| Low- hanging fruits for Rajan to pluck |
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Acknowledging the IFC's existence is a big milestone. Public commentary about RBI and FSLRC after IFC was published evidenced deep- seated distrust. Hardliners on each side of the divide refused to engage on the contents of the IFC — it has been a George Bush- like you- are- either- withusor- against- us approach, with just the divide seeming to matter so much that what the divide was about remained immaterial. With Rajan's opening line, a possible change in the quality of discourse is showing promisingly positive signs. Many a column has been written already about the Governor's speech, ranging from appearances ( both visual, and on his policy approach) to the regulatory signals he has sent. Some even credit the rupee's recovery to this one speech. This edition of the column does not intend to analyse the speech further. This was written before Governor Rajan's first formal policy statement that would have been made by the time this is printed. This piece is rather about two simple but important areas that RBI would do well acknowledge and deal with, using legal and regulatory powers it already has. It would not need Parliament to legislate anything. Not being matters of independence in monetary policy, no aspect of dogma or faith need be addressed. The first affects the man on the street, and the second affects businessmen making investments. First, Rajan could easily pick up for implementation, the draft provisions in IFC that govern protection of consumers of financial services. IFC has provisions that define what would constitute an unfair term in a non- negotiated contract for provision of financial services. The factors set out for determination of what is a non- negotiated contract and what in it would be an unfair term, could easily be prescribed by RBI using its existing powers under the Banking Regulation Act. Unfair conduct, abusive conduct, consumer data privacy, and fair disclosure norms, have all been provided for in IFC and RBI can easily adopt these under subordinate legislation, and regulate this core area of activity in its role as a regulator. Implementing these measures and swiftly making use of the first few violations as opportunities to articulate RBI's thought process and expectations would be a simple way to give this important area of financial sector reform a major leg- up. Second, the area of non- banking financial companies ( NBFCs) needs urgent attention. Today, RBI is increasingly assertive about this part of its turf, and rightly so. Financial firms that otherwise do what banks can do ( borrow from the public, either directly or from banks that borrow from the public, and lend to the public) indeed need to be effectively regulated. RBI Act, which required every such company to register with the RBI and conform to special requirements, sustained a constitutional challenge. If the rule of law has any majesty, these provisions indeed need to be implemented and enforced. However, somewhere down the line, the RBI lost sight of the need for aclearly- stated policy on dealing with NBFCs. An unstated policy of not granting any more NBFC licences got developed, thereby placing an abnormal premium on existing NBFC licences. Transitional provisions for entities that are NBFCs seeking registration are sorely lacking. When a company meets the requirements necessary for registration as an NBFC, and applies for one, RBI should simply grant it with appropriate and well- reasoned restrictions and conditions. Today, companies with thousands of crores of financial assets that want to be registered as NBFCs are simply told they would be prosecuted if they undertake further NBFC activity, without any indication on whether a registration would indeed be granted. A policy for penalising past defaults and registration for future activity is sorely lacking. Rajan would do well to pick this up for aclean- up. The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own. Acknowledging IFC's existence is abig milestone. The area of NBFCs needs urgent attention WITHOUT CONTEMPT SOMASEKHAR SUNDARESAN Protection of consumers of financial services and regulation of NBFCs would give a major leg- up to financial sector reforms ILLUSTRATION: BINAY SINHA |
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| 'Rotation policy to be disruptive' |
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The choices of countries to mandate rotation of auditors or have a mandatory tendering process or have no regulation around rotation are independent. For most of these choices, the pros and the cons are evaluated with regard to a country's environment. After the discovery of financial irregularities, regulators have raised the question of audit rotation. Countries such as Brazil, Belgium and Italy have mandatory rotation. However, recently, the US House of Representatives approved a Bill that prohibited the US regulator from mandating audit rotation. There is insufficient evidence to suggest mandatory audit firm rotation would significantly enhance auditors' objectivity and, consequently, audit quality. Indian regulators, however, believe audit rotation is a positive step and will enhance audit quality. However, given the polarity of views by regulators, India needs to be careful and cautious in