Listedcompaniesliablefor₹ 8,100crinFY13
KRISHNA KANT & M SARASWATHY
Mumbai, 6 October
Listed companies would be liable to spend a total of ₹ 8,100 crore on
corporate social responsibility ( CSR) for 2012- 13, with the new
Companies Act making it mandatory for them to earmark two per cent of
their net profit ( the average of the past three years) on such
activities.
For FY14, the first full year of the law's implementation, the spend
could go up to nearly ₹ 8,700 crore, given that India Inc's
profitability has grown at a compounded 7.5 per cent annually in the
past three years.
The total spending by all companies will be higher, as these estimates
exclude unlisted companies.
The Bill makes CSR spend mandatory for every company with a net worth
of ₹ 500 crore or more or turnover of ₹ 1,000 crore or more or a net
profit of ₹ 5 crore or more during any financial year. Companies will
have to constitute aCSR committee of the board of directors,
consisting of three or more, of which at least one director shall be
independent.
With the implementation of this law, Oil and Natural Gas Corporation
will be India's biggest spender on CSR, contributing nearly ₹ 500
crore, based on the
past three years' numbers ( see
chart). It will be followed by energy and petrochem giant Reliance
Industries, which will have to fund CSR projects worth ₹ 400 crore to
meet the guidelines.
India's 10 most profitable companies will together spend ₹ 2,625 crore
on activities including promotion of commerce, art, science, sports,
education, research, social welfare, religion, charity and protection
of the environment. The spending will, preferably, have to be in the
immediate vicinity of their businesses.
For manufacturing companies, which typically have factories on the
outskirts of cities or in rural areas near the source of raw
materials, the spending is expected to improve the quality of life of
villagers.
India Inc is treating this legislation as a positive development,
which will help them earn the goodwill of locals, besides making them
a partner in the government's inclusive growth agenda. " We believe in
inclusive growth and fully support the intent behind this
legislation," says a spokesperson at the Aditya Birla Group. The
conglomerate's CSR spend already exceed the minimum stipulated by the
government. A 250- member team at the group looks after its CSR
initiatives.
The Tata group follows a twotier structure, where both individual
companies as well as the group holding company, Tata Sons, and its key
shareholders, the Tata trusts, run CSR programmes.
"All Tata group companies have their own CSR team, who work with the
local community. This is independent of the programmes run by various
Tata trusts," says a spokesperson at Tata Sons.
The measure will legalise the various means through which companies
used to ensure smooth functioning of their operations in India's
hinterland. " Now, the benefits will flow directly to local residents,
abetter option over bribing a handful of influential people. This will
earn us goodwill and trouble makers will have less incentive to create
nuisance," says a senior official at a leading cement company. Some
executives say the alternative to mandatory CSR spends, like an
additional CSR cess on corporate tax, would have been worse as it
would have raised the tax rate without providing any benefits to the
companies. " Many companies don't see it as a distraction but an
intrinsic part of their business and away to stay engaged with the
community in which they operate," says Abhay Gupte, senior director at
Deloitte Touche Tohmatsu India.
Companies, meanwhile, have initiated efforts to meet the legislation.
"We track about 150 of the BSE 500 companies and are seeing that they
are formalising an internal CSR structure. There is a thrust in hiring
for CSR personnel, especially people at the top, besides formalisation
of CSR policies and budgets," says Jitten Veer Bhasin, chief executive
officer, CSR India, a consulting firm engaged in promoting responsible
business practices.
Kreeanne Rabadi, regional director, west, Child Rights & You, said
many companies were going through the Bill and its implications,
establishing their CSR teams and finalising their CSR strategies. " We
do expect the bill in the very near future to open more doors for
CRY." Neera Nundy, co- founder and partner, Dasra, says: " Since the
CSR Bill has just been passed, there hasn't been an instant spike but
the corporates are exploring their options. They have started
approaching us and enquiring on how they can support NGOs (
nongovernment organisations)."
