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The Institute of Company Secretaries of India is a premier national professional body constituted under an Act of Parliament namely the Company Secretaries Act, 1980 (Act No. 56 of 1980), to develop and regulate the profession of Company Secretaries in India. The ICSI functions under the jurisdiction of Ministry of Corporate Affairs. The Institute has on its rolls about 36,000 members including members holding certificate of practice. The number of current students is over 2.87 lakh. The Institute:
Has its Headquarters at New Delhi, 4 Regional Councils at Chennai, Kolkata, Mumbai and New Delhi, 68 Chapters located in various cities all over India and the Center for Corporate Governance, Research and Training (CCGRT) at Navi Mumbai.
Registers students with 10+2 and graduate qualifications for Foundation and Executive Program of Company Secretaryship respectively with course contents in Law, Management, Accounting and Finance disciplines;
Conducts Company Secretaryship examination twice a year in June and December, at 66 centers spread all over India and one overseas center at Dubai;
Provides postal/oral coaching and training enabling students to qualify as Company Secretaries;
Provides e‐learning for students through Web Based Training, Video Based Training and Live Virtual Classroom;
Arranges practical training for Executive/Professional Program pass students in Companies/with Practicing Company Secretaries especially empanelled for the purpose;
Enrolls qualified persons as Associate/Fellow members of the Institute and issues Certificate of Practice to members taking up practice;
Conducts Post Membership Qualification Courses for members of the Institute;
Conducts ICSA, UK Exams for members of the Institute;
Publishes ‘Chartered Secretary’, a professional journal popular among all professionals;
Publishes ‘Student Company Secretary’ and ‘C.S. Foundation Program Bulletin’ for the benefit of students;
Publishes Online 'CS update' containing current notifications and circulars relating to various corporate and related laws;
Exercises professional supervision over the members of the Institute, both in employment and in practice in matters pertaining to professional ethics and code of conduct;
Undertakes research in Law, Management, and Finance and Capital Market disciplines and brings out research publications and guidance notes;
Issues Secretarial Standards and brings out Guidance Notes thereon;
Gives expert advisory opinion to members on intricate issues relating to various corporate laws;
Organises Professional Development Programs and, International / National / Regional Conventions and Conferences.
Organises Professional Development Programs in collaboration with Chambers of Commerce, Department of Public Enterprises, Sister Professional Institutes and other Professional Development / Management Bodies.
Interacts with various National and Regional Chambers of Commerce with regard to various Government Policies and Legislations.
Interacts with the Central and State Governments and Regulatory Authorities on matters of professional interests;
Interacts with CS Institutions of other countries in respect of the International Federation of CS;
Bestows ICSI National Award for Excellence in Corporate Governance to best governed Companies; Bestows Life Time Achievement Award on one eminent corporate personality for Translating Excellence in Corporate Governance into Reality.
Founder Member of the National Foundation for Corporate Governance.
Founder Member of International Federation of Company Secretaries.
Visit: www.icsi.edu/bangalore
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Message from Bangalore Chapter of ICSI My Dear Students, Am happy to share with you that the Bangalore Chapter of the ICSI is releasing the E‐ Souvenir to commemorate the 9th State Level Students Conference “Milaap 2013‐ Meeting of Minds” I congratulate all the students who have contributed by way of articles in the E‐Souvenir. My heartfelt thanks to the entire organising team for their time, efforts and invaluable contribution in bringing out the E‐Souvenir in such grandeur. I am confident Milaap ‐2013 will be of immense value to the students in all round development and in shaping their professional career as a Company Secretary.
Message from Mysore Chapter of ICSI Dear Students, Meeting of Minds..!!! Yes indeed! I recall my CS student days, the first ever big event which I attended was Milaap, organised by Bangalore Chapter and participated in each activities of Milaap and was a good learning experience. Every year the Milaap event comes out with unique activities. Earlier the event was participated by CS students from across the Karnataka state and with growing popularity, this reach has surpassed the state and now even students from other states are also attending the event and taking part in each activates listed for their participation and making the theme of Meeting of Minds a grand success and taking this event to the national level. Mysore chapter and Bangalore chapter always share a complimentary relationship in each spheres of professional stream. Mysore chapter student’s takes active participation in Milaap event and Bangalore chapter student’s takes part in Umang…Zeal to Excel. (Annual event organised by the Mysore chapter). With this message I would like to wish the team of Bangalore chapter Managing Committee and the students a grand success in hosting this Annual event and keep the spirit high and keep reaching new heights. Best of Luck!
Message from Mangalore Chapter of ICSI Dear Bangalore Chapter & Students of ICSI, With respect of the MILAAP 2013, I on behalf of the Mangalore chapter of the ICSI would like to wish the Bangalore chapter of the ICSI the very best in organizing the 9th State Level Students' Conference ‐ MILAP 2013. I would also like to take this opportunity to congratulate the Bangalore Chapter for having taken the initiative to organize such a wonderful event for the benefit of the students of the ICSI. I wish the student conference a grand success.
CS M. Manjunatha Reddy Chairman
Bangalore Chapter of ICSI
CS. Sunil Kumar B.G. Chairman
Mysore chapter of ICSI
CS. Ullas Kumar M. Chairman
Mangalore Chapter of ICSI
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ICSI Bangalore Chapter
Managing Committee for the Year 2013
CS. Manjunatha
Reddy
Chairman
CS. Sharada S.C
Vice-Chairman
CS. Dattatri H.M
Secretary
CS. Srinivasan R
Treasurer
CS. G.M. Ganapathi
Member
CS. S. Kannan
Member
CS. Hari babu Thota
Member
Mr. B.N. Harish
Co-opted
CS. Gopalakrishna Hegde
Ex-officio
Member – Central Council
CS. Dwarakanath C
Ex-officio
Chairman-SIRC of ICSI
CS. Nagendra D Rao
Ex-officio
Secretary-SIRC of ICSI
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Nethra Sridhar
CS Professional Program Trainee with CS Parameshwar G. Bhat
Rakshita.T.S CS Professional Program
Dear Friends,
“A small body of determined spirits fired by an unquenchable faith in their mission can alter the course of history”……. Mahatma Gandhi. These inspiring words of Gandhi really give energy to make a small event to big. When we started e‐souvenir we had only a small idea, but while implementing, it was not just about a magazine it was all about knowledge. E‐ Souvenir has given us immense knowledge and also changed us as persons. Two Months before few interested people got together to make an event successful. A small group of determined spirits could make this event successful. Because of this team spirit we have got record breaking articles, which got us smiles on our faces. Thank you so much writers! Writing is that part of our hidden talent which is outburst when we have podium like e‐souvenir. Not only students got e‐souvenir to show their talent. It was also esouvenir which got wonderful, mind storming articles from talented people. The articles on Companies Bill 2012, updated us with latest. Few articles made us to think and inculcate in our own lives. These gave new dimension for souvenir The efforts of our team and their sacrifices of their personal commitments needs big applause. Our commitment to Go green and make e‐souvenir successful could be achieved only by making them to reach all the students. We had nearly made innumerable calls and mails to all students. We at this moment like to remember the support given by all Company Secretaries who contributed to e‐souvenir by encouraging their trainees to be a part of the event, this was great contribution.
We received 82 articles from different places in which we could select 50 articles which enhance the beauty of e‐souvenir. We received these articles from location in and out of Karnataka like Bangalore, Mumbai, Belguam, Mangalore, Sirsi etc. This shows how Bangalore team has put its efforts to make it reach students all over India. We had all categories of students from Young age of 21 to 58 years. The other articles Included “Understanding the Sahara Group Imbroglio ‐A Case Study” “Health Checkup” were quite interesting and “Health Checkup” title was puzzling, it was a giggle. Few articles made our work easy as they were so perfect in all aspects like Presentation, Language, Content, reference, perception etc. We congratulate all the winners and like to wish all the 77 writers who made souvenir a record break event. Our Gratitude to all the reviewers who showed up at the time we needed and could take up time from their busy schedule. We also express our gratitude to the CS Shilpa Budhia, CS. Ravishankar and CS. Sanjeev Rao Y for judging the best articles and we express Our gratitude to our mentors CS. Dattatri H M and CS. Harish B N who supported in each step when we needed them. We thank each office bearer of Bangalore Chapter for their support and the other Milaap teams which also contributed to our success especially publicity Team. Lastly, we are thankful to the people who gave us an opportunity to be part of e‐souvenir and Milaap. This is an event to be remembered in our entire life.
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eSouvenir: Data Sheet! Total articles received - 82 Articles passed through tough round of selections – 50
The Team:
Mentors Members Editors Judges CS Dattatri H.M.
CS Harish B.N.
Rakshita T.S.
Nethra Sridhar
CS Abhishek Bharadwaj
CS Chakri Hegde
CS Omkar Hegde
CS Parameshwar G. Bhat
CS Prabhath
CS. Ratnamala Hegde
CS Sharada S.C.
CS Srinath
CS Vighneshwar Hegde
CS Vinay B.L.
CS Ravi Shankar G
CS Sanjeev Rao Y
CS Shilpa Budhia
Cash awards sponsored by:
CS Vinod Raman
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AArrttiicclleess
1. Sahara Group Imbroglio.................................................................................................................. 9
2. Exchange Traded Funds ................................................................................................................. 11
3. Health Check-Up ................................................................................................................................ 13
4. ESOP ....................................................................................................................................................... 14
5. TP & Role of a CS .............................................................................................................................. 16
6. Committees of a Company ............................................................................................................ 19
7. What is FEMA? ................................................................................................................................... 21
8. Joint Ventures in India .................................................................................................................. 22
9. Money Laundering............................................................................................................................ 24
10. SEZ – An Overview............................................................................................................................ 26
11. Public Issue without Going Public ............................................................................................. 28
12. One Person Company....................................................................................................................... 30
13. Fast Track Exit ................................................................................................................................... 31
14. Takeovers ............................................................................................................................................. 33
15. FDI in Retail........................................................................................................................................ 35
16. Corporate Governance.................................................................................................................... 37
17. Opportunities & Challenges to a CS.......................................................................................... 39
18. Allotment of Securities................................................................................................................... 41
19. CSR & Companies Bill 2012 .......................................................................................................... 43
20. Real Problems in the Virtual World ......................................................................................... 45
21. Fraud and Corporate Governance ............................................................................................. 47
22. Corporate Governance.................................................................................................................... 49
23. Positioning of CS ............................................................................................................................... 51
24. Transparency in Governance....................................................................................................... 53
25. IEPF......................................................................................................................................................... 56
26. Best Legal Practices ......................................................................................................................... 58
27. Related Party Transactions .......................................................................................................... 60
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28. Merchant Banking in India........................................................................................................... 62
29. Producer Companies & Inflation ............................................................................................... 64
30. Sustainability & Governance....................................................................................................... 66
31. Strategic Management.................................................................................................................... 67
32. Interim Dividend ............................................................................................................................... 70
33. Office or Place of Profit ................................................................................................................. 72
34. Corporate Social Responsibility ................................................................................................. 73
35. Soft Skills -An Overview................................................................................................................. 74
36. Buy–back of Shares .......................................................................................................................... 76
37. Accounts and Audit .......................................................................................................................... 78
38. One Person Company....................................................................................................................... 80
39. E-Governance ...................................................................................................................................... 82
40. Management Soft Skills.................................................................................................................. 84
41. One Person Company....................................................................................................................... 86
42. Listing of Securities Kept in Abeyance .................................................................................... 88
43. Body Language – an Effective Communication ................................................................... 90
44. Role of CS under the Companies Bill, 2012 ............................................................................ 92
45. Committees .......................................................................................................................................... 94
46. Withholding Tax ................................................................................................................................ 96
47. Charges.................................................................................................................................................. 98
48. Insider Trading ................................................................................................................................ 100
49. Forensic Audit: Necessity or an Option? ............................................................................... 101
50. Suggested Agenda for BM & SHM ............................................................................................ 103
51. Poems by Coolkarni…105
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Sahara Group Imbroglio
Mohammed Isaq
M.com, CMA (Final) CS (Prof) Accountant @ BBMP, Bangalore
[email protected] Earl Warren states on Law, “It is the spirit and not the form of law that keeps justice alive” Hence, we have to practice and profess law in its true spirit and not to twist the provisions of law to avoid its true compliance. The Supreme Court of India in its recent judgment on Sahara Group has upheld this view. Background: Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment Corporation Limited (SHICL) are the companies controlled by Sahara Group. A special resolution passed in their General Meetings under Section 81(1A) of the Companies Act, 1956 to raise funds through unsecured Optionally Fully Convertible Debentures (OFCDs) by way of private placement to friends, associates, group companies, workers/employees and other individuals associated/affiliated or connected in any manner with Sahara Group of Companies without giving any advertisement to the general public.
Red Herring Prospectus(RHP) filed with the Registrar of Companies specifically indicated that they did not intend to get their securities listed on any recognized stock exchange. And it is only for those persons to whom the Information Memorandum(IM) was circulated and/or approached privately who were associated/affiliated/connected in any manner with Sahara Group, would be eligible to apply.
Truth Unfolds‐Series of events:
Roshan Lal, a resident of Indore sent a letter to National Housing Bank to look into housing debentures issued by
two companies (SIRECL & SHICL) which are bought by large number of investors alleging that Sahara Group was issuing housing debentures without complying with Rules/Regulations/Guidelines issued by RBI/MCA/ NHB. The same was forwarded to Securities Exchange Board of India (SEBI)
SEBI identified the large scale collection of money from the public by Saharas through OFCDs, while processing the RHP submitted by Sahara Prime City Limited, another Company of the Sahara Group, for its initial public offer.
SEBI then addressed a letter to Enam Securities Private Limited, merchant bankers of Sahara Prime City Limited about the complaint received.
Merchant Banker sent a reply stating that SIRECL and SHICL were not registered with any stock exchange and were not subjected to any rule / regulation /guidelines / notification / directions framed there under. The issuances of OFCDs were in compliance with the applicable laws.
Legal provisions involved under various statutes are as follows:
Companies Act, 1956, Securities Contracts (Regulations) Act, 1956 (SCR), SEBI Act, 1992, DIP Guidelines, 2000, Unlisted Public Companies (Preferential Allotment) Rules, 2003 SEBI (ICDR) Regulations, 2009 Key Issues:
o Whether OFCDs issued by Saharas o Securities only under Companies Act OR should be
read with SCR Act? o Convertible Bond under SCR Act?
I
Prize
Winner
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o Offer to fifty or more persons is a public issue and its compliance?
o Required to file final prospectus with SEBI when offer
is made to more than fifty persons? o Liable to Civil and Criminal liability for non‐compliance
of the Companies Act? o SEBI has jurisdiction or power to administer the
various provisions of the Companies Act & SEBI Act? o Violated the various provisions of the DIP (Guidelines)
and SEBI (ICDR) Regulations 2009? Contention of Sahara: o OFCDs are hybrid, a separate and distinct class of
securities, neither shares nor debentures and are convertible bonds so not liable for listing.
o Preferential allotment by unlisted public companies on private placement basis was provided for and permitted without any restriction on number of persons and no requirement of listing them on a recognized stock exchange.
o Prospectus is to disclose true and correct statements and not an invitation to the public for subscription.
o IM or RHPs can be filed to offer shares by way of private placement or to a section of the public or even to the public, but yet without intending it to be listed.
o No evidence of credible nature to show that there was an attempt to deceive or collect money from fictitious sources.
o No violations under the Companies Act. o SEBI has no jurisdiction to administer the affairs of an
unlisted company; their securities could not be regulated by the SEBI.
o No action against the companies by SEBI under the DIP Guidelines till they were repealed. ICDR Regulations would only have prospective effect (w.e.f. 26.8.2009) and would not be applicable to actions and activities which had taken place before the commencement of the ICDR Regulations .
Observation of Supreme Court:
o OFCDs although hybrid, possess characteristics of shares and debentures and fall within the definition of Section 2(h) of SCR Act. Company's option, choice,
election, interest or design does not matter. The law demands the conduct and action.
o Every private placement made to fifty or more persons becomes an offer intended for the public and attracts the listing requirements under Section 73(1).
o Saharas had violated the listing provisions and collected huge amounts from the public in disobedience of law. Order of SEBI is justified in directing refund of the amount with interest.
o Saharas were legally obliged to file the final Prospectus under Section 60B (9) with SEBI.
o Saharas conduct invites civil and criminal liability under various provisions like Sections 56(3), 62, 68, 68A, 73(3),628, 629 and so on.
o The definition of “preferential allotment” under Unlisted Public Companies (Preferential Allotment) Rules, 2003are more explicit and these Rules are subordinate regulations and are to be read with provisions of Section 67(3) and73(1) and other related provisions.
o SEBI has the powers to administer under the provisions of Companies Act,, and can exercise its jurisdiction under Sections 11(1), 11(4), 11A (1) (b) and 11B of SEBI Act and Regulation 107 of ICDR 2009.
o Saharas have violated the DIP Guidelines and SEBI (ICDR) Regulations 2009.
Conclusion: Saharas have no right to collect money from three million (3crore) investors without complying with regulatory provisions contained in the Companies Act, SCR Act & SEBI Act and Rules and Regulations made there under. The conduct of Saharas is clear violations of various regulatory provisions. The Supreme Court has upheld the judgment passed by SEBI and Securities Appellate Tribunal. Saharas have to refund the entire amount collected along with Interest @ 15%. On February 6 2013, Supreme Court allows SEBI to seize Sahara assets and issued contempt notice against the Sahara group for not refunding the entire amount.
This case has made clear raising of funds in disguise of private placement though a public issue cannot be used by companies without complying listing and other approvals and SEBI’s role in protecting the interest of Investors in the spirit of law rather than the form of law.
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Exchange Traded Funds
Apurva R. Murthy Management Trainee with CS. R.C.Venkatesh Rao
Banking your retirement on stocks is risky enough; Banking on individual bonds is typically less risky, but the same general principle holds. There is safety in numbers. That’s why gnus graze in groups. That’s why smart stock and bond investors grab onto ETFs. Just as a deed shows that you have ownership of a house, and a share of common stock certifies ownership in a company, a share of an ETF represents ownership (most typically) in a basket of company stocks. To buy or sell an ETF, place an order either through broker or by on line (due to cost reasons) or place an order by phone. The fluctuation in price of an ETF required to be watched through the trading hours from 9:30 a.m. to4:00 p.m., so as to watch the market value of the securities it holds. (Sometimes there can be a little sway ‐ times when the price of an ETF doesn’t exactly track the value of the securities it holds — but that situation is rarely serious, at least not with ETFs from the better purveyors.)
Preferring ETFs over Individual Stocks Why buy a basket of stocks rather than an individual stock? Quick Answer: You’ll sleep better.
Compared to the world of individual stocks, the stock market as a whole is as smooth as a morning lake. If you are not especially keen on roller coasters, then you are advised to put your nest egg into not one stock, but into basket of stocks. But for most of us commoners, the only way to effectively diversify is with ETFs or mutual funds.
Distinguishing ETFs from Mutual Funds ETFs are bought and sold just like stocks (through a brokerage house, either by phone or online), and their prices change throughout the trading day.
Mutual fund orders can be made during the day, but the actual trading doesn’t occur until after the markets close. ETFs tend to represent indexes — market segments — and the managers of the ETFs tend to do very little trading of securities in the ETF. (The ETFs are passively managed). Most mutual funds are actively managed. ETFs usually require you to pay small trading fees and cost of winding up less than mutual funds because the ongoing management fees are typically much less, and there is never a load (an entrance and/or exit fee, sometime an exorbitant one) as you find with many mutual funds. ETFs are structured due to low portfolio turnover less in taxable capital gains than mutual funds.
Savoring the versatility Unlike mutual funds, ETFs can also be purchased with limit, market, or stop‐loss orders, taking away the uncertainty involved with placing a buy order for a mutual fund and not knowing what price you’re going to get until several hours after the market closes.
Your basic trading choices (for ETFs or stocks) Buying and selling an ETF is just like buying and selling a stock; there really is no difference. Although you can trade in all sorts of ways, the vast majority of trades fall into these categories: 1. Market order. 2. Limit order. 3. Stop‐loss (or stop) order. 4. Short sale.
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Why ETFs are cheaper
The management companies that bring us ETFs are presumably making a good profit. One reason they can offer ETFs so cheaply compared to mutual funds as expenses are much less. When you buy an ETF, you go through a brokerage house. That brokerage house does all the necessary paperwork and bookkeeping on the purchase. ETFs that are linked to indexes do have to pay some kind of fee. But that fee is nothing compared to the exorbitant salaries that mutual funds pay their analysts.
No tax calories The structure of ETFs makes them different than mutual funds. Actually, ETFs are legally structured in three different ways: as exchange‐traded open‐end mutual funds, exchange‐traded unit investment trusts, and
exchange‐traded grantor trusts. ETF shares, which represent stock holdings, can be traded without any actual trading of stocks. In a way it’s like fat‐free potato chips, which have no fat calories and passes through your body.
Conclusion So given that large value stocks historically have done better than large growth stocks, and that small caps historically have knocked the stocks off, does it still make sense to sink
some of your investment dollars into large growth? Oh yes, it does. The past is only an indication of what the future may bring. No one knows whether value stocks will continue to outshine. In the past 10 years or so especially, large growth stocks have lagged behind value
and have fallen behind smaller stocks by a wide margin. But this trend was itself a reversal in 1990s when growth trumped value. The higher your risk tolerance, the closer you’ll want to be, to the lower end of that range. In India, most ETF expenses are in 0.5% to 1% range, but for large ETFs' it can be much lower.
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Health Check-Up
Ankush Sethi
Trainee at J.Sundharesan& Associates [email protected]
The information era which we live in has made people more caring towards health of themselves and their dear ones. With advancement in science new methods to detect & keep disease at bay have been discovered. The people have a fair knowledge to keep themselves in good health, yet feel the need to consult a doctor, as they can very well assess the situation and decide what will be most appropriate alternative to use. But how would you take an artificial/ judicial person to a doctor? DOCTOR!! Doctor in this context will be represented by a professional be it a Charted Accountant, Company Secretary, Cost Accountant, Lawyer wherein each one specializes in their respective fields. Artificial/ Judicial Person refer to all corporate, association of people, body corporate, including statutory bodies. In case of Artificial/ Judicial Person, it is governed by laws, rules & regulations by the appropriate authority which has mandated a compulsory health check‐up, nothing but Statutory Audit for all body corporate registered in India. Audit The term audit is derived from the Latin term ‘audire,’ which means to hear. In early days an auditor used to listen to the accounts read over by an accountant in order to check them. The general definition of an audit is an evaluation of a person, organization, system, process, enterprise, project
or product. The term most commonly refers to audits in accounting, but similar concepts also exist in project management, quality management, water management, and energy conservation. Statutory Audit The purpose of a statutory audit is the same as the purpose of any other audit ‐ to determine whether an organization is providing a fair and accurate representation of its financial position by examining information such as bank balances, bookkeeping records and financial transactions. The progress in science has led to many methods/ tests being brought out to detect various kinds of problems that could affect the health of a person, and is not restricted to only Blood Test or Ct‐Scan or X‐Ray. A CT‐Scan or X‐Ray is done only when advised by the doctor and on basis of his prescription. In the similar manner, there are certain audits prescribed only for certain companies / body corporate, which shall satisfy the conditions specified in the regulations given by the
appropriate authorities. The possibilities of such audits could be like Internal audit: An internal audit is designed to review what a company is doing in order to identify potential threats to the organization's health and profitability, and to make suggestions for mitigating the risk associated with those threats in
order to minimize costs. (Continued in Page 18)
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ESOP
Apoorva G CS Professional Student
[email protected] Employee Stock Option Plan (ESOP) refers to various schemes where the company offers its shares to the employees. The Company provides the employees an option to buy the company's share at a certain price. The price could either be at the market price or at a preferential price and in case it is an unlisted Company, the price could be as decided by the management. WHY ESOPs…??
It is a tremendous motivator and can get employees highly involved in their jobs and focused on their performance.
Promote employee ownership culture and reduce the attrition.
ESOPs offer rewards that can exceed the expectations of employees but are still affordable to the company as they are highly performance driven
Enhances job satisfaction of the Employee due to ownership incentive.
ESOP proves to be a good retirement benefit plan for employee.
Methods of ESOP
Trust Route ‐ is the method in which a trust is created for the allotment of shares to the employees. Company issue shares to the trust and then trust issue shares further to the employees.
Direct route‐ in this method the shares will directly be allotted to the employees of the company.
Frequently used Terms in an ESOP Scheme Grant – issuing of options to employees under various
ESOP schemes Vest –the process by which the employee is given the
right to apply for shares of the company against the option granted to him
Exercise – making of an application by the employee to the company for issue of shares against option vested.
Vesting period ‐ the period during which the vesting of the option granted to the employee in respect of ESOPs.
Exercise period ‐ the time period after vesting within which the employee should exercise his right to apply for shares against the option vested.
Legal Provisions
The Companies Act, 1956
Foreign Exchange Management Act, 1999
SEBI (Employee Stock Option Scheme and Employee
Stock Purchase Scheme), Guidelines, 1999
Income‐Tax Act, 1961
Procedural Aspects
Obtaining in‐principle approval for the ESOP Plan
Step 1 ‐ Board meeting to approve ESOP, to give notice of general meeting and to constitute compensation committee for administration and superintendence of the ESOS.
Step 2‐ Intimation to the stock exchanges about the Board meeting.
Step 3‐ The explanatory statement to the notice and the resolution proposed to be passed in general meeting for ESOP shall contain the following information: [Clause 6.2 SEBI (ESOP & ESPS) Guidelines, 1999] a. total number of options to be granted; b. identification of classes of employees entitled to
participate in the ESOP; c. requirements of vesting and period of vesting; d. maximum period within which the options shall be
vested; e. exercise price or pricing formula;
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f. exercise period and process of exercise; g. the appraisal process for determining the eligibility of
employees to the ESOS; h. maximum number of options to be issued per
employee and in aggregate; i. a statement to the effect that the company shall
conform to the accounting policies specified in clause 13.1**
j. method of valuation of options whether fair value or intrinsic value.
k. the statement as given in the above Clause must also be included in the Annual report.
