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SOURCE  BUSINESS  STANDARD

India Inc grapples with Ind- AS

SUDIPTO DEY Interglobe Aviation, the owner of IndiGo, in its draft red- herring prospectus for its proposed share sale offering, lists among risk factors: "We may be required to prepare financial statements under new Indian accounting standards that are different from Indian GAAP beginning in fiscal 2016. A failure by us to successfully transition to the new Indian accounting standards ( Ind- AS) could have a material adverse effect on our stock price." Likewise, there are about 1,000- odd companies, with net worth of Rs 500 crore or more, that are required to adopt the international financial reporting standards ( IFRS)- compliant Ind- AS in FY17. They could roll over to the new standard in FY16 on a voluntary basis, but many are not game for it. As corporate India prepares to put its house in order, the transition raises concerns: impact on financial statements and revenue recognition, shape and size of consolidated group structures, accounting for intangibles while going for business acquisitions and mergers, and the volatility and subjectivity in income statements brought about by the mandatory use of fairvalue method. " The impact of the new accounting standard will vary by industry, and for each company, touching practically every area comprising revenues, expenses, assets, liabilities and equity," says Sumit Seth, partner and IFRS leader, Price Waterhouse. Accountants and audit experts point out that as quantum of disclosures increases under Ind- AS, companies will have to make more estimates and judgments that are new to them. The extensive use of fair value accounting in Ind- AS – rather than book values followed under current Indian GAAP – could have an impact on capitalisation profiles of many companies. "Items such as redeemable preference shares will get recorded as liabilities, and hybrid instruments split into liability and equity components. This will in turn impact net worth, financial ratios, and debt covenants," adds Seth. include more entities, given the wider definition of control under IndAS, making the evaluation of holdingsubsidiary relationships more judgmental. Terms of loans, guarantees given for financing business, existence of potential voting rights, control through agents, contractual arrangements will determine whether a business will get consolidated. Ind- AS mandates recognition date. " The evaluation of -direct, indirect and minimum alternate tax ( MAT). The government has recently appointed a committee to look into incidence of MAT on companies that are Ind- AS- complaint. What has added to the uncertainty is the raging debate over the need to defer the revenue recognition standards, Ind- AS 115. Globally, the application of the new standards on revenue has been deferred until January 2018, largely due to issues around IT implementation. Following this, various industry bodies in their representation to NACAS, a statutory body involved in the rollout of the new accounting standard, advocated pushing the adoption of the new revenue standards by two- three years. "Ind- AS 115 should be deferred to enable Indian companies to apply the standard in its final shape, rather than one which is still undergoing changes," says Sanjeev Singhal, chairperson, CII sub- group on accounting & auditing standards. The advisory body is expected to give its view to the government in September. Clearly, over the next three- five years, Indian businesses have to get used to the multiple reporting framework. Banking, insurance and financial services companies are likely to migrate to Ind- AS around 2018 or 2019, while other companies will switch to the new accounting standard in phases. " There will be a large population of companies that will continue to follow the current Indian GAAP," notes Vishesh Chandiok, national managing partner, Grant Thornton India. With just seven months to go, there is now a compliance risk if a business does not get it right, points out Pankaj Chadha, partner in Indian member firm of EY Global. Transition to new accounting standard triggers concern over fair valuation, wider definition of control

 

