[aaykarbhavan] Business standard news updates and legal digest

Testing times forMCA SUDIPTO DEY Teething troubles pertaining to the implementation of Companies Act, 2013, will keep whoever occupies the corner room in the Ministry of Corporate Affairs busy from the very first day. Ever since the outgoing government announced the rollout of the new law on April 1this year, ministry officials have been caught between drafting rules for the Act and issuing clarifications on rules relating to the Act's 98 sections notified so far. In between, they have been patiently listening to industry's woes relating to implementation of the Act, its " draconian" provisions, "drafting errors", " overlaps", and instances in which " rules go beyond the Act". A sizable chunk of India Inc hopes the new minister will address the challenges relating to implementation of the new law. Corporate India's biggest peeve, in terms of the new law, is it has been a rush- rush job. Rules for 98 sections of the Act were notified only in the last week of March. Companies barely had three- four days to understand the full import of the new law, as it came into effect from April 1. "Much of the Act is in the rules. One must understand the rules to understand the Act," says Anand Mehta, partner, Khaitan & Co, a corporate law firm. That's where most companies find themselves stumped — strict compliance provisions, most applicable from this financial year. Also, the stringent provisions on related- party transactions mean it will not be business as usual for most companies. The mandatory corporate social responsibility spend of two per cent, too, hasn't been taken favourably by corporate India. Many industry players say the fact that a new government is taking charge at the Centre will mean a fresh look at the law. Others are taking a more realistic approach. "This is an opportunity for the new government to bring in more transparency in the way the Ministry of Corporate Affairs handles the new law," says Vishesh C Chandiok, national managing partner, Grant Thornton India. Most companies say the transition from the old Act (Companies Act, 1956) to the new one could have been handled better. " It is important to restore the confidence of companies in the implementation of the Act," says Lalit Kumar, partner with law firm J Sagar Associates. The new minister has to first see that the 40 per cent of the Act that is yet to be notified is implemented at the earliest. For quicker issue of clarifications regarding the Act, industry has pitched for a single- window within the ministry. This has to be complemented with a time- bound implementation schedule. Creating capacity within the ministry to monitor compliance provisions of the Act will be another key focus area for the new minister. Getting the National Company Law Tribunal (NCLT), currently caught in a legal quagmire, up and running at the earliest should also be high on the new minister's agenda. Without the NCLT in place, the entire Act cannot be effective, corporate law experts say. The new minister has to address the issue of powers of statutory bodies such as the Institute of Chartered Accountants of India and the Institute of Company Secretaries of India. The NCLT, according to the new Act, will take on some of the roles and responsibilities currently borne by the two statutory bodies. Another question worrying some within the ministry is what if the government decides to merge the ministry with the finance, or the law ministry, in keeping with the mood to have fewer ministries? The jury is divided on the impact of such a move. The new head of the corporate affairs ministry will have to take hard decisions on the new company law, as well as the future of the ministry NEW COMPANY LAW INDUSTRY WISH LIST |Set up a cell/ platform to provide guidance and clarifications on the implementation of the law |Staggered and specific roll- out calendar for the various provisions of the new Act |Exempt private companies from some stringent provisions of the Act that include rotation of auditors, directors, provisions relating to loans and investments, insider trading, etc |Do not make Schedule VII ( which sets out the areas for CSR spend) mandatory. This limits and restricts scope of CSR spends Source: Based on CII representation to MCA   The importance of being independent The committee set up under P J Nayak to review the governance of boards of banks in India submitted its report recently to the Reserve Bank of India ( RBI). The essential prognosis of the committee was that the financial position of public sector banks (PSBs) in India was fragile and in need of urgent attention. They correctly identify the problems under which PSBs operate due to the nature of their ownership, the Parliamentary Act they operate under, the excessive controls that the government exercises, the poor quality of their board membership and the onerous compulsions of complying with the oversight of India's vigilance apparatus —Central Vigilance Commission, Comptroller Auditor General, Central Bureau of India. It is amply demonstrated that PSBs have done the bulk of the balance sheet business in India and more than 75 per cent of all lending sits on PSB books. Due to the downturn in the