*Clause 9.1 Lock‐in‐period: one year from the date of grant of options to the date of vesting of option. **Clause 13.1 ‐ compliance with the accounting policies specified in Schedule I given in the SEBI (ESOP & ESPS) Guidelines, 1999. Step 4‐ special resolution in the general meeting authorizing issue of securities to employees under the ESOP. [Sec. 81(1A)(a) of The Companies Act, 1956] Step 5‐ Appointment of registered Merchant Banker or implementation of ESOP as per the guidelines till the stage of framing the ESOP and obtaining in‐principal approval from the stock exchanges. [Clause 22.8 of SEBI (ESOP & EPSP) Guidelines, 1999]
Step 6 ‐ Filing of e‐Form 23 along with a certified copy of the special resolution and explanatory statement within 30 days of such resolution, with the Registrar. [Sec. 192 of The Companies Act, 1956]
Step 7‐ Obtain in principle approval for listing of new shares under ESOP from all the concerned stock exchanges. Applying for the Listing of the exercised options Step 8‐ The Company opens the window for exercise of vested ESOPS as may be decided by the Company from time to time. Step 9‐ Meeting of the Board or Compensation committee to pass a resolution for allotment of shares to the exercisers that have been made during the exercise window period. A return of allotment is to be filed with
the ROC in e‐Form 2 within 30 days of the allotment. [Sec. 75 of The Companies Act, 1956] Step 10‐ In case of listed company give intimation to the CDSL/NSDL for Corporate Action. Step 11 –Apply for Listing of those exercised shares after obtaining credit confirmations by the CDSL and NSDL.
Other aspects:
1. An employee who is a promoter or belongs to the
promoter group shall not be eligible to participate in
the ESOP. [Clause 4.2 of SEBI (ESOP & EPSP)
Guidelines, 1999]
2. Disclosure in the Directors' Report or in the annexure
to the Directors’ Report, the details of the ESOP as
given in the Clause 12.1 of SEBI (ESOP & EPSP)
Guidelines, 1999
3. The company may by special resolution in a general meeting vary the terms of ESOP offered but not yet exercised provided such variation is not prejudicial to the interests of the option holders. [Clause 7.2 of SEBI (ESOP & EPSP) Guidelines, 1999]
4. Right to exercise the option is not transferable. [Clause 11.1 of SEBI (ESOP & EPSP) Guidelines, 1999]
5. Certificate from the auditors at each annual general meeting that the scheme has been implemented in accordance with these guidelines and in accordance with the resolution of the company in the general meeting. [Clause 14.1 of SEBI (ESOP & EPSP) Guidelines, 1999]
The Concept of Re‐Pricing : The Company can Re‐price the options in the interest of employees and approval from the shareholders in General Meeting has to be obtained for such task [Clause7.5 of SEBI (ESOP & EPSP) Guidelines, 1999]. Idea Cellular Limited, OnMobile Global Limited, Strides Arcolab Limited, India Infoline, Dish TV are some of the Companies that have re‐priced their options in the past few years.
Conclusion: The advantage of ESOPs to an employee is that the exercise price remains fixed over the term of the option and that he would exercise his option when the market price of the shares goes substantially high and would gain on the difference between the market price and exercise price. Hence ESOP is primarily a kind of incentive to hold the employees to the company’s fold.
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TP & Role of a CS
Shruthi Murali Kumar Trainee with Prof. CS RV Tyagarajan
A Company Secretary holds a key position in any Company as the Compliance Officer. A Company Secretary is responsible for all regulatory compliances of Company. As per the Income Tax Act, any income (or expenses) arising from an international transaction (or specified domestic transaction) with an Associated Enterprise shall be computed having regard to arm’s length price. Accordingly, it is imperative for the Company Secretary to understand certain terminologies governing the Indian Transfer Pricing Regulations.
1. Associated Enterprise (AE): This term ‘is defined under Sec 92A of the Income Tax Act, in relative terms. In commercial usage associated enterprise generally means a subsidiary of MNCs, sometimes, also called as intermediaries. MNC’s do take active participation in management of intermediaries in different modes through direct or indirect equity holding, control over the board of directors, or appointment of one or more executive directors by one enterprise in other enterprise or by the same person in two enterprises. Situations like granting of loan more than 51% of the book value of assets, giving guarantee of more than 10% of the total borrowings of the other Company, complete dependence on know‐how, patent, etc. of the other Company, or purchase of raw materials from the other Company greater than 90% of the total raw material purchased by the Company during the year, or one entity has more than 10% of the beneficial interest in a partnership firm, association of persons or body of individuals triggers the deemed fiction and the two entities will be deemed to be AE . Role of Company Secretary: The main role of a Company Secretary is to identify all the associated enterprises with whom the Company has transacted during the year. There are likely chances that some of the entities which are falling under the deeming
fiction might go unnoticed to the auditors. The consequence of non‐reporting of a transaction is as high as 2% of the total value of transaction that went unreported. Further, penalty proceedings can also be initiated for concealment of true facts and disclosure under section the Income Tax Act.
2. International Transaction: An international transaction means a transaction between two or more associated enterprises either of whom or both of them are non‐residents. Finance Act 2012 has now clarified that an international transaction shall also include the following:
- capital financing, including any type of long‐term or short‐term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business;
- provision of services, including provision of market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service;
- a transaction of business restructuring or reorganization, entered into by an enterprise with an associated enterprise.
- an intangible asset shall also include marketing related intangible such as trademarks, trade names, brand names, logos, etc; technology related intangible such as process patent, patent application, technical documents and know‐how; artistic related intangible such as literary works and copyrights, musical compositions; data processing related intangibles such as proprietary computer software, software copyrights, automated databases; engineering related intangible such as industrial design, product patent, trade secrets, engineering drawings and schematics, blueprints.
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Role of Company Secretary: Whenever a Company is proposing to enter into any of the above international transactions, a Company Secretary should liaise with the Finance Director or the Chief Financial Officer along with the Statutory Auditors of the Company and ensure that an appropriate advise from a transfer pricing specialist has been taken as to what should be an appropriate arm’s length price for entering into such international transactions. When such transaction is a continuous transaction which is taking place, the Company Secretary should liaise with the Finance Director or the Chief Financial Officer and ensure revising their pricing model on a reasonable concurrent level so as to demonstrate to the tax authorities that the transfer pricing documentation are maintained on a contemporaneous basis.
3. Specified Domestic Transaction: Transfer Pricing until now was applicable to companies having cross border transactions with their associated enterprises. However, Finance Bill 2012, honoring the supreme court ruling in case of CIT vs. M/S GlaxoSmithkline Asia (P) Ltd. (Special Leave to Appeal (Civil) No(s).18121/2007), expanded the ambit of Transfer pricing to specified domestic transactions w.e.f 01 April 2013. Transactions covered under the ambit of domestic transfer pricing:
- Any expenditure in respect of which payment is made or is to be made to a person referred to in
- .Section 40A(2)(b) of the Income Tax Act, 1961;
- Any transaction that is referred to in Section 80A of Income Tax Act, 1961;
- Any transfer of goods or services referred to in Section 80‐IA(8) i.e. applicable to companies operating as industrial undertaking or enterprises engaged in infrastructure development;
- Any business transacted between the assessee and other person as referred to in section 80‐IA(10);
- Any transaction, referred to in any other section under Chapter VI‐A or section 10AA, to which provisions of sub‐section (8) or sub‐section (10) of section 80‐IA are applicable;
- Any other transaction, as may be prescribed by the board.
Provided that the aggregate value of the transaction entered into by the assessee with its domestic associated enterprises exceeds Rs. 5 crore. Implication of such amendment by Finance Act, 2012: All the transactions entered into by the taxpayers operating in Special Economic Zones (‘SEZs’); taxpayers entering into transactions with certain related parties specified under section 40A(2) and all the taxpayers claiming profit based deductions for undertaking specified business activities (under section 80A, 80‐ IA, etc.) will be covered. The most likely affected industries are industries operating in SEZs, infrastructure developers and / or infrastructure operators, telecom services industries, industrial park developers, power generations or transmission, etc. Apart from these industries, the business conglomerates having significant intra‐group transactions would be impacted. Most likely transactions under the scanner of the TP Authorities would be:
- Interest Free Loans to group companies;
- Granting of Corporate Guarantees / Performance Guarantees by Parent Company to its subsidiaries;
- Intra‐group purchase / sell / service transactions;
- Payment made to key personnel of the group companies;
- Payment made to relatives of key personnel of the group companies.
Role of Company Secretary Companies which did not have international transactions till date, however had domestic transactions with related parties, were not governed by the Indian TPR. However, now since the domestic transfer pricing regulations are in place, Company Secretary of the companies who have domestic transaction with its related parties equal to or more than Rs. 5 crore or companies whose present domestic transaction less than Rs.5 Crore but is likely to increase beyond Rs. 5 crore in the financial year 2012‐13 are advised to validate their present business model and pricing methodology from a transfer pricing perspective which will enable them to take corrective actions, if necessary.
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4. Arm’s Length Price: An arm’s length price means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises in uncontrolled conditions [Section 92F (iii) read with Rule 10A] (pl mention name of the Act and name of the rule). It is a price arrived at disregarding any influence from associated enterprise. Role of a Company Secretary: The role of the Company Secretary is to ensure that all the transactions which are entered into by a Company with its AE should be entered into having regards to arm’s length price. If the transactions are found not to be at arm’s length, the Company might face huge transfer pricing additions during the transfer pricing assessments.
Check List for a Company Secretary to ensure appropriate compliance of Transfer Pricing Regulation: 1. During the financial year, liaise with the Financial Director or the Chief Financial Officer along with the statutory auditors of the Company to identify the list of AEs and determine the value of International Transactions or specified domestic transactions. 2. Revisit the existing business model and transfer pricing methodology at least once in a year to ensure that the transactions of the Company with its AEs are at arm’s length to justify contemporaneous nature of transfer pricing business model. 3. Ensure that the Transfer Pricing Accountant Report is filed with the Assessing Officer before the due date of filing of the return of income i.e. 30 November.
Health Check-Up (Continued from Page 13) For all companies to which Companies (Auditor’s Report) Order, 2003 [CARO] applies shall mandatorily need to provide for Internal Audit. Further Clause 49 of the Listing Agreement provides for constitution of an Audit Committee, for purpose of an Internal Audit. Cost audit: Cost audit is an independent examination of cost records and other related information of an entity including a non‐profit entity, when such an examination is conducted with a view to expressing an opinion thereon. The Companies (Cost Audit Report) Rules 2011 (CAR) makes it mandatory for companies involved in activities as described in the rules to obtain a Cost Audit Report from a Cost Accountant who is a member of Institute of Cost Accountants of India. The diagnostics’ across have developed a range of products for the people who have an awareness to keep themselves fit. Products which diagnose a particular aspect say Blood Group, or Sugar level. Then there is something called Master Plan which makes an attempt to analyse the all round factors.
The same ways, companies are advised to adopt a complete audit, which shall enable them to assess the actual position of the company. This purpose is addressed by the practice of Secretarial Audit, and this Secretarial Audit shall be conducted by a Company Secretary in practice. Secretarial audit: The contemporary scope of Secretarial Audit extends itself to the assessment of all Corporate Laws except that related to Finance and Taxation which fall within the scope of a Statutory and Tax Auditor. As of now there are no specific provisions under the existing Companies Act, 1956 for secretarial audit, but The Companies Bill 2012, does make it mandatory for certain companies to get a secretarial audit done by a Company Secretary in Practice. A doctor may also prescribe a test only on occurrence of certain event, or on noticing certain symptoms which give a signal that something is wrong. Similarly the companies may adopt Forensic Audit.
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Committees of a Company
Veena Deepak Majukar CS Professional
Trainee @ GMR Group, Bangalore [email protected]
Corporate Governance may be defined as “A set of systems, processes and principles which ensures that a company is governed in the best interest of all stakeholders. It is about promoting corporate fairness, transparency, effective decision‐making and accountability. Listing agreement & the new Companies Bill, 2012 (which is yet to be passed in Rajasabha) introduces some basic corporate governance practices in Indian companies and brought in a number of key changes in governance and disclosures. It specified the minimum number of independent directors required on the board of a company. The setting up of an Audit committee, and a Shareholders’ Grievance committee, among others, were made mandatory. In this article, it is dealt with the committees constituted by companies to comply with the clauses of the listing agreement.
Audit Committee
Clause 49 of the Listing Agreement: It mandates the setting up of a qualified and independent Audit Committee. An audit committee is a committee of the Board of Directors. It is established with the aim of enhancing confidence in the integrity of an organisation’s processes and procedures relating to internal control and corporate reporting including financial reporting. It provides an ‘independent’ reassurance to the board through its oversight and monitoring role. Need of Audit Committee: The current economic environment has heightened the need for effective audit committees. The financial debacles and alleged fraudulent activities at established organizations – even in some nonprofit making organisations – along with phenomena such as the credit crunch and continuing economic turbulence are well known to the public. Young, growing organizations also face a unique set of challenges
triggered by their less‐developed internal control structures. As a result, both established organizations as well as emerging organizations have an even greater need for independent oversight.
Constitution: The audit committee shall have minimum three directors as members of which 2/3rd of the members shall be independent directors. All members of audit committee shall be financially literate and at least one member shall have accounting or related financial management expertise. The Chairman of the Committee shall be an independent director.
Meetings: The committee should meet at least 4 times a year with a not more than four months. The quorum shall be either two members or one third of the members of the audit committee whichever is greater, but there should be a minimum of two independent members present.
Powers:
To investigate any activity within its terms of reference.
To seek information from any employee.
To obtain outside legal or other professional advice.
To secure attendance of outsiders with relevant expertise, if it considers necessary.
Role of Audit Committee
Review the adequacy of the internal control structure.
Monitor compliance with the code of conduct and conflict‐of‐interest policy.
Review the policies and procedures in effect for the review of executive compensation and benefits.
Review, with the organization’s counsel, any legal matters that could have a significant effect on the organization’s financial statements.
When applicable, review the activities, organizational structure and qualifications of the internal audit function.
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Works with the independent auditor, which may include the following:
Recommend the appointment (or reappointment) of the independent auditor.
Review the independent auditor’s fee arrangements
Review the scope and approach of the audit proposed by the independent auditor.
Conduct a post‐audit review of the financial statements and audit findings, including any significant suggestions for improvements provided to management by the independent auditor.
Review the overall performance of the independent auditor.
Other oversight functions as requested by the full board.
Other Committees of a Company Shareholders’ Grievance Committee(Mandatory)
Nomination committee (Non‐ Mandatory)
Remuneration committee (Non‐ Mandatory)
Corporate Governance Committee
Shareholders’ Grievance committee
The primary function of this Committee is to assist the Board in controlling the shareholders’ grievances against the Company and redresses the complaints of the shareholders. The Committee shall consist of three or more Directors. The Company Secretary shall act as Secretary to this Committee. The quorum of the meetings shall be one third of the total strength or two Directors whichever is more. The Committee shall ensure proper controls at Registrar and Share Transfer Agent and Review movement in shareholdings and ownership structure.
Nomination Committee
The Committee shall be appointed by the Board and shall comprise of a Chairman and at least 2 other members, entirely of independent directors (or where independent directors constitute the majority), with the Committee chairman being an Independent director. The Committee shall regularly review the structure, size and composition (including the skills, knowledge and experience) required of the Board compared to its current composition and make recommendations to the Board with regard to any
changes. It should give full consideration to succession planning for directors and other senior executives in the course of its work, taking into account the challenges and opportunities facing the Company and what skills and expertise are therefore needed on the Board in the future and be responsible for identifying and nominating for the approval of the Board, candidates to fill Board vacancies as and when they arise. Remuneration Committee/Compensation Committee:
The constitution of a remuneration committee is not mandatory and it meets whenever matters pertaining to the remuneration payable, are to be made. The Committee should comprise of at least three members, majority of whom should be independent directors. Chairman of the committee being an independent director, Remuneration payable shall be approved by passing resolution in the meeting. It should have delegated responsibility for setting the remuneration for all executive directors and the executive chairman, including any compensation payments, such as retirement benefits or stock options, etc. It should also recommend and monitor the level and structure of pay for senior management, i.e. one level below the Board. Further, a Committee constituted to offer shares under ESOP/ESOS should be named as Compensation Committee. Corporate Governance Committee
Corporate Governance is a system by which companies are directed and controlled. It reviews and recommends best corporate governance practices including board process, disclosure practices, policy on ethics/code of conduct etc. and to continuously review and reinforce the corporate governance practices within the company. In addition to the committees prescribed under clause 49, the New Companies Bill 2012 also suggests Corporate Social Responsibility committee (CSRC). The CSR Committee shall formulate and recommend CSR policy to Board, which shall indicate activities to be undertaken by the company. The companies’ bill seeks to break this barrier through its notable provisions. Let's hope, these reforms would ensure better corporate governance and protection of interests of stakeholders of the company.
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What is FEMA?
S.Padmavathy CS Professional Student
Trainee with GMR Group [email protected]
Foreign Exchange Management Act, 1999 or in short ‘FEMA’ is an act that provides guidelines for the free flow of foreign exchange in India. It has brought a new management regime of foreign exchange consistent with the emerging frame work of the World Trade Organization (WTO). FEMA was earlier known as FERA (Foreign Exchange Regulation Act). FERA created flourishing black market in foreign exchange. It brought into the economic lexicon the word “HAWALA”. Under FERA, any offence was a criminal one which included imprisonment. There was a demand for a substantial modification of FERA in the light of ongoing Economic liberalization and improving foreign exchange reserves position. Accordingly, FEMA replaced the FERA. The Act consolidates and amends the law relating to foreign exchange to facilitate external trade and payments, and to promote the orderly development and maintenance of foreign exchange in India. FEMA is applicable all over India and even branches, offices and agencies located outside India, if it belongs to a person who is a resident of India.
Important concepts: Foreign Exchange Transactions
Foreign Exchange transactions may be Capital Account transaction or Current Account Transaction:
Capital Account Transactions
A transaction which alters the assets or liabilities i.e., any transaction which affects the balance sheet items or onetime transaction like transfer of property, transfer/ issue of security, borrowing/lending, export/import.
Current account Transactions
Current account Transaction is revenue in nature i.e., regular transaction that affects the routine receipts and payments. Any person may sell or draw foreign exchange to or from an authorized person if such sale or drawal is a current account transaction. The Central Government may, in public interest and in consultation with the Reserve Bank; impose such reasonable restrictions for current account transactions as may be required from time to time.
FEMA prohibits foreign exchange transactions carried out otherwise than through an authorised person. It also exempts possession and few transactions in foreign exchange by any person upto such limit as the Reserve Bank may specify. Capital Account Transactions are deemed to be prohibited unless permitted and Current Account Transactions are deemed to be permitted unless prohibited.
Continued in Page 27
Transactions that do not require any approval from RBI
Transactions that require approval from RBI
Prohibited Current Account Transactions
Release of Exchange for Travel
Upto USD 10,000 or equivalent in one financial year for one or more private visits abroad (Nepal and Bhutan being exempted )
Upto USD 25,000 for business visits Upto USD 1,00,000 for person going abroad for employment, education (yearly) and for medical Treatment
Gifts and Donations above USD 5000
Corporate Donation above 1 % of Foreign Exchange Earnings during 3 previous years or USD 5 million, whichever is less
Drawal of exchange for travel to or with residents of Nepal/Bhutan
Commission on export to JV/WOS abroad of Indian Companies.
Commission on Rupee Trade
Call back Charges Remittance out of Lottery, racing etc.
Bogus Prizes / Fictitious Schèmes etc.
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Joint Ventures in India
Prashanth S V Management Trainee @ Hemanth, Biswajit & Co.,
Introduction India is a fast developing country and an emerging market for new ventures as well as Joint Ventures. Joint Ventures in India have become an integral part of global business strategy for competitive advantage. A Joint Venture is as an association of two or more individuals or business entities that combine and pool their respective expertise, financial resources, skills, experience and knowledge in furtherance of a particular project or undertaking. In other words, a Joint Venture is a co‐operation of two or more individuals or businesses in which each agrees to share profit, loss and control in a specific enterprise. This association may take various forms and may involve the running of a business on a long‐term basis or on the realisation of a particular project. The venture may be entirely a new one or it may be an existing venture in which the prospective joint venture partners will benefit from the introduction of a future partner. A Joint Venture is, therefore, a highly flexible concept, and the nature of any particular joint venture will depend to a very large extent on its own facts, resources, and requirements of the joint venture partners. The joint venture partners may have complementary skills or resources to contribute to the joint venture or may have experience in different industries, which it is hoped will produce synergistic benefits. Substantive Features of Joint Ventures In Joint Venture, two or more persons come together and create a separate entity to carry out business in which each person contributes and plays an active role in
decision making process. The essential features of a JV include
a) Agreement between the parties b) Pooling of tangible and intangible assets c) Mutual control and management; and d) Sharing of profits.
Types of Joint Ventures The two fundamental types of joint venture according to the International Trade Centre of United Nations Conference on Trade and Development (UNCTAD) are: a) Equity Joint Venture: It involves formation of a new
company in which each owns a certain portion of the equity or alternatively, there may be equity participation in an existing company.
b) Contractual Joint Venture: This type of joint venture may be formed where the establishment of a separate legal entity is not needed or the creation of such a separate legal entity is not feasible in view of one or the other reasons. The contractual joint venture agreement can be entered into in situations where the project involves a narrow task or a limited activity or is for a limited term or where the laws of the host country do not permit the ownership of property by foreign citizens.
Formation of Joint Venture Choosing of a good home partner is the most important tool to the success of any joint venture. Once an associate is selected, normally a memorandum of understanding (MoU) or a letter of intent is signed by the parties stressing the foundation of the future joint venture agreement.
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Steps involved in setting up of Joint Venture Company Setting‐up of JVCs require compliances with the rules and legislation prevailing in India if one of the Partner is non‐resident. Joint Venture Agreements and shareholders' agreement should be carefully drafted to provide a comprehensive road map on the rights and obligations of the parties and minimize differences and disputes. Further, the salient features of the JVA and shareholders' agreement must be incorporated in the articles of association of the JVC to be legally enforceable. It is advisable that the JVC must provide right to first refusal to ensure that differences and conflicts among the parties do not paralyze the operation of the JVC. Right of first refusal in a JVA is a device under which a party planning to exit the JVC is obliged to offer his shares to the existing party before selling these to an outside party. The object is to preserve the sanctity of the JVA by preventing entry of outsiders into the JVC. Setting up a JV in India: A JV in India, has to comply with all applicable Indian laws. Further, foreign investment in India is governed by FDI Policy and subsection (3) of section 6 of the FEMA dealing with capital account transactions, read with Foreign Exchange Management
(Transfer or issue of security by a person resident outside India) Regulations, 2000. Contracts Associated with Joint Venture Companies
Promoters' Contracts: Generally promoters enter into pre‐incorporation agreements for supplying technical know‐how, land and building, plant and machinery for implementation of the JV project to be owned by the JVC ‐ called "promoters' contracts". Such contracts are legally not binding on the JVC because JVC would not have been in existence when these contracts were entered into by the promoters with third parties. Duties of Promoters: The two fiduciary duties of promoters are: a) Not to make any profit, directly or indirectly, at the expense
of the JVC, without the knowledge and consent of the company, otherwise the company can repudiate the contract and compel them to account for it;
b) Can make profit out of promotion with the consent of the JVC in the same way as an agent may retain a profit obtained through its agency with its principle's consent subject to complete disclosure.
Contracts in which directors are interested: The Board of Directors (BOD) of a JVC, for entering into certain contracts in which particular directors’ are interested have to comply with Section 297 of the Companies Act, 1956 (Act). The provisions of Section 297 of the Act are also founded on the principles of fiduciary relationship of
directors with the company. A JVC is entitled to the collective wisdom of its directors and if all or any of them are interested in any contract with the company, the company loses the benefit of its unbiased judgment. In other words, every director, directly or indirectly, concerned or interested in an arrangement must disclose it to the board, and abstain from participating in such discussions and voting relating to such matters. Failure by a director to make disclosure is punishable with fine. Conclusion: Joint Venture is an excellent
business vehicle for facilitating for mutual advantage and exploring and establishing new markets. However, before deciding a JV, factors like the eligibility criteria, merits and demerits of different forms of business organization, fund raising avenues and type of instruments, transfer of capital and repatriation, tax concessions and incentives etc., should be carefully considered.
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Money Laundering
Agilesh R. Iyer CS Management Trainee
J. Sundharesan and Associates [email protected]
Introduction to and meaning of money laundering:
Money is the prime reason for engaging in almost any type of criminal activity. Money‐laundering is the method by which criminals disguise (Conceal) the illegal origins of their wealth and protect their asset bases, so as to avoid any suspicion. Criminal activities such as – terrorism, illegal arms sale, financial crimes, smuggling, drug trafficking, bribery etc., produce large profits for criminal groups. Such criminal groups convert this money into legal money (i.e., the process of converting tainted money into untainted money).
Impact of money laundering on the economy of the country:
Money‐laundering can erode a nation's economy by changing the demand for cash, making interest and exchange rates more volatile, and by causing high inflation in the country.
Money laundering has negative effects on economic development. The infiltration and sometimes saturation of dirty money into legitimate financial sectors and nations accounts can threaten economic and political stability.