determining how the implementation should be achieved. This needs to be implemented in a phased and calibrated manner, in a way that does not completely disrupt the business environment or enhance audit risk. I am not in favour of a big- bang approach. What is the implication of this move on the audit business? The current [ draft] rules require virtually every company — exceptions being one- person companies and small companies — to rotate their auditors over a specific term, not exceeding two terms. This could impact thousands of companies, probably many more than in other countries where rotation has been introduced. Initially, it is likely to be highly disruptive. Mid- sized and small audit firms would need to replenish their portfolio of clients, which may be difficult in small- town geographies and for specialised industry auditors. Business models of some of the small- and medium- sized audit firms would get challenged. For larger firms, the reach is wider, and the ability to service clients from more than one office is a real possibility. Companies, too, are likely to undertake a careful evaluation of the audit firm it would choose. This may actually reduce the population of available and capacity- capable auditors significantly. It is, therefore, highly unlikely the aggregate churned portfolio would have a number of new entrants at the top. What does this mean for companies? Though there is a three- year time frame for implementation from the time the Act is notified, I expect a scramble among on their financial statements and operating factors. Enhanced reporting, both by the board and the auditor, on the internal financial controls will mean added work for the auditor. The Act has also made consolidation mandatory, against just listed enterprises currently. Both auditors and managements of companies would have to invest more time for effective audit output. From a company perspective, I expect auditing costs to increase. Do you expect a change in the 'coziness' equation between companies and their auditors? The fact that a company has been audited by the same firm of auditors for many years has often been interpreted it may be a good starting with care and they are considered in good standing and of high eminence, with the ability to drive the desired change in the economy and enhance investor confidence. How do you assess the impact of changes in the depreciation rates on balance sheets of companies? The current Schedule XIV to the Companies Act, 1956, was largely a rates- provided regime. We have moved to a useful- lives regime in which specified entities have the freedom to determine fairly the useful lives. This, in itself, is a good concept in amature economy, as it establishes the principle on which depreciation is charged to the statement of profit and loss. However, rather than leave useful lives to be determined by all companies these lives have been prescribed by the schedule. Having said this, there is a significant decrease in the useful life and, therefore, an increase in the deemed rates of depreciation for, say, continuous process plants. Here, the total charge for depreciation is more than double the amount provided earlier. Also, it is expected in the short term, there would be significant volatility in the charge for depreciation, as the unamortised cost is to be depreciated over the revised balance life, as determined under the schedule. Depreciation is required to be computed and provided by companies before declaration of dividend and is, therefore, likely to impact the dividend policies of some companies. For full interview visit www. business- standard. com SHYAMAK R TATA is a partner with Deloitte Haskins & Sells, Mumbai, and a chartered accountant with about 20 years of experience in the sector. He has been tracking the emergence of the Indian economy since 1991, primarily from the consumer business side. In an interaction with Sudipto Dey, he talks about the implications of the auditor rotation policy on the audit business and on companies. Edited excerpts: |
| BENCH PRESSN [1] M J ANTONY | |
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depose and verify on oath before the court in order to prove the contents of the complaint if he had witnessed the transaction as an agent of the payee/ holder in due course or possesses due knowledge regarding the transactions. The court was deciding two appeals against the judgments of the Bombay and Andhra Pradesh high courts. The Mumbai case, A C Narayanan vs State of Maharashtra, started when a firm launched a scheme of investment and collected amounts from various persons in the form of loans. It, then, issued post- dated cheques in the managing director's personal capacity. The cheques were dishonoured leading to criminal complaint under the Negotiable Instruments Act. The complaint was filed by a person on behalf of several others. The MD moved courts for quashing the complaint, but without success. The Andhra case was similar. The main issue was whether a power of attorney holder could file a complaint. The Supreme Court said yes, and referred all such cases back to the courts where they came from to decide on them, according to the facts in each case. The second issue settled in the judgment, Escorts Ltd vs Rama Mukherjee, was whether the court within whose jurisdiction the bounced cheque was presented had jurisdiction to entertain the complaint. The court stated that a complaint could be filed in any of the jurisdictions where transactions took place, including the place of issue and the place of dishonour. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Modvat condition relaxed The Supreme Court has rejected the stand of the revenue authorities that a firm, which claims Modvat credit must verify from the authority concerned that the manufacturer of the inputs had paid excise duty or not. Dismissing the appeal of the Commissioner of Central Excise, the court upheld the defence of Kay Kay Industries of Punjab and several other assessee companies from all over the country. The stand of the revenue authorities was that during the Modvat verification, it was found that the suppliers of inputs had not discharged full duty liability for the period covered by the invoices. Since the duty had not been paid by the manufacturer of inputs, the assessees cannot claim Modvat credit. The authorities maintained that it was obligatory on the part of the assessees to take all reasonable steps to ensure that the manufacturer of inputs paid excise duty on the inputs used in the manufacture of their final product as required under Rule 57A( 6) of the Central Excise Rules. That view did not find favour with the high courts and excise tribunals. On the revenue authorities' appeal, the Supreme Court stated that Rule 57A ( 6) and the relevant notification only required the manufacturer of final products to take " reasonable care" that the inputs acquired by him are goods on which the duty has been paid. " The proviso requires 'reasonable care' and not verification from the department whether the duty stands paid by the manufacturer- seller," the judgement explained and added: " To require the firm to find out from the departmental authorities about the payment of excise duty on the inputs used in the final product …would be travelling beyond the notification, and in a way, transgressing the same. This would be practically impossible and would lead to transactions getting delayed." >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Status of staff after hiving off employees were also transferred to the new employer. According to the agreement between the two companies, Lafarge would take over the company personnel in terms of the Industrial Disputes Act without interruption in service, with terms not less favourable than before. It was also provided that the buying company would be liable to pay to the employees in the event of their retrenchment, compensation on the basis that services have been continued and have not been interrupted by the transfer of business. Fresh letters of appointment were issued by Lafarge following this agreement. The employees complained later that they were not told about the terms and they wanted to go back to the original employer. They complained to the labour commissioner. Tata maintained that they were no longer its employees. Since conciliation talks failed, the government referred the dispute for adjudication. Tata moved the high court which ruled that it was an industrial dispute and it should be adjudicated as such. On appeal, the Supreme Court stated that the government's terms of reference was wrongly worded, as it assumed that the employees were of Tata Steel, when the latter company was disputing it. Since the high court had acted on wrong assumptions, the court set aside its judgment. But the government was asked to make a fresh reference with correct terms. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Interest sought from wrong party The Supreme Court has set aside the Karnataka high court order directing the state Khadi & Village Industries Board to pay interest on the loan taken by a borrower from Punjab National Bank on the recommendation of the board. An organisation, Shevasakhti Gramodyoga Sangh, took loan from the bank with an agreement that if the repayment was made without default, the board will pay the interest on the loan. This was in tune with a state government scheme of subsidy. The borrower, Sangh, in fact defaulted and the bank sued both the Sangh and the board. The courts asked the board to pay interest according to the agreement. It moved the Supreme Court. It held that since the borrower had defaulted in repayment, the board was not liable to pay interest. The role of the board was not as a guarantor. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> UP power corp loses appeal Thermal Power Station Stage- I. Public sector NTPC had taken over the project from the state electricity board in 1992, as it had been grossly delayed since 1986. Therefore, an additional expenditure was incurred, and a revised tariff structure was sought and approved. The tribunal held that as the project was left incomplete, NTPC required additional capital. Therefore, the additional capital was well within the approved cost of the project. Both the Central Electricity Regulatory Commission and the Appellate Tribunal rejected the contention of the corporation that the additional capital expenditure incurred by it could not be taken into consideration for tariff fixation without the same having been approved by the Central Electricity Authority. The court rejected this contention. | |
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