[aaykarbhavan] Business standard updates and legal digest

Some muscle for small shareholders

PRIYA NAIR In 2011, Mahindra Satyam agreed to pay $ 125 million (₹ 580 crore) in an out- of- court settlement to end a bunch of class action suits — a combined petition by a large group of investors — filed in the US. The suits were filed after Satyam Computer investors lost substantial money. This followed former chairman Ramalinga Raju admitting to " cooking" the company's books. Eventually, the company was acquired by Tech Mahindra. Similarly, the group also made a settlement with Aberdeen for losses incurred by its investors. In India, Satyam Computer's home country, mutual fund and retail investors lost crores but were paid nothing. The new Companies Act plans to rectify this. But retail investos can only have a voice, if they come together. This shouldn't be difficult; most of us are members of groups on social networking sites. These could be groups involving extended families, colleagues, classmates, or people who share our interests. Thanks to the Companies Act, 2013, individual or minority shareholders will find it easier to effect a change in decisions taken by a company's management, but only if they can organise themselves into groups. A few important provisions came into force from April. Shriram Subramanian, founder of InGovern Research Services, says by themselves, these measures might not prompt retail investors to play more active roles. However, there is at least a provision now for aggrieved shareholders; earlier, this wasn't the case. Sai Venkateshwaran, partner and head ( accounting advisory services), KPMG India, says shareholders are increasingly becoming aware. As there is an enabling provision, shareholder might organise themselves into forums. " We are already seeing investor activism. Investors might use social media to come together and form groups," he says. Class action suit One of the provisions is the concept of class action suits, which can be initiated by shareholders against the company/ directors/ auditors/ advisors/ consultants or anybody involved with the company in any advisory capacity. A class action is a lawsuit filed by several individuals who come together as a group. It has been widely used in the US. Under the new Companies their interests," says Venkateshwaran. The reasons behind shareholders taking the class action suit route might be to prevent the passing of a resolution if the company hasn't informed all shareholders or if it has suppressed facts. Shareholders can also seek financial compensation in case a decision taken by the company has led to wealth erosion and benefited the promoter or promoter- related entities or resulted in a loss to minority shareholders This will ensure directors and the company management will be more careful. In countries such as the US, where class investor takes the lead. " A class action suit means you, as a shareholder, are filing the case on behalf of other investors. It is similar to public interest litigation," says Subramanian. There are plenty of cases in the courts, of companies fighting to buy out minority shareholders. Among these is Cadbury India Ltd, which delisted in 2003. The delisting price was ₹ 500 per share. Over the years, Cadbury has raised its buy- back price to ₹ 1,900. Court- appointed valuer Ernst & Young came up with a value of ₹ 2,014 per share, rejected by shareholders who wanted ₹ 2,500 then. Today, minority shareholders are asking for ₹ 3,000 per share. The case for capital reduction has dragged on in the Mumbai HC, as the company and minority shareholders have been unable to agree on the buy- back price. For instance, a case filed by minority shareholders, against Cadbury India's delisting is pending in Mumbai High Court. The company was delisted in 2003 and the minority shareholders went to court as they wanted a higher valuation for the shares. The shareholders, who jointly had less than two per cent stake in the company, includes any transaction not at arm's length or not in the ordinary course of business. These could include transactions, such as the sale or purchase of property or material, or the appointment of agents or vendors. The recent case of car maker Maruti Suzuki proposing to use its surplus cash to set up and manage a manufacturing plant for parent Suzuki, as well as buy cars from Suzuki, falls in the scope of related- party transactions. The proposal is on hold due to opposition from shareholders. In the case of Maruti, institutional shareholders such as mutual funds had opposed the move. With implementation of the Companies Act, minority shareholders, too, can exercise their rights when the resolution comes up for vote. However, if they don't exercise this right, or if the transaction goes through with the requisite majority, the company's action doesn't violate the law. Nonetheless, the shareholders can pursue a class action suit, which will be judged on its merits. E- voting Now, e- voting is mandatory for listed firms and those with at least 1,000 shareholders. This may enhance the participation of minority shareholders, especially institutional investors. Companies will have to offer a platform so that shareholders can log on, see the resolution proposed and vote. "While this is an enabling factor for minority shareholders to exercise their power, the question is will they will start doing so? It requires a change of mindset. People should be aware of their rights," Venkateshwaran says. Appointment of a small shareholder as a director There is a provision that 1,000 small shareholders can come together and propose a director represents their interests. A small shareholder is someone who holds shares worth less than ₹ 20,000. While this is not mandatory, companies might choose to appoint a shareholder director. The Companies Act also says if shareholders nominate adirector and if the company refuses, it will have to explain the reasons behind the refusal. This will make it difficult for companies to refuse such amove. " Also, there are a lot of disclosures and transparency in the Companies Act, 2013. Therefore, even if companies fall foul of norms, the disclosures will reflect this. This will, in turn, be reflected on the corporate governance of companies and their valuation could be affected," Venkateshwaran says. HOW MINORITY action suit to oppose any decision taken by the company if it is detrimental to their interests related- party transactions minority shareholders against resolutions as directors Provisions under the new Companies Act will give teeth to minority shareholders but only if they come together

