| Corporate governance 2014- 15 in retrospect |
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The case in point is the separate meeting of independent directors. Anecdotal evidence suggests that many companies have complied with the provisions only in letter and not in spirit. In some companies, including government companies, the separate meeting of the independent directors was over in less than 30 minutes and evaluation of the board, chairperson and individual directors was completed within that period. This shows that the promoters/ managers of companies do not see value in board evaluation. Independent directors either could not induce the promoters/ managers for facilitating holding of the separate meeting or they also hold the same view as that of promoters/ managers. This is bad news for shareholders. During the year business newspapers reported the apathy of some companies in providing e- voting facilities to shareholders. Some large companies, including a leading public sector bank, did not provide e- voting facility in extra- ordinary general meetings (EGM) and court- convened special meetings. Without getting into the debate on whether legally e- voting facility is to be provided in EGMs and special meetings, it can be concluded that promoters/ managers do not want shareholders to participate in decisionmaking even in those areas that are reserved for shareholders by law. This is an example of poor corporate governance. Last minute appointments of women directors by companies is yet another example of compliance of law in letter but not in spirit. Business newspapers reported that most of those who are appointed to the Board are relatives of the promoter of senior executives. Enough time was given to companies to search for a right woman director. The search for a woman director might be more difficult than searching for a male director due to inadequate number of women who fit the job. But was there a serious effort by companies? The answer is no. Otherwise, companies could induct women with potential to be a Board member and mentor them. I am not saying that relatives of promoters or senior executives are not competent. But the purpose of appointing a woman director is to bring diversity to the Board. It is difficult to assume that a director, who is a relative of the promoter or a senior executive, will bring independent perspective and views in the Board. Quite likely they will act subserviently to the promoter. Appointment of a woman as independent director might serve the purpose better. Theoretically, the cost of capital to the companies, which have adopted good corporate governance practices, should be lower than that of others. This is so because investors perceive higher risk in investing in companies where the quality of corporate governance is poor. However, practically this might not happen. Investors cannot assess the quality of corporate governance from outside except when a serious corporate governance issue in a company comes in public. Disclosures fail to reveal the level of seriousness with which the company has complied with the provisions of the Companies Act 2013 and Clause 49. Therefore, investors fail to distinguish between companies that have adopted the ' tick- box' approach from those which have complied with the legal provisions with seriousness. Consequently, if most companies adopt the ' tick- box' approach, investors assume that all the companies adopt the ' tick- box' approach. As aresult, the cost of capital is likely to remain almost the same for all the companies in the same industry, except those few, which could build the reputation that they follow good corporate governance practices. This is one reason why promoters/ managers do not see value in good corporate governance. The other reason is the lack of independence and competence of independent directors. During the year 2014- 15, Boards continued to function in the same way as they were functioning earlier. Independent directors failed to bring any meaningful outside perspective in boardroom deliberations. Neither independent directors nor promoters/ managers were interested in directors' training. As a result, directors continued to lack understanding of business model and business environment. Boards spend time in discussing routine issues and listening to power- point presentations by the management. Long power point presentations kill the time and leave little time for meaningful discussion. Independent directors ask some questions, but hardly probing ones. Strategic issues are not discussed in the Board. Board is informed of the strategy and no serious discussion takes place. Iam hopeful that some promoters/ managers will appreciate the value of an empowered Board. Institutional investors will lead shareholder activism. Things will change in 2015- 16. Affiliations: Professor and Head, School of Corporate Governance and Public Policy, Indian Institute of Corporate Affairs; Advisor ( Advanced Studies), Institute of Cost Accountants of India; Chairman, Riverside Management Academy E- mail: asish. bhattacharyya@ gmail. com ASISH K BHATTACHARYYA Most companies are not yet ready to adopt best practices and comply with provisions only in letter, not spirit Independent directors ask some questions, but hardly probing ones |
