| Why are company secretaries upset ? |
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Barely days after the new company law regime has come into effect on April 1, there has been large scale protests by company secretaries ( CS) outside Shastri Bhavan ( that houses the Ministry of Corporate Affairs) and the Institute of Company Secretaries of India ( ICSI), the statutory body for training and certifying company secretaries. Subsequently, over the last 10 days senior officials from ICSI and the MCA have been huddled in meetings to sort out the misgivings. The Companies Act, 2013, limits the role of company secretaries ( CS) to 7,000- odd companies, putting at threat the livelihood of thousands of CS professionals in the country. The new rules mandate the appointment of a company secretary only for listed companies and public companies with a paid- up capital of ₹ 10 crore or more. There is no specific requirement for a private company under the new legal framework to appoint a company secretary. According to ICSI estimates, of the nine lakh- odd active companies in India, around 93 per cent are private. According to R Sridharan, president, ICSI, the thrust of the new company law regime is on corporate governance and compliance. " Leaving out a vast majority of private companies from the ambit of secretarial audit goes against the spirit of the Act," says Sridharan. Moreover, company secretaries should be seen as an extended arm of the regulator, he adds. There are around four lakh registered company secretaries in the country and around 2,000 fresh professionals get registered every year. What has taken the CS community by surprise is the divergence in the draft Act – issued towards the end of 2013- and the final notified rules that came out last week of March 2014. The draft rule had proposed that every listed company and " every other company" having a paid- up share capital of ₹ 5 crore or more should have whole- time key managerial personnel (KMP). Company secretaries are part of KMP, along with managing director or CEO, a whole- time director and the chief financial officer. The MCA has raised concerns over overlap in the scopes of secretarial audit and financial audit to limit the role of company secretaries. However ICSI's stand has been that secretarial audit relates to audit of compliances of applicable laws, while any financial audit would involve audit of financial transactions. Typically, financial audits fall under the ambit of chartered accountants. The new law has done away with the need for pre- certification of some e- forms by a practicing professional. The ICSI's contention has been that pre- certification would help improve compliance and governance. Corporate lawyers note that the Ministry would have to amend the rules if they were to make it mandatory on certain class of private companies to have company secretaries. The law ministry would have to take a call on any such amendment in the rules, a Ministry official said. RULES OF CONTENTION KEYMANAGERIAL PERSONNEL KMPs need to be appointed in every listed company and every public company having paid up share capital of ₹ 10 cr or more SECRETARIAL AUDIT Besides listed companies, the rules prescribe such audit for (a) public company having a paid- up share capital of ₹ 50 cr or more; or (b) having a turnover of ₹ 250 cr or more ANNUAL RETURN Annual return of companies with paid- up share capital of ₹ 10 cr or more or turnover of ₹ 50 cr or more to be certified by company secretary Extracts of annual return to be attached with the board report need not be certified by a company secretary PRE- CERTIFICATION OF E- FORMS Certain forms which required precertification according to Companies Act, 1956, do not require pre- certification by a practising professional; Pre- certification required only in respect of 14 forms COMPANIES ACT, 2013 |
| Minority shareholders can block related- party deals |
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Mumbai, 13 April The new Companies Act rules have given a lot of powers to minority shareholders, but the one creating ripples in the corporate sector is that promoters, who are majority shareholders, cannot vote in special resolutions in cases of related- party transactions. The new rules under Section 188 say any related- party transaction that is not done in the ordinary course of business and is not at an arm's length will need approval of minority shareholders by way of a special resolution. But, shareholders who are related or interested parties in the transaction will not be able to vote in resolutions relating to payment of brand fees or management fees to majority shareholders. The section further says all related- party approvals will now be scrutinised by audit committees, comprising a majority of independent directors. Related- party transactions include sale or purchase of goods, services and property, appointment in an office of profit in a company or group company, underwriting subscriptions, etc. The definition of 'related party' has also been widened to include holding companies, subsidiaries and several key managerial persons and executives, besides relatives of directors. Also, thresholds have been prescribed to determine transactions that will be treated as related- party ones. The transactions are linked with turnover and net worth and appointments to salary levels. Amit Tandon, managing director of Institutional Investor Advisory Services ( IIAS), a proxy shareholder advisory firm, says the new provisions strengthen the hands of minority shareholders and will improve corporate governance. Earlier, in select cases, the Centre's approval was necessary for special resolutions relating to appointment of directors and key managerial personnel. Yogesh Sharma, partner (Assurance), Grant Thornton India, says: " Under the previous Companies Act, minority shareholders' approval or consent was not necessary for entering into related- party transactions. As a result, a majority of shareholders could go for transactions with themselves or related parties as they deemed appropriate." There will now be the much- needed checks and balances to protect minority shareholders, especially in companies where promoters continue to hold a majority of shares and even subsidiaries of multinational companies where the foreign parent holds a majority of shares. Turn to Page 7 > Corporate law experts welcome change in Companies Act rules, but warn against abuse of power to harass promoters even in genuine cases What are related- party transactions? |Sale, purchase or supply of goods, or materials associate company |Directors, key management personnel ( including relatives) |Firms/ companies where directors/ relatives have interests |Appointments of senior management- level and functional heads What's the threshold to qualify as related- party transaction? |If paid- up share capital of a company equals or exceeds ₹ 1 crore |If related- party transactions exceed 5% of annual turnover, or 20% of net worth — whichever is higher What is an office of profit in related- party deals? |Remuneration exceeding ₹ 10 lakh |
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| Click: Article continued from…Minority shareholders can |