MANDATORY CSR SPENDING
Company CSR spend* Net profit 3- Year CAGR growth (%)
Cairn India 176 12,056 125.52 Tata Motors 218 9,893 56.70 ICICI Bank
156 9,604 27.16 TCS 223 13,917 25.74 Coal India 287 17,356 21.73 SBI
293 17,916 15.15 Infosys 164 9429 14.59 NTPC 212 12,591 12.52 ONGC 499
24,220 7.67 Reliance Inds 399 20,879 - 5.20 All listed firms 8,127
4,06,352 7.40
*Based on companies' FY13 numbers using the formula and the threshold
provided in the New Companies Bill 2013 Source: Capitaline Compiled by
BS Research Bureau
TOP CSR SPENDERS (₹ crore)
Directors' salaries under I- T scanner in new transfer pricing rules
SHARLEEN DSOUZA &M SARASWATHY
Mumbai, 6 October
With transfer pricing being extended to domestic transactions in the
Finance Act, 2012, as well under section 92BA of the Income Tax Act,
1961, directors' salaries have also come under scanner. Due to the
absence of data points for comparison of their remuneration, companies
might have to take the help of third- party research on director
salaries and it is difficult task. Directors that are shareholders
will also face more problems.
Transfer pricing is a commercial transactions between different parts
of the groups and one party transfering to the other goods, services
or technology for a price. Now, directors' salaries are also covered
under this. Till now, this was restricted to international transfers
but certain domestic transactions have now been covered.
Human resource experts said third- party information providers such as
human resource ( HR) consultants would be in demand. E Balaji, an
independent HR expert, explained that all allowances, salaries and
sitting fees for directors would need to be disclosed to the income
tax ( I- T) department under the new rules.
However, he added, it might not be possible for companies to make
disclosures of fees in an arm's length clause unless there is a
benchmark. "Companies may have to engage independent third- party
service providers to give data on remuneration practices, which can
then be presented to I- T if there is any query." Section 92BA( i) of
the Act specifically states: " Any expenditure in respect of which
payment has been made or is to be made to a person referred to in
clause ( B) of sub- section ( 2) of section 40A shall be considered as
transaction for the purpose of Section 92, 92C, 92D and 92E of the
Act." It had said the related parties covered under that section of
the Act includes the directors of a company as well.
Additional disclosures would mean the documentation process will be
lengthier and more cumbersome. In terms of the disclosures required
from companies, information on perks and all other details of
remuneration will have be provided to the IT department. The human
resource head of a financial services firm said the department has
indicated that separate teams would have to be set up by companies to
look into matters of director salaries and pay package.
The benchmarking exercise is undertaken with respect to remuneration
to the directors, which in general terms, is expected to be carried
out qualitatively on the basis of factors such as qualifications and
work experience. This could, however, lead to some discrepancies.
Rakesh Nangia, managing partner of Nangia and Co Chartered
Accountants, opined it would involve an individual's judgment and
discretion, which is bound to result in transfer pricing adjustments
and consequent litigation.
Determining the arms length price is expected to be an area of
contention. Sanjay Tolia, partner, Price Waterhouse & Co, said in the
tranfer pricing certificate to be filed by the due date of filing
return of income, the disclosure would essentially be the book value
of the director remuneration and its arms length price ( ALP), along
with the method used for determining the ALP.
He explained if a director was also a substantial shareholder (holding
more than 20 per cent), then a range of remuneration payable across
comparable companies could in addition be relied upon to prove ALP of
the director's fees. These could be sourced from publicly available
financial statements of comparable companies (to the extent
disclosed), or from an HR firm or recruitment agency.
Tax experts say this clause has caused documentation work to increase
and directors with a shareholding in the company will face problems.
Samir Gandhi, tax partner with Deloitte, a tax consultancy firm, added
companies will have to set up a remuneration committee as well.
construction development
Govt mulls easing FDI rules for
SURAJEET DAS GUPTA &SOUNAK MITRA
New Delhi, 6 October
In a bid to bring foreign money to the cashstrapped realty sector, the
department of industrial policy and promotion ( DIPP) has moved a
Cabinet note seeking relaxation of riders on foreign direct investment
( FDI) in the construction development sector.
The move comes after FDI in real estate dropped 57 per cent year- on-
year in 2012- 13 .
At present, 100 per cent FDI is permitted through the automatic route
in the sector, which includes townships, housing, commercial premises,
hotels, resorts, hospitals, educational institutions, recreational
facilities, city and regional level built- up infrastructure.
DIPP has also sought to reduce to 20,000 sq mt the minimum carpet area
in classIcities with a population of more than 100,000 against the
requirement of 50,000 sq mt built- up area at present. The built- up
area is sought to be replaced with carpet area, as the latter can be
objectively measured.
Considering the acute shortage of land in urban areas as well as
exorbitant costs, DIPP has also sought to reduce the minimum
requirement for land for a serviced housing project to five hectares
from 10 hectares. The department also further proposed that the
minimum paid- up capital in wholly owned subsidiary of foreign
partners be reduced to $ 5 million, from $ 10 million at present. In
the case of joint ventures, $5 million minimum capital is required
even now.