Economic crimes have the potential of adversely affecting people who do not prima‐facie, seem to be the victims of the crime. The negative economic effects of money laundering on economic development are difficult to quantify yet it is clear that such activity damages the financial‐sector institutions that are critical to economic growth reduces productivity in the economy’s real sector by diverting resources and encouraging crime and corruption, which slow down economic growth.
Stages in Money Laundering:
1. Placement Stage: The placement stage represents the initial entry of the ‘Dirty’ cash of crime into the financial system. Generally this stage serves two purposes: - It relieves the criminal from holding and guarding
large amounts of cash - It places the money into the legitimate financial
system. 2. Layering Stage: This takes place after the funds have
entered the financial system through the placement stage. In this stage, the Launderer engages in a series of conversions of funds to separate them from their sources.
3. Integration Stage: The final stage in Money laundering is the Integration stage. It is in this stage where the money is returned to the criminal from what seems to be the legitimate source. The major objective at this stage is to reunite the money with the criminal in a manner that appears to result from a legitimate source.
Prevention of money laundering: International and domestic initiatives:
1. Since money laundering is an International phenomenon, transnational co‐operation is of critical importance to fight the menace of money laundering.
2. At the international level, a number of initiatives have been taken to deal with the problem of Money Laundering (Ex: Various International Conventions like Vienna Convention, Council of Europe, The Financial Action Task Force(FATF), BASEL Committee statement of principles, etc.,)
3. At the Domestic level Prevention of Money Laundering Act was passed in the year 2002.
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Some Methods of Money Laundering 1. Frequent exchange of cash into other currencies 2. Transfer of large sums of money to or from overseas
location with instructions to pay in cash 3. Purchase of Art Treasures and Jewelry 4. Technique of over payment of tax 5. Gambling (Horse Race, Betting, Lottery etc.) “Dirty Money” is mainly being used for Political corruption, Terrorist Financing, Anti Corruption and Financial Corruption.
Concept of Lobbying and Bribery Lobbying: The act of attempting to influence business and Government leaders to create legislation or conduct an activity that will help an organization. The recent example for Lobbying in India is Wal‐Mart Lobbying case (2012). The US based supermarkets have approximately spent Rs. 125 Crores to enter Indian market. This case was mainly initiated because Lobbying is considered to be legal in USA and illegal in India. Bribery: Bribery may include the corruption of a public official as well as commercial bribery, which refers to the corruption of a private individual to gain a commercial or business advantage. The essential elements of official bribery are – (1) Giving or Receiving, (2) A thing of value, (3) To influence, (4) An official act. Anti – Money Laundering
Anti–Money Laundering is the term used by the banks and other financial institutions to describe the variety of measures to combat this illegal activity and to prevent criminals from using individual banks and the financial system in general as the conduit for their Proceeds of Crime. The vast majority of criminal dealings are done in cash. Criminals need ways to dispose of the cash and have it reappear as part of their wealth with as little chance as possible of it being tracked back to the cash element. Criminals have to use the financial system and banks in particular to do this. Anti–Money Laundering processes and controls help banks and financial institutions to protect themselves and
their reputation from the criminals. Two aspects in which financial institution can protect itself from these risks are:
Strong Know Your Customer processes and
Strong Transaction Checking processes Know Your Customer (KYC) The words KYC in financial sense describe the process by which a bank or a financial institution checks the identity, background and other aspects of the source of wealth of potential and existing customers. RBI has come up with more specific guidelines regarding KYC. These were divided into four parts:
Customer Acceptance Policy: All banks shall develop criteria for accepting any person as their customer to restrict any anonymous accounts and ensure documentation mentioned in KYC.
Customer Identification Procedures: Customer to be identified not only while opening the account, but also at the time when the bank has a doubt about his transactions.
Monitoring of Transactions: KYC can be effective by regular monitoring of transactions. Identifying an abnormal or unusual transaction and keeping a watch on higher risk group of the account is essential in monitoring transactions.
Risk management: This is about managing internal work to reduce the risk of any unwanted activity.
Conclusion: Thus Money Laundering is a global problem and must attract global concerns. Without international cooperation money laundering cannot be controlled. Bankers play the most prominent role and without their connivance the operation cannot be carried out. Development of new high‐tech coupled with wire transfer of funds has further aggravated the difficulties to detect the movement of slush funds. Money laundering must be combated mainly by penal means and within the frameworks of international cooperation among judicial and law enforcement authorities. Last but not the least it is vitally important to keep in mind that simple enactment of Anti‐Money Laundering Laws are not enough. The Law enforcement Community must keep pace with the ever changing dynamics of money Launderers who constantly evolve innovative methods which helps them to stay beyond the reach of law.
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SEZ – An Overview
Shambhavi M. CS Professional Program
Trainee – Ganapathi & Mohan
In the present scenario, export activities are considered as one of the contributing field for the economic development of a country. Further, a continuous effort for overall development of particular backward regions in a state or a country may contribute for the economic development of a country which is achieved by declaring such regions as Special Economic Zones. Special Economic Zone means designated areas in countries that possess special economic regulations that are different from other areas in the same country. Moreover, these regulations tend to contain measures that are conducive to foreign direct investment. Conducting business in a SEZ usually means that a company will receive tax incentives and the opportunity to pay lower tariffs. It is a geographical region that has economic laws that are more liberal than a country’s typical economic laws. An SEZ is a trade capacity development tool, with the goal to promote rapid economic growth by using tax and business incentives to attract foreign investment and technology. SEZ does it really required? The concept of SEZ’s was largely pioneered by China, wherein the SEZ’s contribute to 20 percent of the total FDI. Then the SEZ model was also successfully implemented in Poland and Philippines. The SEZ’s are important in today’s context for the third world countries which have been in the race for rapid economic growth. There are many positives which emerge out of establishing an SEZ. Advantages: 1. Promote exports 2. Encourage substantial investments from domestic as
well as foreign investors 3. Generate additional economic activity 4. Development of infrastructure facilities
5. Duty free import/domestic procurement of goods for development, operation and maintenance of SEZ units
6. Income Tax exemption on export income for SEZ units 7. Exemption from minimum alternate tax 8. Exemption from Central Sales Tax, Service Tax 9. Exemption from State sales tax and other levies of the
State Governments. 10. Simplified procedures for development, operation,
and maintenance of the Special Economic Zones and for setting up units and conducting business in SEZs.
Some of the approved activities under SEZ: Land & Site Development Utilities Security Systems Tele Communication facilities Facilities & Infrastructure Waterside Infrastructure Trading Hub Common facilities & Services Social Infrastructure Operation of SEZ in Karnataka: Moving continuously towards growth phase, global trade and investment, Karnataka has been one of the most active state in initiating productive ventures and activities on the SEZ front. Further, the Karnataka Government has been efficient in generating growth and expansion through Karnataka SEZ’s at multiple locations all over the state. Some of the names that deserve mention are as follows:
Sector Specific SEZ for Pharma & Biotechnology at Hassan.
Sector Specific SEZ for Food Processing and Agro‐based industries at Hassan.
Sector specific textile SEZ at Hassan.
IT SEZ at Mangalore.
Coastal SEZ at Mangalore.
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Drawbacks: a) Takes away the agricultural land from the farmers. b) SEZ’s are leading to decrease in crop production, thus
slowing down of agricultural activity in the country which could lead to food crisis and loss of self sustenance in future.
c) The SEZ’s if not properly located could lead to Supply Chain Management problems.
d) Improper planning could lead to unbalanced growth in the region.
e) SEZ’s setup for the manufacturing sectors may lead to environmental pollution.
As India consists of more villages, main activity of majority group of people is agriculture. The SEZ’s could on one face greatly contribute to the economic development of a country and on the other face affects the agricultural activities of a country. To conclude, focus towards the growth of a nation should not become bane to the individual person or group. It is the duty of the Government which authorizes and declares the region as SEZ, to take necessary actions, plans and steps to safeguard the interest of common public.
What is FEMA? (Cond., from Page 21)
Conclusion: In today's changed scenario, Indian rupee has become fully convertible so far as current account transactions are concerned. This implies that foreign exchange is freely available to the residents for remittance on account of current account transactions for the various purposes like foreign travel, foreign education, and medical treatment abroad etc. The non‐residents are also freely allowed to remit outside India the income or capital gain generated in India. But, even today, the Indian rupee, in respect of capital account transactions, is not fully convertible.
Business and Commercial Remittance Abroad
Foreign Technology Agreements are permitted except in High Priority Industries
Payment can be made on lump sum or Royalty based on sales or by issue of Equity Shares after deducting TDS
There are no limitations on royalty payment and payment of Technical Fees No collaboration permitted in Lottery, Gambling etc.
Commission to Agents abroad for sale of residential/commercial plots in India above 5 % of Inward Remittance or USD 25000, whichever is higher
Consultancy Charges paid abroad for more than USD 1 million
Reimbursement of Pre‐incorporation expenses above 5% of FDI or USD 1 lac whichever is higher
Few Examples of Current Account Transactions
Payment for imports of goods
Remittance of interest on investment made and funds borrowed from abroad after tax deductions
Remittance of Dividend if the investment was allowed without any condition
Booking with Airlines/Shipping Salary/remuneration to Foreign Directors subject to restrictions in any other law
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Public Issue without Going
Public
Meenakshi Sharma
Management Trainee @ ING Vysya Bank [email protected]
To the league of the corporate legal battles of Vodafone tax issue, illegal mining in Karnataka, Goa and other states, now, Sahara Group has joined them on 24th November, 2010. Howsoever, the battle is still going on through appeals and second petition from both Securities Exchange Board of India (SEBI) and Sahara Group though the Supreme Court has passed the judgment. We will consider the Case law in the light of the same.
Parties to the Case
(i) Two unlisted Sahara group entities ‐ Sahara India Real Estate Corp (SIRECL) and Sahara Housing Investment Corp (SHICL) – for the purpose of this article, we shall collectively consider this as ‘Sahara Group’ (ii) SEBI – Market Watchdog
Issues:
1. Whether Optionally Fully Convertible Debentures (OFCDs) issued by the Appellant are securities within the meaning of section 2(h) of SEBI Act?
2. Whether SEBI has jurisdiction u/s 55(b) of the Companies Act, 1956 to call for information and investigate the matters relating issue and transfer of OFCDs offered by the Sahara Group to more than 50 persons?
3. Whether the Sahara Group had committed any violation of section of companies act relating to issue of prospectus, misstatements in prospectus and criminal liability and penalties for violations?
Background
1. Sahara India Real Estate Corp Ltd. (SIRECL) floated an issue of OFCDs and started collecting subscriptions from investors with effect from 25 April 2008 up to 13
April 2011. During this period, the company claimed to have collected over Rs. 19,400 crore, while up to 31 August 2011, after redemptions the company had a total collection of over Rs. 17,656 crore.
Similarly, Sahara Housing Investment Corporation (SHCIL) had filed a red herring prospectus with the Registrar of Companies, Mumbai, in October 2009 and raised Rs. 6,373 crore from 7.5 million investors. In 2009, when Sahara Prime City, one of the group companies approached SEBI to go public, the regulator suddenly asked SIRECL and SHICL to refund all the OFCD money to investors. That begun the battle. 2. When SEBI sent its queries, Sahara had its arguments well marshaled. Section 55A of the Companies Act of 1956, it argued, delegates administrative power to SEBI only with respect to listed public companies and those companies which intend to get their securities listed in India.
Since the two companies, SIRECL and SHCIL, had stated in their red herring prospectuses that they did not intend to list the OFCDs, the matter was outside the market regulator’s purview. Also, since the OFCDs were being issued to a defined group of people, though large it may be, it was a preferential issue, not a public issue, and hence not within SEBI’s regulatory jurisdiction.
SEBI was not convinced by these arguments. If OFCDs are being issued to 50 people or more, it becomes a public issue and therefore falls within its jurisdiction, the market regulator said.
Case processing:
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In April 2010, SEBI forwarded some OFCD investor complaints to RoCs in UP and Maharashtra saying that Sahara companies were unlisted and had not filed prospectus for raising funds with it, and requested the two RoCs "for examination (of the complaints) and necessary action". When this information came to the notice of the capital market regulator, it started its investigation and passed an ex‐parte order on 24 November 2010 restraining the company from mobilizing funds under a red herring prospectus (RHP). SEBI passed an order dated 23 June 2011 that was placed before the Supreme Court, which asked both the Sahara companies to withdraw their writ petitions from the Bombay High Court with a direction to appeal before the Securities Appellate Tribunal (SAT). Around this time, in another case relating to an unlisted entity, initially, government opinion favored Sahara. In early 2011, when Salman Khurshid was the corporate affairs minister and Veerappa Moily was law minister, Additional Solicitor General Mohan Parasaran had said that unlisted companies, like Sahara India Real Estate Corporation and Sahara Housing Investment Corporation, should be regulated by the ministry of corporate affairs and not SEBI. In July 2011, Khurshid and Moily swapped portfolios and the scenario changed: the ministry of corporate affairs now said that SEBI and it would work in tandem and the market regulator had full jurisdiction over public issues. Now, on the question of whether the OFCD offer to more than 50 people was a public issue, the SC has recently ruled that they come under SEBI's jurisdiction. However, in 2007 Sahara had reported that there were 1.97 crore investors for its first issue and no one had objected. In addition, post this discloser, two RoCs had allowed Sahara to issue fresh OFCD issues. The Case observed the following points:
1. It was noted that Sahara claims to issue OFCDs on private placement but the facts/action stating entirely different.
2. Sahara had issued the hybrid securities to more than 50 Persons and it is deemed to be a public offer in
terms of Section 67 (3). Therefore, SEBI got its jurisdiction.
3. Section 60(b) 1 casts no obligation to issue Information Memorandum (IM). However Sahara chooses to do that to raise public demand and issued Red Herring Prospectus (RHP).
Decision ‐ Court Judgment The Supreme Court ordered the two companies on August 31 of 2012 to return the money they had raised through the bonds — Rs. 24,029 crore — to the 2.96 Crore investors, along with interest (15 per cent per annum). It is said that the deposit amount be deposited an interest bearing deposit A/c with a nationalize bank and authorize SEBI to take legal recourse, if Sahara fails to comply with the direction. Appropriateness of Decision After an extensive see saw game, the Supreme Court has stated the above judgment, however on the flop side, it has left back the following unanswered questions: (i). If with government permission a business is done for 11 years, can the rules be changed and the entity punished with retrospective effect? (ii). Can a regulator give one statement in Parliament and after a few months give a contradictory statement through an affidavit in court? (iii). Can SEBI state through a letter to RoC that an entity is not under it and RoC should take action, but after seven months contradict itself and issue prohibitory orders against the same entity saying it was under its purview and not MCA, the nodal ministry for RoC?
Influence on the existing law
The Case will give an estimate to the authorities to include the section related to the case that when the unlisted entity issues a hybrid security to more than 50 persons, it will be under SEBI’s purview or MCA’s purview.
Conclusion
This is quite a commendable judgment by SEBI to protect interest of small investors as well as to prohibit unscrupulous promoters who raise huge money from public in the name of savings.
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One Person Company
Sowmya Raghunath Trainee at Ganapathi & Mohan, Company Secretaries,
Bangalore
“ONE PERSON COMPANY (OPC)” is a new avenue to India which is an entity which functions on the same principle as a Company, but with only one member and one shareholder. One Person Company (OPC) is the Concept introduced by the Government of India in Companies Law, 2009. The Companies Law, 2012 has been passed by Lok Sabha on 18th December 2012. This may move to Rajya Sabha in the coming budget sessions of Parliament. The bill will come into force on the date on which the Central Government may, by publishing notification in the Official Gazette. Basic Features of One Person Company (OPC):
One Person Company is one of the type of Company on the basis of number of members
One Person Company has only one person as a member/shareholder
One Person Company is a Private Company
Minimum paid up share capital of One Person Company is one lakh rupees (Rs. 1,00,000)
One Person Company may be either a Company limited by share / a Company limited by guarantee / an unlimited Company
The words "One Person Company" should be mentioned in brackets below the name of the One Person Company
The Name of Company shall include word OPC ‘One person Company’ within bracket below the name of the Company, wherever its name printed, affixed or engraved.
One Person Company shall indicate the name of the nominee/other person in the memorandum, with his prior written consent
The written consent above, shall be filed with the Registrar at the time of incorporation of the One Person Company along with its MOA&AOA (Memorandum and Articles)
The nominee/ other person can withdraw his consent at any time
The member/Shareholder of One Person Company may change the nominee/other person at any time, by giving notice to the other person and intimate the same to Company. Then the Company should intimate the same to the Registrar
In case of the death of member/shareholder or his incapacity to contract, then nominee/other person become the member of the Company
Member/Shareholder of the One Person Company acts as first director, until the Company appoints director(s)
One Person Company can appoint maximum 15 directors, but minimum should be one director
One Person Company need not to hold any AGM (Annual General Meeting) in each year
Cash Flow Statement may not include in the financial statements of One Person Company
One Director is sufficient to sign the Financial Statements/Director's Report
Within 180 days from the closure of the Financial Year, One Person Company should file the copy of the Financial Statements with Registrar
One Person Company should inform to the Registrar about every contract entered and also should record in the minutes of the meeting with in 15days from the date of approval by the BOD (Board of Directors)
(Continued in Page 36)
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Fast Track Exit
Vinayak Bhat Professional Programme, Sirsi [email protected]
Ministry of Corporate Affairs has introduced a scheme called “Fast Track Exit Scheme (FTES)” on 7th June, 2011 vide General Circular No. 36/2011. The main intention of Fast Track Exit Scheme is to provide easy way for dissolution to such companies, which are inoperative for various reasons since incorporation or commenced business but become inoperative or defunct later on. Such defunct companies, which are desirous of getting their names struck off from the Register of Companies maintained by the Registrar of Companies (ROC), can avail the FTES under the provisions of Section 560 of the Companies Act, 1956 rather than going for elaborate liquidation procedure.
This Scheme is less time consuming and also less expensive compare to other modes of winding up of Companies in India. FTES made the way easy for the defunct companies for dissolution. FTES is an improvement over the Easy Exit Scheme (EES). The main differences between Fast Track Exit Scheme and Easy Exit Scheme are as follows:
Applicability: FTE Scheme is applicable for a “Defunct Company”. Defunct Company means, The Company:‐ which has nil Assets and Liability
has not commenced any business activity or operation since incorporation.
is not carrying over any business activity or operation for last one year before making application under FTES.
Any defunct company which has active status or identified as dormant by the Ministry of Corporate Affairs (MCA), may apply for getting its name struck off from the Register of Companies. The following companies shall not be allowed for FTE mode:
Listed Companies
Companies de‐listed for non‐compliance of listing agreement
Companies registered under section 25 of companies act, 1956
Vanishing Companies
Companies where investigation and inspection is pending in the Court
Companies against whom prosecution is pending for non‐compoundable offences.
Company is in default or outstanding in repayment of public deposits
Company having secured loan
Company having management dispute
Company having dues towards Income Tax, Sales Tax, Banks,
Central Excise, Local/ State or Central Government
Company in respect of filing documents have been stayed by Court, Company Law Board, Central Government or any competent authority.
Particulars Fast Track Exit Scheme
Easy Exit Scheme(EES)
Filing Fees Rs. 5000/‐ Rs. 3000/‐
Eligibility The Company which is inoperative or not carrying any business activity since last one year.
The Company which is inoperative or not carrying any business activity since 1st April, 2008 and The Company which did not raise their minimum paid up capital that is Rs. 1,00,000/‐ or Rs. 5,00,000/‐.
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Procedure: The Defunct Company which is desirous of getting their names struck off from the Register of Companies maintained by the ROC can avail FTES under the provisions Section 560 of the Companies Act, 1956 by following below mentioned procedure:
- The Defunct Company shall make an application in the Form FTE along with the filing fee of Rs. 5000.
- The Form FTE shall be digitally signed by any of the Director, Secretary or Manager.
- Form FTE shall be certified by a Chartered Accountant or Company Secretary or Cost and Works Accountant in whole time practice.
- The Form FTE shall be accompanied by an affidavit signed by all the existing Directors before a first class Judicial Magistrate or Oath Commissioner or Notary to declare that the Company is a “Defunct Company”. If the company has carried some business for a period in that case the date shall be specified.
- Form FTE shall also be accompanied by a notarized Indemnity Bond stating that the losses and liability of the Company will be met in full by every director individually or collectively even after the name of the Company is struck off from the register.
- If the Company has a Foreign Nationals or Non Residents the Affidavit and Indemnity Bond shall be notarized as per the respective country’s Law.
- The Company shall also file a statement of accounts certified by Statutory Auditor or Chartered Accountant in practice. The said statement of account shall be drawn up to a date which is not older than one month from the date of filing the application.
- The Company shall disclose pending litigation if any, involving the Company while applying FTE.
- If the litigation is regarding non filing of Annual Return then such application may be accepted, provided that the applicant has
already filed the compounding application. But the step for final striking off would be done only after the disposal of the compounding application.
Procedure adopted by the registrar of companies under FTE mode:
- The ROC on receipt of application shall put up the name of the Company under FTE mode and send notice to the Company by giving 30 days’ time for the stakeholders for raising objections, if any.
- The ROC on being satisfied shall strike off the name of the Company and on publication in the Official gazette the Company stands dissolved.
- The decision of the ROC in respect of striking off the name of the Company shall be final.
Conclusion: FTES is the best and easy way for defunct companies to striking off their names from the Register of Companies maintained by the ROC and also in FTES time and cost involved is comparatively much lower than involved in other modes of winding up.
Now‐a‐days it seems that FTE became a regular part of company law administration and is not a time bound scheme.
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Takeovers
Rakshita.T.S Professional
Programme [email protected]
Introduction: The word Merger, Amalgamation and Takeovers creates attention as being inexplicable. The word takeover is just not a word in any books now, but infact it has become corporate growth devices in Business world where one company acquires control of the other company. But acquiring a company is that so easier? The companies which intends for take over should follow legislations and regulations laid for the same. Meaning: Take over means a business transaction where a group of individuals or a company becomes owner of the other company by acquiring control over the assets or management of other company. Why Takeovers take place?: Any company which comes into existence intends not only to make profit but have an intention to grow and also to sustain for long time in its Industry and market. Apart from the above they are various reasons for takeover such as
Competition
Improve economies of scale
Brand name
Financial stability and so on and so forth. So, for any corporate body the decision of takeover has been proved in recent times as cost benefit and profit and growth benefit. Legal Aspects of Takeovers: To make any takeover and action plan of a corporate body, successful and legal, the legislations and regulations helps them.
The legislations and regulations that govern takeover Companies Act, 1956 SEBI(Substantial Acquisition of Shares and Takeovers)
Regulations,2011 Listing Agreement. Companies Act, 1956 – Sections 395 Power and duty to acquire shares of shareholders dissenting from scheme or contract
(a) The company which intends to acquire the shares of another company with an intention to have control on that another company is called as Transferee Company.
(b) The company whose shares are proposed to be acquired is called as transferor company.(reference – study material)
(c) Every circular or offer made on this behalf will be accompanied by approval of Board of directors of both Transferor and transferee companies and every offer made by the transferee company shall be accompanied with statement stating that the steps have been taken by it to ensure that necessary cash will be available.
(d) The transferee company can circulate any circular given by directors of transferor companies “recommending to accept the offer of transferee company” only after filing the circular with registrar in form no 35A
(e) The transfer of shares by the transferor company must be approved by the holders of 9/10th in the value of the shares whose transfer is involved
(f) Such approval should be obtained within 4 months from the date of circulation
(g) The MOA of the transferee company should contain in its object clause a provision for take over
(h) Once the approval is available the transferee company should compulsory acquire shares of the minority interest
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(i) The transferee company must send the notice to the minority interest to surrender their shares
(j) Once in the books of the transferor company acquisition of the 90% of shares has been registered ,the transferor company should send intimation within one month of registration to the dissenting shareholders about the registration and receipt of the amount from the transferee company
(k) The amount to be paid to acquire minority stake should be transferred by Transferee Company to Transferor Company and the amount so transferred should be in accordance of the scheme or contract.
SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 Regulation 3 ‐ Open Offer Thresholds: Open offer should be made if the following is triggered. This is applicable when the control of the company is done through acquisition of shares: Acquisition of 25% or more shares or voting rights Acquisition of more than 5% or voting rights in a financial year
Regulation 4 – Acquisition of Control: This regulation applies when there is change in control of the company
Regulation 6 – Voluntary Offer: It is a Voluntary open offer made by the person holding 25% or more in the target company but less than maximum permissible non‐public shareholding.
Regulation 7 – Offer size: The offer size should be at least of 26%, of total shares of the target company.
Regulation 9 – Mode of payment: The offer price can be paid in form of cash, issue or exchange of shares or exchange of convertible debt instruments or combination of all the three.
Regulation 10 – General Exemptions: This regulation exempts from open offer obligations under Regulation’s 3 and 4 without SEBI’s approval for few categories such as immediate relatives, group companies, ordinary course of biz of merchant banker, stock broker etc., Takeovers as per SARFAESI Act etc.
Regulation 11 – Exemptions by SEBI: The regulations exempt the open offer obligations ender regulations 3 and 4 with SEBI’s approval. But it depends on individual cases.
Regulation 17 – Escrow Account: As a security for acquirer’s performance an escrow account should be opened with scheduled commercial bank or bank guarantee should be given and deposit the amount in following manner:
- If consideration is upto Rs. 500 Cr – 25% of consideration
- If consideration is more than Rs. 500 Cr – 25% of Rs. 500crs and 10% of balance amount.
Regulation 21 – Payment of Consideration: The acquire has to complete all the procedure including payment of consideration
to shareholders within 10 days from the close of tendering period.
Regulation 23 – Withdrawal of Open Offer: An acquirer can withdraw the open offer for reasons like statutory approvals have been refused, if SEBI requires withdrawl, if individual acquirer dies etc.