| Pad up for Goods & Services Tax |
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Ten years after former finance minister P Chidambaram first proposed —in his 2006 Budget speech — the introduction of the Goods and Services Tax ( GST), one of the most important indirect tax reforms might finally take off in April 2016. However, corporate India still appears ambivalent about its full impact on business, on the pricing of products and services, and on making their businesses and processes GST- ready. "The biggest challenge is to understand the enormity of GST. It will impact every part of the business —from financial reporting and tax accounting to the supply chain. This will lead to potential re- design of procurement vendor contracts, buying models and changes in the IT and ERP systems," said Harishanker Subramaniam, partner and national leader, indirect tax, EY. Tax experts claim there is no standard benchmark to assess the cost involved for companies to be GST- ready. " The cost involved for companies to be GST- ready will differ from industry to industry, and from sector to sector," says Prashant Raizada, partner, indirect tax, BDO India. Companies first need to get a GST impact assessment study done. Experts say, cash flow and working capital issues will emerge from these impact studies. Companies would need to look at ways to streamline processes and procedures, suitably to re- configure their IT and ERP systems and optimise their supply chains. "The efforts and costs involved would be largely dependent on the nature and breadth of business operations," says Raizada. Experts say service companies might need a much higher effort and cost involvement in streamlining their processes and procedures and transition to the compliance framework. Under the GST model adopted by India, both the Centre and states will levy GST on supply of services. So it will be important for service companies to understand place of supply rules. This is made more complex due to multiple jurisdiction and registration issues. Also, increase in GST rate for services could have potential cash flow and working capital issues for many such companies, says Subramaniam. " Many companies have still not fully understood the impact of one per cent origin tax that is non- creditable on their supply chain and could be a huge distortion. GST will have an impact across process, people and technology," he adds. RMuralidharan, senior director, indirect taxes, Deloitte Touche Tohmatsu India, points out that GST is also an opportunity for the companies to pro- actively take action and make their supply chain GST efficient. " The benefits of such an exercise could be significant and far exceed the costs talked about," he adds. Agrees Vivek Anand, chief financial officer, Uninor, the Indian arm of Norway- based telecom major, Telenor: " Preparing for GST is a big change- management event. Cost of compliance and complexity in business will go up. But in the long run, it will be good for the businesses ecosystem and the economy". Anand says as a service company with a mass- market presence across many states, after GST roll- out Uninor will have to register itself in all the six states it offers its services. This would require a change in IT and ERP system, and changes in its book of accounts to factor in tax incidence in each state. " The next 12 months will be a challenge as rules are not yet defined. The government should make the GST structure simpler and easier to comply with," says Anand. Anil Chawla, managing director, Wincor Nixdorf, a German company that provides ATM and point- of- sale hardware, software and services, says that they, too, could not start preparation for GST due to lack of clarity on rules. " GST is a welcome step as it brings more clarity in the taxation regime. However the federal structure of the country could create challenges in its implementation. The dual GST structure complicates business process," he says. Experts point out that going by international experience, GST could create an inflationary pressure in the economy for a period of 12- 15 months after its roll- out. " The pressure would subside as the impact on product pricing start to play out," says Raizada. Competitive pressures would ensure that prices would come down over aperiod of time, say experts. "Any new tax regime will have its own positives and negatives compared to the current tax regime. Normally one would assume that businesses would pass on the negative impacts to customers immediately leading to price increases in the shortrun," says Muralidharan. However, over two to three years, businesses tend to share the benefits accrued from the tax regime with their customers, bringing down the prices. Experts say business would have to give special attention to long- term contracts, while tax clauses have to examined for change of legal provisions. " Business contracts have to recognise GST's impact while drafting the agreements with enabling clauses to pass on the additional incidence of GST," says Raizada. Clearly, it is still early days in corporate India's journey to be GST- ready. The clock has started ticking for corporate India to get its act in place by April 