Indian economy and the number of infrastructure projects that are currently stuck, the impact on the health of PSB balance sheets is all the greater, and so their share of non- performing assets (NPAs) is disproportionately higher. The committee may have been a little too harsh in assessing their frailty at this moment of time when the economy is in adownturn and infrastructure projects are stuck. In fact, over 2,200 of the 5,200 projects of over ₹ 150 crore, which were started since 2007, are stuck for want of clearances, and 64 per cent of restructured assets of the industry are in the core sectors – steel, power, telecom, infrastructure and textiles – on account of policy infirmities. Nevertheless, the need for creating an agenda for change that the committee highlights cannot be understated. The committee has not highlighted the benefits of the first flush of reform PSBs underwent in the early part of the century – when they were allowed to list, go onto CBS, reduce NPAs, develop aprofit mindset and undergo substantial transformation. Thereby, they become much more efficient in their costincome ratio, which came down below 50 per cent, and they managed eight times as much business as a decade ago with less manpower. However, the committee's underlying prognosis is not wrong and the need to reform PSBs must be an important agenda item for the new government. The issues the committee highlights are correct — PSB boards are poor, the government stake at 51 per cent carries great externalities and limits their ability to act. India and PSBs deserve better and the committee's reference to Axis Bank as a great example of a future model PSB is appropriate. I completely agree and have argued before ( most recently " Near national treatment for public sector banks" Business Standard, December 11, 2013) for the need to corporatise PSBs and State Bank of India, and take them out of the current Act of Parliament under which they operate. In fact, IDBI Bank operates under a different Act. Again, I have often argued before for fixed tenures of chairmen and directors, together with more marketlinked compensation and reduction of government ownership below 51 per cent. However, the one issue on which I disagree with the committee is the structure of its solution. It is surprising that the committee did not stay with the analogy of Axis Bank, but went on to create what I believe is an unduly complex and unnecessary solution of a bank investment company ( BIC) and a bank boards bureau ( BBB). Both may lead to the creation of the same problems that the committee seeks to avoid. Why do we want to shift all government holding into a central bank investment committee? Why can't these banks be allowed to operate like other banks? The nomination committee of the board will pick the CEO and compensation will be market- based. When we can allow independent banks with independent boards to run their banks, all we need is that the government stake be brought below 51 per cent. I think it is simpler and more effective, after corporatising these banks, to reduce the government's stake in each of the banks to, say, 25 per cent, than create aBIC. This one step simply addresses the issues that the committee wants to tackle. There are too many hurdles in creating aBIC in the sovereign wealth fund mode to manage the government's stake in these enterprises, when the national consensus remains that the government has the largest stake in PSBs. Also, creating a BBB to select the CEOs of these banks, especially with its composition of former senior bankers, smacks more of the final revenge of the bankers on the IAS, than being efficient for the banks. This power must go to empowered bank boards. Another area that I did not see much need was creating a different class of investors called authorised bank investors with the right to hold a higher limit of 20 per cent. If required, the investment limit for non promoters could be pegged at 10 per cent. Further, in respect of distressed banks to allow private equity ( PE) funds to acquire 40 per cent represents more hope than experience. In the recent North Atlantic financial crisis, I did not see PE funds coming in to invest in the US or UK banks when they ran into trouble. Personally, I would advise caution with PE ownership of banks at any time. But overall, the report is timely and addresses a key critical issue. We need to address the serious stress PSBs in India are currently under and cannot brush the main issue of the government's 51 per cent ownership under the carpet anymore. The Axis Bank model provides the appropriate blueprint for PSBs. The government should move to corporatise PSBs and bring its ownership below 51 per cent as early as possible. The time is now. The writer is chairman, Asia Pacific, BCG. These views are personal The P J Nayak committee report shows we cannot ignore the issue of the government's stake in public sector banks anymore JANMEJAYA SINHA When we can allow independent banks with independent boards to run their banks, all we need is that the government stake be brought below 51 per cent. The Axis Bank model provides the appropriate blueprint for public sector banks BS PHOTO       When to allow someone   to act on your behalf