Companies would, however, need to bring the entire amount within six
months of commencement of the project (the date on which the building
plan is approved by the statutory authority). There is no clarity at
present as to when the commencement of the project be counted from.
The note also says it has decided to change the nomenclature of the
sector so that what is sought to be allowed is the activity of
construction development. This will be an over- reaching term, which
would include townships, infrastructure and housing. Earlier, the
definition was specified. It also noted there would be a lock- in
period of three years for the repatriation of FDI from the sector. The
three years will be counted from the date of completion of minimum
capitalisation and receipt of each subsequent tranche, respectively.
However, the department also said that the investor may be permitted
to exit earlier on receipt of completion occupancy certificate issued
by the competent local authority or with prior approval of the Foreign
Investment Promotion Board (FIPB). The current proposal only says the
investor can exit before three years with FIPB's approval. With
investors proposed to be allowed to exit earlier on receipt of
completion occupancy certificate, there would be an incentive for
players to complete the projects.
The note proposed to prohibit Indian investees from selling
undeveloped plots, where roads, water supply, street lighting,
drainage, sewerage and other conveniences have not been made
available.
The construction development sector received about $ 22 billion of FDI
in 2000- 2013, 11 per cent of the country's total FDI during the
period. However, since 2012, FDI in the sector has slowed down
drastically.
In 2012- 13, it was down to $ 1.3 billion against $ 3.1 billion in the
previous year.
DIPP wants sector activity to include townships, infrastructure and housing
Indian investees might not be allowed to sell plots where facilities
such as roads & drainage are missing
BRIEF CASEN [1] M J ANTONY
A weekly selection of key court orders
SC sidesteps a BIFR question
Does the law for revival package under the Sick Industrial Companies (
Special Provisions) Act cover foreign companies registered in India? A
single judge Bench of the Calcutta High Court said no, but on appeal,
a Division Bench said yes, and accordingly decided the suit between
Yash Deep Trexim Ltd and Namokar Vinimay Ltd. However, on further
appeal, the Supreme Court did not decide this question and left it
open to be decided in an "appropriate case". According to the apex
court, it was not necessary to decide whether the revival scheme
framed by the Board for Industrial and Financial Reconstruction (
BIFR) in respect of the Baranagore Jute Factory Plc should be
implemented. The Supreme Court was freed from answering the issue as
the company, which was before the BIFR for a long time and caught in a
mesh of litigation and arbitration proceedings, had recovered due to
acquisition of its vast land, about 24 acres in Kolkata, by the
National Highway Authority of India and for other public works. The
acquisition compensation has wiped out all losses and liabilities,
leaving a surplus of ₹ 50 crore. It was no longer a BIFR case, the
Supreme Court said. In view of this finding, the court did not go into
the applicability of SICA to foreign companies. The company is yet to
recover from several proceedings related to earlier winding up
petitions, shareholder disputes and management issues. The company has
only one factory in India, and all shareholders and workers are
Indians. The Supreme Court directed that all the issues be decided by
the high court and other competent forums. The apex court further
clarified that for the present, " the management of the company as on
date will continue until orders, if any, varying the current position
are passed by any forum competent in law".
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Wine producers lose appeal
The Supreme Court has dismissed the from sudden financial losses and
to encourage the production of grapes, especially in Sangli and Nashik
districts. The government also exempted the manufacturers from the
levy in certain years. However, one retailer of country liquor moved
the Bombay High Court, contending that though the state government had
exempted the manufacturers from payment of excise duty, the
manufacturers in the garb of collecting the maximum retail price
included the excise duty in the MRP of such country/ foreign liquor.
He, therefore, requested the high court to direct the manufacturers to
remit/ deposit the excise duty so collected by the manufacturers to
the retailers who are by the notification of the government exempted
from the payment of excise duty. The high court allowed the petition
and stated that if for any reason the manufacturers have collected
excise duty, they would be liable to deposit the amount with the state
government since it had exempted the manufacturers from the payment of
excise duty. Otherwise, it would amount to " unjust enrichment".
Dissatisfied with the judgment, the wine manufacturers approached the
Supreme Court, but it upheld the high court judgment. However, those
who had not collected the levy can approach the authorities and show
from their account books that they have not done so and the
authorities may pass appropriate orders in such individual cases.