 

TEETHING TROUBLES IN NEW REGIME  DID YOU KNOW? Corporate India shares its experience as it gears up for a new company law regime Auditor rotation inconsistent with global trends Jamil Khatri Global head, Accounting Advisory Services Practice KPMG Auditor rotation is one of the more controversial requirements of the Companies Act 2013 ( Act). Even though the European Parliament recently approved rotation rules for member countries, support for rotation outside the European Union has been limited. For example, regulators in the United States considered rotation after the Enron debacle and concluded that there was insufficient evidence that rotation would increase audit quality. Despite resistance by several stakeholders, the Act provides for mandatory rotation, which makes India one of the first few countries to implement this requirement. In addition to listed companies, several unlisted companies are also covered by the rotation requirement based on paid- up capital or public borrowings. Requiring rotation for such a large group of unlisted companies is unique and inconsistent with the global trends. The Act restricts the appointment of audit firms to 10 years with a cooling- off period of five years thereafter. The Act provides for a three- year transition period to implement these requirements. Thus, companies that have completed seven years or more with their current audit firm can continue with their current auditors for a maximum period of only three years. Large companies and business groups need to start planning for the eventual transition. Factors such as accelerating the change to obtain access to the best audit teams, choosing an audit firm that understands the company through previous work, but is still independent to perform the audit, and implications on audit of global operations, will impact the timing of the initial rotation and the choice of the new auditor. The change in the company law regime was long overdue and is a welcome change in keeping with the times. Having said that, the new Act should have been implemented in one go, instead of the piecemeal way it has come about, as the Act has been in the making over the last three- four years. The haste in notifying the same along with rules, in bits and pieces, during the course of the last week of the previous financial year ( FY 2013- 14) should have best been avoided. This has added to the confusion, forcing corporates as also practising professionals to seek frequent clarifications and directions from the Ministry of Corporate Affairs. The Act redefines the role of independent directors, raising the bar on corporate governance. Just as the Act gives a transition period for rotation of auditors, there should have been a transition period for independent directors, given the enhancement in their roles. Another issue that would need careful examination is related party transactions. It is a big challenge especially for large corporate houses to map all transactions across the organisation and its subsidiaries to arrive at treatment for related party transactions. The fact that all of this comes into immediate effect adds to the challenge. While greater corporate involvement in social spending is welcome, the restrictions in the scope of spending could have been avoided. The challenge will be to map related party transactions Company Secretary, Lupin The Companies Act 2013 is a landmark legislation and will have far reaching consequences on all companies operating in India. It, for sure, raises the bar on governance, deals with investor protection, fraud mitigation, auditor accountability, director responsibility, enhanced disclosure norms, stricter enforcement and institutional restructure. The legislation addresses the demands of modern times. The new law is futuristic and provides flexibility to corporate environment. More importantly, the new law encourages corporate democracy, thrust on self- regulation, and reduces the number of government approvals. The Companies Act, 2013, not only attempts to ensure compliance, but also wants the board and company secretary to certify. This is a stringent and onerous responsibility and the management needs to demonstrate and satisfy directors that there is enough mechanism to ensure a 100 per cent compliance. It will be a huge drain on management time, and is expected to change the face of relationship between the audit committee and the board, the board and promoters, shareholders and the company, and finally, the auditors and the company. The Companies Act, 2013, will help organisation like ours to further our corporate social responsibility footprint in the country and scale up our involvement and commitment for the causes we believe in. Most importantly, it will provide an excellent opportunity to converge multiple technologies, applications and resources of various organisations, including the government, the community, and the private sector to deliver a comprehensive solution to improve the living standards of the societies around us. Madhusudan Rao Chief Financial Officer and India Controller, Ingersoll Rand The Companies Act 2013 is in keeping with the changing market dynamics, with a focus on investor protection and