PRIYA NAIR In the film Baazigar, Shah Rukh Khan played a man out to avenge the death of his father. The father, a rich businessman, had executed apower of attorney ( PoA) in the name of one of his employees, who later used the PoA to take charge of the business, leaving the original owner and his family with nothing. Such examples abound, in real life, too. A PoA is an agreement by which one can authorise another individual to carry out certain tasks on her/ his behalf. It can be used to buy, sell or rent property; carry out financial transactions such as operating bank accounts, receiving payments, making investments, etc. However, if not executed carefully, it can be misused, and the only way out could be a longdrawn court battle. A PoA can be executed in the name of family members, friends, or real estate and stock brokers. Sometimes, promoters of companies do it in the names of employees. The person giving the PoA is called the donor or grantor, while the one to whom it is given is called the attorney. The PoA can be between two parties in the same city, different cities or different countries. Matters relating to powers of attorney are regulated by the Powers of Attorney Act. Mumbai- based lawyer Rizwan Siddique says most people executing aPoA do not understand it. "There have been cases in which a PoA is given to sell property, and the buyer issues the cheque in favour of the attorney, instead of the property owner," he says. "They do not understand that a PoA is not a transfer of title document in itself, but only gives limited power to the holder to deal with the property in the name of the donor. Any misuse of the PoA or collection of any money in the personal name of the attorney shall not only make the attorney liable for criminal prosecution, but also the said transaction shall be deemed illegal and invalid," he says. Or there are cases where high networth individuals give PoA to brokers to carry out equity trading on their behalf. But if the broker trades recklessly then the client could end up losing lot of money. So, clients need to regularly keep track of their investments and check with the brokers if they suspect something. Then there are instances in which the person granting the power revokes it, but the attorney continues to use the power, says Anil Harish, a lawyer at D M Harish and Company Associates. At times, an attorney simply signs a document without attending to the details, which creates problems for the donor. "Sometimes, an employee might use the power by contracting on behalf of the employer. Often, we see notices in newspapers to the effect that an employee has left an organisation and the employer states he/ she will not ratify the acts of the employee," Harish says. Types of PoA There are two types of PoA — general and specific. A general PoA is one that gives an attorney the authority to do multiple things. For instance, if one is going abroad on an assignment, one can give a PoA in the name of his/ her father, authorising him to operate a bank account, collect rent, etc. A specific PoA is for specific purposes and should mention all details of the task to be carried out. For instance, assume you are planning to buy a house and the deal will fall through if the payment isn't made within 20- 25 days. In such a case, if you have to go out of town, you can give a specific PoA to your broker, authorising him/ her to carry out the transaction on your behalf. This PoA will mention all details such as the property name, the price at which the deal will be transacted, the seller's name, the period by when the deal will be completed, the person in whose name the cheques should be issued, etc. Also, one must mention the documents the attorney can sign on your behalf. Some other conditions that the PoA should ideally include are the time period by when the specific transaction ( for which the PoA is being given) should be complete and the region or geographical area within which the PoA is valid. "It is better to give a specific PoA to persons other than family members. This will ensure it is not misused. Give a general PoA only when you trust the person," says Rajmohan Krishnan, co- founder and managing director, Entrust Family Office Investment Advisors. It is important for a person who receives a PoA to keep a copy of every document she/ he signs under the PoA. This way, one can produce it whenever necessary to show he/ she hasn't violated the terms of the power, says Harish. How to register a PoA A PoA has to be executed on stamp paper. In Maharashtra, Article 48 of Schedule I to the Maharashtra Stamp Act provides for the stamp duty on a PoA — in some cases, the duty is ₹ 100; for others, it is ₹ 500. If the PoA relates to the sale of immovable property and is given to someone other than a close relative ( such as broker or afriend), the stamp duty will be about five per cent of the property's worth. A PoA might be notarised or registered. If it relates to immovable property, it must be registered; if it pertains to movable property, notarisation will suffice. In such cases, an advocate will have to identify the person giving the PoA. Also, if a PoA is registered, it must have a witness. Typically, a witness should be a third party, not someone related to either the grantor or the attorney. Cancelling a PoA If a PoA is notarised, you can cancel it by crossing the deed, akin to cancelling acheque. However, if it is registered, you have to revoke the deed and publish advertisements in this regard in one or two newspapers (preferably English and regional- language ones) that are circulated in the city in which the attorney resides. Following this, the deed is automatically revoked. In case an attorney misuses a PoA and causes damage to a grantor, there is no other option for the grantor but to move court. Also, the grantor will have to register the revocation, which will involve a particular fee. Sometimes, power is given to a sub- delegate, that is, the attorney can appoint another attorney. However, in such cases, the donor might lose control and not be aware of who the power has been sub- delegated to. Therefore, donors can include a clause stating the attorney must give a copy of every document signed by him/ her to the donor soon after a document has been signed, says Harish. Typically, a PoA expires when a donor or attorney dies. " If the donor dies, the attorney might not be aware of this and might continue to use the PoA. Or, the attorney could continue to use the PoA, despite knowing the donor has passed away," Harish says. Legal sanctity A PoA has legal sanctity, but it can be contested in court. Nowadays, there are safeguards in a PoA — in addition to the signature, the photograph and thumb impression have to be affixed. "But despite this, a person might use the PoA for wrong purposes or sell property or an asset for a lower consideration than he ought to," says Harish. In such a case, the affected party might move court against either the PoA or its use. Someone who loses by virtue of the use of the power can also contest it. If the PoA is used despite the fact that the donor has revoked it, the donor can contest the validity and use of the power. TO PREVENT MISUSE OF POWER OF ATTORNEY |Avoid a general power of attorney ( PoA) unless it is in the name of close family member or someone you trust |Give a specific PoA with details of what the attorney can do and what documents she/ he can sign on your behalf |Set a validity period for the PoA, after which it will be automatically revoked |Get PoA registered |Though it isn't mandatory, get the PoA vetted by a lawyer Specify the task for the person and insist on getting copies of all documents she/ he signs Any misuse of PoA or collection of any money in the personal name of the attorney shall not only make the attorney liable for criminal prosecution, but also the said transaction shall be deemed illegal and invalid RIZWAN SIDDIQUE Mumbai- based lawyer PHOTO: THINKSTOCK

