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How will shareholder and board meetings be different from July 1?
The institute has certain secretarial standards for its members to follow, in terms of an advance notice for a board meeting, issuing an agenda for a meeting of a board of directors, etc. But we found many private limited companies weren't serious about following these. So, the institute has made it mandatory for all companies —both public and private limited — to send a notice for a board meeting seven days in advance. For any approval from the board, the agenda for the board meeting has to be supported with notes on the items. For any decision related to financial results, dividend distribution, a change in the capital structure and information related to key managerial personnel at a board meeting, the board has to be informed in advance. The other new standard issued by the institute relates to shareholder meetings (companies are not allowed to give gifts to shareholders). From July 1, these two standards will be mandatory, in line with the Companies Act. Adoption of these standards will increase corporate governance and lead to more clarity in the proceedings at a board meeting, especially for private limited companies. It will also reduce litigation. Many litigation cases result from disputes arising due to board meeting notices not being sent, the agenda being introduced without sufficient notice, etc. This will also increase the confidence of investors such as private equity players and foreign investors who want to invest in private limited companies. Many private equity players have already welcomed this move. We are coming out with a guidance note on how to follow the two standards. Are there any penalties for not following these? For any default in compliance at a meeting, a company is liable to pay a penalty of ₹ 25,000 and each officer (in charge of the meeting) is liable to pay ₹ 5,000. These penalties also apply to cases of distributing gifts at shareholder meetings. Will these penalties have a deterrent effect? This penalty has been introduced for the first time and applies to all companies. Most large companies go beyond secretarial standards; the problem arises with smaller companies, which aren't used to following secretarial standards. India has a million registered companies, perhaps the most in the world. Of these, about 5,300 are listed, again one of the highest in the world. About 900,000 are private limited companies. Now, shareholders can file class action suits, according to the new company law. Does this make life difficult for auditors? If statutory and secretarial auditors are found guilty of lapses, shareholders can file class action suits against them, as well as the company. Now, secretarial auditors are on a par with statutory auditors, with similar responsibilities, liabilities and penalties. So, they cannot take things lightly. Non- compliance has a high cost. Are you coming out with similar standards in other areas, too? We are trying to save our members from the hassle of class action suits. As a preventive measure, they should follow the standards laid out by the institute. We are preparing a guidance note on standards for corporate social responsibility, managerial remuneration, independent directors, key managerial personnel, mergers laws applicable to it. This is mandatory from 2014- 15 and applicable to listed companies, public limited companies with paid- up capital of at Recently, the Institute of Company Secretaries of India ( ICSI) issued two new secretarial standards, to be applicable from July 1 this year. While one does away with the practice of distributing gifts at shareholder meetings, the other gives an advance notice to shareholders to explain in detail each item for which a company seeks approval at a board meeting. ATUL HASMUKHRAI MEHTA, the president of ICSI, says these standards are aimed at ensuring transparency and better governance in boardrooms. In an interaction, Mehta talks to Sudipto Dey about the impact of these standards on a company's operations. Edited excerpts: ATUL HASMUKHRAI MEHTA President, ICSI | Due diligence vital for start- ups | |
JAYSHREE P UPADHYAY
The Securities and Exchange Board of India ( Sebi) has revolutionised the way start- ups and new- age companies access capital by clearing listing norms that make it easier for companies to find serious investors. While the norms are forward- looking and address the capital woes of new- age companies, these might lead to additional due- diligence requirements for even savvy investors such as private equity ( PE) and venture capital ( VC) players. The final norms have diluted the requirements for compliance and disclosures for companies looking to come out with initial public offerings ( IPOs) and trade on the Institutional Trading Platform. Experts say this could be a concern for those looking to invest in these companies. Initially, Sebi had proposed listed start- ups spend only up to 25 per cent towards " general corporate purposes", expense which could include virtually everything. However, it has revised it to bring it on a par with global standards. Now, start- ups being listed can spend the entire sum on general corporate purposes; they can simply state that proceeds from the listing and selling of equity will be used for these purposes, without being too specific. According to the new proposal by Sebi, start- ups on the Alternate Capital Raising Platform don't have to disclose all facts before listing. They aren't required to share the fact that they will raise funds, as small investors are anyway kept out and seasoned investors don't need this information. On the issue of court cases, a declaration will purely depend on the latest update and developments. Originally, it was proposed that a start- up seeking to list on this platform disclose all court cases and regulatory orders. Additionally, they were mandated to inform the public at large that they would raise funds ( common during the listing of traditional companies on stock exchanges). As the stock market typically demands a lock- in period after the sale of equity shares, Sebi has mandated alock- in period of six months for start- ups listing on this alternate platform. Amit Rahane, executive director (fraud investigation & dispute services), EY India, says the new norms will increase reliance on forensic diligence. "Investors are extremely keen on India as a region and PE and VC firms are looking to tap the potential this market presents. Dealing with investing in the start- up space does, however, present a set of challenges, unlike larger companies, which have historical figures to draw a comparative against. Forensic diligence, therefore, becomes imperative, as key decision makers need to evaluate the reputation and integrity of the promoter, managing techniques and gauge the morale of employees compared to empirical data. We have been seeing an increased interest from PE/ VC firms, to qualm their fears about their investee companies. These listing norms will serve as an impetus in this regard, as the reliance on forensic diligence will certainly increase because these will be unable to access the company's books and records," he says. Another market player says investors will have to do their own homework before putting money in these IPOs, as such companies don't need enough disclosures. Dinesh Anand, partner and leader (forensic services), PwC India, says, "While start- ups have their own inherent risks, safeguards in the form intent of the norms is to ensure only investors with adequate risk appetite and the ability to identify and understand the relevant risks are allowed to invest. At the same time, investors will have to conduct smarter due diligence to overcome the limitations they might face due to the diluted norms for disclosure. Overall, the fact listing of start- ups is a very positive step." Another concern is companies have been given an option of migrating to the main stock exchanges after three years of listing. " A company could choose to keep trading with minimal disclosures," says a PE player. Sebi norms for listing of these entities require minimal disclosures and compliance Companies have been given an option of migrating to the main stock exchanges after three years of listing | | BRIEF CASE | |
