[aaykarbhavan] Source Economic Times and Business standard

​Source  Economic  Times

Government further relaxes norms for companies 

http://economictimes.indiatimes.com/news/economy/policy/government-further-relaxes-norms-for-companies/articleshow/47574866.cms

 

 

Source  Business  standard

United Spirits Limited — a case of corporate governance failure?

United Spirits Limited ( USL) is again in the news. The company's board of directors in November last year instituted an enquiry into the firm's books for financial years 2010 to 2014. PricewaterhouseCooper (PwC)' s UK office, which conducted the investigation (forensic audit), has reported widespread irregularities, with funds being diverted to Mallyaowned UB group companies and to the now- defunct Kingfisher Airlines. As a matter of prudence, the company has provided for a loss of ₹ 1,700 for the year 2014- 15, as it governance issues. support to other group companies is not a new revelation to the market. There is nothing unusual. It is not wrong for a company to give loan to other group companies. However, as reported by the present management of the company, some of the transactions were entered into clandestinely to camouflage the full exposure of the company to other group companies. This is bad governance. It violates the principles of transparency and integrity. Business groups are managed with the objective of maximising the wealth of the group. Strategies of different group companies flow from the group strategy. This policy leads to maximisation of the wealth of the shareholders of the holding company. If the business group is a family business, the founding family is benefitted. Maximising the wealth of the group does not necessarily benefit shareholders of individual companies in the group. However, every company in the group benefits from the synergy, if any, among the group companies and from the group support during hard times. The need is to balance the group interest and individual company's interest when they are not aligned. This balancing act is challenging. Internal banking within a business group is a traditional and well- known practice. This will continue. The law recognises the same. Section 186 of the Companies Act 2013 permits inter corporate loan. It requires that the board of directors (Board) should approve, in a meeting, proposals to give loan to a person or body corporate, guarantee or security to a person or body corporate, or acquisition of securities of a body corporate, with the consent of all the directors present at the meeting. If giving of any loan or guarantee or providing any security or the acquisition of securities exceeds 60 per cent of the company's paid- up share capital, free reserves and securities premium account or 100 per cent of its free reserves and securities premium account, whichever is more, prior approval of the shareholders by means of a special resolution ( three- fourth majority) is required. No loan should be given at a rate of interest lower than the prevailing yield of one year, threeyear, five- year, or ten- year government security closest to the tenor of the loan. The Board has the responsibility to protect minority shareholders' interest by ensuring that the decision to give loan etc. is not prejudicial to the interest of the company. For example, if the cash available with the company is required to support the company's growth, parting with the cash is prejudicial to the interest of the company. Similarly, it is possible that the company has the borrowing capacity and therefore, it borrows to support its own activities and gives available cash as loan to a group company whose balance sheet is weak. In this case, the Board must ensure that interest rate attached to the loan is not lower than the borrowing cost. The Board should also appraise the creditworthiness of the borrowing company. The purpose of internal banking is defeated if the Board applies the same stringent norms that external financial institutions apply in appraising the credit worthiness. Usually a company with a weak balance sheet finds it difficult to borrow from financial institutions. This is true, the Board should not approve giving loan etc to a company survival of which is surrounded by huge uncertainties. For example, USL's decision to lend to Kingfisher Airlines was a bad decision that was prejudicial to the interest of the company. In most situations, the decision to provide financial accommodation to a weak company within the group is a tightrope walk. Independent directors should seek complete information and bring objectivity in deliberations over the issue. Is it appropriate to conclude that in the USL case the Board had failed to protect the interest of the company? There is no straight answer. I guess that clandestine transactions were never reported to the Board. Those were passed as routine transactions. Only because the loans have become non- recoverable, should one not conclude that the directors failed to act diligently while approving loans. Without going through the minutes of the meetings in which loans were approved, one cannot form a judgement. If minutes of meetings fail to provide rationale for the decisions, directors, including independent directors, might find it difficult to defend those decisions. 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 Private Limited E- mail: asish. bhattacharyya@ gmail. com Internal banking within a business group is a traditional and well- known practice recognised by law ACCOUNTANCY ASISH K BHATTACHARYYA No loan should be given at a rate of interest lower than the prevailing yield

 