interest of minority shareholders. While the stress on corporate governance practices is welcome, it will also be one of the biggest challenges when it comes to implementation. Getting quality independent directors is a concern. Another challenge, especially for the financial services companies, is the issue of inter- corporate borrowing. Sections 185 and 186 of the Act have put restrictions on inter- corporate borrowing. As an infrastructure sector lender, we do a lot of lending to project- specific Special Purpose Vehicles ( SPVs) that are backed by holding companies. If the holding companies are not able to back these SPVs financially, lending to them will now become a riskier proposition. While the government may have tightened the rules guiding inter- corporate borrowing to avoid misuse of this route to raise funds, this has an impact on the business of infrastructure sector lenders such as IDFC. The rules seem to have overlooked this aspect and may need to be revisited, more so for financial services companies. The distinction between private and public companies has blurred. Rajeev Uberoi Group General Counsel & Group Head - Legal & Compliance, IDFC Lending to Special Purpose Vehicles will become risky Compliance will be ahuge drain on management time |MAKING OF THE LAW: It took 10 years for the government to draft a new company law. The first concept paper on the legislation was put on the MCA website in August, 2004 |LAST- WEEK RUSH: Although the government took long time to frame the law, private and public companies barely got five days to study the provisions of the Act before it came into effect from April 1, 2014 |THE UK COMPANIES ACT: The United Kingdom took two years implement its new Companies Act, 2006 in a phased manner |AUDITING PRIVATE SECTOR: Private companies are now required to undertake internal audit under the new Act |DIRECTORS' BURDEN: Directors need to take onus of internal financial controls systems only in case of listed companies, whereas auditors need to do so in case of all companies |BACK- UP PLAN: Subsidiaries of foreign companies, which used shared service centres outside India for maintenance of books, will now need to take back- up of such data on servers located in India |RESIDENT DIRECTORS: All companies now need to have aresident director ( staying in India for more than 182 days) |NO INDEPENDENT DIRECTORS FOR PRIVATE COMPANIES: Private companies do not need to appoint independent directors, although draft rules on CSR suggested otherwise |SECTION- 8 COMPANIES: Non- profit companies ( earlier referred to as Section- 25 companies under the Companies Act, 1956) will now be called Section- 8 companies |DEPRECIATION BREAK: Schedule II of the Act allows depreciation of intangible assets ( toll roads) using a revenue- based method. This was not in the Act as notified but reinstates an earlier MCA clarification.   Is board evaluation a reality now? Self- evaluation of the board, its committees and directors, which is universally seen as a good practice, has now been included in the Indian corporate governance practice. Section 149 of the Companies Act 2013 has come into force from April 1, 2014, which mandates review of the performance of the chairperson of the company, non- independent directors and the board, by independent directors. According to the provision of the Act, independent directors will meet separately, at least once in a year, for this purpose. The requirement is applicable to listed companies and some other classes of companies to be specified in the rules to be issued by the government. This provides an opportunity for companies to continuously improve and transform a ' good board' to a ' great board'. Boards, which will take the ' tick box' approach and declare that ' we are OK', will miss the opportunity to improve the board effectiveness. The objective of the evaluation is quite simple. It is to measure how the chairman, board, committees and individual directors have contributed to improving the company's health and ensuring perpetual success of the company. However, developing evaluation parameters and the process to achieve this simple objective is complex. The same size does not fit all. Therefore, like regulators in other jurisdictions, the government has not prescribed the review process. Every board has to develop its own process and parameters. Review of the performance of individual non- independent directors also includes review of the performance of the CEO. The new provision in the Companies Act definitely aims at empowering independent directors and strengthening the institution of independent directors. The power equation within the board is bound to change with effective implementation of the new provision. The experience of the UK, the US and other countries, shows that such achange does not weaken the management. It rather strengthens the CEO. In order to avoid tension within the board, it is crucial that both — the CEO and independent directors —understand each other's rights and responsibilities. Independent directors, in their zeal, should not usurp the CEO's right to run the company. The board's role is limited to advising and monitoring the management. There