2016 THE ROAD TO GST: SOME KEY MILESTONES ON THE WAY n2006n Then Finance Minister P Chidambaram proposes introduction of GST from April 1, 2010 n2007n Parthasarathi Shome submits a study paper on GST Empowered Committee of State Finance Ministers constitutes the joint working group n2008n EC finalises its views on a broad GST structure with consensus on Dual GST ( Central & State GST), separate legislation, levy and administration n2009n First discussion paper on GST released by the EC The 13th Finance Commission releases its report on GST n2011n The government tables in Parliament The Constitution Amendment Bill to enable roll- out of GST n2013n The Standing Committee on Finance tables its report on GST Bill The EC rejects central government's proposal to include petroleum products under GST n2014n The previous Constitution Amendment Bill lapses The newly- elected government sets April 2016 as new date for GST roll- out GST sub- committee in the EC proposes a revenue- neutral rate of 26.7% Alcohol to be kept outside the purview of GST All entry taxes proposed to be subsumed under GST, whether collected by states or local bodies Petroleum and petroleum products to be subsumed in GST, with nominal or zero- rated tax GST compensation to states pegged at around ₹ 11,000 crore Centre to provide three- year compensation on the revenue loss incurred by states after GST roll- out |
| BRIEF CASE |
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Allahabad High Court allowed the criminal cases to proceed. However, on appeal, the Supreme Court quashed the criminal cases of cheating, breach of trust and other offences under the Indian Penal Code, describing them as abuse of process of law. In this case, Jetking Infotain Ltd had a franchisee agreement with SVS Computers Ltd. Disputes arose between them over payments. SVS then issued a cheque to Jetking which was dishonoured by the bank due to stop- payment instruction. Jetking filed a complaint under the Negotiable Instruments Act. SVS retaliated by filed criminal complaints against the rival firm. Jetking moved the high court against it, but was not successful. But on appeal, the complaints were quashed and the Supreme Court stated that the high court had not followed the five steps, narrated in the judgment, for testing such complaints for their truthfulness. In another cheque bounce case last week, Supreme Court set aside the Madras High Court order quashing the complaint of the payee. The apex court found fault with the high court for going into " highly disputed questions of facts" which should have been left to be decided by the trial court. The dispute in this case, S Krishnamoorthy vs Chellammal, involved a mortgage and alleged misuse of cheques. Supreme Court allowed the prosecution. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Interest on debentures deductible The Supreme Court has ruled that the liability of a company to pay interest upfront to debenture holders is allowable as deduction in income tax in the first year itself though the life of the debenture may spread over several years. The Supreme Court stated so in the judgment, Taparia Tools Ltd vs CIT, Nasik, setting aside the rulings of the Income Tax Appellate Tribunal and the Bombay High Court. The high court had upheld the action of the revenue authorities who had treated the payment as ' deferred revenue expenditure' to be written off over a period of five years, which was the life of the debentures in this case. They allowed only one- fifth of the payment, though the entire payment was made in one year. The company challenged the stand of the authorities in several forums, where it lost all the way. But the Supreme Court accepted its arguments and explained the legal position as follows: " The company did not want to spread- over of the expenditure over five years. In the return filed by it, it had claimed the entire interest paid upfront as deductible expenditure in the same year. This course of action was permissible in law. Therefore it could not be deprived of the option to claim the expenditure as deduction." >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Excise notice to Maruti quashed parts were procured in the form of bumpers, grills, etc., on which electro deposition coating, an anti- rust process, was made to increase their shelf life. This process increased the value of the inputs. Supreme Court stated that there was no manufacture by this value addition. It said that the final product that were removed from the factory for home consumption remained the same despite the coating process. Mere value addition without more would not make the process ' manufacture'. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Defaulters' claim for privacy rejected Can a lender bank publish the name and photograph of a defaulter invoking the power under the Securitisation (Sarfaesi) Act? High courts have taken different views on this question. Several persons challenged the right claimed by State Bank of India in writ petitions in the Gujarat High Court. They argued that their reputation and dignity would be affected and the fundamental right to privacy guaranteed in Article 21 of the Constitution violated. They also contended that the guidelines provided in the Bank Codes and the Standards Boards of India provided for the privacy and confidentiality of borrowers. However, the high court last week dismissed all the petitions, titled Monal Chokshi vs SBI. The bank had argued that the law provided for a procedure for recovery of the dues, like publication of the non- performing asset and the names of defaulters. Since the lender has that power, the modalities which are not prohibited could be resorted to, it was contended. The court accepted the bank's arguments and stated that the Act as well as the agreement signed by the borrower allowed the lender to choose the mode of publication. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> 'Bulldozing' anti- dumping probe The Delhi High Court has quashed the order of the anti- dumping designated authority on the petitions of Mahindra &Mahindra and Volkswagen India Ltd as they were not given a hearing before passing an adverse order last year. Synergies Castings Ltd, a producer of cast aluminium alloy wheels in India, had approached the designated authority alleging material injury on account of dumping of similar goods from China, Korea and Thailand. An inquiry was conducted and the order was passed, which was challenged by the vehicle manufacturers. Allowing the writ petitions, the court stated that the companies were "interested parties" who were entitled to a hearing. It further pointed out that there were several " unanswered questions" in the case and remarked that " anti- dumping investigations are time- bound but that does not mean that such important matters can be bulldozed in the manner it has been done in the present case." >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> The Supreme Court has steeply enhanced the compensation to be paid by the insurance company in a road accident death, on an appeal by the widow and children. In the case, Asha Verman vs Maharaj Singh, the motor accident tribunal awarded ₹ 3.75 lakh as compensation with 6.5 per cent interest from 2006 when the mishap occurred. This was enhanced by the Madhya Pradesh high court to ₹ 5.35 lakh. The widow appealed in the Supreme Court. It found that the courts below had erred in computing the compensation, ignoring established principles, and raised the amount to ₹ 16.58 lakh with nine per cent interest from the date of the accident. |
| Centre to overhaul forest laws for ' ease of business' |
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New Delhi, 5 April The Centre is all set to overhaul environmental and forest regulations, policies, and laws once the twoday conference of state forest ministers and officials is over. The conference will start on Monday with Prime Minister Narendra Modi addressing it. After effecting some 100- odd changes to regulations through executive orders, the Union environment ministry has set in motion more structural and policylevel changes, many of them in line with the PM's wish to have aregulatory regime providing 'ease of business'. The changes include a revision of the Indian Forest Act, 1927; Environment ( Protection) Act, 1986; Wildlife Protection Act, 1972; National Forest Policy, 1988; and, the National Wildlife Policy, 2002. The ministry is also working on how to do away with the additional clearances required from the states under the Water and Air Acts by merging these into a single- window clearance system. The time taken for this single comprehensive clearance is also set to be considerably shortened. The two- stage process at the moment requires companies to get project specific terms of references for environmental assessment. This assessment along with public hearing, then, becomes the bedrock for an appraisal leading to the final clearance. The government has worked out standardised terms of references for each industrial and development sector and most projects would now have to only use these as the template. This is expected to bring down the time taken for clearances. The need for public hearing and renewal of clearances has already been diluted for many industrial activities and mining through executive orders. In what is likely to be a boon for the real- estate sector in the national capital region, the government has also formulated a new legal definition of forests, which would exclude forests that are not classified as such in government records. With unresolved conflict between revenue and forest departments and different state classification systems, many good forest patches remain classified as non- forestlands in government records. All these areas – such as some community forest patches in Aravalli hills – will not require a forest clearance to be chopped once the new definition is inserted into the laws. The change of definition will also free the plantation sector from stringent forest regulations, which many consider have stifled forestry practices and choked supply of wood products in the country. The Union environment ministry is also finalising a proposal for involving the private sector in afforestation on government forestlands – a controversial move that has been shelved several times in the past. Civil society groups and environmentalists have opposed it fearing the impacts on millions who are dependent on the forestlands for