| The elusive concept of control |
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The word ' control' means exercising direction and command over things. But this simple definition does not hold water in the complex and dynamic world of mergers and acquisitions. Every year, regulators such as the Securities and Exchange Board of India ( Sebi), Ministry of Corporate Affairs ( MCA) and the Competition Commission of India ( CCI) receive a lot of queries from legal advisors of companies to ensure that they are on the right side of the law. Last year, Sebi, following the controversy around the Jet- Etihad deal, decided to take a look at the definition of control. But even after a year, the regulator is nowhere close to finding the answer. According to sources, the regulator has not been able to zero in on a definition that lawyers had suggested. "The right to appoint a majority of directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly" is how Sebi's substantial acquisition and takeover code defines control. Any acquisition of more than 25 per cent of shares automatically construes as ' control and leads to an open offer. The MCA and the foreign direct investment ( FDI) rules go with that definition, but CCI has a different version. The definition of ' control' under the Competition Act, 200, is wide, including " decisive control over the management or affairs of the enterprise". trading, and service also become relevant terms. Lalit Kumar of J Sagar Associates believes the tricky part is dealing with control over management and policy decisions. "While it is easy to determine control from the perspective of the right to appoint a majority of directors on the board of a company because it is a simple calculation to see if a person has a right to appoint a majority of directors on the board, however, the second test of control is always a question of facts and circumstances. The definition does not clearly lay down the tests to determine the meaning of However, many others are of the opinion that certain level of discretion with the regulator is expected. As was exercised in the case of SpiceJet, where the new promoter, Ajay Singh, was exempted from making an open offer, as SpiceJet was established as bankrupt. "Given that ' control' is an elusive concept, by design any definition of control will grant discretion to regulator, and this is not the case just in India but the world over," says Suhail Nathani, partner, Economic Laws Practice. Some lawyers argue that CCI is assuming a different definition, rightly so, as they are catering to a different perspective. But, not all see it that way. Another area that companies and advisors grapple with is a lack of consistency. "However, the apprehension in India is the lack of consistency. There should be some amount of certainty in the form of precedence and uniformity of treatment across regulators. Assuming definitions are consistent, companies need comfort that if a case was dealt by one regulator in one manner the same would apply to similar cases across regulators," says Nathani. Another interesting question that arises on ' control' is: whether affirmative voting rights or veto matters or reserved matters result in control? It is typical for the investors to have such rights in a company when they have invested funds to protect their investment. There are some judicial precedents under Sebi Takeovers Regulations on the issue. The most recent one in this regard is an order of Securities Appellate Tribunal ( SAT) in the matter of Subhkam Ventures. The SAT's order in 2010 made the issue clear by holding that such affirmative votes do not result in control over a company. But a subsequent appeal in the Supreme Court by Sebi held that the order could not hold precedence. "In view of the Supreme Court's order, the SAT's order cannot be treated as a precedent. Therefore, the settled issue that reserved matters do not lead to control is far from being is a settled issue now," says Kumar. However, he is quick to add that a view can be taken that affirmative voting rights do not lead to control. With Sebi undergoing the exercise of redoing the definition of control just four years after the Substantial Acquisition of Shares and Takeovers regulations were revamped, perhaps there is a need for an operational list of cases similar to insider trading rules. "As in the new insider trading code, there is a list of who is an insider and what price- sensitive information is. Something similar is needed to define that situation that can be construed as control," says a legal advisor. Sebi has so far been unable to zero in on a definition that lawyers have put forward SEBI | 25% share acquisition leads to automatic open offer |Control over management and policy decisions is the key focus area |Veto rights as per SAT order of 2010 doesnt lead to control |Definition of control focusses on control over management, board and policy decisions CONTROL HAZE CCI |25% acquisition doesnt neccesarily lead to control |Decisive control over management is of utmost importance |Having veto right leads to control |Distribution, trading, services, production assume importance in defining control |
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| The Negotiable Instruments ( Amendment) Bill, 2015 | |