TAX POINT OF VIEW: Tax Planning can be done for acquiring company For example: If any company takeover sick company then it can benefit the accumulated losses of sick company by acquiring company through carry forward and setoff losses against profits which reduces tax liability of acquiring company. STRATEGIC POINT OF VIEW: Takeover has similar benefits of that of Mergers and Amalgamations like
a. Market expansion, b. Profit making, c. Cheaper acquisition business, d. Economies of large scale etc.
But, takeovers if become a tool for any business tycoons then it may create Monopoly in the industry it is operating and close the doors for all new entrants to the industry and also for the existing small industries as they cannot compete with large industries. At same time such take overs help to improve country’s economy by generating Income through Foreign Investments, Foreign Technology Collaborations, and also to reduce Non‐performing Assets blocked in sick companies which affects economy on whole Conclusion: Takeovers in recent times have become quite popular in business world. It has become common strategy for expansion and access to world markets. Few recent acquisitions have proved differently. These has not only helped the companies for their own benefits but also made realize the entire world that India stands equally shoulder to shoulder as a competitor in Business world. These acquisitions have really changed the Phase of Industrial era for India. The Legislations and regulations are changed accordingly for the benefit and successful implementation of law for takeovers in India.
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FDI in Retail
Chethan J. Nayak Mangalore
[email protected] Foreign Direct Investment refers to Foreign Capital that is invested in India wherever the Funds are required, to enhance or expand the production or business respectively. However, FDI in retail is different from the investment in any sector. Retail can be single or multi brand and may be described as a sale to the ultimate consumer at a margin of profit. Retailing is one of the core parts of the Indian economy that constitutes certain percentage of GDP and India is one of the top five retail markets in the world. As estimated by PwC the Indian retail sector is worth US$ 350 Billion and the organized retailing is only 8%. In a Country having a population of 1.2 billion, there is scope for tremendous increase in the retail markets. In November 2011, India's central government announced retail reforms for both multi‐brand stores and single‐brand stores. These market reforms paved the way for retail innovation and competition with multi‐brand retailers such as Walmart, Carrefour and Tesco, as well single brand majors such as IKEA, Nike, and Apple. Later, on 7th December 2012, the Federal Government of India allowed 51% FDI in multi‐brand retail in India. The Feds managed to get the approval of multi‐brand retail in the parliament despite heavy uproar from the opposition. Some states will allow foreign supermarkets like Walmart, Tesco and Carrefour to open while other states will not. Critics It will promote welfare of farmers by agriculture growth and thereby increasing their income level. FDI in retail will make the consumer happy as well. In the absence of intermediaries, the consumer will end up with paying lower price for a better product. Besides, in the unorganized sector, consumer has to argue and fight a lot in case he has to return some faulty product to the
retailer. This process will be standardized. It will serve as an antidote to inflation. The producer will get direct payment from the retailer and the same will be higher than what he was getting earlier due to the foul play by intermediaries. FDI will improve investment in logistics of the retail chain, leading to an efficient market mechanism. India is one of the biggest producers of fruits and vegetables (more than 180 million tones). However, it does not have a strong integrated cold‐chain infrastructure with only around 5,400 cold storages having total capacity of about 24 million tones. Foreign direct investment in the retail sector will spur competition as the current scenario is of low competition and poor productivity. India will flourish in terms of quality standards and consumer expectations. Fears that the entry of FDI in multi‐brand retail may cause unemployment as foreign firms may not procure material from domestic producers and may import the same from international market are unfounded as the entry of big companies like Reliance and Tata has substantially improved the life standard of farmers and villages from where they are procuring. Allowing multiband retailing may cause the Indian market to consist only of Sales Men’s and not of Production. There will be more foreign company coming to India not giving Domestic Company enough space to grow. It may create large monopoly in the retail market. There is fear of large takeover of the domestic company by the foreign giants. It increases the demand and creates pressure in the production market and farmers leading to hyper production of fruits and vegetables without having enough nutrients in it. Challenges McKinsey study claims retail productivity in India is very low compared to international. For example, the labor productivity in Indian retail was just 6% of the labor productivity in United States in 2010. India's labor
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productivity in food retailing is about 5% compared to Brazil's 14%; while India's labor productivity in non‐food retailing is about 8% compared to Poland's 25%. Total retail employment in India, both organized and unorganized, account for about 6% of Indian labor work force currently ‐ most of which is unorganized. This is about a third of levels in United States and Europe and about half of levels in other emerging economies. A complete expansion of retail sector to levels and productivity similar to other emerging economies and developed economies such as the United States would create over 50 million jobs in India. Training and development of labor and management for higher retail productivity is expected to be a challenge.
To become a truly flourishing industry, retailing in India needs to cross the following hurdles: Automatic approval is not allowed for foreign investment in
retail.
Taxation, which favours small retail businesses.
Absence of developed supply chain and integrated IT management.
Lack of trained work force.
Low skill level for retailing management.
Lack of Retailing Courses and study options
Conclusion: Though FDI in retail is a boom for Indian market, there is an opposition from political parties and restriction in some states. Still there is a long way to go!
One Person Company (Continued from Page 30)
Advantages of OPC:
Better opportunities for loan and banking facilities as a company
Unorganized proprietorship into organized structure of accompany
No cash flow statements required Annual return need not be necessarily signed by a
company secretary Annual general meeting is not essential and general
meetings/extraordinary general meetings are not applicable in this case.
Expansion of a Company is easy and possible. All you need to do is to increase the authorised capital and allot shares
Investment and investors prefer a Private Limited Company, since it is the only structure where it is possible to issue shares to third parties, and also have a board from which supervision is possible.
Disadvantages of OPC:
Just like any other form of business, being an OPC can also have its disadvantages.
Liability – Single entrepreneur though seen as a separate entity by the law. Still it is sometime subject to unlimited liability. This means if the business gets into debt, the business owner is liable. In the worst case, this may mean a person risks their home, personal savings and any other assets
they have both in and outside of the business.
Finance ‐ Single entrepreneur often find it difficult to raise finance to fund their business. They may struggle with expansion in the future.
Reverse economies of scale‐ Single entrepreneur will be unable to take advantage of economies of scale in the same way as limited companies and larger corporations, who can afford to buy in bulk. This might mean that they have to charge higher prices for their products or services in order to cover the costs.
Decision making – All decisions must be made by the single entrepreneur. There is no room for help by others. So the success or failure of the business rests on one person.
Taxation‐ If the corporation does not elect to be treated as a corporation, there is the potential for double taxation. There are also other tax issues.
To sum up, OPC is a zealous step which will help in bringing the unorganized sector of proprietorship in to the organized version of a private limited company, i.e., ONE PERSON COMPANY. With this new progress in law, more number of small and medium enterprises will enter into the corporate domain. This will help in boosting our Indian market also, but proper care should be given as this OPC era should not boost foreign nomination in our country by making Indian as a nominee shareholder and monopole the Indian market. Let’s all welcome the new concept
with a positive approach by not give way to any negative impact on the nation.
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Corporate Governance
Sanjeev R K Management Trainee @ GMR Energy Limited
Corporate governance is needed to create a corporate culture of consciousness, transparency and openness. It should lead to increasing customer satisfaction, shareholder value and wealth. With increasing government awareness, the focus is shifted from economic to the social sphere and an environment has been created to ensure greater transparency and accountability. It is integral to the very existence of a company.
Corporate Governance refers to combination of laws, rules, regulations, procedures and voluntary practices to enable the companies to maximise the shareholders long‐term value.
Corporate Governance Models around the World: There are many models of corporate governance around the world. The Anglo‐American model tends to emphasize the interests of shareholders. The coordinated or multi‐stakeholder model associated with Continental Europe and Japan also recognizes the interests of workers, managers, suppliers, customers, and the community at large.
The Organisation for Economic Co‐operation and Development (OECD) on corporate governance: OECD, in its endeavour to improve the governance practices, had published its revised principles on Corporate Governance in the year 2004 The OECD Principles of Corporate Governance have since become an international benchmark for policy makers, investors, corporations and other stakeholders worldwide. The OECD advanced the corporate governance agenda and provided specific guidance for legislative and regulatory initiatives in both member and non‐member countries. OECD Principles on Corporate Governance are: i. Principle I: Ensuring the Basis for an Effective Corporate Governance Framework ii. Principle II: The Rights of Shareholders and Key Ownership Functions protected and facilitated iii. Principle III: The Equitable Treatment of Shareholders
iv. Principle IV: The Role of Stakeholders in Corporate Governance‐ recognized v. Principle V: Disclosure and Transparency: Timely and accurate disclosure is made on all material matters including the financial situation, performance, ownership, and governance of the company. vi. Principle VI: The Responsibilities of the Board‐Monitoring Management and Accountability to Shareholders
Evolution of corporate governance framework in India:
With the globalisation and liberalization of the Indian economy since 1991 the government had formulated different measures to protect the diverse interest of shareholders and stakeholders in the companies. The report on corporate Governance by the Cadbury Committee in the U.K. in 1992 has provoked intense consideration of the concept in our country. The parties involved in corporate governance include government agencies and authorities, stock exchanges, management (including the board of directors, the Chief Executive Officer, other executives and line management, shareholders and auditors). Other influential stakeholders are lenders, suppliers, employees, creditors, customers and the community at large.
Companies Act, 1956 provides for basic framework for regulation of all the companies. Certain provisions were incorporated in the Act itself to provide for better corporate governance viz.: 1. Loan to directors or relatives or associated entities needs
Central Government approval 2. Interested contract needs approval of the Board in a duly
convened meeting and also the approval of Central Government in certain cases
3. Interested directors are not allowed / considered to participate or vote
4. Appointment of director or relatives for office or place of profit needs approval by shareholders. If the remuneration exceeds prescribed limit, Central Government approval required
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5. Constitution of Audit Committee is mandatory for Public companies having paid‐up capital of Rs.5 Crores or more
6. Shareholders holding 10% can appeal to Court in case of oppression or mismanagement.
Steps taken by SEBI for ensuring better governance in listed companies: The introspection that followed the Satyam episode has resulted in some major changes in Indian corporate governance regime. Some of the recent steps taken in this regard are:
Disclosure of pledged shares by the Promoters in listed entities promoted by them; Peer review: In the light of developments with respect to Satyam SEBI carried out a peer review exercise of the working papers (relating to financial statements of listed entities) of auditors in respect of the companies constituting the NSE – Nifty 50 the BSE Sensex and some listed companies outside the Sensex and Nifty chosen on a random basis.
Disclosures on their websites regarding agreements with the media companies Maintenance of website: to maintain a functional website containing basic information about the entity, duly updated for all statutory filings, including agreements entered into with media companies, if any.
Compulsory dematerialization of Promoter holdings Peer reviewed Auditor:, Limited review/statutory audit reports to be submitted to the concerned stock exchanges shall be given only by those auditors who have subjected themselves to the peer review process of ICAI and who hold a valid certificate issued by the ‘Peer Review Board’ of the said Institute; Approval of appointment of ‘CFO’ by the Audit Committee
Disclosure of voting results/patterns on their websites and to the exchanges within 48 hours from the conclusion of the concerned shareholders’ meeting.
Enabling shareholders to electronically cast their vote to ensure wider participation of shareholders in important proposals.
Manner of dealing audit reports filed by listed entities: SEBI has approved mechanism to process qualified annual audit reports filed by the listed entities with stock exchanges and Annual Audit Reports where accounting irregularities have been pointed out by Financial
Reporting Review Board of the Institute of Chartered Accountants of India (ICAI‐FRRB). In order to enhance the quality of financial reporting done by listed entities, it has been, inter‐alia, decided that: 1. Deficiencies in the present process would be examined and
rectified. 2. SEBI would create Qualified Audit Report review
Committee (QARC) represented by ICAI, Stock Exchanges, etc. to guide SEBI in processing the audit reports where auditors have given qualified audit reports.
3. Listed entities would be required to file annual audit reports to the stock exchanges along with the applicable Forms. After preliminary scrutiny and based on materiality, exchanges would refer these reports to SEBI/QARC
4. Cases wherein the qualifications are significant and explanation given by Company is unsatisfactory would be referred to the ICAI‐FRRB. If ICAI‐FRRB opines that the qualification is justified, SEBI may mandate a restatement of the accounts of the entity and require the entity to inform the same to the shareholders by making the announcement to stock exchanges.
Listing Agreement and Corporate Governance: Clause 49 of the Listing Agreement provided for detailed rules for ensuring better transparency and openness. An abstract of the Clause 49 of the Listing Agreement is as under:
1. The Clause contains detailed provisions for composition of the Board of Directors, its committees, the items of business to be considered at its meeting, with stress on participation and contribution of independent directors. The details of remuneration to executive directors shall be disclosed to shareholders and other stakeholders at periodical intervals and the same shall be placed on the website of the company.
2. The roles and responsibilities of the various committees and its constitution is also provided to ensure balance of authority
3. Disclosure of related party transaction is mandatory 4. Periodical certification by the CFO and CEO to ensure
continuance compliance of the clause of listing agreement 5. The management / Board of Directors are responsible to
provide report on CG on a periodical basis
The objective of CG shall be to respect the rights of the shareholders and other stakeholders and help them to exercise those rights. It can be achieved by communicating information that is understandable and accessible. In recent days CG is gaining more and more Importance and it should be followed by all Corporations to achieve sustainable growth.
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II
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Winner
Companies Bill 2012
Opportunities & Challenges
to a CS
Karthik S.N. Professional Programme, Bangalore
[email protected] In this study I have tried to concisely present a comprehensive analysis of the recently passed Companies Bill 2012 (“Bill”),with respect a Company Secretary (CS), in terms of opportunities that are coming by as well as the challenges to be prepared for and to overcome them. The much‐anticipated Bill received the Lok Sabha’s assent on 18th December 2012.The Bill that places more thrust on corporate governance and corporate social responsibility (CSR) entrusts enhanced responsibility on the management of the company, especially the Key Managerial Personnel (KMP). In the Bill, a CS is included in the definition of a KMP (Claus 2(51)).Such an inclusion goes on to show that the much‐needed statutory recognition of a CS’s roles and responsibilities is duly recognized and acknowledged by the legislature. However, it is to be borne in mind that such recognition will always accompany greater expectations and demands in future. A CS, being an academically and practically experienced individual, is reared to take up demanding roles and responsibilities at the helm of an organization. With proper application and execution, a CS can become an impetus in an organization’s success. The various roles that a CS, member of the ICSI, can do is shown in the pictograph given with this artile.
Hoping all goes well, the Bill should soon be enacted and the new legislation will throw open a plethora of opportunities and challenges to a CS. The following is a
brief overview of the provisions of the Bill that promises the upcoming opportunities and cautions on the challenges ahead – Opportunities ‐ An option to perform one’s duties and propel with excellence!
The Bill bestows a CS with opportunities by which he can contribute and uphold the purpose towards corporate governance and CSR. The roles & responsibilities under
the current Companies Act, 1956 continue to be associated with a CS, only that it is renewed with more thought and provisions for effective implementation in the Bill. The opportunities under the Bill cover the ambit from statutory procedure to voluntary compliance. As a CS, the voluntary compliance is the key to make the most of any
opportunity and thereby combat the associated challenges.
The following are the opportunities– a list of provisions in the Bill – that a CS should take note of: To declare/certify that all the requirements of the Act (i.e.,
Bill) and the rules made thereunder in respect of registration and matters precedent or incidental thereto have been complied with (Cl 7 (1)(b)).
To certify the Annual Return of the company(Cl 92(1)). In addition, a listed company and certain other class of companies, as maybe prescribed, will have to get its annual
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return certified by a practicing CS (PCS) as well. However, with respect to a one‐person company (OPC) the certification by a CS may not be mandatory.
A CS, being a KMP, is entrusted with recording and maintaining minutes of proceedings of Board/committee (Clause118).
A CS in employment will have to sign on the financials of the company (Clause 134 (1)).
To conduct secretarial audit as stipulated in Clause 204. While doing conducting such an audit, the powers & duties of the PCS are to be in sync with provisions listed out in Clause143.
This is a very huge opportunity for a PCS as their role & responsibility grows manifold when they check and ensure that a company is complying with all the provisions of the Act (i.e. Bill). By virtue of this provision, a CS can be an active whistle‐blower.
To ensure that the company complies with appropriate appointments to any of the KMP positions (Clause203).
To adhere to and perform in accordance with the functions mentioned in Clause205, which is very exhaustive clause as it mandates and directs a CS has to ensure that the company complies with all the provisions of the Act (i.e., Bill).
To certify annually whether a scheme of compromise/arrangement, including mergers and amalgamations, is being implemented in accordance with the terms specified in the order of the tribunal (Clause 232).
A CS in practice for a period of 15 or more years is eligible to be a member of the National Company Law Tribunal that shall be constituted by virtue of Clause408 (Clause409 (3) (d)).
The CS in employment or a PCS to certify in accordance with clause (ii) & (iii) of sub section (c) of Section III, Part II of Schedule V that –
(i) All secured creditors and term lenders have stated in writing that they have no objection for the appointment of the managerial person as well as the quantum of remuneration and such certificate is filed along with the return as prescribed under sub‐clause(4) of Clause196.
(ii) There is no default on payments to any creditors, and all dues to deposit holders are being settled on time.
The CS in employment or a PCS to certify that the requirements of Schedule V have been complied with and such certificate shall be incorporated in the
return filed with the Registrar under sub‐clause (4) of Clause196 (In accordance with Part III of Schedule V).
CS as a professional independent director – The bill mandates that every listed and such other class of companies, as prescribed, shall mandatorily appoint such number of independent directors on its Board of Directors (Clause 149 (4)). A CS is very much eligible to be appointed as an independent director on the company’s Board and can be more than a just a company secretary to the company.
This will broaden the scope of a CS and will enable him to respond to demands of responsibility. From being a person ensuring compliance, in the capacity of a CS, he can be a person complying or effecting compliance from the top most level of the management by being an independent director.
Challenges –Opportunities in disguise!
Shortcomings – The shortcomings for a CS is that the Bill has enhanced the penalty/liability for any contraventions in quite a lot of provisions. A CS, who is defined as an ‘expert’ (Clause2 (38)), is liable for any misstatement or misleading certifications made to the company or its members (Clause 245 (1) (g) (iii)). Being a person defined as a KMP, the liability is always attached to every act and omission.
Upholding professional values ðics – One of the most commonly faced confrontation to all professionals, including company secretaries is – what’s the level of integrity that one should be having in performing one’s duties and upholding all that is right. It is a matter challenging self‐conscience and professional etiquette when there is pressure from the management or peer and even more so if the work/earnings are at stake.
However, these challenges are an opportunity in disguise for a CS to act wisely and be a professional who not only speaks of compliance but also walks his talks; even if it means to brave against the odds, to follow law by letter & spirit‐ coupled with ethical standards. With the constant perseverance of the ICSI, through its teachings and guidance, and the professional and student members’ zeal to excel, the profession will surely reach new heights. In near future, when a CS says ‐ Every word of it will bear authenticity.
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Allotment of Securities
Naresh Kumar B.R Professional Programme
Allotment of Shares : “Allotment” of shares means the act of appropriation by the Board of directors of the company out of the previously un‐appropriated capital of a company of a certain number of shares to persons who have made applications for shares.
Notice of Allotment: An allotment is the acceptance of an offer to take shares by an applicant, thus, a binding contract between the company and the applicant could emerge only when the allotment is made by a resolution of the Board of directors and notice of such allotment has been given to the allottee to bind a contract between the company and the allottee. General Principles Regarding Allotment: With regard to the allotment of shares, the following general principles should be observed:
(1) The allotment should be made by proper authority,
i.e. the Board Directors of the company, or a committee authorised to allot shares on behalf of the Board. Allotment made without proper authority will be invalid. Allotment of shares made by an irregularly constituted Board of directors shall be invalid [Changa Mal v. Provisional Bank (1914) ILR 36 All 412].
(2) Allotment of shares must be made within a reasonable time (As per Section 6 of the Indian Contract Act, 1872, an offer must be accepted within a reasonable time).
(3) The allotment should be absolute and unconditional. Shares must be allotted on same terms on which they were applied for and as they are stated in the application for shares. Allotment of shares subject to certain conditions is also not valid.
(4) The allotment must be communicated.
(5) Allotment against application only — No valid allotment can be made on an oral request. Section 41 of the Companies Act, 1956 requires that a person should agree in writing to become a member.
(6) Allotment should not be in contravention of any other law.
4. Minimum Subscription
Section 69(1) of the Companies Act, 1956 states that no shares shall be offered to the public until the minimum subscription stated in the prospectus has been subscribed and the amount payable on application has been received in cash by the company. In this context, SEBI has prescribed that any company making public or right issue must receive a minimum of 90 percent of the issue including devolvement on underwriter’s subscription against the entire issue before making allotment.
5. Letter of Allotment
The company is required to issue letter of allotment to persons who are alloted shares. Such letter is called Letter of Allotment. Such persons are required to surrender this letter of allotment to company for issue of share certificate.
6. Effect of Irregular Allotment
An allotment is irregular if it is made without complying with the conditions precedent to a regular allotment, viz, the provisions of Section 69 and 70 of the Act. Consequences of irregular allotment depend upon the nature of irregularity involved. These may be noted as follows: 1. Failure to deliver a copy of the prospectus to the
Registrar before its issue — In case an allotment has
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been made without delivering to the Registrar of Companies, a copy of the prospectus along with other specified documents either before or on the date of its issue, the company and every person who is knowingly a party to the issue of the prospectus shall be punishable with fine which may extend to Rs. 50,000 [Section 60(5)]. The allotment, however, shall remain valid.
2. Non‐compliance with provisions of Section 69 and Section 70 — In the event of non‐compliance with the provisions of Section 69 and Section 70 (viz allotment without raising minimum subscription or without either collecting application money or collecting less than 5 percent as application money or failure to deliver a copy of statement in lieu of prospectus at least three days before allotment), the following consequences shall follow:
The allotment is rendered voidable at the option of the applicant. The option must however be exercised: Within 2 months after the holding of the statutory meeting of the company and not later; or Where the company is not required to hold a statutory meeting, or where the allotment is made after the holding of the statutory meeting, within 2 months after the date of allotment and not later. Any director who has knowledge of the fact of the irregular allotment of shares shall be liable to compensate the company and the allottee respectively for any loss, damages or costs which the company or the allottee may have sustained or incurred thereby. Proceedings to recover any such loss, damages or costs cannot be commenced after the expiration of 2 years from the date of allotment.
7. Ultra vires allotment Where the directors have no authority under the company’s memorandum to make an allotment, the allotment would be irregular and may be ratified by the company. But it would be void where the company itself has no power to make an allotment. At common law any subscription money was returnable to the allottee. [Waverly Hydropathic Co. v. Barrowman, 1895 23 R. 136].
8. Return of Allotment Section 75 of the Companies Act provides that after allotment of shares by any company, a return of allotment in the prescribed e‐form 2 even if it is of a single share, must be filed with the Registrar of Companies within thirty days of the allotment of shares. The return must state:
(A) Where shares are allotted for cash (i) The number and nominal amount of the shares
allotted. (ii) The amount paid or payable on each share.
i. The class of shares‐equity or preference. ii. The amount of premium paid/discount.
(B) Where shares (other than bonus shares) are allotted for consideration otherwise than in cash whether fully paid up or partly paid‐up, the following are required:
(i) A copy of contract, if any, for allotment of such shares is required to be attached with the e‐form.
(ii) The contract of sale or for services or other consideration for which the allotment was made; and
(iii) A return stating the number and nominal value of the shares so allotted, to the extent to which they are paid‐up, and the consideration for which they are allotted.
(C) Where bonus shares have been issued, a return must
be filed with the Registrar stating:
(i) The number and nominal value of such shares comprised in the allotment.
(ii) The names, addresses and occupation of the allottees; and
(iii) A copy of the resolution authorising the issue of such shares is required to be attached with the e‐form 2.
(D) Where the shares have been issued at a discount, a
copy of the resolution passed by the company authorising such issue and a copy of the order of the Central Government sanctioning the issue must be filed with the Registrar. If rate of discount exceeds 10% the relevant order of the Central Government must also be filed with the Registrar as an attachment with e‐form.
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CSR & Companies Bill 2012
Rajeshwari S. Professional Program
Hemanth Biswajit & Co [email protected]
‐ “May the whole world live happily” ‐ Our ancient sages prayed for the wellness of the whole world and that time society was small with limited boundaries. Way of living on earth saw a sea change since that ancient time. Now it is not that simple living. Society as a whole expanded making the whole earth a global village ‐ thanks to the advanced Information Technology as well as rapid transport systems. Man likes to live within the society and gives to the society either in the form of service or business and receives the same from the society. As civilization advanced, business too changed into various forms‐ i.e. from barter system to electronic mode of transactions. Rules and regulations formed by the civilized society which resulted in business enterprises transforming into companies and big corporate houses. These enterprises flourished obtaining raw materials, labour and support from the society. Much of the wealth happened to accumulate in the hands of few individuals. Concept: Now, in an era of globalization, multinational corporations and local businesses are no longer able to conduct destructive and unethical practices, such as polluting the environment, without attracting negative feedback from the general public. As the awareness is increased in the society and electronic media is a playing vital role, pressure from non‐governmental organizations and rapid global information sharing, there is a surging demand from civil society, consumers, governments, and others for corporations to conduct sustainable business practices. In addition, in order to attract and retain employees and customers, companies are beginning to
realize the importance of being ethical while running their daily operations. This “new consciousness” is being known as Corporate Social Responsibility (CSR). CSR is also known as corporate conscience, corporate citizenship, social performance, sustainable responsible business or responsible business. It is a form of corporate self‐regulation integrated into a business model. CSR policy functions as a built‐in, self‐regulating mechanism whereby a business monitors and ensures its active compliance with the spirit of the law, ethical standards, and international norms. CSR is a process with the aim to embrace responsibility for the company's actions and encourage a positive impact through its activities on the environment, consumers, employees, communities, stakeholders and all other members of the public sphere who are also considered as stakeholders. A business needs a healthy educated workforce, sustainable resources and an adept government to compete effectively. Definition: 'CSR' may be defined as corporate initiative to assess and take responsibility for the company's effects on the environment and impact on social welfare. The term generally applies to company efforts that go beyond what may be required by regulators or environmental protection groups. The World Business Council for Sustainable Development defines CSR as "the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society
III
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Winner
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at large". CSR is a process to achieve sustainable development in the society. A growing number of companies in the world‐ wide practice some form of CSR. Recently more than 3500 companies took part in Global Reporting Initiative and had issued more than eight thousand environmental and social sustainability reports. Initiative by India: Companies Bill 2012 As CSR is being accepted globally our legislatures envisaged to legalize Corporate Social Responsibility by making CSR a mandatory requirement for large companies in the new Companies Bill 2012. In the Companies Bill 2012, Clause 135 provides for: 1. Every company having‐ net worth of Rupees Five Hundred Crore or more; or turnover of Rupees One Thousand Crore or more; or a net profit of Rupees Five Crore or more
during any financial year, shall constitute a CSR Committee consisting of three or more directors, out of which at least one director shall be an independent director. 2. The Boards Report under sub‐section (3) of section
134 (the provisions under existing Section 217 of Companies Act 1956) shall disclose the composition of the CSR Committee.