Courts can skip empty formalities: SC
It is a basic principle of law that no action shall be taken without providing a hearing to the affected party. This principle, called the law of natural justice, is " flexible" according to situations, and it need not be followed as an empty formality, Supreme Court stated in its recent judgment, Dharampal Satyapal vs Deputy Commissioner. The doctrine cannot be applied as a " straitjacket formula." It all depends upon the kind of functions performed and to the extent to which a person is likely to be affected. For this reason, certain exceptions have been invoked under certain circumstances. " For example, courts have held that it would be sufficient to allow a person to make arepresentation and oral hearing may not be necessary in all cases, though in some matters, depending upon the nature of the case, not only full- fledged oral hearing but even crossexamination of witnesses is treated as necessary concomitant of the principles of natural justice," the court explained. However, if no prejudice is caused to a party, the principle need not be applied as an empty formality. In this case, the company had availed of tax benefit for industries set up in north- eastern states. Later the benefit was withdrawn for industries dealing in pan masala, tobacco and tobacco substitutes. The authorities wanted to recover from the company what it had benefited. The company challenged it in the high court and Supreme Court on the ground of breach of natural justice. The court dismissed its argument in the special circumstances of the case. Depreciation allowance gets priority Supreme Court has held that in income tax assessments, the unabsorbed depreciation should be allowed before the allowance of the unabsorbed investment in computing income of a firm. The question arose in the case, Seshsayee Paper & Boards vs Dy Commissioner. The firm had unabsorbed investment allowance of previous years as well as unabsorbed depreciation of the earlier years. In its income- tax return, however, it chose to carry forward investment allowance and claimed set- off of the unabsorbed investment allowance thereby showing the returned income as Nil. According to the assessing officer, it was not the investment allowance, but unabsorbed depreciation of the earlier years which had to be set off first by giving priority to the unabsorbed depreciation. Therefore, the officer adjusted the unabsorbed depreciation of the earlier years and accepted Nil income return but on his interpretation of rules. The firm challenged it in the Madras High Court without success. Supreme Court dismissed its appeal. It explained that according to a 1976 CBDT circular the combined effect of the provisions of Sections 32, 32A, 33, 33A and 72 is that in a case where there are allowances in the nature of depreciation, investment, development rebate, development allowance and losses, such allowances and losses would be deductible in the specified order where the profits are insufficient to absorb all of them. Royalty not involved in CD copying If a copyright holder or distributor of music gives job work to a firm which duplicates the video/ audio CDs and returns them to the copyright holder, the duplicating firm will not be liable to pay excise duty by including the royalty on the music embedded in the CDs. In this case, M/ s K. R. C. D. ( I) Pvt Ltd vs CCE, the transaction went like this: the artist/ lyricist who is the owner of copyright parts with the copyright for a certain consideration to a producer of music which music/ picture is then captured on CD. The producer in turn parts with such copyright in favour of a distributor who, ultimately, gets the CDs duplicated on job work basis. The distributor then sells the CDs in the market to the ultimate customer. The revenue authorities in this case issued show cause notice to the job working firm taking the view that the royalty would be taken into account for excise, as such royalty is inextricably connected with the music. That view was upheld by the tribunal, leading to the appeal. Setting aside the tribunal's view, the court maintained that the CDs after duplication were totally given back to the distributor who sold them in the market. The job work firm itself did not sell them. Therefore it has nothing to do with the royalty. Agreement can't oust court jurisdiction The Gujarat High Court last week ruled that it has admiralty jurisdiction to pass orders regarding ships entering Indian territorial waters even if there is an agreement between parties to refer disputes to arbitration or other courts. In this case, Phaethon International Co SA vs M V Americana, the ship was in Hazira port. There was a claim of $ 141,812.99 against Americana and therefore the court was moved to arrest the ship. In defence, the latter argued that there was an agreement to refer disputes to the high court of England. Therefore the admiralty jurisdiction of the high court in India was ousted. The high court rejected the argument in a detailed judgment and ordered issue of warrant of arrest of the ship while the issue is being adjudicated. If such an order is not passed, the claimant would suffer " irreparable loss which would not be compensated in terms of money," the judgment said. Penalty on film distributors The Competition Commission last week imposed penalty on the office bearers of one group of film distributors and cinema owners in Kerala for anti- competitive practices. They had formed an association and denied new releases to another group. The Director General of the commission conducted an enquiry and confirmed the charges. Producers also succumbed to the pressure of the cinema owners' powerful cartel. The judgment stated that all of them " transgressed their legal contours". The penalty was calculated on the basis of seven per cent of the average income for the relevant financial years. Exporters' bodies are not ' consumers' The National Consumer Commission has dismissed the complaint of the Confederation of Exporters and Expo Mart Exhibitors alleging deficiency in service by India Exposition Mart Ltd which charged them external development charges over and above the price of space allotted to them. Exporters were allotted individual spaces in a complex in Greater Noida, in the National Capital Territory, to showpiece their wares. But they were aggrieved by the demand of extra payments and the extent of space allotted to them. The commission rejected their complaint holding that the exporters were not consumers according to the definition of the word in the Consumer Protection Act. According to the law, those who buy goods or avail of services for commercial purposes are not consumers. They cannot approach the consumer forums, but should seek other legal forums. | | |
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