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This is the third major amendment in recent times to the Negotiable Instruments Act 1881, prompted by dishonour of cheques in lakhs, shaking the credibility of the instrument, confidence of business community and choking courts. The 1988 amendment introduced penalty for issuing cheques which get dishonoured for want of fund in the bank. Since that provision, Section 138, was found insufficient to deal with the menace, the penalty was increased from one to two years imprisonment after a summary trial. Even this has not resolved the problem and at present 1.8 million criminal cases are before magistrates' courts and appellate courts. One of the devices employed by dishonest drawers is to challenge the jurisdiction of the courts, stalling the proceedings. This was tried to be resolved by the Supreme Court in its 2009 judgment in Dashrath Rupsingh case. What does the present amendment do? The amendment adopts the basic principles laid down by the Supreme Court in the above case regarding jurisdiction of courts and improves upon it in the light of the representations made by various stakeholders, including industry associations and financial institutions. Complications had arisen because a cheque was issued in one place on one bank, and presented in another place to another bank. The payer company might be in one corner of the country and places and even if he won, appeals would be filed in another court and arguments will continue for years. The Supreme Court found that even high courts had differed on case. The present amendment removes such legal bottlenecks and speeds up the trial. Now the question of jurisdiction cannot be raised as the law is clear. What is the procedure laid down by the amendment? The new provision states that the holder of the cheque can file a criminal complaint before a magistrate where he resides and tendered the cheque. He need not go to the place where the cheque was issued or other courts. After this clarification, there is a single place to file the complaint. Litigation expenses will come down, and the drawers of cheques, including company directors will be more careful while signing such cheques. The government feels that these procedural changes will be fair to both parties. What happens to cases already pending? According to the newly introduced Section 142A, all cases which were pending in any court, whether filed before it or transferred to it shall go before the court having jurisdiction under the new procedure. What is the other important proposed change in the Bill? The new law also cures a deficiency in the definition of " a cheque in the electronic form". The law as it stood presumed drawing of a physical cheque and signature. With the advance in technology it needed to be updated. Therefore, it is explains that " a cheque in the electronic form" means a cheque drawn in electronic form by using any computer resource and signed in a secure system with digital signature ( with or without biometrics signature) and asymmetric crypto system or with electronic signature. The Negotiable Instruments Act borrows definitions of technical expressions from the Information Technology Act 2000. (COMPILED BY MJ ANTONY) |The Excise ( Spirits) Act, 1863 |The Excise ( Malt Liquors) Act, 1890 |The Indian Tramways Act, 1902 |The Children ( Pledging of Labour) Act, 1933 |The Indian Companies (Amendment) Act, 1936 |The Employers Liability Act, 1938. |The Income- tax Law Amendment Act, 1940 |The Indian Income- tax (Amendment) Act, 1941 |The Excess Profits Tax (Second Amendment) Act, 1941 |The Railways ( Local Authorities Taxation) Act, 1941 |The Income- tax and Business Profits Tax (Amendment) Act, 1947 |The Delhi Hotels ( Control of Accommodation) Act, 1949 |The Indian Merchant Shipping ( Amendment) Act, 1949 Clearing the statute books of obsolete laws is an ongoing process. A two- member government- appointed committee has identified 1,741 obsolete central Acts. These include 777 central Acts, 83 central Acts relating to state subjects, to be repealed by state legislatures, 624 central Appropriation Acts, and 257 Appropriation Acts enacted by Parliament for states under President's Rule. The Law Commission through several reports has recommended repeal of 289 obsolete Acts. Till now 125 central Acts have been repealed by the government over the past six months The Repealing and Amending ( Fourth) Bill, 2015, passed byLokSabha last week, seeks to repeal 295 obsolete and redundant laws that clog the statute book. Here are some keyeconomic laws that the bill proposes to do awaywith FAQs | |
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| Toshiba — a case of internal audit failure | |
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The corporate governance structure met corporate governance standards. Time and again cases of corporate governance failures have provided evidence that good corporate governance structure does not necessarily lead to good corporate governance. Organisation culture is a critical determinant of the quality of corporate governance. Some of the observations of the independent investigation committee of the company on internal audit demand discussion and debate. The investigation committee observes, " According to the division of duties rules of Toshiba, the corporate audit division is in charge of auditing the corporate divisions, the companies, branch companies, and affiliated companies. However, in reality the corporate audit division mainly provided consultation services for the ' management' being carried out at each of the