3. The CSR Committee shall,— a. formulate and recommend to the Board, a Corporate
Social Responsibility Policy which shall indicate the activities to be undertaken by the company as specified in Schedule VII of Companies Bill 2012
b. recommend the amount of expenditure to be incurred on the activities referred to in clause (a); and
c. Monitor the Corporate Social Responsibility Policy of the company from time to time.
4. The Board shall after taking into account the
recommendations made by the CSR Committee, approve the CSR policy for the company and disclose contents of such Policy in its report and also place it on the company's website, if any, in such manner as may be prescribed; and
5. The Board of every company referred to in sub‐section
(1) shall ensure that the company spends, in every financial year, at least two per cent of the average net
profits of the company made during the three immediately preceding financial years, in pursuance of its CSR Policy:
Provided that the company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for CSR activities: If the company fails to spend such amount, the Board shall, in its report made under clause (o) of sub‐section (3) of section 134, specify the reasons for not spending. In a company CSR policy may be as per Schedule VII of the Companies, Bill 2012. Activities which may be relating to: i. Eradicating extreme hunger and poverty; ii. Promotion of education; iii. Promoting gender equality and empowering women; iv. Reducing child mortality and improving maternal health; v. combating human immunodeficiency virus, Acquired
Immune Deficiency Syndrome, Malaria and other diseases;
vi. Ensuring environmental sustainability; vii. Employment enhancing vocational skills; viii. Social business projects; ix. Contribution to the Prime Minister's National Relief Fund
or any other fund set up by the Central Government or the State Governments for socio‐economic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women; and
x. such other matters as may be prescribed
The Companies Bill 2012 proposes mandatory measures for companies to commit themselves to CSR programs and activities. In fact, Corporate Social Responsibility is well on its way to become an eventuality. When the Bill becomes an enactment companies are expected to perform well in non‐financial areas such as human rights, business ethics, environmental policies, corporate contributions, community development, corporate governance, and workplace issues.
At present, in India only a few large companies are fulfilling their social responsibilities effectively and contributing to the society in various ways. We can say that fulfillment of CSR is a gateway for better corporate governance and thereby enhances the image of the company in the society as well as in the business world.
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Real Problems in the
Virtual World
Shivali CS Executive Programme
Bangalore [email protected]
The internet last month turned thirty and this comes quite as a surprise as internet in a comfortably within short span of time has made a
tremendous impact, rather an overbearing one. For good or bad internet has changed the world, not the least for India. Birth of a network : Though Scientists had networked computers way back in 1950’s but no common language had been developed which allowed the network to communicate between each other easily. It was only in the late 1970’s that the American Defence Advanced Projects Agency after a series of experiments resulted in the outcome of Transmission Control Protocol/Internet Protocol (TCP/IP) which was adopted on January 1, 1983. One amidst the creators to have invented internet named David .P. Reed stated “Most of us never thought that this particular internet, which would be a very experimental thing, would last very long”1
The marvel of internet is paraded in our lives having got interlaced right from getting a Birth certificate, Railway reservations, Banking transactions, Telephonic communications, Bio‐matrix attendance in offices, Examination result cards, Aircraft transportations, Traffic signals, to obtain a death certificate which are all now carried out with the aid of computers and every data and information has acquired electronic shape and capable to glide through the optic cables. With the pervasion of internet so strong in our lives the epidemic called cybercrime is fast becoming an everyday affair.
What is cyber crime? The term cybercrime is held to be a misnomer. The term has not been defined in any of the statutes and acts enacted by the Indian Parliament. Cybercrime maybe defined as “Any criminal activity that uses computer either as an instrumentality, target or a means for perpetuating further crimes comes within the ambit of cybercrime”2
A cybercriminal can destroy websites and portals by hacking and planting viruses, carry out online frauds by transferring funds from one corner of the globe to another, get his hands on highly confidential and sensitive information, cause harassment by e mail threats or indecent material, play tax frauds, indulge in cyber pornography involving children and a whole range of other obscene acts. With recent events like the death of Internet activist Aaron Swartz, the arrest of 2 girls for updating contentious matters on Facebook, online threats to a Kashmiri all‐ girls band extending to the most heinous crimes like the use of Information Technology by terrorist organisations to burn down nations and sabotage tranquility exemplifies the enormity of an impact the global computing network can cause. For Instance the Hollywood flick Diehard 4 dramatically pictures the wallop and the devastating imprints a cyber‐warfare can lead to. Hard hitting crimes unspecified in the IT ACT High Yield Investment Programmes‐ Faux websites which dubiously promise a return of invested money with a return of 1% interest on a daily basis attracts a lot of innocent netizens, who are duped of their lifetime savings.
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Financial crimes –in a case where Wipro Spectra mind lost the telemarketing contract from Capital one due to an organized crime. The telemarketing executives offered fake discounts, free gifts to the Americans in order to boost the sales of the Capital one. The internal audit revealed the fact and surprisingly it was also noted that the superiors of these telemarketers were also involved in the whole scenario.3This led to huge financial loss to the company. IPR theft – Owing to unconfined territorial dominion of the net and the rise of digital technologies and internet file sharing networks, laxity in law enforcement IPR thefts are becoming grossly redundant. In a theft the source code is stolen thus leading to heavy loses for companies. Cyber squatting and typo squatting is another popular crime through which squatters make money by trafficking and registering popular domain names in a bad faith from the goodwill of a trademark that belongs to another person. Data theft and phishing also has caused irreparable blows to banks and corporate houses. Card tricks: With the rising usage of debit and credit cards and the internet emergence as a popular tool for transactions, fraudsters are on the constant lookout for gullible customers .The migration from a cash based to a cashless economy has further encouraged the use of cards and net for banking transactions .This has led to advancement in the technicality of crimes where in fraudsters can con the people without stealing their cards. Skimming/card cloning –With the help of a cashier at large retail stores the card is swiped twice where once in the card reader and then in the skimmer, which captures the card data which is later be misused . ATM frauds‐the data transfer between the ATM and the banks server is intercepted by a device attached to the network cable. The data is then stored and replicated later. The device can also be used to interrupt the ATMs functioning and deceive the customer.
Eye of the storm‐Section 66A 66A. Punishment for sending offensive messages through communication service, etc.4“The phraseology of Section 66A of the IT Act, 2000 is so wide and vague and incapable of being judged on objective standards, that it is susceptible to wanton abuse and hence falls foul of Article 14, 19 (1)(a) and Article 21 of the Constitution.” says Shreya Sangal who filed a PIL to review the law under which two young women were arrested recently in Maharashtra for their Facebook posts.5
A few cyber security personnel hold a view that the rules and legislations governing and policing the cyber space is not well regulated and framed, owing to the fact that when the germination of IT rules were enacted there wasn’t enough deliberations and the legislation slipped through bereft of brainstorming. Conclusion: Internet is a revolution which has substantially altered our lives. Despite the setting up of cyber appellate authority, cyber‐crime police stations and aiding websites like the internet crime complaint center (IC3), cyber‐crimes are growing in geometrical progression. Primarily the lacunae can be spotted both in the mind set and enforcement of the regulations.
Adjudication of the crime is a prolonged process and a remedy could be, by appointing enough special magistrates to exclusively handle cyber cases. Our society comprises of a class divide, a section that cannot connect with the need of cyber space and deem the ubiquitous presence of internet unwanted and the other section mostly comprising of the younger lot who hold it an indispensable
medium. Ethical hackers must be got to the mainstream and groomed to deal with Cyber warfare. Regardless of the fact that cybercrime has become habitual and pernicious the cognizance of the paramount issue is yet to be regarded and is devoid of sufficient awareness that has to be created amongst the netizens equipping them with the needed precautionary measures for a E‐world safe and secure.
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Fraud and Corporate
Governance Rahul Murthy
Trainee @ R.C. Venkatesh Rao, Bangalore [email protected]
Introduction In common parlance, the word fraud is defined as any act of deception committed for personal gain, and/or to cause damage or disadvantage to another individual. This definition is on a micro‐level; when we take it to a macro level this definition encompasses entire organisations devoted and dedicated to fraud, either overtly or covertly. The overtly fraudulent organisations are those who are known publicly or by a substantial section of public to be criminally active. The covert ones however, are what we are interested in with respect to this article. Organised forms of business have been around since time immemorial, and have been governed by diverse set of laws depending on the cultures, usages and time of the society. In 1602 the Dutch East India Company was established in Netherlands as a trading company. It is widely believed to be the first organisation to issue shares and become a public company. However from the time of the industrial age, the growth of joint stock companies has been phenomenal, with one nation after another adopting this form of business, as they develop economically. If one thought that this growth was fast, then the growth that took place towards the end of the 20th century and beginning of the 21st would have altered their perceptions dramatically. The information age as it were began, combined with rapid globalisation, rising levels of awareness, and a vigorous entrepreneurial spirit ensured that companies would be incessantly formed all over the globe. As companies grew, so did the capital markets in every part of the world, and along with it came new financial instruments to tap into more and more funds. This is where the promising story started to reveal colours that
we didn’t quite see in all the excitement and fervour around fabulous stories of wealth and prosperity. Scandalous!: In the frenzy of growing companies faster and faster, nobody seemed to be paying attention to the need for adequate controls. In the absence of which executives and management, along with the auditors found themselves in an open bank vault with no one around. This was one the parents to the practice that would come to be known as creative accounting. The other parent or cause was the extreme standards that shareholders and the public had set for, or expected of companies. Each quarterly target had to be bigger than the previous, and each one had to be met in a timely manner. To achieve both these ends and get away with it, the figures presented to shareholders had to be tinkered with. And although this tinkering began slowly, like all addictions, it soon become so vast that it seemed to resemble a fictional illustration given in college study material. Creative accounting are practices that attempt to show faithfulness in complying with the rules of standard accounting practices, but which divert from the spirit of those rules. They are methods of using accounting practices to convincingly show a particular state of affairs, when the reality may be very different.
Cases: 1. In 2003, Nortel made a big contribution to this list of
scandals by incorrectly reporting a one cent per share earnings directly after their massive layoff period. They used this money to pay the top 43 managers of the company.
2. In 2005, after a scandal on insurance and mutual funds the year before, AIG was investigated for
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accounting fraud. The company already lost over 45 billion US dollars worth of market capitalisation because of the scandal. Investigations also discovered over a billion US dollars worth of errors in accounting transactions.
Public ownership and limited liability, along with limited role of shareholders in running of the company should have been clear signals to the relevant authorities and regulatory agencies that caution was needed. The interaction between shareholder, top management and the board is an intricate balance of power, stewardship and responsibility. When such balance is upset, then the major frauds as witnessed at the end of the 20th century and beginning of the 21stare the result. Table: Effect of Frauds Company Asset
($ Billions) Bankruptcy Filed On
WorldCom 101.9 July, 2002
Enron 63.4 Dec, 2001
Texaco 35.9 April, 1987
Global Crossing 25.5 Jan, 2002
Adelphia 24.4 June, 2002
United Airlines 22.7 Dec, 2002
PG & E 21.5 June, 2002
Corporate Governance to the Rescue: While all the frauds were being carried (during the initial periods), a committee was considering ways to improve accountability, provide greater control and improve transparency at the board and managerial levels. This committee was known as the Cadbury committee. The Cadbury Report, titled Financial Aspects of Corporate Governance, is a report of a committee chaired by Adrian Cadbury that sets out recommendations on the arrangement of company boards and accounting systems to mitigate corporate governance risks and failures. The report was published in 1992. The Committee recommended sweeping changes to the manner of internal regulation of the board, the management and in the matter of disclosures in reports to shareholders. The Cadbury Report was the inception point of the formation of many such committees all over
the world for the same purpose of strengthening the corporate governance systems.
Basically corporate governance (as agreed by various bodies) is the set of processes, customs, policies, laws, and institutions affecting the way a corporation is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. History of Corporate Governance in India: There have been several major corporate governance initiatives launched in India since the mid‐1990s. The first was by the Confederation of Indian Industry (CII), India’s largest industry and business association, which came up with the first voluntary code of corporate governance in 1998. The second was by the SEBI, now enshrined as Clause 49 of the listing agreement. The third was the Naresh Chandra Committee, which submitted its report in 2002. The fourth was again by SEBI — the Narayana Murthy Committee, which also submitted its report in 2002. Based on some of the recommendation of this committee, SEBI revised Clause 49 of the listing agreement in August 2003. All the committees had certain common recommendations to offer including: 1. Composition of the Board favouring Non‐executive
Members 2. Independent Directors 3. Audit Committee and strengthening of internal Audit
Function 4. Whistle Blower Mechanism 5. Frequency of Board Meetings and Attendance thereof
Verdict: Success or Failure?
Despite the well‐intentioned efforts of the various bodies, and regulatory agencies, the implementation of the corporate governance systems, though resulting in certain success, left marks of failure that exposed many loopholes not just in the system, but more so in the lack of understanding of the spirit of the codes by corporate houses.
(Continued in Page 55)
Page 49
Corporate Governance – An Understanding
Rajeev T.S. Professional Programme
Management Trainee@ Hemanth, Biswajit & Co. [email protected]
Corporate governance is nothing more than how a corporation is administered or controlled. Corporate governance takes into consideration company stakeholders as governmental participants, the principle participants being shareholders, company management, and the board of directors. Adjunct participants may include employees and suppliers, partners, customers, governmental and professional organization regulators, and the community in which the corporation has a presence. Corporate Governance‐ In Brief Corporate Governance refers to the way a corporation is governed. It is the technique by which companies are directed and managed. It means carrying the business as per the stakeholders’ desires. It is conducted by the board of Directors and the concerned committees for the company’s stakeholders’ benefit. It is all about balancing individual and societal goals as well as economic and social goals. Corporate Governance is the interaction between various participants (shareholders, board of directors, and company’s management) in shaping corporation’s performance and the way it is proceeding towards. The relationship between the owners and the managers in an organization must be healthy and there should be no conflict between the two. The owners must see that individual’s actual performance is according to the standard performance. These dimensions of corporate governance should not be overlooked. Corporate Governance is looked upon with utmost importance by the legal systems and company
regulatory regimes all around the world. India is not an exception to it. In India too, various committees set up by the industry, Securities and Exchange Board of India and the Ministry of Corporate Affairs have made reports and recommendations covering every subject of importance to corporate governance. The government has also introduced a comprehensive bill in the Parliament for amending the various provisions of the companies Act 1956 and the related provisions contained in other Acts. Corporate governance is based on principles such as conducting the business with all integrity and fairness, being transparent with regard to all transactions, making all the necessary disclosures and decisions, complying with all the laws of the land, accountability and responsibility towards the stakeholders and commitment to conducting business in an ethical manner. Another point which is highlighted in the SEBI report on corporate governance is the need for those in control to be able to distinguish between what are personal and corporate funds while managing a company Importance of Corporate Governance: Fundamentally, there is a level of confidence that is associated with a company that is known to have good corporate governance. The presence of an active group of independent directors on the board contributes a great deal towards ensuring confidence in the market. Corporate governance is known to be one of the criteria that foreign institutional investors are increasingly depending on when deciding on which companies to invest in. It is also known to have a positive influence on the share price of the company.
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A clean image of corporate governance will make it easier for companies to raise capital at more reasonable costs. Unfortunately, corporate governance often becomes the centre of discussion only after the exposure of a number of scams happened in corporate world. Role of Company Secretary: The principal responsibility in this regard has been entrusted on the CS, who has been given an alleviated position in the corporate hierarchy. Company Secretary being a key functionary in the corporate hierarchy his role, functions and responsibilities have been widened over the years. With increasing emphasis on the principles of good governance and introduction of various provisions relating to corporate governance, he has added responsibilities for safeguarding the interests of the stake holders. A qualified company secretary has a clear responsibility to protect the probity of the organization He not only serves the interests of shareholders but also is able to represent the interest of the numerous other stakeholders such as creditors, employees and local communities. The delegated authority and full range of responsibilities that company secretaries undertake varies considerably from company to company but their responsibility for supporting the directors is consistent throughout. Need for further strengthening The changes mostly are a welcome change and do go a long way in establishing considerable authority of the CS over matters relating to the internal regulation, but could be made more effective by some further changes. Companies today follow diverse secretarial practices. The companies adopt such secretarial standards as have been decided in their general body meetings. It is the
submission of the researcher that these standards must be made uniform on the lines of the accounting standards. An effective model to be followed could be the one proposed by the Institute of Company Secretaries of India. The Secretarial Standards formulated by the ICSI are a set of principles which companies are expected to adopt and adhere to, in discharging responsibilities and could integrate, consolidate, harmonize and standardize these secretarial practices. Other measures which could be taken are: 1. Penalty for non‐appointment of KMP after the expiry
of six months. 2. The appointment of a Practicing Company Secretary
should be by way of a resolution passed at the meeting of the members on the same lines as appointment of Statutory Auditor.
3. Mandatory secretarial audit apart from a financial audit Such an audit would give an independent assurance
of compliance of the complex web of laws and rules and regulations which govern the functioning of a company. Conclusion Since late 1990s, significant efforts have been made by the Indian Parliament, as well as by Indian corporations, to overhaul Indian Corporate Governance. The current Corporate Governance regime in India straddles both
voluntary and mandatory requirements like Voluntary Guidelines by Ministry of Corporate Affairs. For listed companies, the vast majority of Clause 49 of the listing agreements requirements is mandatory. The voluntary guideline on Corporate Governance by Ministry of Corporate Governance is a benchmark for the Corporate Governance practices in the Indian corporations, and hopefully the corporate world will make the best use of it. India has one of the best Corporate Governance legal regimes but poor implementation together with socialistic policies of the pre‐reform era. It has affected the corporate governance.
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Positioning of CS -under the New Companies Bill, 2011
Naveen Kumar K Professional Programme
Corporate Law Consultant at Naveen & Associates, Bangalore Company Secretaries as Key Managerial Personnel:
In clause 203 of the Companies Bill, 2011, the Secretaries are recognized as whole time key managerial personnel along with Managing Director, Chief Executive Officer and Mangers. Further the Companies Bill, 2011 has also made it mandatory to appoint the Company Secretary. Inclusion of Company Secretaries in the definition of Key Managerial Personnel: “Key Managerial Personnel” means:
The Chief Executive Officer or the managing director or the manager;
The Company Secretary;
The Chief Financial Officer if the Board of Directors appoints him; and
Such other officer as may be prescribed;
Increased role in certification of Annual:
A much responsible role has been proposed for company secretaries in employment and in practice as well through clause 92 of the Companies Bill, 2011. As per clause 92 of the new Companies Bill, 2011, every company shall prepare its Annual return in the prescribed form containing the particulars as they stood on the close of the financial year regarding just like previous Section 159 of the Companies Act, 1956.
New Signing provisions at a glance: As per the Companies Bill Annual Return is required to be signed by: a. A Director and the Company Secretary, or where there
is no Company Secretary, by a Company Secretary in whole‐time practice.
It means that in respect of all the companies, whether private or public, listed or unlisted, if no Company Secretary is appointed by the company, the Annual Return is compulsorily required to be signed by the Company Secretary in practice.
b. In case of listed companies and companies having such paid‐up capital and turnover as may be prescribed, the Annual Return is also to be signed by a Company Secretary in whole‐time practice certifying that the annual return states the facts correctly and adequately and that the company has complied with all the provisions of the Act, in the prescribed form.
It means, in case of a listed company, even if the Annual Return is signed by the Company Secretary in employment of the Company, it is further required to be signed by the Company Secretary in Whole time practice.
In case of One Person Company and small company, the annual return shall be signed by the company secretary, or where there is no company secretary, by the director of the company.
Introduction of Secretarial Audit
Secretarial Audit was very much there in Listed Companies. Under Companies Bill, 2011, the parliamentary Standing Committee recommended Secretarial Audit for listed and other class of companies as may be prescribed. Clause 204 of the Companies Bill, 2011 explains the proposed provisions as follows:
a. Every listed company and a company belonging to other class of companies as may be prescribed shall annex with its Board’s report a Secretarial Audit Report, given by a Company Secretary in Practice, in such form as may be prescribed.
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b. It shall be the duty of the company to give all assistance and facilities to the Company Secretary in Practice, for auditing the secretarial and related records of the company.
c. The Board of Directors, in their report shall explain in full any qualification or observation or other remarks made by the Company Secretary in Practice in his report.
d. If a company or any officer of the company or the company secretary in practice, contravenes the provisions of this section, the company, every officer of the company or the company secretary in practice, who is in default, shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.
Functions of Company Secretary
a. To report to the Board about compliance with the provisions of this Act, the rules made there under and other laws applicable to the company;
b. To ensure that the company complies with the applicable secretarial standards issued by ICSI and approved by Central Government;
c. To discharge such other duties as may be prescribed.
Provision of penalty for non‐appointment of CS
As per Companies Act, 1956 the penalty for non‐appointment of company Secretary was Rs. 500 per day. But considering the importance of appointment of Company Secretary, Companies Bill, 2011 has proposed the penalty for non‐appointment of CS (pl do not use short forms) as follows:
On company – one lakh rupees which may extend to five lakh rupees.
On every director and KMP (pl do not use short forms) who is in default – 50,000 rupees and 1,000 rupees per day if contravention continues.
Compulsorily application of Secretarial Standards For the first time, the Secretarial Standards has been introduced and provided statutory recognition in the Act. As per clause 118(10) of the Companies Bill, 2011: “Every company shall observe Secretarial Standards with respect General and Board Meetings specified by the Institute of Company Secretaries of India constituted under section 3 of the Company Secretaries Act, 1980 and approved by the Central Government.” As per clause 118(10) of the Companies Bill, 2011 it is duty of the Company Secretary to ensure that the company complies with the applicable Secretarial Standards.
Difference between Companies Act, 1956 and Companies Bill, 2011 COMPANIES ACT, 1956 COMPANIES BILL, 2011
Definition of CS (no short forms)in Sec.2 (45) Definition (do not use short forms) of PCS in
Sec.2(45A)
1) Definition of CS in Clause 2 (24) 2) Definition of PCSP in Clause 2 (25) (do not use short forms)
1) No provision of Secretarial Audit 2) No provision for Compliance with Secretarial
Standards of ICSI
1) Secretarial Audit mandatory for all listed Companies and such other Companies as prescribed under Clause 204
2) All Companies shall comply with Secretarial Standards of ICSI relating to Board & General Meeting as prescribed under Clause 118(10)
Annual Return signing by a Director and a Secretary, if any. And if there is no Secretary then by 2 Directors.
Annual Return to be signed by a Director and the Company Secretary, or where there is no Company Secretary, by a Company Secretary in practice.
Companies having a minimum paid‐up capital and capital up to Rs. 5 Crores a Compliance Certificate from PCS is required
Concept of Compliance Certificate from practicing Company Secretary re‐casted in new form and clubbed with Annual Return Certification of listed company and such other companies as may prescribed.
CONCLUSION: Many good provisions have been proposed like applicability of Secretarial Standards, revised framework for regulation of mergers and amalgamations, insolvency, rehabilitation, liquidation and winding up of companies, which offers great scope for Companies Secretaries not only to act as liquidator/administrator but
also to represent the various stakeholders before the Tribunal. It is quite visible that to promote good governance, detailed disclosures are contemplated under the proposed Bill for the compliance of which the companies would look forward to professionals including Company Secretaries.