| Minority shareholders can block special resolutions |
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Sai Venkateshwaran, partner & head (Accounting Advisory Services), KPMG India, says the changes in the Act are supportive of small shareholders but these could lead to abuse. " It could also lead to situations where majority shareholders find themselves unable to undertake genuine business transactions for want of minority shareholders' approval, even if the terms are reasonable. This could potentially cause hardship and disrupt business transactions." >FROM PAGE 1 |
| RBI relaxes some import/ forex rules |
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Till now, advance payment without any limit and without abank guarantee or standby letter of credit could be made only to notified mining companies by an importer, other than a public sector company or a department or undertaking of the Union or state governments. Henceforth, RBI will not notify the names of foreign mining companies from which such an importer may import roughs by way of advance payments and without any limit or bank guarantee or standby letter of credit. However, banks remitting the advance payments must adhere to certain conditions. RBI says banks should undertake the transactions on their commercial judgment and after being satisfied about the genuineness of the transaction. The foreign mining company should have the recommendation of the Gems and Jewellery Export Promotion Council. The importer should be a recognised processor of roughs, with agood record. Advance payments should be strictly as in the sale contract and made directly to the account of the company concerned — that is, to the ultimate beneficiary, not through numbered accounts or otherwise. Also, due caution is to be exercised to ensure the remittance is not permitted for import of what are termed 'conflict diamonds' – they must have the Kimberly Certification, a scheme established by the United Nations to prevent diamond sales from financing war and/ or human rights abuses. The Know Your Customer and due- diligence exercise should be done by the banks as the rules prescribe. Banks should follow- up on the filing of the bill of entry and other documents evidencing the import of roughs. In the case of an importer entity in the public sector or a department or undertaking of the central or state governments, banks may permit an advance remittance of at least $100,000, subject to the above conditions and a specific waiver of bank guarantee from the Union ministry of finance. Other easing Giving partial effect to its first bi- monthly monetary policy statement for 2014- 15, RBI has now allowed all resident individuals and companies with actual or anticipated foreign exchange exposure to book forward contracts up to $250,000 on the basis of a simple declaration, without further documentation. The existing facilities for small and medium enterprises having direct and/ or indirect exposure to forex risk, permitting these to book or cancel or roll over forward contracts without having to produce the related documents, to manage their exposures effectively subject to specified conditions, remain unchanged. RBI has also delegated the powers of compounding i. e. settling a dispute by agreeing on an amount less than the claim, to its regional offices in cases of delay in reporting inward remittance for issue of shares, in filing form FC ( GPR) after issue of shares, refund of share application money beyond 180 days, mode of receipt of funds, violation of pricing guidelines for issue, issue of ineligible instruments such as non- convertible debentures, partly paid shares, shares with optionality clause, issue of shares without approval of RBI or the Foreign Exchange Promotion Board, respectively, wherever required. email: tncr@ sify. com EXIM MATTERS TN C RAJAGOPALAN |
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| CSR expenditure not a tax- deductible expense |
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However, the revised version in certain critical areas is against the general objective and intention behind introduction of DTC. CSR is one such domain where the lawmakers have disappointed the taxpayers. The newly introduced Companies' Act 2013 provides a broad list of CSR activities, which includes women empowerment, preferment of education and employment, orphanages and old age homes, preservation and protection of wildlife, etc. Every company, which has a net worth of at least ₹ 500 crore, or a turnover of at least ₹ 1,000 crore or net profit of at least ₹ 5 crore is, henceforth, mandatorily required to spend at least two per cent of the average net profits of the company in the immediately three preceding years towards CSR activities. The Finance Ministry, while introducing the revised draft, has made clear that it is not in support of giving tax allowances to businesses for their social welfare expenditure since it is an application of income and tax deduction, which would imply foregoing one third of government tax revenue. This is despite the recommendation proposed by the SCF to allow tax deduction for such CSR expenditure. The current Indian socio- economic scenario demands a significant expenditure on CSR activities by business houses. The absence of tax incentive on the same will only impediment the voluntary spend by businesses, and will also lead to dissatisfaction amongst companies. NEERU AHUJA Partner, Deloitte Haskins & Sells CSR |
No provision for merger of LLPs
The revised DTC contains inter alia M& A provisions, which are similar to the current tax provisions and has provided further clarity on certain aspects introduced by the old version.
One key provision is the taxation of indirect transfers when shares of foreign entities change hands.
DTC- 2013 has clarified that if the Indian assets/ interest represent 20 per cent of the fair market value of all the assets owned by the foreign entity, the foreign entity would be subject to tax in India.
DTC- 2013 continues to provide tax neutrality to mergers and demerges subject to satisfaction of certain conditions. It has further modified the definition of business reorganisations to facilitate nonresidents.
DTC- 2013, however, does not contain provisions relating to the merger of Limited Liability Partnerships ( LLP). This is likely to gain rapid preference once there is more clarity on tax provisions. General Anti Avoidance Rules contain a broad set of provisions that have the effect of invalidating arrangements under certain circumstances.
This law gives a free hand to the tax department to challenge any restructuring transaction, thereby opening the doors to the possibility of a host of litigation.
DTC provides a window of opportunity to an assessee to seek an advance ruling on whether a transaction is impermissible or not.
Other provisions pertain to taxation of controlled foreign companies, which focus on taxing the undistributed profits of a foreign company situated in a low tax jurisdiction, but controlled by residents.
ZULFIQAR SHIVJI Partner and Head, Transaction Advisory & Support, BDO India
M& A
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