BRIEF CASEN [1] M J ANTONY Curtains on 1992 securities scam The Supreme Court, on Friday, brought to an end a 23- year- old dispute related to the 1992 securities scam and Standard Chartered Bank, whose appeal against the special court order was allowed. The bank will now be richer by more than ₹ 50 crore. Nine financial companies have to pay the amount to StanChart along with 6 per cent interest from 1996. In this case, Stanchart vs Andhra Bank Financial Services, several top banks like ANZ Grindlays and Canara were involved in circuitous transfers of NTPC bonds.  SC picks holes in new land law Even before the new land acquisition law comes out of the tumult of political and social justice issues, the Supreme Court has discovered a few legal faultlines in the proposed Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013. So there is still time to hear the call of the court in its recent judgment in the case, Soorajmull vs state of Bihar. The case involved a 1981 land acquisition, which was repeatedly notified under the infamous " urgency" provision but allowed to lapse. The court ruled that the state had denied the land owner " just and fair compensation for the land from which he was dispossessed well over three decades ago." So the acquisition was struck down under the new law. On the 2013 law, the court observed that there seemed to an " unexplained inconsistency between Section 24( 1)( a), which allows an acquisition to stand despite a failure to pass an award while only requiring the compensation to be determined and Section 24( 2), which deems the acquisition to have lapsed for a failure to pay compensation or take physical possession of the land where an award has been passed over five years prior to the commencement of the 2013 Act." There is yet another poser from the court: " Which provision in the 2013 Act governs a situation where the state has not progressed beyond making a declaration of acquisition; where possession of the land has not been assumed by the state; where neither part nor whole of the compensation has been paid or tendered!"  Vaseline Heel Guard is a medicament The Supreme Court last week dismissed the appeal of the commissioner of central excise and declared that 'Vaseline Intensive Care Heel Guard' manufactured by Hindustan Lever Ltd is amedicament with curing properties and not merely a skin care preparation. Therefore the duty on the product will be 15 per cent, which I less than the tariff for cosmetics. The revenue authorities contended that the product should be included in the cosmetics and perfumery entry attracting 40 per cent levy. The company marketed it as a solution for cracked heels and claimed that the solution was especially developed by the scientists at Vaseline Research. The court stated that when certain products have shades or qualities of both cosmetics and prophylactic, namely, skin care as well as cure of skin diseases the onus is on the department to show that it is not a medicament. For this, it will have to demonstrate that the curative value is only subsidiary in nature. The authorities have not discharged this responsibility. Moreover, though a product is sold without a prescription of a medical practitioner, it does not lead to the immediate conclusion that all products that are sold over the counter are cosmetics. There are several products that are sold OTC and are yet medicaments.  Palm oil importers' appeals dismissed Supreme Court has dismissed the appeals of importers of palm oil challenging the 2007 notifications of the central government prohibiting the import of the oil through all the ports of Kerala. The notifications were issued invoking the Foreign Trade (Development and Regulation) Act. Kerala is the largest producer of coconut oil and the import of cheaper palm oil, a competitive product, will affect 350,000 farmers in the state. The notifications were issued as a matter of policy of the government and the court would be reluctant to exercise its power of judicial review in such matters. The judgment in Parisons Agrotech Ltd vs Union of India concluded: " There is sufficient public good sought to be achieved by banning the imports of crude palm oil through ports in Kerala."  Re- auction should be justified The government has discretion to cancel an auction sale due to valid reason like cartelisation or failing to fetch adequate price above the reserve price, but the reason should be transparent to the bidders. This rule was reiterated last week by Supreme Court in its judgment, Punjab State Leather Development Corporation vs M/ s Bandeep Singh. Supreme Court incidentally took a decade to deliver its judgment dismissing the appeal of the state government and the corporation. The highest bidder had deposited the earnest money and 25 per cent of the bid amount and auction was confirmed. But for some reason, the corporation cancelled the sale and ordered re- auction. The bid money was also not returned, leading to acomplaint before the high court. It found in favour of the bidder. The corporation appealed to Supreme Court, which upheld the high court judgment. The apex court said, " every decision of an administrative or executive nature must be a composite and self- sustaining one, in that it should contain all the reasons which prevailed on the official taking the decision to arrive at his conclusion. It is beyond cavil that no authority can be permitted to travel beyond the stand adopted and expressed by it in the impugned action."  Challenge to welfare fund dismissed Supreme Court last week dismissed the appeals of works contractors of Madhya Pradesh challenging the levy of one per cent of the cost of construction for the welfare of unorganised labourers. The levy was demanded according to the Building and Other Construction Workers' Welfare Act which came into force in 1998. The levy was constitutionally challenged earlier in the Delhi High Court which dismissed it. That judgment was upheld by Supreme Court. This time, contractors approached Supreme Court arguing that though the law was passed in 1996, the state government constituted the board for the welfare of the labourers only in 2003. The government had not taken steps to implement the provisions and register the names. Therefore, they should not be asked to pay for the period before 2003. The court dismissed their appeals, titled A Prabhakar Rao & Co vs State of MP. It stated that the government was bound to collect the charges as soon as the central law came into force. Collection of the levy cannot wait for the formalities and " the service to the workers is not required to be a condition precedent for the levy of the cess. The rendering of welfare services can be undertaken only after the cess is collected and credited to the welfare fund." A weekly selection of key court orders

 

Source  Business  Line     

        

Can share transfers be controlled?