companies, etc ( as part of the business operations audit), and it rarely conducted any services from the perspective of an accounting audit into whether or not an accounting treatment was appropriate." The observations of the committee give the impression that the fault of the internal audit in Toshiba was that it focused on consultation service rather than assurance service. Should internal audit avoid providing consultation service? I do not think so. It was not the fault of the internal audit that it provided consultation service. The fault was that it did not pay attention to accounting audit. In Toshiba, the top management used to set targets that are unachievable. There was excessive pressure from the top management to achieve those targets. The variable pay is a significant portion of the total pay. The compensation of executive officers comprises abase compensation based on title and a role compensation based on work content. Forty per cent to 45 per cent of the role compensation is based on performance of the overall company or business department. 'Challenge' to achieve unachievable targets and performance- based pay provide enough motivation to manage earnings. Therefore, accounting audit should have been a focus area for internal audit. Internal audit can function independently only if the audit committee is capable, independent and effective, and the internal auditor reports to the audit committee. In Toshiba, the audit committee was neither capable nor independent. The three external members of the audit committee had no knowledge of finance and accounting. An ex- Chief Financial Officer ( CFO), who was the CFO during the timeframe when accounting irregularities occurred, was the only whole time member of the audit committee. Therefore, the internal audit was not independent of the management. Earnings management had the tacit approval of the top management. Therefore, it is not surprising that accounting audit was excluded from the scope of internal audit. It is incorrect to infer that the accounting audit did not receive the attention of the internal audit because its focus was on providing consultation service. Contemporary literature defines internal audit as 'assurance and consulting service'. The issue is of balancing between consultation service and assurance service. Problem arises when the internal auditor forgets that the internal audit is primarily an assurance function. The consultation service flows from the assurance service. Although, the primary objective of operation audit is to obtain assurance that the internal control that is installed to achieve operation objectives is adequate and operating effectively, the auditees look to the internal auditor for suggestions and consultancy. Such consultation service is a by- product of the assurance service. Auditees should not be denied the benefits of internal auditor's understanding of the industry and the business, and the challenges before the auditees in achieving operation objectives. Exclusion of consultation service from the scope of internal audit would result in sub- optimal utilisation of internal audit resources. Organisation culture also determines the effectiveness of internal audit. The investigation committee observes, " A corporate culture existed at Toshiba whereby employees could not act contrary to the intent of their superiors". In such a culture an upright internal auditor cannot survive, particularly if he is not independent of the management. Perhaps, it is the reason that the internal audit in Toshiba had chosen the easy path of focusing on ' consultation service' only without reporting internal control weaknesses. Internal auditor is the ' eyes and ears' and ' go- to man' of the audit committee. Therefore, internal audit failure leads to corporate governance failure. Affiliation: Chairman, Riverside Management Academy Private Limited; Professor and Head, School of Corporate Governance and Public Policy, Indian Institute of Corporate Affairs. Email: asish. bhattacharyya@ gmail. com ACCOUNTANCY ASISH K BHATTACHARYYA The 140- year- old pillar of Japan Inc is caught up in the country's biggest accounting scandal since 2011 In Toshiba, the audit committee was neither capable nor independent | |
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| BRIEF CASEN M J ANTONY |
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If two companies have to be declared 'related persons' for excise purposes, there should be mutuality of interest in the business of each other. If there is only ' one- way traffic', the two companies are not related. The revenue authorities must prove mutuality of interest or " two- way traffic", Supreme Court stated while dismissing the appeal of the commissioner of central excise against the order of the appellate tribunal in a case involving Goodyear South Asia Tyres Ltd. The company in this case was a joint venture of RPG SATL and Goodyear. It manufactured and supplied tyres exclusively to Ceat and Goodyear sold in their brand names. Goodyear and RPG Ceat had 50: 50 shares in the assessee company. The excise authorities issued demand notice to the company on the basis of related persons under section 4 of the Excise Act. The company contended that its sale of tyres to the two companies was on principal to principal basis and at arms length. The commissioner rejected the plea but the tribunal accepted it. On appeal, Supreme Court upheld the tribunal's view The