate incentive to implement an effective vigil mechanism ACCOUNTANCY ASISH K BHATTACHARYYA The government should not reduce investment in a PSE below 50 per cent if it serves public purpose | |
| Defective fan takes customer in a whirl |
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Madhav Palkar had purchased a Bajaj fan from Nakoda Steel Centre at Parel in Mumbai. The fan, purchased on March 24, 2011, and it stopped functioning on April 17, within a month. He lodged a complaint with Bajajs customer care. After three days, a technician visited Palkar and found the problem was with the fans motor, which required to be replaced. The motor was replaced a month after ( on May 17) but the regulator still did not work properly. After about another month, the technician took the faulty fan, and replaced it with a new one ( on June 15). On July 25, while the Palkar couple were taking an afternoon nap, they felt some heat and woke up to find the fan had caught fire. The walls and the ceiling of the house had turned black and the furniture was damaged. Photographs of the damage were taken and a complaint was lodged with Bajaj's service centre. A technician was deputed, who inspected the fan and offered to replace it once again. Having been fortunate to escape unhurt, Palkar was not interested in taking a risk with another fan. Instead, Palkar demanded compensation and damages. Since Bajaj did not comply, Palkar sent a notice to the company, and then filed a complaint before the Central Mumbai District Forum. He claimed ₹ 75,000 as damages along with 18 per cent interest and a compensation of ₹ 1 lakh. Bajaj came up with a novel defence. It argued Palkar had purchased a wall mounting fan model 'Spectrum SW 01- 02'. The company explained that coding of the model, where the letter S stands for Spectrum, while W stands for wall mounting fan. Bajaj attributed the fire to Palkars negligence, claiming that the product had been mishandled by using a wall mounting fan as a table fan. Bajaj claimed that it had replaced the fan even though it was under no obligation to do so, as the guarantee had been invalidated due to mishandling. It also claimed it could not be held liable as Palkar had continued to wrongly use a wall fan as atable fan. The Forum observed acommon consumer cannot be expected to know the significance of the letters ' S' and / or 'W' in the model name. There was nothing to show that Palkar had been informed it was a wall mounting fan which cannot be used as a table fan. Even the guarantee card does not disclose this information. On the contrary, the bill referred to the fan as a ' table fan'. Hence, the Forum concluded the companys defence was unacceptable. The Forum also noted the fan had already been replaced once after its motor was found to be faulty. By its judgement of May 8, 2014 delivered by Presiding Officer B S Wasekar, on behalf of the bench along with Mr Bhaise, the Forum held the fan was defective. As the problem arose during the peak summer period, the Forum awarded ₹ 25,000 as compensation for mental agony. Additionally, for the damage caused to the wall and furniture, the Forum awarded ₹ 50,000 as damages, along with nine per cent interest from the date of the complaint. Cost of ₹ 5,000 were also granted. Both Bajaj and the shopkeeper were jointly held liable to comply with the order within one month. A happy customer can give greater mileage to a company by word of mouth publicity. So, it is better to focus on customer satisfaction, rather than spend on litigation and advertisements. The writer is a consumer activist CONSUMER IS KING JEHANGIR GAI A happy customer can give greater mileage to a company by word of mouth publicity. So, it is better to focus on customer satisfaction rather than spend on litigation and advertisements |
| BRIEF CASEN [1] M J ANTONY | |
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When loss- making cooperative one, the accumulated losses of the Supreme Court stated in its judgment in Rajasthan Ginning Mills Federation vs Dy Commissioner of IT. In this case, the state government cancelled the registration of four loss- making societies and the assets and liabilities were taken over by the federation. When the federation wanted to carry forward the losses and set them off against its profits, tax officials did not permit it, leading to the litigation. Dismissing the arguments of the federation, the court stated that first, since the merged societies ceased to exist after the amalgamation, they cannot file returns and carry forward their losses. Second, the analogy of the companies, banks and other entities which are allowed to do so cannot be applied in the case of cooperative societies as the Act did not provide for it at the time of the assessment. Cooperative societies are in a different class. Tax laws must be interpreted strictly, the court added. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Computing loss in damages suit While computing compensation for a motor vehicle accident, the victim's salary should be taken into account minus the income tax paid by him. Voluntary contributions which are in the nature of savings like contributions to general provident fund made for the welfare of the family, house rent, repayment of loan and insurance should not be deducted. The Supreme Court stated so in its judgment, Manasvi Jain vs Delhi Transport Corporation. The court directed National Insurance Company to pay the son of the deceased ₹ 16.15 lakh with six per cent interest, up from ₹ 10 lakh that the Uttarakhand High Court awarded. The high court and the tribunal had not followed this principle; therefore their judgments were set aside and the appeal was allowed. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Penalty for trademarkviolation had infringed its trade name, Schweppes, for a popular beverage. The local firm did not represent itself in the court. The judgment stated that a firm which chooses to stay away from court proceedings should not be permitted to enjoy the benefits of evasion of court proceedings. It could not escape liability due to its absence. " There is a larger public purpose involved to discourage such parties from indulging in such acts of deception," the judgment said. There is a growing menace of piracy in this country and courts have started granting punitive damages when the accused party failed to show its sale figures. The party which suffered losses on account of infringement of trade mark must get compensation. It will also deter wrongdoers and likeminded persons from indulging in such unlawful activities, the high court remarked. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Aquestion of day and night The Delhi High Court has settled an insurance claim in favour of Weston Tubes Ltd after 18 years and asked National Insurance Company to pay enhanced compensation for the loss in fire of imported machinery on the night between May 1 and May 2, 1996. One of the bitter points of contention was about the meaning of ' day' and ' night'. Weston approached the insurer on May 1 for enhancement of the cover and it was accepted. The fire occurred the same night. The insurance company contended the policy had not come into effect. The single judge accepted the argument, among other contentions. However, a division bench reversed it and stated that " in view of the fact that the fire took place post 12 mid- night and the document produced enhances the sum assured from May 02, without time being specified thereon, the inevitable conclusion has to be that the sum assured stood enhanced from the mid- night of the intervening night of May 01 and May 02 on account of the fact that May 02 commenced at the stroke of the first second past mid- night of the intervening night of May 01 and May 02, 1996." >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Judgments mustgive reasons The National Consumer Commission has stated that consumer forums must give reasons for passing orders; otherwise they will not be valid. In this appeal case, National Seeds Corporation vs Dadaso Bagal, the Maharashtra state consumer commission passed an order against the corporation, upholding the compensation ordered by the district forum. However, the state commission did not give the facts or reasons for the dismissal of the corporation's appeal. The state commission should have dealt with the pleas raised by the complaining person. In several cases, the Supreme Court had asked all legal forums to give reasons for their decision. Since this directive has been violated, the national commission remitted the matter to the state commission to write a reasoned judgment. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Pestered by marketing calls on mobile A person pestered by unsolicited marketing calls and SMS in spite of registering his phone number in the National Do Not Call Registry can seek information on the action taken by the Telecom Authority of India ( Trai) against service providers but a complaint of inaction against Trai or the service provider must be taken to the consumer forum. The Central Information Commission (CIC) stated so in its judgment, Akshay Kumar Malhotra vs TRAI. In this case, a person lodged approximately, 1970 complaints of receiving unsolicited SMS and voice calls through his Vodafone connection. Effective action was taken in hardly 100 complaints. While he maintained that Trai can seek information from private companies, Trai stated that it cannot do so solely for providing it under the RTI Act. CIC ruled he can pursue his remedy in the consumer forum and TRAI should provide information available to it. But it should be kept in mind that " providing bulky, voluminous or unnecessary and huge load of information will prove detrimental and hinder the normal course of activities of Trai... Discretion and judiciousness needs to be exercised in deciding the scope and ambit of the information to be furnished." >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> | |
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