their fuel, fodder and livelihood needs. The ministry said the move would " improve productivity of forests lands and realise the optimum potential of the forests for the benefit of the country" and also " enhance the supply of raw materials for wood based industry for meeting domestic requirement of wood products and to save precious foreign exchange". The government plans to make amendments to the green laws in two stages, with mild changes in the current session of Parliament and radical changes in the next. While consultants have been shortlisted for the complete overhaul of laws, ministry officials are working on the changes that could be tabled in this Parliamentary session. A senior official said: " It's a tight deadline, but we are hoping to get some amendments vetted in time to table them in the current session." Most of the changes being brought are in tune with the TS R Subramanian committee report. The report continues to face all- around criticism from environmentalists, but the government has accepted it in principle. A revision of the coastal zone regulations is also on the anvil with the government having already made some exceptions for projects to come up along the shorelines. "We are discussing these with the state ministers and officials over two days and do not expect any objections to these reforms. The proposal to do away with the state level additional clearances might require some effort to convince the states," the official added. He said the two days would also be used to clarify the Centre's positions on the plethora of executive orders that have been passed in the previous months for ' ease of business'. Business Standard had earlier reported more than 60 of these were done on the demands of the Prime Minister's Office ( PMO) though officials defended the saying the PMO had merely recommended areview and the changes were done after taking aconsidered view. While the environment ministry has expressed the need to change focus more on monitoring than holding back clearances of projects, this is unlikely to happen at least in the current year with the Budget cuts preventing any enhancement of manpower in the regional monitoring offices. CHANGES ON ANVIL Green policies and laws to change for 'ease of doing business' |Change definition of forests to remove large patches from the purview of forest laws |Create land banks that industry can easily access for compensatory afforestation |Ready digital maps of forestlands in all districts |Severely diluted inviolate forest areas or no mining zone to be notified by states |Tribal consent for using forestlands to be done away with |Discounted rates of net present value to be charged from industry for using forests |Standardised terms of reference for environment impact assessment studies by each industrial sector |Do away with state's environmental clearances |Revision of the Indian Forest Act, 1927, with greater powers to the Centre |Private investments using government forestlands |A tree- land trading scheme to help industry meet its compensatory afforestation targets |Amendments to the Environment Protection Act and Forest Conservation Act, 1980, in two phases |Amendments to the coastal zone regulations |Review National Forest Policy |Third party verification and monitoring of industries to be put in place |National Green Tribunal's powers to be curtailed |Self- certification of pollution levels by industries to set in Changes already brought in through executive orders |Chopping of trees for linear projects, even before final forest clearances, cannot be challenged in court till final clearance |Integrated forest, wildlife and environment clearance online |No public hearings for projects inside industrial estates or parks with existing general clearances |Dilution of Coastal Regulation Zone for hotels, resorts |Made site- inspections prior to clearances an exception |All highway projects in border states without public hearing |Expansion of coal mining by a larger percentage without public hearings |No need to have prior possession of land to acquire green clearance |Eased clearance for projects near inter- state boundaries and protected areas |Fast- tracked clearances for linear projects such as pipelines, highways and canals |Most coal blocks taken out of inviolate areas |Irrigation projects with Cultural Command Areas of less than 2000 ha and biomass- based thermal power projects up to 15 Mw put on Automatic Approval Route |No extra CSR expenditure by industries for green clearances |No additional conditions over thermal and hydro- power projects by experts besides those by ministry |No additional studies to be asked of project developers |Preliminary surveys by industries in wildlife areas do not require central clearances |Moratoriums lifted in extremely polluted industrial areas |Index measuring industrial belts put in suspension About 100 changes have already been effected through executive orders; new amendments involve structural and policy- level alterations The green ministry is working on how to do away with the additional clearances required from the states under the Water and Air Acts by merging these into a single- window clearance system |
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