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> FERA angle to fodder scam
The Supreme Court has dismissed an government of Bihar and his three
children are being prosecuted by CBI for violation of FERA for
allegedly receiving huge sums in dollars and pounds by defrauding the
government. According to CBI, these remittances were not genuine gifts
as claimed by them but were amounts arranged by certain persons
involved in the animal husbandry scam in violation of the provisions
of FERA. The accused father and sons argued that the state government
had no power to transfer the FERA case to the special court. Rejecting
the contention, the Supreme Court stated in the case, Kamlesh Kumar vs
State of Jharkhand, that the high court has administrative power
bestowed by the Constitution to transfer any criminal case pending
before one competent court to another court within its jurisdiction.
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Family dispute over trade mark
The Delhi High Court has granted both parties in the trade mark
dispute between Ajanta Ltd and Ajanta Transistor Clock Manufacturing
Co " one final opportunity" to file an undertaking that they shall
strictly comply with all the clauses of memorandum of understanding (
MoU) until an award is passed by the arbitral tribunal after trial.
The complex dispute is over the division of brand names and products
between two brothers and it has reached the Supreme Court once. The
companies manufacture clocks, calculators and other consumer
electronic goods with brand names, Ajanta and Orpat. The family
arrangement did not settle the differences and the dispute is before
the arbitral tribunal. The high court asked the parties to abide by
the MoU till the award of the tribunal " in order to maintain the
peace and harmony of families by avoiding litigation, including
contempt cases".
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Bank insures loan without borrower's consent
The National Consumer Commission has dismissed the appeal of Indian
Overseas Bank against the award of compensation by the Karnataka
consumer commission to a woman whose loan was insured by the bank
without her consent or request. She had taken loans to set up a cold
storage to make a living. She later found some debits in her account.
When she made enquiries with the bank, she was informed that to cover
the risk of lending, it had insured the loan amounts and debited the
premiums paid to National Insurance Co. She had never signed any
proposal form, nor taken any policy personally nor received the
policies with the terms and conditions. The claim arose when there was
an electrical supply failure causing damage to the freezer damaging ₹
3 lakh worth of ice cream. When she claimed compensation, the insurer
paid only for the damage to the equipment and not for the ice cream.
When she sued the bank, it argued that she should sue the insurer
instead. The insurance company contended that the fire policy did not
cover ice cream and it paid according to the policy, which might have
underinsured her, so it was not responsible. The consumer commission
held the bank guilty of deficiency in service and compensated her for
the loss.
'GST will not subsume entry tax'
What is your contention with the
judge Bench to continue with the assessment for entry tax.
Are the judgments of the single and division Bench in contradiction
with each other?
No, they are not. The next hearing is in November. We are of the view
the Act is still ultra vires, as the earlier judgment of the single
Bench has not been stayed by the division Bench. Hence, the Act is
still invalid. So, how can I pay tax? The commercial tax department is
asking how the court can ask for assessment when the Act is invalid.
What is assessment? It is the quantification of the liability to pay
the tax. Realisation is a different thing. The court did not ask for
realisation.
Assessment is determination of tax. In the case of entry tax disputes,
some courts have held that the tax has to be paid. But our court has
not said so, so the realisation of tax is invalid. So, why are the
dealers not filing a contempt of court case against the state?
The government is using coercive methods. It is issuing notices for
assessment, not realisation. Only if they issue realisation notices
does the question of contempt arise. What are your views on the
justification of entry tax?
Entry tax can be levied by state governments. Article 301 says a state
can impose tax on the entry of goods into another state. However, for
that restriction, you have to have the consent of the President.
Several other states are also fighting cases pertaining to entry tax.
In case President's assent is obtained, there are several other
grounds under which the entry tax can be called unconstitutional.
For example, it is to be seen if the tax violates Article 14, 19, 304
of the Constitution. I've the fundamental right to bring any goods
from any state to my state. Suppose, if a person is transferred from
Chennai to Kolkata, he will be bringing his goods for use of
consumption and use in West Bengal. So, is he liable to pay entry tax?
The Act violates the law of equality as some states have imposed entry
tax and some have not.
Recently, Punjab changed the name of entry tax as advanced tax on
import of goods. Can the tax be retained by changing its name?
Advance tax is equated with self assessment of income tax. It is to be
seen how they adjust the entry tax with self assessment.
Will GST impact entry tax?
GST will not subsume entry tax, as there is no relation between entry
tax and GST.
Two recent judgments on entry tax by the single and CHAKRABORTY, talks
about the legal implications of the judgments and the constitutional
provisions pertaining to entry tax. Edited excerpts:
How NSEL shunned corporate governance
The NSEL case presents an example of bad strategy and poor corporate governance.