assessee company had no interest in the business of the other two. " The fact that the two buyers had given ₹ 85.66 crore interest- free loan to the assessee company by itself may not be a reason to hold them as related persons in the absence of any mutuality of interest existing between them," the judgment said. Foreign airlines win TDS case The Supreme Court last week resolved conflicting views of the Delhi High Court and the Madras High Court on the rate of TDS deducted from payments made by foreign airlines to the Airports Authority of India while using facilities in domestic airports. The Delhi High Court had held in the case of Japan Airlines that the rate is 20 per cent interpreting section 194- I of the Income Tax Act. This was in accordance with the argument of the revenue authorities. However, the airline's appeal was allowed by the apex court stating that the rate was two per cent, applying section 194- C. The Madras High Court had ruledin the case of Singapore Airlines that the rate was two per cent. The tax authorities had appealed against it. Their contention was that the airline used the land the moment the wheels touched down and then used parking space. Supreme Court dismissed their appeal, upholding the view of Madras High Court. When the airlines pay charges for landing, lighting, passenger services, they are not paying for " use of land" as argued by the authorities calling this view " naïve and simplistic." The substance of the charges must be considered. Supreme Court said: " When the matter is looked intokeeping in view the full picture in mind, it becomesvery clear that the charges are not for use of land per se and, therefore, it cannot be treated as rent." Debt tribunal can condone delay The debt recovery appellate tribunal under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act has the power to condone delay in filing petitions, the Supreme Court ruled last week in the judgment, Baleshwar Dayal vs Bank of India. The debt recovery law provided for 45 days as limitation, while SARFAESI provided for only 30 days. But the laws are complementary and the debt recovery mechanism is part of the SARFAES scheme, the judgment said. The contrary view held by the Madhya Pradesh High Court was incorrect and that court was directed to reconsider its judgment. Several other appeals involving the same question were also remanded to respective courts and tribunals for reconsideration. Dismissal too harsh for slapping colleague After 25 years of litigation, the Supreme Court ordered Telco to pay its former employee, Talukdar Singh, ₹ 5 lakh as retrenchment compensation. He was dismissed for slapping his colleague at work in 1990 when he was 59 years old. The labour court found him guilty but held that dismissal was " shockingly disproportionate" to the charge. It, however, awarded him ₹ 6,049 as compensation. Singh moved the Bombay High Court which enhanced the amount to ₹ 1 lakh. He again appealed to the Supreme Court, which raised the compensation to ₹ 5 lakh. Curtains fall on 45- year rowover gunny bags The Supreme Court last week drew the curtains over an excise dispute started in 1970 which trundled its way up via various authorities and appellate tribunals. Ultimately, Tata Chemicals lost the appeal and was asked to pay excise duty on gunny bags in which it sold soda ash. The company has been arguing that there was an arrangement for the return of durable packing, namely gunny bags, for reuse as packing material for selling the soda ash in bulk. The tribunal had ruled that the claim put forth by Tata Chemicals that the value of gunny bags used for packing soda ash manufactured by them should be excluded in finding out the assessable value wasunacceptable. Supreme Court dismissed the appeal, observing that the law has been clear in this matter through a long series of judgments. The packing material must be both durable and returnable. Since the buyers paid for the packing, the seller could not claim it back, the court said. Discrimination against ship- breaker flayed The government has wide discretion in the matter of granting, curtailing, withholding, modifying or repealing exemptions granted in earlier notifications. It is not bound to grant exemption to anyone it so desires. But if there is discrimination and arbitrariness, the court can exercise its power of judicial review, the Supreme Court has stated in the judgment, Union of India vs M/ s N S Rathnam. This firm bought a ship for breaking it after paying customs duty at the rate of ₹ 365 per ton. It did so following a 1987 notification which exempted it from excise duty if the customs duty was paid. But there was another notification of the same date which stated that only those who paid ₹ 1,400 per ton would be eligible for the benefit. The revenue authorities denied the benefit to the ship- breaker. It challenged the notifications in the Madras High Court. It found that the demand of the authorities were illegal. The government appealed to the Supreme Court. It dismissed the appeal, stating that the notifications gave a choice to the ship- breaker to pay according to either method. Merely because the assessee opted for a cheaper method, it should not be discriminated against. Though Parliament has extremely wide discretion to classify items for tax purposes, it should refrain from " clear and hostile discrimination" as in this case, the court ruled. 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