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Transparency in
Governance
– The Ultimate Key to Success
Avinash Jain Bangalore
Corporate collapses as in the case of Enron, Harris Scarf, HIH, Ansett etc. highlight the need of greater ethics and the need of framework for enforcing good ethical practices within the organization. These business failures have compelled a re‐look at the corporate accountability and transparency issues thus propelling the board role in corporate governance into the spotlight. A values based corporate governance framework is the need of the hour and must hence be developed with a full view to its overall impact on various stakeholders such as employees,investors,customers,investors,customers,management,local communities and the environment. The principle of governance must be in accordance with the recognized international mechanisms that promote sound ethical business practices. In the six decades of independence from alien rule, India, despite its burgeoning Population, grinding poverty, large‐scale illiteracy and unparalleled diversity, has not only remained successfully afloat in the democratic ark, remarkably so in a destabilizing neighborhood, but can also rightfully boast of significant advances made in agriculture and food production, science and technology, trained technical man power and higher education to name a few areas of success. Meaning of corporate governance: Corporate governance is "the system by which companies are directed and controlled". It involves regulatory and market mechanisms, and the roles and relationships between a company’s management, its board, its shareholders and other stakeholders, and the goals for which the corporation is governed. In contemporary business corporations, the main external stakeholder
groups are shareholders, debt holders, trade creditors, suppliers, customers and communities affected by the corporation's activities. Internal stakeholders are the board of directors, executives, and other employees. Much of the contemporary interest in corporate governance is concerned with mitigation of the conflicts of interests between stakeholders. Duty to act honestly, with due care and diligence: There is quite a tangible potential for directors to incur legal liability in the wake of legislations such as SOX. The inability of the legal to effectively prosecute suggests that this issue is less likely to be driven by the regulation and enforcement than by personal values and an inner sense of concerns for ethics. There is much pressure via business media, as well active business professional groups such as confederation of Indian Industry and the accounting and commercial law communities. The NGO movement is also a significant force in India. Frame work of integration of governance. Transparency & Disclosures Transparency in governance refers to the absence of secrecy and mystery between the Government and those being governed. It implies that the Government shares as much information with the citizenry as possible. The information shared should not be ambiguous or selective, but complete and correct. A transparent Government does not just inform the people about decisions that affect them, but also lets them know the grounds on which such decisions have been taken. Transparency also implies that all rules and regulations regarding the
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functioning of the various arms of the government and the powers and duties of its officers are in the public domain. Transparency in governance in India has certainly improved in recent years, but a lot is still to be desired. The transparency international report in 2008 puts India at No.85 among 180 countries for corruption – which is the direct result of lack of transparency. Even as the country ranks right behind the developed nations in terms of economic development, it is still far behind in terms of transparency. The two most important recent developments regarding transparency in governance in India have been the passing of the Right to information Act and the emergence of the concept of e‐Governance. The passage of the Right To Information Act (RTI Act) in 2005 has been a truly revolutionary event, in the sense that it has empowered citizens to seek information on all public matters without asking for justification, sets a time‐frame within which officials must provide information, and also provides for punishments for those officers who wrongfully, or with mal‐intent, deny information to the public. The RTI Act also states that an officer who denies any information to the applicant has to justify his reasoning for doing so, and also allows petitioners to appeal against his decision. The RTI Act has indeed become a powerful tool in the hands of activists against corruption, who have used its
empowering features for unearthing corruption in projects like road constructions to award to tenders by individual in Government’s claims regarding development. Transparent Administration According to Er. Ajit Mahapatra, government must believe in transparency and target to weed out corruption in public places. Transparency can never be tackled in isolation. It is a part of five softer Components, which are heavily inter‐linked. They are: 1. Social Openness: The more open a society is; the more transparent its activities are. 2. Society's respect and commitment to education and training: The Education system should incorporate a sense of moral values at all Levels. All type of training must be value‐based.
3. Relative honesty and transparency in business/government relation: The collusion between government and business at the expense of Efficiency and effectiveness stifles the free expression of human Spirit and creativity, resulting in a corrupt society. This type of activities must be opposed openly. 4. Strong legal framework: Such framework to provide consistency and Predictability, and time‐bound action, allowing business to focus on what it does best and in the best way. 5. Admiration for risk takers: The people, in general, must learn to admire those who take risks and spearhead innovation, which see opportunity despite tremendous odds. The society has to take such people as their role models and follow their style, which are never based on corruption. From the above, one could realize that ‘transparency in governance’ is only one of the components which cannot be tackled in isolation. All the other components are to be tackled simultaneously to get the desired results. So the holistic nature of these components and resulting synergy created thereof, can only fight corruption in common places.
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Conclusion: The strategies to achieve good governance being forwarded by international leading agencies are being applied to realities prevailing in the third world. The concept is being counted as panacea for all political ills the march affecting the nation’s democracy good governance is characterised consensus arrived, accountable, transparent, responsive, effective, efficient government rule of law. The government of the day viz, of the third world expected to move in the specific direction, obviously inconsensus with LPG. The success of the governance in the modern world need to adopt Organizational Strategy and leadership, establishing and managing the integrity system, the
written guides to acting with integrity‐polices and code, communicating policy and building commitment, developing integrity skills and abilities, managing integrity breaches and feedback, reinforcement of appropriate behaviours, evaluation and disclosure, benchmarking through best practices. To sum up, the 'vigilant citizens' could shake up the bureaucracy by making it duty conscious and accountable. Unless the public servants are made afraid of being questioned, they shall never improve and perform and corruption shall continue to thrive. Therefore, the citizens must act—either on their own or with the help of NGOs
Fraud and Corporate Governance (Continued from Page 48)
The Satyam scandal rocked not only the legal system, but also left a deep gash in the auditor‐client system that was prevailing. While the rules of corporate governance may on the face of many companies seemed to be well‐applied, frauds like this show that companies have not conscientiously felt the need to be transparent and to follow the straight and only road to long‐lasting success. Looking to the Future: We now live right in the middle of a period of rapid globalisation, where many more forces will start to impact and influence the activities of the company. Legislations like the USA’s Foreign Corrupt Practices Act, and the UK Bribery Act will have a bearing on the activities and consequently the decisions of companies. E&Y, in their report titled: Fraud and Corporate Governance –Changing Paradigm 2012, have observed that many companies have started to or are in the process of incorporating proactive fraud risk management systems in their structures. Such companies have realised the damaging impact even a false charge can have on the operations of the company. Their report
further notes that the awareness among companies of fraudulent practices and the need for controls has visibly increased. Steps that Companies can take to Improve Corporate Governance:
1. Leverage technology to enhance the detection, and prevention of fraudulent practices and to isolate high risk areas
2. Inculcate a culture of Integrity into the workforce by rewarding honest hard work, and through intrinsic and external motivators.
3. Strengthen the Whistle=‐Blower Mechanism by assuring confidentiality of informants and providing a direct channel to the relevant committees and their members.
4. Conduct third party due diligence periodically, as it shows employees that you are serious in maintaining a fraud‐free environment
5. Empower independent directors and encourage them to act as deterrents to fraud.
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IEPF Anitha Revanth
Management Trainee @ Hemanth, Biswajit& Co. [email protected]
Introduction: Government of India, through Ministry of Corporate Affairs formed the Investors Education and Protection Fund [IEPF] under section 205C of the Companies Act, 1956. There were many factors that were noted prior to the formation of IEPF which actually caused its formation. For a long time, authorities were discussing on this fact that being aware about investing, helps the investors to take careful steps towards the coming opportunities and the risks associated with them. Knowledge about investment opportunities allows them to take decisions watchfully, understand the strategies of the market and thus participate actively in the growth of the nation. So, IEPF was formed to create more awareness among the investors and to help them invest wisely. About Investor Education and Protection Fund: Investor Education and Protection Fund (IEPF) has been established under Section 205C of the Companies Act, 1956 by way Companies (Amendment) Act, 1999 for promotion of investors’ awareness and protection of the interests of investors. As per the Act, the following amounts which have remained unclaimed and unpaid for a period of seven years from the date they became due for payment shall be credited to the IEPF. a) Amounts in the unpaid dividend accounts of
companies. b) The application moneys received by companies for
allotment of any securities and due for refund. c) Matured deposits with the companies. d) Matured debentures with the companies. e) grants and donations given to the Fund by the Central
Government, State Governments, companies or any other institutions for the purposes of the Fund.
f) The interest or other income received out of the investments made from the Fund.
The Act provides for setting up of a Committee for taking decisions regarding spending moneys out of the Fund for carrying out the objects as mentioned above. For the purpose of administration of IEPF, the Investor Education and Protection Fund (awareness and protection of investors) Rules 2001 were notified on 1st October 2001. These Rules, inter alia, contain provisions relating to constitution and functions of the Committee, activities relating to investors’ education, awareness and protection to be undertaken with the recommendation of the Committee, conditions for utilization of Funds by the Committee, proforma for applications for registration of associations, institutions or organisations and also for seeking financial assistance under IEPF, etc. The present Committee has been constituted of members who are experts in various fields of Capital Market, Accountancy, Taxation, Media, Management Consultancy, RBI, etc. The Fund has been established with a view to support the activities relating to investor education, awareness and protection. Following are the objectives/ activities of the Fund: a) Educating investors about market operations. b) Equipping investors to analyze information to take
informed decisions c) Making investors aware about market volatilities d) Empowering the investors by making them aware of
their rights and responsibilities under various laws. e) Continuously disseminating information about
unscrupulous elements and unfair practices in securities market and broadening the investors’ base by encouraging new investors to participate in securities market.
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f) Promoting research and investor surveys to create a knowledge base that facilitate informed policy decisions
Major initiatives under IEPF: Under IEPF, various programmes on investor education and awareness have been funded and organized through Voluntary Associations or organizations registered under IEPF. The various initiatives for increasing the investors’ awareness and education undertaken under the aegis of IEPF were as follows:
a) Series of advertisement on investor education were
issued in national as well as regional language newspapers. Through these advertisements, efforts have been made to educate investors for investing in IPOs, market instruments, Mutual Funds etc.
b) Media campaigns were launched in various
newspapers, wherein besides the above said educative message, NGOs/VOs involved in investor education and protection activities, especially those with a rural outreach, were been invited to apply for financial assistance under IEPF schemes. Further, organizations, which were keen to carry out the research on the subjects of investor education/protection, related issues were also invited to submit their proposals to the IEPF.
c) Investor Education message was aired on All India
Radio through Prasar Bharati to create awareness on the issues concerning investors and about the IEPF.
d) An “Investor Helpline” www.investorhelpline.in
project which had been launched under IEPF through Midas Touch Investors Association to provide a mechanism for redressal of grievances and to create investor awareness has been rendering effective service to the investors. The redressal rate has been around 46 percent.
Filing of information regarding unpaid and unclaimed amounts: Every Company (Companies and Residuary Non‐banking Companies) shall, within a period of 90 days after the
holding of Annual General Meeting or the date on which it should have been held as per the provisions of section 166 of the Act and every’ year thereafter till completion of the seven years period, identify the unclaimed amounts as referred to in sub‐section (2) of section 205C of the Act, separately furnish and upload on its own website as also on the Ministry’s website or any other website as may be specified by the Government a statement or information through e‐Form 5INV, separately for each year, containing following information, namely:‐ a) The names and last known addresses of the persons
entitled to receive the sum; b) The nature of amount; c) The amount to which each person is entitled; d) The due date for transfer into the Investor Education
and Protection Fund; and e) Such other information as considered relevant for the
purpose Default in filing of information: If a company fails to furnish and upload information or furnishes and uploads false information on the website, the company, and every officer of the company who is in default, punishable with fine which shall not be less than Rs 5 lakh but which may extend to Rs 25 lakh and every officer of the company who is in default shall be punishable with fine which shall not be less than Rs 1 lakh but which may extend to Rs 5 lakh, the bill stipulates. Conclusion: IEPF has been actively involved in organizing seminars and programs that are directly related with spreading awareness about protection among investors through education. IEPF has also been assisting those organizations, through infrastructure and finance channel which have been showing and taking active part in accomplishing the mission set by IEPF. Other than all afore mentioned activities, IEPF has also been a busy customer in furnishing vital information on important investment options such as role of capital market, IPO investing, mutual fund investing, stock trading, depository accounts, debt market and others for the investors to get the inner view of the terminologies and complication that may arise for them in financial markets.
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Best Legal Practices
& Compliance Initiatives
Jigna Jinandra Mumbai
Professional Programme [email protected]
For survival and growth of any institution, the best legal practices and compliance are much needed and here are some of the best practices that may help us to build and maintain an effective strategy:
Define audit policy categories (configure which events to
record) Automatically consolidate all event records centrally Use both flat format & database records Event monitoring‐ Real‐time alerts & notification policies Define which events should trigger an alert, and define your
poll intervals Generating reports for key stakeholders: auditors, security
or compliance officers & management teams
Auditing Log Data Central Log Analysis Ad‐hoc forensics
Identifying Best Practices
Some firms are so well known for best practices in certain areas that it is not necessary to consult books, magazines, libraries, or the Internet to find the information. For example, Federal Express is often cited as having best practices among competitors in the expedited small package industry for their on‐time delivery and package tracking services. Microsoft, the computer software developer, is cited as being innovative and creative, while the L. L. Bean outdoor products and clothing company is frequently lauded for its customer service practices and return policy guarantees. When a firm is benchmarking to learn about the best practices of others, often these superior methods are found in companies outside the firm's key industry segment. Thus it is important to research and observe companies in a wide variety of settings, countries,
industries, and even in the not‐for‐profit sector to learn better ways to improve continuously. Information on best practices and innovative technologies can also be found on the Best Manufacturing Practices (BMP) Web site at http://www.bmpcoe.org/. This site has as its goal to increase the quality, reliability, and maintainability of goods produced by American firms. One way BMP accomplishes this goal is to identify best practices, document them, and share the information across industry segments. They believe that by sharing best practices, they allow companies to learn from others' attempts and to avoid costly and time‐consuming duplication of efforts. Companies profiled have submitted abstracts of what their organization does well and they include previous practices, changes to new processes, and information on implementation as well as quantitative details and lessons learned.
An example of best practice outside the manufacturing sector is provided by Richard T. Roth in a recent article in Financial Executive. Roth writes: "An analysis of the most recent finance benchmarks in the 2005 Hackett Book of Numbers finds that world‐class performers spend 42 percent less than typical companies on their finance operations as a percentage of revenue … and operate with less than half the staff of their peers. At the same time, they close their books more quickly each month, and historically have generated significant additional savings through reducing effective tax rates and days sales outstanding." The example illustrates how a well‐quantified "best practice" can become a corporate goal elsewhere.
Background Compliance initiatives
"Basic Policy for Compliance”, which has been officially announced, describes the management's determination.
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1. Winning trust from our customers
2. Promoting fair and reasonable business
3. Ensuring appropriate disclosure of corporate information
4. Showing respect for employees
5. Making contribution to preserving our environment
6. Contributing to society
7. Ensuring harmony with international and regional communities
All these models contain various components aimed at enhancing and ensuring institutional compliance, including:
Establishing institutional expectations and codes of conduct
Developing and effectively communicating policies and procedures
Designating a formal compliance office with suitable administrative powers
Implementing a program to monitor compliance
Identifying and applying sanctions for intentional non‐compliance
Implementation Steps
CFO redesignates the Executive Director of Internal Audit as the Executive Director of Internal Audit and Institutional Compliance (the Executive Director). The Executive Director continues to report to the CFO, with a direct reporting relationship to the President and the Committee on Audit of the Board of Trustees.
Board of Trustees redesignates the Committee on Audit as the Committee on Audit and Compliance.
Executive Director of Internal Audit and Compliance is tasked with presentation of an annual institutional compliance report to
the President, Cabinet, and Committee on Audit and Compliance.
President appoints a Compliance Coordinating Committee, The primary purpose of this Committee will be to meet at least semiannually to do risk assessments and ensure that all members are knowledgeable about pertinent noncompliance risks deriving from sources external to the University.
The Executive Director initiates Compliance Program activities, including:
Provides liaison with the Office of the General Counsel, the Office of University Communications, and other responsible offices in addressing incidents of alleged noncompliance that arise.
Works through the Internal Audit function to both monitor compliance and assess the adequacy of compliance activities in each area. Includes such information in the annual compliance report.
Implements and publicizes a "Compliance Helpline" program.
In cooperation with the Office of the General Counsel, develops a formal policy, and procedures, to protect University employees who make allegations of noncompliance.
Networks with other university compliance officers throughout the nation to keep apprised of emerging compliance issues, share best practices, etc.
Considers needed changes in the compliance program and brings them to Compliance Coordinating Committee for review and transmittal to the President.
Secures necessary funding from the Provost to carry out the above activities.
Conclusion Learning about the best practices of others is a valuable way for firms to gather fresh insights into possible methods of improving a myriad of aspects of their operations. It should be an important part of an organization's strategic planning activities.
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Related Party Transactions
Nethra Sridhar
Professional Programme Trainee with CS Parameshwar G. Bhat
In the corporate world, one of the most frequently used terms is RELATED PARTY TRANSACTIONS. Different laws contain various provisions on this matter. In the Companies Act, 1956, we come across this term under sections 297, 299, 300 and 301. The supreme capital market regulator, the Securities and Exchange Board of India, through Listing Agreement casted certain duties on companies in this regard. As per Section 40A(2) of the Income Tax Act, 1961, Assessing Officer can disallow the expenditure incurred by the assesse in respect of specified persons to the extent excessive and unreasonable. The Institute of Chartered Accountants of India has come out with an Accounting Standard (AS18) on Related Party Disclosures. Some important definitions given in AS 18in this context are: Related party: ‐ parties are considered to be related if at any time during the reporting period one party has the ability to control the other party or exercise significant influence over the other party in making financial and/or operating decisions. Related party transaction: ‐transfer of resources or obligations between related parties, regardless of whether or not a price is charged. Control – It may be by way of
(a)Ownership, directly or indirectly, of more than one half of the voting power of an enterprise; or
(b) control of the composition of the board of directors in the case of a company or of the composition of the corresponding governing body in case of any other enterprise; or
(c) a substantial interest in voting power and the power to direct, by statute or agreement, the financial and/or operating policies of the enterprise. Significant influence: ‐ participation in the financial and/or operating policy decisions of an enterprise Key management personnel: ‐ persons who have the authority and responsibility for planning, directing and controlling the activities of the reporting enterprise. Generally, the relationship exists between: Parent and subsidiary company Joint venture partner Investor and its investee Associates Key management personnel(KMP) of reporting
enterprise Relative in case of individual enterprises
The following are not deemed to be related parties: A common director of companies who is not able to
influence mutual dealings of the companies A single customer, supplier, franchiser, distributor or
general agent with whom significant volume of business is transacted
Providers of finance Trade unions Government departments and agencies COMPANIES ACT, 1956: Section 297:‐Subject to the conditions herein below, a director of the company or his relative, a firm in which such director or his relative is a partner, any other partner in such firm, or a private company of which the director is
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a director or member, can enter into any contract with the company with respect to – (a) sale, purchase or supply of any goods, materials or services; or (b) underwriting the subscription of any shares in or debentures of the company. The conditions are: A) Where the paid‐up share capital of the company is less than Rs. 1 crore:‐ 1. Prior approval of the Board of directors; or 2. Subsequent approval of the Board within three
months from the date of entering into contract.
B) Where the paid‐up share capital of the company is Rs. 1 crore or more:‐ 1. Prior approval of the Board of
directors; and 2. Prior approval of the Central
Government. This power of the Central Government has been delegated to Regional Directors vide MCA notification dated July 10, 2012. Exceptions to Section 297:‐ (a) Transactions only on cash basis and at prevailing market prices; (b) The value of the contract does not exceed Rs. 5,000/‐ in aggregate n any year; (c) In case of banking or insurance company, any transaction in the ordinary course of business. Every Director, by virtue of Section 299 is duty bound to disclose his interest to the Board. He is required to give a general notice to the Board, disclosing his nature of interest in the entity with which the company has entered into or is entering into any contract. Such notice will expire at the end of every year and is required to be renewed.
In the case of a publicly owned company Section 300 does not allow a director to take any part in the discussion or to vote on any contract or arrangement in which he is interested. Section 301 requires every company to maintain a Register of contracts, companies and firms in which directors are interested.
Disclosure of related party transaction to Audit Committee:
(i) Periodical statement of transactions in the ordinary course
of business (ii) Details of material individual transactions which are not in
the normal course of business (iii) Details of material individual transactions not on an arm’s
length basis together with Management’s justification for the same;
Requirements under Clause 49 of the Listing Agreement:
Audit Committee has to mandatorily review the information related to Statement of significant related party transactions submitted by management;
Report on Corporate Governance in the Annual Report of Companies should include Disclosures on materially significant related party transactions that may have potential conflict with the interests of the company at large.
In the case of corporate entities, real owners are different from the management. The directors being at the helm of the organization, must exercise their powers bona fide and for the benefit of the company as a whole. To prevent the management from misusing its powers, the law requires the Board to monitor Related Party Transactions and establish remuneration policy for Board members and their relatives employed by the company.
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Merchant Banking in India
S.K.RAVI CS Professional
Trainee with R.C. Venkatesh Rao [email protected]
Happiness: a good bank account, a good cook, and a good digestion ‐ Jean Jacques Rousseau ORIGIN OF MERCHANT BANKING: The origin of merchant banking is to be traced to Italy in late medieval times and France during the seventeenth and eighteenth centuries. The Italian merchant bankers introduced into England not only the bill of exchange but also all the institutions and techniques connected with an organized money market. Merchant banking consisted initially of merchants who assisted in financing the transactions of other merchants in addition to their own trade. In France, during seventeenth and eighteenth centuries a merchant banker (lemer chand Banquer) was not merely a trader but an entrepreneur par excellence. He invested his accumulated profits in all kinds of promising activities. He added banking business to his merchant activities and became a merchant banker. ORIGIN OF MERCHANT BANKING IN INDIA: The first merchant bank was set up in 1969 by Grindlays Bank. Initially they were issue managers looking after the issue of shares and raising capital for the company. But
subsequently they expanded their activities such as working capital management, syndication of project finance, global loans, mergers, capital restructuring, etc. Initially the merchant banker in India was in the form of management of public issue and providing financial consultancy for foreign banks. In 1973, SBI started the merchant banking and it was followed by ICICI. SBI capital market was set up in August 1986 as a fully‐fledged merchant banker. Between 1974 and 1985, the merchant banker has promoted lot of companies. However, they were brought under the control of SEBI in 1992 with enactment of the Securities and Exchange Board of India (Merchant Bankers) Rules, 1992. SERVICES RENDERED BY MERCHANT BANKS: The working of merchant banking agencies and units formed subsequently to offer merchant banking services has shown that merchant banks are rendering diverse services and functions, such as organizing and extending finance for investment in projects, assistance in financial management, acceptance house business, raising Eurodollar loans and issue of foreign currency bonds, financing of local authorities, financing export of capital goods, ships, hydropower installation, railways, financing of hire‐purchase transactions, equipment leasing, mergers and takeovers, valuation of assets, investment management and promotion of investment trusts. Not all merchant banks offer all these services. Different merchant bankers specialize in different services. Merchant banking may cover a wide range of financial activities and in the process include a number of different financial institutions.
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FUNCTIONS OF MERCHANT BANKERS:
1. Promotional Activities – Merchant Banks helps the entrepreneur in conceiving an idea, identification of projects, preparing feasibility reports, obtaining Government approvals and incentives, etc.
2. Issue Management ‐ Management of issues refers to effective marketing of corporate securities viz., equity shares, preference shares, debentures or bonds by offering them to public. Merchant banks act as intermediary whose main job is to transfer capital from those who own it to those who need it.
3. Credit Syndication ‐ Credit Syndication refers to obtaining of loans from single development finance institution or a syndicate or consortium. Merchant Banks help corporate clients to raise syndicated loans from commercial banks.
4. Project Counseling‐ It includes preparation of projects reports, deciding upon the financing pattern, appraising the project relating to its technical, commercial and financial viability. It includes filling up of application forms for obtaining funds from financial institution.
5. Leasing and Finance – Many merchant bankers provide leasing and finance facilities. Some of them even maintain venture capital funds to assist the entrepreneurs. They also help companies in raising finance by way of public deposits.
6. Servicing Issues – Merchant Bankers helps in servicing the shareholders and debenture holders in distributing dividends, debenture interest.
7. Other Specialized Services – Merchant Banks also provide corporate advisory services on issues like mergers and amalgamations, tax matters, recruitment of executives and cost and management audit, etc.
LEAD MERCHANT BANKER: All issues should be managed by at least one merchant banker functioning as the lead merchant banker. In an issue of offer of rights to the existing members with or without the right of renunciation, where the amount of the issue by the body corporate does not exceed rupees fifty lakhs, the appointment of a lead merchant banker is
not mandatory. Every lead merchant banker shall before taking up the assignment relating to an issue, enter into an agreement with such body corporate setting out their mutual right, liabilities and obligations relating to such issue an in particular to disclosures, allotment and refund. GENERAL OBLIGATIONS: The 1992 regulations have enunciated the following general obligations and responsibilities for the merchant bankers. Sole Function: Every merchant banker shall abide by the Code of Conduct as specified in Schedule III. They are as follows:
1. Merchant Banker not to associate with any business other than that of the securities market.
2. No merchant banker, other than a bank or a public financial institution, who has been granted certificate of registration under these regulations, shall after June 30th, 1998 carry on any business other than that in the securities market. However , a merchant banker who prior to the date of notification of the Securities and Exchange Board of India (Merchant Bankers) (Amendment) Regulations, 1997, has entered into a contract in respect of a business other than that of the securities market may, if he so desires, discharge his obligations under such contract. Similarly, a merchant banker who has been granted certificate of registration to act as primary or satellite dealer by the Reserve Bank of India may carry on such business as may be permitted by Reserve Bank of India. TO CONCLUDE: The merchant banking apparatus has proved to be a key link between investors and companies. With the increased amount of compliance practices, the rapidly changing regulatory environment and the explosion in popularity of the corporate body will ensure that the role will only become more critical in times to come. Therefore, it would be good if Government ensures proper environment in which both investors and companies can reap the most of merchant bankers.
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Producer Companies &
Inflation
Sudhir S Gaonkar ING Vysya Bank Limited
[email protected] In 2012, India witnessed approximately 2.5% growth rate in agriculture sector when compared to average 5.5% and 9% growth rate in industry and service sectors respectively. Year on year the food production rate is decreasing while the industrial production rate is increasing. Does it signify agriculture is neglected or inflation is eating up the growth rate? According to the latest CPI all India annual inflation rates data published by Central Statistics office of Ministry of Statistics and Programme Implementation, inflation rate for food and beverages has reached 13.04% up to December 2012. Thus, a common man’s expenditure has increased twice, though the source of income and income levels remained almost stagnant. On shoot up of prices of vegetables, grains and other food stuffs, farmers became poorer than before due to their inaccessibility to the direct consumers. In many of these cases, the middlemen/agents also contribute to inflation to earn higher profits. Farmers engaged in agriculture are shifting from their primary occupation by selling off their lands. Why not the same with middlemen? Rule position of Producer Companies as per Law: The concept of Producer Companies was inserted in the Companies Act, 1956 by amending the provisions in 2002, with an intention to provide the facility of co‐operative principles within the Companies Act. The Companies should work on mutual assistance principle. The Act provides the voluntary membership with single voting right irrespective of shareholding.