BRIEF CASEN [1] M J ANTONY Bizwoman freed from husband's shadow A woman entrepreneur should not be denied registration for government contracts because her husband had faced criminal prosecution, the Supreme Court has stated while quashing the judgment of the Allahabad high court which took a contrary view. In this case, Manyata Devi vs State of Uttar Pradesh, the woman was the proprietor of M/ s Krishna Construction which was a governmentregistered firm. When she applied for renewal of the registration, she was asked to submit a solvency certificate and a character certificate from the district magistrate. The magistrate denied the character certificate because her husband was involved in certain criminal cases. She moved a writ petition in the high court, but was unsuccessful. On appeal, the Supreme Court stated that the high court was wrong and observed that the magistrate was swayed by extraneous considerations. It also noted that her husband had been acquitted in all cases. The judgment added: " It is difficult to appreciate how criminal cases against the husband could possibly deny her a certificate of good moral character." The court also found that the magistrate " invented fresh reasons for denial of certificate", like lack of experience in contract works. The state government argued that character certificate was insisted upon as there was a " contractor mafia" and criminals should be kept out of government contracts. She was a proxy for her husband as he could not apply due to his criminal background. The Supreme Court stated that though these arguments could not be faulted, it should not be achieved by a side- wind. It also underlined that it was not the magistrate, but competent authorities who should determine the suitability of contractors. If the ground situation in UP is so bad, the government should strengthen registration procedures. The court directed the magistrate to reconsider the woman's application for a character certificate. HC should not stall recovery proceeding When disputes over mortgaged land are pending before the debt recovery tribunal ( DRT) a high court shall not pass orders lifting encumbrances on the land or part of it, the Supreme Court stated in the case, Maharaj Educational Trust vs SGS Constructions & Development Ltd. The trust had taken a loan from HUDCO but it defaulted in repayment. The housing development corporation moved the tribunal seeking sale of part of the land invoking the Securitisation (' SARFAESI') Act. A builder who had an agreement with the trust objected to it and moved the Allahabad High Court asking it to demarcate certain areas as unencumbered. The high court acceded to the request. The trust and HUDCO appealed to the Supreme Court. It quashed the high court order stating that the high court could not have adjudicated on the question of rights over the property. The judgment said that " it was not open to the high court to enter into the question which of the property is unencumbered and to be sold in realisation of the debt. It is the outlook of the recovery officer of the tribunal where the proceedings are pending."  Excise rowover use of brand names A small scale industry cannot claim exemption or concessional rate in excise duty if it uses the brand name of another manufacturer who is not eligible for the benefit. The Supreme Court reiterated this principle in the case, Kali Aeriated Water Works vs Commissioner of Central Excise. This small- scale industry was using the word ' Kalimark' as its trade mark for several years. It was a family concern. Its members made a mutual agreement dividing their business area in Tamil Nadu where the brand is strong. When it applied for exemption granted to small scale industries under a 1994 notification the excise authorities denied it on the ground that the brand name " Kalimark" has been used on the goods which belonged to M/ s Shri K P R Shakthivel. Since the firm was using the brand name of a third party, the exemption would not benefit the firm. That view was accepted by the CESTAT in its judgment. Therefore, the firm appealed to the Supreme Court. It found from the family settlement deed that the trade mark Kalimark would remain vested in all the parties and further, there shall not be any payment of royalty or remuneration to any other party. Therefore, the firm was entitled to the excise benefit. > Failure to hit target not serious A development officer of New India Assurance whose services were terminated for not meeting the target set by the public sector company got back his job on the order of the Supreme Court. The officer, K S Raveendran, apparently had personal problems in his marital life which resulted in underperformance. The company conducted an enquiry following which he was sent away. He moved the labour court, which dismissed his petition rejecting his explanation. On appeal, the high court felt that stoppage of increment for three years was enough punishment, but no back wages. The officer appealed to the Supreme Court. It directed the insurance company to reinstate him with 50 per cent back wages. It stated that termination on the ground that he failed to achieve the target fixed for him was wrong.  Dispute over arbitration jurisdiction The Delhi High Court has dismissed the arbitration appeal of NHPC Ltd in its dispute with Hindustan Construction Company over encashment of a bank guarantee. One of the arguments was that the agreement between them was signed at Faridabad, Haryana; the project was executed in West Bengal; the registered office of NHPCL is in Faridabad; the registered office of HCCL is in Mumbai; the bank guarantees were issued in Mumbai; and no part of the cause of action arose in Delhi. It was contended that, as such, the Delhi High Court did not have jurisdiction to entertain any appeal under the Arbitration and Conciliation Act. However, the high court observed that in the agreement, the venue for arbitration was mentioned as New Delhi/ Faridabad. Though one part of the dispute was pending in a Haryana civil court, that factor alone would not take away the jurisdiction of the Delhi High Court, the judgment said. A weekly selection of key court orders

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A.Rengarajan
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Chennai

Mobile 93810  11200

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Posted by: CS A Rengarajan <csarengarajan@gmail.com>

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