are many factors that will determine the way the provision will be implemented in practice. The crucial one is the level of independence of independent directors. If, independent directors are not independent in its true sense, the review of the CEO, other directors and the board will turn out to be a ritual. The Companies Act stipulates: "appointment process of independent directors shall be independent of the company management." Today's reality is different. In most private sector companies, independent directors are appointed with the approval of the CEO and the promoter. Therefore, in the private sector, the review will not be effective unless the appointment process is changed, not on paper only, but in practice. The Remuneration and Nomination Committee should be allowed to work independently. However, that does not mean that the views of the CEO and the promoter should be ignored. The committee should consider their views before finalising the names. However, the CEO and the promoter should not have an overwhelming influence on the appointment of independent directors. This will happen only in those companies in which the CEO and the promoter take initiatives to change the process. The problem with public sector enterprises ( PSEs) is different. In PSEs, the appointment process of independent directors is independent of the company management. However, in a PSE board, the government nominees enjoy more power than independent directors. This power equation will act as a constraint in effectively implementing the provision of the Companies Act. The solution lies in better appreciation of independent directors' role by government nominees. Although the actual review will take place at the end of the year, to be effective, the process should start immediately. The first step is to document the responsibilities of the board and its priorities for FY15. Responsibilities are generic, but priorities depend on the company's business strategy, positioning, the current financial position and new initiatives. The next step is to decide the review process. It may be informal or formal. The board should deliberate and decide the process and designate the independent director ( for example, chairman of the Remuneration and Nomination Committee) who will lead the process. It should also decide how it would use the feedback. This is crucial and sensitive, but an important issue. Will the board review a reality in practice? Let us not expect that the review, even in respected companies, will be effective from the very first year. That has not happened anywhere in the world. We should expect only a humble beginning. Email: asish. bhattacharyya@ gmail. com Affiliations: Professor and Head, School of Corporate governance and Policy, Indian Institute of Corporate Affairs; Advisor ( Advanced Studies), Institute of Cost Accountants of India; Chairman, Riverside Management Academy Private Limited The review will not be effective unless the appointment process is changed, not only on paper but in practice, too ASISH K BHATTACHARYYA ACCOUNTANCY   BRIEF CASEN [1] M J ANTONY  A weekly selection of key court orders Tenants stall Sarfaesi action In a large batch of appeals moved by tenants of properties mortgaged to banks, the Supreme Court last week stated that the Securitisation Act (Sarfaesi) will prevail over the provisions of the Transfer of Property Act, though there are some inconsistencies between the two. In these 75 cases, led by Harshad Govardhan vs International Assets Reconstruction Ltd, the property owners who had taken loans did not repay the amounts leading to Sarfaesi proceedings. The tenants in those properties resisted their eviction by the secured creditors under the Act, claiming their right to occupy the premises, leading to the appeals on the question of their rights when the property is being taken over by creditors. The court ruled, among things, that a lease of a secured asset made by the borrower after he receives notice from the creditor will not be a valid lease. The judgment also discussed the rights and remedies available to lessees when the property is being taken over by the creditors for the fault of the borrowers. Since the appeals differed on facts in each case, the court classified them into different categories, depending on whether the lease was signed before or after the Sarfaesi proceedings started. The court then remanded the cases to the chief metropolitan magistrate in Mumbai to decide according to the principles laid down in the judgment. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Pay interest first, then principal The Supreme Court ruled last week that when a court passes a money decree against an insurance company, the amounts paid will go first to satisfy the interest part and then towards the principal amount. It set aside the judgment of the Andhra Pradesh High Court which had put the priority in reverse order. In this case, VKala Bharathi vs Oriental Insurance Co, the motor vehicle accident claims tribunal had awarded ₹ 98 lakh as compensation for the death of an engineering graduate in a road accident. Both the legal heirs and the insurance company carried appeals, first to the single judge and then to the division bench. Meanwhile, the insurer was ordered to pay amounts pending the final decision. When the case was finally disposed of, the dispute arose over payment of interest. The executing court took the view that the amount deposited by the insurer from time to time during the litigation should be adjusted first towards the interest component and thereafter towards the amount decreed. On appeal, the high court ordered that the payments made by the insurance company shall go first to satisfy the principal amount and then the interest. The Supreme Court said that the high court was wrong and the executing court was right. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> High courts not to go into facts In a tenancy dispute, the issue whether the landlord genuinely requires his property for his personal use is a question of fact and it should be decided on evidence by the trial court. The high court cannot go into the evidence and take its own decision on questions of facts unless law was involved, the Supreme Court ruled last week in the case, Kalpesh Shah vs Manhar Auto Stores. A lower court had ordered eviction of the tenant, but the Bombay High Court reversed it, analysing the facts of the case. The Supreme Court stated that the high court wrongly interfered with the finding of facts by the court below. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Ore contract stopped for tiger's sake The Supreme Court has dismissed the appeal of Steel Authority of India Ltd (SAIL) and directed it to refund the amounts paid by Tycoon Traders which had bought 1100,000 tonnes of iron ore from Kemmanagundi mines in Karnataka in an e- auction. The iron ore could not be lifted by the buyer because the chief conservator of forests had declared the Bhadra Wildlife Sanctuary as a tiger reserve and the ore was in the protected area. SAIL forefeited the payments on the ground of breach of contract. The high court had asked SAIL to refund the money. The public sector company moved the Supreme Court, which dismissed the appeal stating that the contract has become unenforcable and unlawful as the object of the contract is forbidden by the wild life law. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Tax benefit for charitable trusts The Supreme Court has held that a charitable institution established for the benefit of any particular religious community or caste will not be eligible for income tax exemption under Section 11 and 12 of the Income Tax Act. But if such an institution based on religious tenets serves other communities as well, it can avail of the benefit, the court stated in its judgment, Commissioner of IT vs Dawoodi Bohara Jamat. The Jamat in this case is a public trust registered under the MP Public Trusts Act. It applied for registration before the commissioner to avail of the exemption. But it was denied as it was a religious trust. On appeal, the high court stated that it was eligible for the benefit. The appeal of the revenue authorities was dismissed and the Supreme Court explained that certain activities of a trust may contain the elements of both religion and charity. Jamat was based on religious tenets of Koran, but its activities are not exclusively for a particular community. So it would be eligible for tax benefit. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> TN power corporation appeal dismissed The Supreme Court last week dismissed the appeal of Tamil Nadu Generation & Distribution Corporation Ltd in its dispute with PPN Power Generation Ltd over payment of about ₹ 1,787 crore. The two companies had a power purchase agreement for supply of the entire electricity generated by PPN Power for 30 years. The dispute arose when a rebate scheme of the central government was invoked. According to the scheme, the distribution company was entitled to a rebate at the rate of 2.5 per cent if the payment was released within five days from the date of invoice and one per cent if the payment was released within 30 days. Accordingly, while making payment the distribution company deducted the 2.5 per cent rebate. PPN Power alleged that the distributing company had unilaterally made several disallowances on part payments without informing it. These and several other aspects were taken to the Tamil Nadu Electricity Regulation Commission, where the distribution company lost their case. The Appellate Tribunal for Electricity as well as the Supreme Court dismissed its appeals. The court rejected the TN corporation's plea that the issues raised being complex they ought to have been referred to arbitration. The appellate tribunal correctly held that the corporation could not dictate that the commission ought to have referred the dispute to arbitration. It has " illegally arrogated to itself the right to adjudicate by unilaterally assuming the jurisdiction not available to it," the judgment said.

 

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CS A Rengarajan

9381011200

CS Benevolent Fund is a collective effort towards extending the much needed financial support to the community of Company Secretaries in times of distress  Let us lend support and join for noble cause.

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