The Concept: Integrating the farmers, especially the small farmers, within the value chain so that the net return is remunerative enough for the farmers to pursue agriculture. The concept of Producer Company enables the farmers to earn better price and the consumer to enjoy fresh produce and thus they are mutually benefitted. The Concept covers mainly the primary produce viz. agriculture including animal husbandry, horticulture, floriculture, pisciculture, viticulture, forestry, forest products, re‐vegetation, bee raising and farming plantation products: produce of persons engaged in handloom, handicraft and other cottage industries: by ‐ products of such products; and products arising out of ancillary industries. An illustration about the concept Mr. A, a farmer growing 10000 coconuts a year and having an estimated annual income of 1,00,000/‐ has many constraints. Since he cannot accommodate transport facility, sells coconuts through an agent at the rate of `6/‐ each. This agent further sells to a wholesaler at the rate of 9/‐ each. The wholesaler sells to retail traders at 12/‐ each and retail traders sell to the ultimate consumers at `15/‐ each (Farmer Agent 6/‐ Wholesaler 9/‐ Retailer 12/‐ Ultimate Consumer 15/‐). Here the profit is 9/‐ and is shared between all the middlemen. The customer paid inflated price of 15/‐ where as farmer got only 6/‐!! However under Producer Company, farmer sells to Producer Company at `6/‐, Producer Company markets/
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sells to ultimate customer at `12/‐ and the profit of `6/‐ of Producer Company is shared by the farmers as dividend/patronage bonus. Here the customer is benefitted with 20% (`15/‐‐ `12/‐) lesser price and farmer also gains a benefit of dividend, which equals to `8/‐ each. Controlling Inflation Inflation mainly and practically is of two kinds. One is fuel inflation and the other one is food inflation. The existence of Producer Company at each level of primary produce will bring the retail market of India under the control of various producer companies. The Government with the regulatory power can fix the support price for each kind of produce and thereby control the food prices in retail market and thereby food inflation of the country. Challenges for implementation 1. Patronage: It is the
use of services of Producer Company by a member participating in its business activities. However member’s share in the company shall be proportionate to the patronage. This clause restricts a member to deal through Producer Company for an amount of goods not more than the farmer’s investment.
For example: Mrs. C has invested Rs. 20,000/‐ in shares of XYZ Producer Company Limited. She is eligible to take her product to the market through XYZ Producer Company (Using Service i.e., patronage) only up to Rs.20,000/‐.
2. Restriction on Invitation for Public deposits: The
Companies Act, 1956 restricts invitation for public deposits from persons other than the members. This
clause affects the management of working capital and short term expansion plans of the company.
3. Lack of education: The farmers do not have the
knowledge of existing laws and are engaged in the conventional trading method. Capacity building of farmers will enable the successful implementation of this concept.
4. Tie‐ups with retailers: Instead of establishing own
retail chain, existing Producer Companies are acting like middlemen who supply to big branded retail chains.
Farmers are joining hands and mind, body and spirit. In a quiet revolution underway across the countryside, growers are setting up companies, replete with balance sheets, professional CEOs, Board of Directors, and income tax returns. By pooling together the land and produce of
their shareholders, these companies are signing lucrative deals with large retail chains, food companies and exporters keen to establish reliable supply chains. As many as 300 companies have been formed by farmers from different parts of the country. With an average 1,000 members, more than 2 lakh farmers are now shareholders in what are known as 'Producer Companies' under the Companies Act.
From identifying the opportunity, mobilising potential shareholders (farmers), exploring the market potential in the product value chain, writing business plan, getting the company registered, appointing staff, filing annual returns with the Registrar of Companies, professional consultants are assisting farmers to learn and adopt the best practices and visualizing for another ‘GREEN REVOLUTION’ in India.
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Sustainability &
Governance Indu Sharma
Bangalore [email protected]
Sustainability’s is an ingredient and a complete material as well which is required as an approach a concept in various domains. Where it will alignment the system and integrates the system. Being the base of Longevity for resources, world and people Sustainability is to be applied in every action to get the effective results. From the economic point of view it will enhance the curve of GDP of a country which is dependent on various variables. However this is fallen a pray of poor governance if seen from the implementation aspect. The growth span of economic plans and availability of resources require Governance to act as a shield and provide systematic results. Meaning of Governance is same however the application is changing at a pace where policies and framework require reconsideration. It is required at macro and micro level, single unit and Industry level. Every individual, system and framework calls for redefinition. To apply it in a manner which will lead to required results and results which have approach of better future for the generations to come. Corporations have seen and world have seen the impact of poor governance at firm level like Enron and Arthur Andersen. These cases have raised question on the system and governance at firm level and at regulatory level. These have definitely brought a tighten guidelines and work flow and introduced Sarbanes–Oxley Act of 2002 and in India Clause 49. But the saga of poor governance has not stopped after this. Laws are framed, policies have been framed, regulations are tight, punishments are tough however still scam happens and unethical practices flourish. Because in the system somewhere somebody has an urge and he seeks to align the system as per his requirements and frame an atmosphere which is favourable to him and scam occur.
The frameworks which are defined for better and progressive economy have bought changes and many revisions are done but the need was felt after the noticeable effect or bad practices. It is a question which can be asked at any given stag of business activity or day to day life if good governance is imbibed in the system then it leads for a better flow and mapping the dots for life. Why would be require committees to sit and frame regulations to control the undesired practices. The answer could be somewhere someone wants:
Faster growth
Individual is not doing his duty
Easy money Which leads to imbalance dots feels the gap which gets filled by unethical practices. And this leads to imbalance in the basic economic principles. After all has happened the responsibility comes on the shoulder of government. Whereas we tend to forget the economy starts with us and government system is run on our practices we like. We as a part of system give scope for poor governance and unethical practices. Instead of blame game we should practices our duty in authorised manner. When we take sustainability as a responsibility then we also know that the need of future integrity, accountability and responsibilities which are governed by good governance ‘sustainability is doubtful’ till we understand how to achieve sustainability. Knowing the best and doing the best has a thin line difference and the reason is – Desire, anger, greed, lust, ego and jealous (Lord Krishna) Today the scams like Coal and Spectrum allocation because the need and integrity were to be defined by self and if we share the responsibility of the same then lies on the policy makers as well and we practise the same at all level. Such situations will not occur.
Continued in Page 69
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Strategic Management - A Contemporary look
Vinod Kumar Trainee with R.C. Venkatesh Rao
[email protected] “However beautiful the strategy, you should occasionally look at the results” ‐ Sir Winston Churchill A strategy is a set of actions that managers take to increase their company’s performance relative to rivals. If a company’s strategy does result in superior performance, it is said to have a competitive advantage. The main strategic responsibilities of its CEO are setting overall strategic goals, allocating resources among the different business areas, deciding whether the firm should divest itself of any of its businesses, and determining whether it should acquire any new ones. Strategic Managers Managers are playing a important role in the strategy‐making process. It is individual managers who must take responsibility for formulating strategies to attain a competitive advantage and putting those strategies into effect. They must lead the strategy‐making process. In most companies, there are two main types of managers: general managers, who bear responsibility for the overall performance of the company or for one of its major self‐contained subunits or divisions, and functional managers, who are responsible for supervising a particular function—that is, a task, activity, or operation like accounting, marketing, R&D, information technology, or logistics. Levels Managers Corporate‐Level Managers: The corporate level of management consists of the chief executive officer (CEO), other senior executives, the board of directors, and corporate staff. These individuals occupy
the apex of decision making within the organization. The CEO is the principal general manager. In consultation with other senior executives, the role which focused on urban and suburban locations, corporate‐level managers is to oversee the development of strategies for the whole organization. This role includes defining the goals of the organization, determining what businesses it should be in, allocating resources among the different businesses, formulating and implementing strategies that span individual businesses, and providing leadership for the entire organization. Business‐Level Managers: A business unit is a self‐contained division (with its own functions—for example, Finance, purchasing, production, and marketing departments) that provides a product or service for a particular market. The principal general manager at the business level, or the business‐level manager, is the head of the division. The strategic role of these managers is to translate the general statements of direction and intent that come from the corporate level into concrete strategies for individual businesses. Functional‐Level Managers: Functional‐level managers are responsible for the specific business functions or operations (human resources, purchasing, product development, customer service, and so on) that constitute a company or one of its divisions. Thus, a functional manager’s sphere of responsibility is generally confined to one organizational activity, whereas general managers oversee the operation of a whole company or division. Although they are not responsible for the overall performance of the organization, functional managers nevertheless have a major strategic role: to develop functional strategies in their area that help fulfill
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the strategic objectives set by business‐ and corporate‐level general managers. Mission Statement: The first component of the strategic management process is crafting the organization’s mission statement, which provides the framework or context within which strategies are formulated. A mission statement has four main components: a statement of the raison d’être of a company or organization—its reason for existence—which is normally referred to as the mission; a statement of some desired future state, usually referred to as the vision; a statement of the key values that the organization is committed to; and a statement of major goals. For example, the current mission of Microsoft is “to enable people and businesses throughout the world to realize their full potential.” The vision of the company—the overarching goal—is to be the major player in the software industry. The key values that the company is committed to include “integrity and honesty,” “passion for our customers, our partners, and our technology,” External Analysis: The second component of the strategic management process is an analysis of the organization’s external operating environment. The essential purpose of the external analysis is to identify strategic opportunities and threats in the organization’s operating environment that will affect how it pursues its mission.
Three interrelated environments should be examined at this stage: the industry environment in which the company operates, the country or national environment, and the wider socioeconomic environment or macro environment.
INTERNAL ANALYSIS: The third component of the strategic planning process, serves to pinpoint the strengths and weaknesses of the organization. Such issues as identifying the quantity and quality of a company’s resources and capabilities and ways of building unique skills and company‐specific or distinctive competencies are considered here when we probe the sources of competitive advantage. Building and sustaining a competitive advantage requires a company to achieve superior efficiency, quality, innovation, and responsiveness to its customers.Company strengths lead to superior performance in these areas, whereas company weaknesses translate into inferior performance. SWOT Analysis: The next component of strategic thinking requires the generation of a series of strategic alternatives, or choices of future strategies to pursue, given the company’s internal strengths and weaknesses and its external opportunities and threats. The comparison of strengths, weaknesses, opportunities, and threats is normally referred to as a SWOT analysis Its central purpose is to identify the strategies that will create a company‐specific business model that will best align, fit, or match a company’s resources and capabilities to the demands of the environment in which it operates. Managers compare and contrast the various alternative possible strategies against each other with respect to their ability to achieve a competitive advantage.
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Strategy implementation: Having chosen a set of congruent strategies to achieve a competitive advantage and increase performance, managers must put those strategies into action: strategy has to be implemented. Strategy implementation involves taking actions at the functional, business, and corporate levels to execute a strategic plan. Thus, implementation can include, for example, putting quality improvement programs into place, changing the way a product is designed, positioning the product differently in the marketplace, segmenting the marketing and offering different versions of the product to different consumer groups, implementing price increases or decreases, expanding through mergers and acquisitions, or downsizing by closing down or selling off parts of the company. The Feedback Loop: Strategic planning is ongoing; it never ends. Once a strategy has been implemented, its execution must be
monitored to determine the extent to which strategic goals and objectives are actually being achieved and to what degree competitive advantage is being created and sustained. This Knowledge is passed back up to the corporate level through feedback loops and becomes the input for the next round of strategy formulation and implementation. Top managers can then decide whether to reaffirm existing strategies and goals or suggest changes for the future. For example, a strategic goal may prove to be too optimistic and so the next time a more conservative goal is set. Or feedback may reveal that the strategy is not working, so managers may seek ways to change it. Conclusion In a dynamic and uncertain environment, strategic management is important because it can provide managers with a systematic and comprehensive means for analyzing the environment assessing their organization's strengths and weakness and identifying opportunities for which they could develop and exploit a competitive advantage.
Sustainability & Governance Continued from Page 66 The subjects which we ignore and believe less sometimes becomes the subjects which provide us the better path like Cadbury Committee and Kumar Mangalam Birla committee report is for us to guide through better governance. Leaders have a great responsibility to affirm which will incisive for sustainability. They can turnaround the system and change many things for better results. Due to few poor examples a need for change in the leadership also is felt. It requires polishing and strong push with an approach of intelligence which requires spiritualism as an important ingredient. Which has an objective of serving others and through study it is observed that this approach helps in resolving many problems. This can also help in enhancing morality and ethical values to funnel down for sustainability. There are various concepts and theories for sustainability practiced but the base is Triple Bottom principle hold true for world and for individual and urges to become custodian for governance in the levels of slots defined for everybody. It is observed that corporates and governments are changing their approach to have sustainability is there business. But this goal is difficult till every single individual understand the meaning of sustainability. Governance is merely a system however ingredients are the individuals who are part of the system and every dot need to be joined for better future.
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Interim Dividend
Indu P Trainee with CS Vivek Hegde [email protected]
The word "dividend" comes from the Latin word "dividendum" ("thing to be divided"). Dividends are the share of a company’s profits that it decides to pay to its shareholders. They are an important part of the return from investing in shares, in addition to any increase in the share price. Companies are under no obligation to pay dividends, but they usually choose to do so because dividends provide an incentive to invest in their shares. Companies typically keep part of their profits back to expand the business or to increase their reserves, and will then pay out the rest as a dividend. If companies have good investment opportunities, they will tend to keep more of their profits back for this purpose, reducing the amount available for dividends. So the amount of profit companies make and the alternative uses of its profits will help to determine the dividend.
Dividends are usually payable for a Financial Year (FY) after the final accounts are ready and the amount of distributable profits is available. Dividend for a FY of the company (which is called Final Dividend) is payable only if it is declared by the company at its Annual General Meeting (AGM) on the recommendation of the Directors. Sometimes dividend is also declared by directors between two AGMs which are called an Interim Dividend. As the name goes, it is a dividend declared and paid during the intervening period between two AGMs and may also be treated as Final Dividend if the Company does not declare any dividend at the AGM. Procedure for declaration and payment of interim dividend by a private limited company Under Companies Act, 1956 – Section 205 1. The Company in accordance with Section 286 of
Companies Act must issue notice for holding a
meeting of the Board of Directors of the Company to consider the matter. Alternately interim dividend can be declared via a circular resolution also, if the Articles of Association of the Company do not restrict the same. Before declaring an interim dividend, the Directors must satisfy themselves that the financial position of the Company allows the payment of such a dividend out of profits available for distribution. The Company must have adequate profits to pay interim dividend after providing for depreciation for the full year. The Directors of the Company may be held personally liable in the event of wrong declaration dividend.
2. No dividend should be declared by the company unless certain percentage of profit is transferred to reserve account in accordance with The Companies (Transfer of profits to reserves) Rules, 1975 which provides for transfer of not less than 2.5% to 10% of current profit to reserve account, for proposed dividend ranging from 10% to 20% or more.
Calculation of Interim Dividend Total Dividend = %Profit After Tax declared
100
Dividend per Share = Total Dividend No. of Shares
Dividend Percentage = Dividend per Share * 100 Face Value of share
3. Open an Interim Dividend Account with the bank as
resolved by the board and deposit the amount of dividend payable in the account within 5days of declaration of dividend.
4. Prepare a statement of dividend in respect of each shareholder containing the details of name and address of the shareholders, number of shares held,
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amount of dividend payable along with their bank account details (for online transfer).
5. Ensure dividend tax is paid to the tax authorities within prescribed time, as detailed below.
6. Dispatch dividend warrants within 30days of the declaration of dividend.
7. Arrange for transfer of unpaid or unclaimed dividend to a special account named “Unpaid dividend A/c” within 7 days after expiry of the period of 30days of declaration of dividend.
8. Any Money transferred to the unpaid dividend account of a Company which remains unpaid or unclaimed for a period of seven years from the date of such transfer shall be transferred to Investor Education And Protection Fund (IEPF)
9. The Company while crediting Fund to Unpaid dividend A/c should separately furnish to ROC a statement of unclaimed and unpaid amounts in e‐form 5 INV of IEPF rules duly certified by a practicing CA, CS or CWA.
Under Income Tax Act, 1961 – Section 115‐O 1. Dividends are exempt from tax in the hands of
shareholders but the Company is liable to pay Dividend distribution tax.
2. All dividend received from foreign company are taxed in the hands of Shareholders.
3. Dividend shall be charged to dividend distribution tax
(DDT) @ 15% (plus applicable surcharge and cess i.e. 5% & 3% respectively). The effective DDT works out currently to 16.2225% on the dividend declared. The company is required to pay dividend distribution tax even if no income tax is payable.
4. No deduction shall be allowed to the Company or a
Shareholder for DDT or any expense on dividend income.
5. DDT shall be paid to the credit of the central
government within 14days from the date of declaration or distribution or payment of dividend, whichever is earlier. Non‐payment or delayed payment of DDT attracts simple interest @ 1% per month or part thereof.
Under FEMA – Remittance of dividend to Non‐Resident Shareholder Remittance of dividend to a non‐resident shareholder is a permitted current account transaction and as such does not require any specific RBI approval. However the procedure must be followed: 1. Indian companies intending to remit dividend to their
non‐resident (NR) shareholders should make an application to an Authorized Dealer (AD) in Form RCD 1, supported by the particulars of non‐resident shareholding in form RCD 2 and other documents prescribed in the form. ADs may allow the remittance of dividend after verifying the documents and satisfying themselves that necessary permission of the Reserve Bank has been obtained by the non‐resident shareholders for purchase of the shares, if any.
- ADswill also verify that the certificate given in Part 'B' of the form RCD 1 has been properly completed by the company's auditors before remitting the dividend amount through Form A2.
2. Indian companies can remit dividend to their non‐resident shareholders either through the normal banking channels without issuing individual dividend warrants or by issuing individual dividend warrants to the shareholders’ bankers in India for credit to their Ordinary Non‐resident Rupee (NRO) accounts.
3. As regards the remittance of interim dividend,
application may be made by the company in India to the AD by letter (in duplicate) enclosing only the form RCD 2 and a copy of the Board Resolution approving the payment of interim dividend. ADs may allow the remittance of interim dividend subject to what has been stated in paragraph.
Above is a brief procedural note on declaration and payment of interim dividend. The Directors’ Report normally carries a reference to dividend payment, if any and also if the Directors are proposing any Final Dividend at the AGM or the interim dividend is itself to be treated as Final Dividend.
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Office or Place of Profit
Bhavana Shetty Trainee with CS. Sharda Balaji
Section 314 of the Companies Act, 1956: Director, etc., not to hold office or place of profit An office or place of profit means an office of profit or position which brings to the person holding it some advantage or benefit. It will be an office or place of profit if it carries some remuneration, advantage, benefit etc. Section 314 (1) except with the consent of the company accorded by a special resolution: (a) No director of a company shall hold office or place of profit, and (b) (i) No partner or relative of such director, (ii) No firm in which such director, or a relative of such director is a partner (iii) No private company of which such director is a director or member, and (iv) No director or manager of such a private company shall hold office or place of profit carrying a total monthly remuneration as prescribed (shall not be less than Rs. 50,000 per month, as per circular passed by Ministry of Corporate Affairs as on 6 April 2011). Relationship between the Company and the said person holding office of profit: A person is said to hold an office or Place of Profit if there is, between the said person and the company a relationship of employer and employee or such other person performs for and on behalf of the company certain acts under the control, direction or supervision of the company and also he is in receipt of consideration in due discharge of his duties. Approval of Shareholders in General Meeting by Special resolution is required for the following persons: Director, Partner in a firm in which a director is a partner, Relative of such director, A firm in which such director or relative is a partner, Any private company of which a director is
a director or member, Any director or manager of such a private company ‐
shall hold any office or place of profit in the company which carries a total monthly remuneration as prescribed (shall not be less than Rs.2,50,000 per month). Director's Relatives (Office or Place of Profit) Amendment Rules, 2011 ‐ Amendment in rules 3 and 7
Persons Excluded from the provisions of this Section are Managing Director, Manager, Banker and Trustee for Debenture holder
Vacation of Office: It would be deemed that the person holding such place or office of profit would vacate his office as such on and from the date after the General meeting and shall be liable to refund to the company any remuneration received in respect of holding the office of profit.
Subsection 2(A): Any person who is appointed to hold a place of profit shall declare in writing of the relationship the said person has with the director of such company.
Subsection 2(B) and 2(C): Any such person who holds the office of profit on and from the date after the general meeting shall be liable to refund to the company any remuneration received in such position.
Subsection 2(D): The company shall not waive the recovery of any sum refundable to it unless with the permission of CG.
Forms to be filed: Form 24B: Application of CG for holding office of profit Form 23: Registration of Special resolution Conclusion: The Provisions of this section is applicable to public and private limited companies. Directors appointed directly by Central government (under section 408) shall be excluded from the provisions of this section.
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Corporate Social
Responsibility Pooja B Desai
Mumbai Professional Programme
The main aim for corporate is to make money and increase shareholders’ value. Through CSR, Company increases the shareholders’ wealth, it helps the society in which it operates. CSR help the shareholder as CSR Activities are bound to increase the reputation of the Company and its brand Image. Corporate Social Responsibility is a management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders. CSR is generally understood as being the way through which a company achieves a balance of economic, environmental and social imperatives (“Triple‐Bottom‐Line‐ Approach”), while at the same time addressing the expectations of shareholders and stakeholders. In this sense it is important to draw a distinction between CSR, which can be a strategic business management concept, and charity, sponsorships or philanthropy. Even though the latter can also make a valuable contribution to poverty reduction, will directly enhance the reputation of a company and strengthen its brand, the concept of CSR clearly goes beyond that. There are various corporates like TCS, Infosys and Wipro who are already doing many CSR activities, before the law on CSR is passed. The Lok Sabha has approved the Companies Bill introducing the concept of CORPORATE SOCIAL RESPONSIBILITY making it mandatory for profit‐making companies to spend on activities related to corporate social responsibility. In this article, let us discuss the provisions of CSR in companies’ bill and its Impact.
Constitution of CSR activities: As per Clause 135(1), every company having Net worth of Rupees five hundred crore or more, or Turnover of Rupees one Thousand crore or more or A Net profit of Rupees five crore or more
during any financial year shall constitute a Corporate Social Responsibility Committee.
The committee shall consist of 3 or more Directors out of which at least one Director shall be an Independent Director. It is interesting to note that CSR is applicable to “Every Company” & not merely a listed Company or a Public Company. Role of CSR Committee: Formulate a CSR policy Recommend the amount of expenditure to be
incurred for CSR activities Monitor the CSR policy from time to time. Schedule VII contain list of activities which may be included by companies in their Corporate Social Responsibility Policies: Eradicating extreme hunger and poverty Promotion of education Promoting gender equality and empowering women Reducing child mortality and improving maternal
health Combating human immunodeficiency virus, acquired
immune deficiency syndrome, malaria and other diseases
Ensuring environment sustainability Employment enhancing vocational skills Social business projects Contribution to the Prime Minister’s National Relief
Fund or any other fund set up by the Central Government or the State Government for socio‐economic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women; and
Such other matters as may be prescribed.
…Continued in Page 75
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Soft Skills -An Overview
Chethan Kumar Professional Programme
Soft skills are personal attributes that enhance an individual's interactions, job performance and career prospects. Unlike hard skills, which are about a person's skill set and ability to perform a certain type of task or activity, soft skills are interpersonal and broadly applicable. We all possess 2 types of skills, technical skills, soft skills or interpersonal skills. Do you know importance of technical skills vs. soft skills towards our success? According to Harvard Business School, technical skill contributes only 15% to our success, and then what is responsible for balance 85%? Soft skills contribute 85% towards our success. Adopting of soft skills is very important in this corporate world. It is one of the basic things everyone should learn. Soft skills are very important for the professionals in his/her daily business activities, which will lead to shine his/her profession and leads to best practice. Those who rank with good soft skills are generally the people that most employers want to hire, retain and promote. Technical and job‐related skills are a must, but they are NOT sufficient when it comes to progressing up the ladder. Superior performance depends on how well an individual handles himself/herself and others around the work‐space. Soft skills therefore complement the hard skills. Soft skill for successful career: Soft skill is the ability required and expected from persons for finding a suitable work, its maintenance and promotion.