 

BRIEF CASEN

Damages must consider inflation The fall in the value of money due to inflation is an considered while computing compensation in road accident claims, the Supreme Court has stated in the case, V Mekala vs M Malathi. The motor vehicle accident tribunal and the Madras High Court had not adequately taken this into account. The tribunal awarded ₹ 6.46 lakh to a 16year- old girl who was permanently disabled in an accident. She held first rank in the board examination. On appeal, the high court raised the damages to ₹ 18.22 lakh. The Supreme Court found that the calculation of the losses was not adequate and raised the amount to ₹ 31 lakh. Such a brilliant student could have got a good job with perks and allowances these days, the judgment said, and added that the loss of prospects of marriage was also an important factor to be considered. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> HCs to not re- assess evidence The should not interfere in the findings of facts by the courts and tribunals below to arrive at its own conclusion. In this case, Iswarlal vs Paschim Gujarat Vij Co, the employee was working for Bhavnagar Electricity Co which was taken over by Gujarat Vij. The employee wanted to correct his date of birth in the records, which was not allowed. He superannuated on the wrong date. He moved the labour court which upheld his claim. However, the high court set it aside. On the employee's appeal, the Supreme Court stated that the high court should not have gone into evidence, which was the function of the labour court. The employee was ordered to be reinstated with full wages and benefits till the real date of superannuation. [1]M J ANTONY A weekly selection of key court orders

 

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CS A Rengarajan

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