MUKESH BUTANI

There's raging controversy over how the restrictions on such transfers can be enforced

Many shareholder agreements contain clauses that restrict buyers from selling shares freely. However, whether such restrictions can be enforced is debatable, and is now the subject matter of controversy.

Consequently, whether the board of a company, whose shares are covered by such agreements, is bound by such restrictions, and whether such restrictions are contrary to legislative intent or the by-laws of the company, remain unresolved.

The relevant portion of Section 111A of the Companies Act, 1956 states: "…the shares or debentures and any interest therein of a (public) company shall be freely transferable: provided that if a company without sufficient cause refuses to register transfer of shares…the transferee may appeal to the Tribunal and it shall direct such company to register such transfer of shares."

The Delhi, Bombay and Gujarat High Courts had previously interpreted contractually agreed share transfer restrictions as being violative of the 'free transferability' provisions under the Section 111A. However, recent decisions of the Bombay High Court have turned in favour of shareholders, by recognising their rights to enter into such arrangements.

Shareholder rights

Examples include the Messer Holdings Ltd vs Shyam Madanmohan Ruia case and the Western Maharashtra Development Corporation Ltd vs Bajaj Auto Ltd.

In the Messer Holdings case, the Bombay High Court recognised the rights of shareholders to voluntarily enter into binding contracts.

The Bombay High Court also thought that the intended meaning of Section 111A was to restrict the directors of a company from refusing to register share transfers, except in accordance with applicable laws.

The Bajaj Auto case reiterated this. In that case, the Bombay High Court further clarified the intent of Section 111A, tracing its origin to Section 22A of the erstwhile Securities Contracts (Regulation) Act, 1956, which was to ensure that the board of directors is prohibited from refusing to register share transfers.

The Bombay High Court therefore resolved that "free transferability" did not impede on two shareholders' rights to enter into consensual agreements to deal with their shares, either at the time of contracting or in the future.

The Companies Act, 2013 appears to resonate the above views by introducing a proviso to Section 58 (2), which states: "Any contract... between two or more persons in respect of transfer of securities shall be enforceable as a contract."

This proviso, however, fails to fully resolve the controversy. While it addresses and recognises the right of individual shareholders to contractually agree on share transfer restrictions, whether such restrictions can bind a board of directors is not very clear.

Another interesting decision is that of the Supreme Court in the VB Rangaraj vs VB Gopalakrishnan case, which discusses the interplay of contractual arrangements inter se shareholders and the by-laws of a company.

The judgment draws reasoning from Section 82 of the 1956 Act, which provides that shares are movable property that may be dealt with in the manner provided for in the by-laws of a company.

Accordingly, the only restrictions on the transfer of shares of a company that are enforceable are those that are incorporated in its by-laws.

However, the three-judge bench of the Supreme Court in the Vodafone International Holdings BV vs Union of India & Anr case rightly departed from the view taken in the Rangaraj case, stating that none of the provisions of the 1956 Act prevent shareholders from entering into agreements providing for voting rights attached to their shares or share transfer arrangements.

It appears that the Bombay High Court in the Messer Holdings case as well as the Supreme Court in the Vodafone case have taken the view that irrespective of the terms of the share transfer agreements being incorporated into the by-laws, such agreements would be valid under general applicable laws and binding on the contracting parties.

Binding restrictions

While we concur with the view of the division bench of the Bombay High Court in the Messer Holdings case — that it should not be mandatory for such contractual restrictions on share transfers to be incorporated in the by-laws of a company — such incorporation is advisable.

It would make such restrictions binding on the company and prevent it from undertaking actions that are ultra vires the by-laws. The Messer Holdings case is presently before the Supreme Court. One hopes that the apex court will be guided by legislative intent and uphold the freedom of parties to impose restrictions on themselves.

(The writer is Managing Partner, BMR Legal. With assistance from Roshan Thomas, Partner, BMR Legal

 

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A.Rengarajan
Practising  Company  Secretary
Chennai

Mobile 93810  11200

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

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