It is a bad idea to search for regulatory grey areas with the
expectation that the firm will flourish faster in the absence of
regulatory constraints. When a firm operates in a twilight zone, it
exposes itself to enormous risk of regulatory overdrive when the
incentive to the regulator fails to motivate it to turn a blind eye on
the operation of the firm. Look at the National Spot Exchange ( NSEL)
saga.
The Ministry of Consumer Affairs, for a long time, turned a blind eye
on the violation of conditions, under which trading on NSEL was
exempted from the application of Forward Contract Regulations. Only in
midJuly 2013 did it intervened and direct immediate settlement of
contracts as one that is settled immediately or within 11 days ( T+
10) through When the promoter develops a business model with the
objective of circumventing regulations, the firm starts on a weak
cultural foundation. It signals disregard for laws and regulations.
Illegal and unethical transactions thrive, causing ultimate demise of the firm.
There are examples that certain promoters could build business empires
on poor ethical foundation, but those are exceptions. The risk that
the business model will fall flat sooner than later is genuine. It
will not be surprising if investigations reveal that NSEL executives,
investors and commodity traders had colluded to perpetrate financial
and other types of fraud.
The NSEL corporate governance system failed to address the issue of
conflict of interest. Recently, the media has brought out many high
profile cases where sons- in- law embarrassed parents- in- law.
The son- in- law of the chairperson of NSEL ( Shankar Lal Guru) too
embarrassed his father- in- law. He is the promoter of NK Proteins, a
company that owes ₹ 920 crore ( 16.5 per cent of the total payout) to
investors. Guru, who was the non- executive chairman, resigned only
after the crisis erupted in July 2013. It would have been better had
he resigned when NK Proteins used NSEL to finance its working capital
needs.
There was nothing wrong with the NSEL business model. NSEL introduced
T+ 25 and T+ 36 settlement cycles. Technically, trades on NSEL were
not exactly in the nature of a future contract.
Future contracts are forward contracts routed through an exchange.
They are usually settled in cash rather than through the delivery of
the underlying asset. In case of NSEL contracts were closed through
physical delivery.
The T+ 25 and T+ 36 settlement cycles gave an opportunity to investors
to earn high return by lending money to commodity traders who
preferred hassle- free process for raising funds to support working
capital needs.
The modality is simple. The investor ( say, Y) enters into buy and
sell contracts with a trader ( say, Z) simultaneously or at a short
interval. The buy contract is settled on the third day. Y pays the
price to Z and takes ownership of the commodity through the transfer
of the warehouse receipt. The commodity remains in the warehouse. The
sell contract is settled on the 37th day. Z pays the price to Y and
takes back the ownership of the commodity. Thus, the lending by Y is
secured by collateral of the commodity in the warehouse.
The spread between the buying price and the selling price is the
income for Y. Z arranges the fund to pay Y in the second leg of the
transaction by selling the commodity to an ultimate user or by
arranging finance from another investor. In this arrangement, Z is
likely to default if he is unable to liquidate the stock in the
warehouse or unable to find another investor.
When the Ministry of Consumer Affairs intervened in July 2013,
investors smelled a rat and shied away from NSEL. Traders found it
difficult to arrange funds and defaulted. NSEL facilitated financing
commodity traders and, thus, enhanced their liquidity.
Higher liquidity helps traders to hold stock for a longer period and
choose the right time for liquidating the same, which contributed
towards stabilising commodity prices. The transparent mechanism of
trading on an electronic platform helps in price discovery. Thus, NSEL
was serving an important purpose.
The same purpose could be served even if NSEL did not enjoy exemption
from Forward Contract Regulations and had operated under the
surveillance of the regulatory authority.
A T+ 10 settlement system might have resulted in increased transaction
cost but could serve investors and traders better.
The demise of NSEL will be unfortunate.
If that happens, those who are responsible for the governance of NSEL,
including Mr. Jignesh Shah, will have to take the blame. The NSEL
episode highlights the importance of corporate governance provisions
in the Companies Act 2013.
asish. bhattacharyya@ gmail. com Affiliations: Professor and Head,
School of Corporate Governance and Public Policy, Indian Institute of
Corporate Affairs, Manesar; Advisor ( Advanced Studies), Institute of
Cost Accountants of India; Chairman, Riverside Management Academy
Private Limited
ACCOUNTANCY
ASISH K BHATTACHARYYA The NSEL corporate governance system failed to
address the issue of conflict of interest. The son- inlaw of the
chairperson of NSEL is the promoter of NK Proteins, a company that
owes ₹ 920 crore to investors
--
CS A Rengarajan
9381011200
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times of distress Let us lend support and join for noble cause.
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