Communication skill as soft skill: Successful communication is an exchange, two people sharing insights on the same topic. Their insights might be diametrically opposed, but each expresses an opinion and listens to the response. Many times the conversation instead of being a dialogue becomes a monologue. Only one person does all the talking and the other listens. This leads to breakdown in conversations. Good conversation like good tennis needs volleying from both sides. So remember when you converse allow the other person to air his / her opinion. Try to understand his view if possible even if it is totally against your opinion. Whether speaking to an audience of hundreds or of one, strengthen your speaking‐ and your image with a short silent pause. We often clutter our speech with verbal crutches‐“like”, “Uhh” “Err” “Well” . We lean on these crutches to fill the silence when thinking of the next idea or word. The silence is better. If you use these crutches break the habit by pausing. Make no sound. You will be surprised to see how quickly the next word pops up. And you will find the silence is hardly noticeable. Dealing with sensitive issues:‐ Candor and directness are admirable qualities but sometimes tact works more effectively. If the issue is sensitive and can lead to confrontation tread a bit carefully. Use the following three diplomatic techniques especially if the issue is raised at your workplace:‐
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Lower your voice and control your tone: Its true hostility can be conveyed in a whisper but that’s less likely if you control/ soften your tone of voice. Cushion the impact of criticism with expressions like “maybe” and “we might consider”‐ Such expressions can prompt an open response. For example‐ “Maybe we can approach it another way” sounds much better. Use the passive voice to focus on the issue not the individual: Instead of: ‐ You designed the concept to…. Try: ‐ The concept seems designed to… The words you choose and the way you deliver them can turn confrontation into resolution. Small Talk:‐ You are in the elevator and the Managing Director enters. As the elevator ascends the silence builds. You search desperately for something to say. What do you say? You think what the MD will think if you say nothing. Casual meetings may not advance or derail your career, but they do add to the impression people form of you. In such situations sparkling conversation is not expected but small talk is. So what do you talk about‐? Don’t try to be brilliant‐ Most people don’t expect it in casual meetings. Turn the spotlight on the other person‐ Ask about the other person’s family, vacation plans etc.” What do you think of the weather” is not exactly original but can work as an ice breaker. Compliment carefully. Give sincere praise. False flattery can back fire. Use friendly body language‐ Smile, make eye contact and don’t fold you arms. Many times the other person may be just as uncomfortable as you are. So any small talk will be welcome.
➢ Communication skills form the corner stone of soft skill
➢ Every human being has to essentially & effectively communicate with others
➢ Effective communication is the hallmark of one’s education
➢ The ability to speak fluently using the right word in the right order is an good communication
➢ Message using appropriate vocabulary and syntax form effective communication Body language: Non verbal language Face is the index of the mind and it clearly displays the person’s interest. Body language presents to the audience what we feel & think about the particular matter Ex: Nodding one’s head. Body language includes arms crossed, standing, sitting, relaxed etc. Emotion of the sender & receiver can be felt clearly ‐ speaking clearly, enthusiastic etc., Written communication Skill: - Writing evaluates a person’s proficiency indications,
spelling grammar etc. - Errors committed while writing circulars, reports &
agenda considerably spoil the image of the writer - Good visual presentation using graphics, color,
balanced design layout‐ adds so much to written communication.
- Keep handouts and other written materials for your presentation.
Corporate Social Responsibility (Continued from Page 73) Quantum of Contribution under CSR The Company shall spend at least 2% of average net profits during the preceding 3 years in pursuance of the CSR Policy. In case if a Company is unable to contribute the profits as prescribe above, it need to specify the reasons for not spending the amount in the Board’s Report. Companies shall also give preference to the local area around it where it operates, for spending the amount earmarked by it for CSR activities.
Those Companies which would like to contribute to the Society and some welfare measures might contribute to CSR activities, while the rest of the Companies might quote many reasons like business expansion, new infrastructure creation, etc. as the reasons for not contributing to the CSR Activity. So CSR is mandatory but in reality it depends on companies policies and wishes only.
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Buy–back of Shares
Medha Gokhale Professional Programme
Trainee with Dwarakanath & Associates [email protected]
What are shares? ‘Share’ as the name itself indicates, is a share in ownership of a Company. Share capital is an inevitable part of a Company. It can be of two types: Equity share capital and preference share capital. The shareholders of the company are generally referred to as members of the Company.
What is buyback? Buy‐back, as the name indicates, is acquisition by the company, of its own shares. There are certain provisions in the Companies Act, 1956 which allow the shareholders to sell their shares directly to the Company. Thus, buy back of shares can be understood as the process by which a company buys its shares back from its shareholder or a resort a shareholder can take in order to sell the shares back to the company. The background: Prior to the amendment of the companies act in 1999, there was no way a company could buy its shares back from the shareholders without a prior sanction of the court (except for the preferential shares). The laws as to the buying of its share by the companies were very stringent. Some of the ways by which a company could buy its shares back were as follows:
Reduction of share capital as given in sections 100 to 104.
Redemption of redeemable preferential shares under section 80.
Purchase of shares under an order of the court for scheme of arrangement under section 391 in compliance with the provisions of sections 100 to 104.
Purchase of shares of minority shareholders under the order of the company law board under section 402(b).
Though there were ways by which a company could buy its shares back from the shareholders, it could not be done without the sanction of the court. This was done to protect the rights of the creditors as well as the shareholders. But the need of less complex ways of buying its shares back by the company was always felt. The much needed change in the companies act was brought about by the Companies Amendment Act 1999.Sections 77A, 77AA and 77B were inserted in the companies act by this amendment. Provisions in the Act: The provisions regulating buy back of shares are contained in Section 77A, 77AA and 77B of the Companies Act, 1956. These were inserted by the Companies (Amendment) Act, 1999. The Securities and Exchange Board of India (SEBI) framed the SEBI (Buy Back of Securities) Regulations,1999 and the Department of Company Affairs framed the Private Limited Company and Unlisted Public company (Buy Back of Securities) rules,1999 pursuant to Section 77A(2)(f) and (g) respectively. Why buyback? Buyback is usually resorted to for the following reasons/objects:
To increase promoters’ holdings.
To increase earnings per share.
To rationalize the capital structure by writing off capital not represented by available assets.
To payout surplus cash.
To support share price.
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How to buy back?
From existing shareholders on a proportionate basis.
From the open market through stock market.
From open market through book building process.
From odd lots.
From employees, those shares issues pursuant to a scheme of stock option or sweat equity.
From where to generate Funds for Buyback? i) Free reserves‐ Where a Company purchases its own
shares out of free reserves, a sum equal to the nominal value of the shares so purchased shall be transferred to the capital redemption reserve and details of such transfer shall be disclosed in the balance sheet.
ii) Securities premium account iii) Proceeds of any shares or other specified securities. A
company cannot buyback its shares or other securities out of the proceeds of an earlier issue of the same kind of shares or specified securities.
Conditions for Buy Back:
It should be authorized by the articles of association.
A special resolution authorizing the buy back has to be passed at the general meeting.
If the buy back is 10% or less than the total paid up equity share capital, a resolution at the general meeting is not needed to be passed rather a simple board resolution is enough, provided that no offer of buy back shall be made within 365 days reckoned from the date of offer of buy back.
The buy back is or less than 25 percent of the total paid up equity share\ capital and free reserves.
The post buy back debt‐equity ratio should not exceed 1:2.
Share to be bought back are fully paid.
The buyback of listed securities should be in accordance with the regulations made by the SEBI.
Every buy back of shares should be completed within a period of 12 months.
Modifications to the Existing Framework for Buy back It has been observed by SEBI that buy back through open market has failed to achieve its objectives in spirit, due to the following reasons:
Section 77A (4) of the Companies Act, 1956 specifies that every buy back shall be completed within a period of 12 months. However, even after keeping the buyback offer open for such a long time, there have been instances where companies did not buy a single share.
There are no explicit provisions in the Companies Act, 1956 or in the SEBI (Buyback of Securities) Regulations, 1999 regarding the price or quantity of Buy back.
It was observed that there were companies, which did not take a single step to buy the shares even after publishing public notice.
The company discloses the maximum price only and eventually purchases the shares at market price which could be significantly lower than the announced price. This may convey a misleading message to the shareholders and to the market
Key highlights of the proposed modifications for buy back through open market purchase Minimum buy back quantity: It is proposed to mandate 50% as the minimum buy back quantity. Maximum period to complete the buy back: It is proposed that companies complete the buy back in3 months. It is further proposed that these companies be mandated to put 25% of the maximum amount proposed for buy back in an escrow account. Post buy back obligations: Listed companies coming out with buyback programs may not be allowed to raise further capital for a period of two years. Disincentive for not completing the buyback program successfully: In order to ensure that the companies do not launch buyback programs for stabilizing the share price, it is proposed that companies who are not able to buy back 100% of the proposed amount (or the proposed maximum number of shares) may not be allowed to come with another buyback for a period of at least one year irrespective of the mode of approval for buyback.
(Continued in Page 84)
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Accounts and Audit -under the Companies Bill 2012
Chaitanya V.Bhat Trainee with CS C.Dwarakanath
Professional Program [email protected]
Thanks to the far‐reaching changes proposed by the new Companies Bill with respect to auditors and the manner in which audits will be conducted. Hereafter the financial statements and auditors’ report will be read with greater reliance and trust. The Bill was passed by the Lok Sabha in the recently concluded winter session. After a spate of serious scams that shocked India like Satyam, 2G etc. the deficiencies and ambiguities in the existing Companies Act, 1956 with respect to audits were felt and there was a need to upgrade the audit standards to bring them in line with globally‐accepted practices. It was also felt to make auditors more accountable to the various stakeholders who rely heavily on their assessments. Realizing this need, there were recommendations that ranged from ensuring more independence to auditors, providing for rotation of auditors, punishing those guilty of fraud or abetting or colluding in any fraud, prohibiting them from providing non‐audit services, and so on. The Companies Bill has incorporated these recommendations. Chapter X of the Bill consisting of clauses 139 to 148 deals with audit and auditors. Every company is required to get its accounts audited for each financial year from a Chartered Accountant or a Firm of Chartered Accountants. U/s.139, the first auditor can be appointed by the Board of Directors. At present, auditors are appointed by the members at the Annual General Meeting every year. Now, at the annual general meeting the members have to appoint auditors for a term of 5 years. Thereafter, on expiry of every 5 years, the members have to appoint
auditors for a further term of 5 years. It is also provided in section 139 that the members will have to follow the procedure for selecting the auditors as per the Rules which will be notified by the Government. The company has to file the notice of appointment of auditors within 15 days with the Registrar of Companies. Rotation Of Auditors: The introduction of a mandatory rotation clause for auditors in the new Companies Bill is expected to significantly improve the quality and integrity of auditing. In the case of listed companies and such class or classes of companies as may be prescribed a new provision is made in Section 139(2) for rotation of auditors. This provision is as under: (i) An Individual auditor shall not be appointed for more than 5 consecutive years. (ii) A firm of auditors shall not be appointed for more than 10 consecutive years. (iii) The auditors who have completed the above term, cannot be reappointed as auditors of that company for a period of 5 years. This restriction for reappointment shall apply to the audit firm which is to be appointed after completion of the above term to any audit firm in which one or more partners are partners in the firm which has completed its term as stated above. (iv) In respect an existing company to which this provision applies it is provided that such company shall comply with
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the above provision within 3 years from the date of commencement of the Companies Act, 2011. (v) Members of the company can resolve that the firm of auditors appointed by them shall rotate the audit partner and his team every year or the members may decide to appoint two or more audit firms as auditors of the company. Resignation Of Auditors: The auditor of a company once appointed can be removed before expiry of his term by passing a special resolution after obtaining previous approval of the Government as provided in the rules. If the auditor submits his resignation before the expiry of his term of office, he has to file within 30 days a statement in the prescribed form about the reasons and other facts relevant to his resignation with the company to the ROC. If this statement is not filed by the auditor he can be penalized by levy of minimum fine of Rs.50,000 which may extend up to maximum of Rs.5 lakh. Change Of Auditors By The Order Of Tribunal: The Tribunal may, by order, direct the company to change its auditors, if it is satisfied that the auditor of a company has acted in a fraudulent manner or assisted in any fraud by, or in relation to. The company or its directors or officers. The Tribunal may so direct either suomoto or on an application made to it by the Central Government or by any person concerned. Reporting Of Fraud Committed By The Company: If an auditor of a company, in the course of the performance of his duties as auditor, has reason to believe that as offence involving fraud is being committed against the company by officers or employees of the company, he shall immediately report the matter to the Central Government within such time and in such manner as may be prescribed. If any auditors do not report fraud committed or being committed as above, he shall be
punishable with fine which shall not be less than one lakh rupees but which may extend to twenty‐five lakh rupees. Auditor Not To Render Certain Services: An auditor appointed under the Companies Act, 2011 shall not directly or indirectly provide any of the services like accounting and book keeping, internal audit, actuarial services, investment advisory services, management services, rendering of outsourced financial services and any other kind of consultancy services to auditors company or its holding company or subsidiary company or associate company. Closing Thoughts: Although the Companies Bill attempts to reform the audit system, it misses some crucial reforms, such as the role of audit committee in the appointment of auditors. In some of the most developed economies, the appointment of auditors requires approval of an independent audit committee. The Companies Bill, however, only provides for seeking the recommendation of the audit committee in matters of appointment and filing casual vacancy of an auditor. But audit committee can only recommend. The final say for the choice of auditor rests with shareholders,
which means a large controlling shareholders’ decision can influence the choice of auditor. A welcome change which will make the auditors more accountable to punish the auditor, if found guilty of abetting or colluding in any fraud. Such an auditor will be removed and debarred to act as auditor of any company for a period of five years. In such cases, both the firm
and the partner concerned will be jointly and severally liable. Therefore, now, audit firms will not be able to wash their hands of corporate scams committed in connivance with their audit partners. Further, for certain violations of duties and obligations, an auditor can be imprisoned and made liable to pay damages to the company, statutory bodies or authorities, for loss arising out of incorrect or misleading statements in the audit report.
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One Person Company a New Era in Corporate India
Swati Hegde Trainee under Dwarakanath& Associates
Professional Programme [email protected]
Background What is wrong if a single person has given an opportunity to explore his business talent and participate in economic activity in the platform of, corporate form of organization? What is strange if a single person fortuned with corporate skills and all resources form singly a company and run the business in structured and organized way? It is neither wrong nor the strange concept but the desired concept by the most of the entrepreneurs of the country for being given an opportunity to participate into corporate activity. And finally, our Government realized the need for the dream concept for making things clearer and more logical. The recommendation of One Person Company has been done by the Experts committee in 2005. The Committee reported‐ “with increasing use of information technology and computers, emergence of the service sector, it is time that the entrepreneurial capabilities of the people are given an outlet for participation in economic activity through the creation of economic person in the form of a company”. With all efforts, the Companies Bill, 2012 is provisioning the concept of One Person Company and corporate India is looking forward for welcoming this new concept in India. Meaning and definition As per Clause 2(62) of the Companies Bill, 2012, which has been passed by LokSabha on 18th December, 2012, ‘One Person Company’ is a company having only one person as a member. ‘One Person Company’ is one which is formed for any lawful purpose by only one person as member where legal and financial liability is limited to the company and not to the member.
Thus, one person company is essentially a legal entity which functions on the same principles as a company, but with only one shareholder. It is an alternative for Indians, who typically operate using the risky concept of a proprietorship. Features and Provisions This new idea which is still in its infancy is backed with several features and new concepts, provisioned in new Companies Bill passed by Lok Sabha. Provisions for One Person Companies strew all across the Bill. If we make a list of features of the concept along with the provisions of Companies Bill, 2012, it will go as under: 1. The one person has only one person as a member
(Clause 2(62) 2. One Person Company is a private company whose
minimum paid up capital is rupees one lakh. 3. The word “One Person Company” should be
mentioned in brackets below the name of One Person Company to distinguish it from other companies (Clause 12(3)).
4. One person Company shall indicate the name of the nominee in memorandum, with his prior written consent, which would be registered at the time of incorporation and the nominee becomes the member of the company if the original member dies or becomes incapable to enter in to contract. The nominee has the right to withdraw his nomination at any time and the member has the right to cancel and change the nomination at his discretion. This provision has been introduced to keep alive the principle of ‘Perpetual succession’ of company form of organization. (Clause 4(1) (f)).
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5. One Person Company can appoint maximum 15 directors but the minimum number is one director (Clause 149).
6. One Person Company need not hold Annual General Meeting in each year (Clause 96).
7. Cash flow statement may not include in the financials of One Person Company as per clause 2(40).
8. Annual Return can only be signed by the director and not necessarily by the company secretary.
9. It would suffice if one director signs the financials on behalf of the Board (clause 134).
10. As per Clause 137, One Person Company will get six months from the close of the financial year to file their financials.
11. One meeting of the board has to be conducted in each half of a calendar year and the gap between the two meetings should not be less than ninety days as per clause 173.
12. If One Person Company suppose to enter into contract with the sole member of the company and who is also a director of the company, the company shall, unless the contract is in writing, ensure that the terms of the contract are contained in memorandum or are recorded in the minutes of the first board meeting held after next enter into contract.
Pros and cons With the several pros, the concept of One Person Company is proposed to float in India. Though the supportive rules for the concept are not yet ready, we can look over major and general pros and cons of the concept. Pros 1. The sole member can enjoy the limited liability
concept which he never had experienced during his entrepreneurship and the business risk may be transferred from promoter to the company.
2. The business talent of a person can be optimized in the structured arrangement. This concept will be organized version of sole proprietorship.
3. Due to centralized control, flexibility in corporate decision will be given to an individual.
4. Member can be relieved from unstructured business line as well as enjoy the corporate form of platform with less provisions and compliances.
Cons: But the concept is suffering from many loop holes. 1. The theoretical check and balance system in the
company management – shareholders’ meeting, board of directors and board of supervision may not be available in one man company,
2. The shareholder can lie under the shadow of limited liability privilege; transfer the loss of the company to the creditors.
3. There is a bottleneck to the foreign subsidiary One Person Companies with the introduction of the concept of mandatory Resident Indian Director on the Board.
4. Expansion of business may face difficulty because of less opportunity to raise funds.
5. Investor may prefer a company other than One Person Company since the former provides the opportunity for issue shares to the third parties.
6. It may give room for evasion of public funds and tax liabilities by individual.
Conclusion The provisions in the Companies bill, 2012 for One Person Company seems to be focused on minimizing compliance requirement under the Companies Act. As Indian industry is tired of lode of compliances for corporate form of organization, definitely One Person Company concept will be new era in corporate India. The critical thought which is playing in the minds of Indian entrepreneurs is how
supporting legislation pushes the concept of One Person Company. Let us hope for getting such a legislation which recognizes the concept as an entity and not just an extension of a sole proprietorship. Corporate India is looking forward for rise in birth of One Person Companies.
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E-Governance
Keerti Hegde Working under CS C Dwarakanath
Professional Programme [email protected]
Introduction: The development of information technologies has led to a new form of communication with the government – e‐governance. The main purpose of e governance is to bring about fundamental changes in the relationship between citizens and public authorities and local governments. Meaning: By definition, e‐governance means the provision of government information and services by means of the Internet and other computer resources. It means, it is a comprehensive programme at all levels of Government to improve efficiency, transparency and accountability at the Government – Citizen interface. It is the application of Information and Communication Technology (ICT) for delivering government services, exchange of information communication transactions, integration various stand‐one systems. It provides for services between Government‐to‐Citizens (G2C), Government‐to‐Business (G2B), Government‐to‐Government (G2G) as well as back office processes and interactions within the entire government frame work. Advantages of E – Governance
Better access to information and quality services for citizens,
Transparency, efficiency and accountability in the government,
Expanded reach of government. E – Governance in India
Indian governments, like their global counterparts, are using e‐governance as part of their broader government modernization programs. The Government of India has launched the National e‐Governance Plan (NeGP) with the intent to support the growth of e‐governance within the country. It aims to make all government services accessible to common citizens in their localities through common service delivery outlets and ensure efficiency, transparency and reliability of such services at affordable costs. NeGP’s goal is to make most public services available online, ensuring that all citizens have access to them, thereby improving the quality of basic governance on an unprecedented scale. Ensuring Better Corporate Governance through E – Governance As company is a congregation of various stakeholders and should be fair and transparent to its stakeholders in all its transactions. In view of the large number of corporate scams and scandals shocking the nation, e‐governance tools have to be employed on a large scale to improve corporate governance. E‐governance has a vital role to play in expanding the scope of corporate governance to cover new areas. The use of information technology in corporate governance leads to greater transparency and efficiency. MCA 21 As A Flagship E ‐ Governance Initiative
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MCA 21 is India's largest e‐governance initiative by the Ministry of Company Affairs and a mission project under Govt of India's national e‐Governance plan. The MCA‐21 project is the largest full‐scale deployment of Information Technology, in the shortest possible time frame, and will revolutionise the way India Inc. interfaces with the government. Salient Features of MCA‐21 include: o Corporations, professionals and the public at large
will no longer need to visit the Registrar of Company offices and would be able to interact with the Ministry using the MCA‐21 portal from their offices or home or by going to the facilitation centres, which have been set‐up.
o The users will have multiple options to make payments in the online mode either through credit cards or the Internet banking facility. Besides this, the traditional payment through demand draft would be accepted against a system‐generated challan at more than 200 bank branches across the country.
o The programme also introduces the concept of Director Identification Number (DIN), which is a unique and lifetime identification number being issued to all current and prospective directors. It is mandatory for all directors who wish to interact with the ministry in future to acquire a DIN.
o The system would also enable the stakeholder to track the service request through a Service Request Number (SRN).
o The MCA‐21 project will also facilitate electronic submission of forms, which require a unique Digital Signature Certificate (DSC).
Role of Company Secretaries in E – Governance
Companies Bill, 2012 has introduced the concept of e governance to corporate sector. It provides for various company processes like maintenance and inspection of documents in electronic form, option of keeping of books of accounts in electronic form, financial statements to be placed on company’s website, holding of board meetings through video conferencing/other electronic mode; voting through electronic means. A Company Secretary of present days needs to be tech savvy and updated about e – governance, particularly while dealing in following areas.
MCA 21
EDIFAR (Electronic Data Information Filing and Retrieval system)
MIS ( Management Information System)
Online Secretarial Audit
E‐ Incorporation
E‐ Search Conclusion: E‐governance has been responsible for the progression in technology of developing countries. The goal of E‐governance is the ability to access and interact with the world on an even plain. Without E‐governance, developing countries will be left behind when it comes to technology because almost every day, ICT technologies are advancing and changing. Developing countries now have the opportunity to better themselves through electronics and make their society be more advanced and more efficient than ever before. E – governance opens tremendous opportunities for Professionals and business houses. But it requires continuous updations and extensive care while its usage.
Buy–back of Shares (Continued from Page 78) Ongoing disclosure requirements: The companies will be asked to disclose the number of shares purchased and the amount utilized to the exchanges on daily basis. The current requirement of fortnightly publication proposed to be cancelled. Limit for open market method: Buy‐back of 15%or more of (paid up capital + free reserves) must be only by way of a tender offer method.
Procedure for buy‐back of physical shares (odd lot) in Open Market Purchase Method: Creation of separate window in trading system for buying physical shares is also proposed. This window will remain open only during the buy‐back program. Shareholders holding 500 shares or less in physical form will be eligible to tender their shares in this window.
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Management Soft
Skills
Santanu Kumar Gantayat Professional Programme
Any business is managed by people; therefore soft skills are all about how you deal with people and
present yourself. Soft skills are very significant in the current globalized business environment. It is indispensable to be technically adept but one ought to also have the knack to deliver the idea from down or up the organizational hierarchy in the greenest manner. Soft skills relates to a constellation of personality traits like: attitude, communication, adaptability, social graces that typify an individual’s relationships with people both in and out of workplace. Soft skills are progressively becoming the solid skills of today's work force. It's just not adequate to be high in technical skills, without developing the softer, interpersonal and relationship‐building skills. Methodical and job‐related skills are mandatory, but they are not passable when it comes to making headway in the organizational set up. With the customary authoritarian style of leadership becoming passé, and much of the work today is being performed in teams, professional managers expect their teams to be preemptive and connect openly. Their cordiality and people skills eventually ensure sustainability of the pact their employers have bagged. These behavioral people skills are more crucial as organizations melee to find significant ways to sustain themselves in a fiercely competitive globalized business environment and be productive. Teamwork, communication and leadership are braced by soft skills
development. As each is an important constituent for organizational and individual success, evolving these skills is very essential and it does count. An individual’s soft skill is an imperative part of their specific contribution to the achievement of an organization like those dealing with customers’ head‐on. Planning is essential but implementation is also just as important. Soft skills facilitate such executions with ease as it implicates dealing with people directly. In the preliminary existences of one’s career, procedural or knowledge skills are vital for attainment of prized assignments. However, when it comes to budding in an organization, it is your persona that matters, as numerous people with parallel technical proficiency will vie for a promotion. Soft skills are more pertinent in the Indian context where the education system does not contain aspects of personal grooming and professional development. Employees are the concerning link between the company and the business environment so it’s quintessential that their soft skills enable them to present their company in a rewarding frame. Here is a list of personal mannerisms which professionals and students alike can inculcate to enrich on their soft skills? 1. Figure out your personality type and asses the type of
person you are. 2. Read a number of personality improvement literature. 3. Participate in online forums on personality
development and get your queries answered by experts.
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4. Participate in group activities and improve on your adaptability skills.
5. Analyze your strengths and weaknesses, retain your strengths and work on to weed out your weaknesses.
6. Follow ethical work principles. 7. Ensure that others swear by your good principles at
work and they find you to be dependable and responsible.
8. Fine tune your time management skills. 9. Respond to feedback via constructive criticism. 10. Practice good corporate etiquettes and ensure your
communication is very polite. 11. While in professional space doesn’t forget to greet
people around you. 12. Always respond to foster communication. This can
mean a simple “thank you” and people will definitely keep you in their good books. This ensures that you are very much in the network.
13. Be a genuinely active listener and ensure empathy for people.
14. Ensure that the tone and tenor of your communication is not provocative.
15. Wear outfits that complement your profession, this sets a feel good factor not only for yourself but for others too.
16. Restrict your peer discussions to something which is very general and not personalized.
Apart from the above individual efforts one can join formal training programs that can zest up personality traits to a great extent.
Conclusion: In a nutshell it can be summed up that while your knowledge skills may help you reach the door, your people skills are prerequisites for the doors to open up for you. An individual’s attitude, work principles and emotional intelligence are essential ingredients for successful career. With these soft skills you can excel as a leader, in teams and also feel complete as a professional. Day to day official work involves handling conflicts, negotiations; team work, motivating, delegating, goal setting and handling these can be a cakewalk if your soft skills are polished. To sum up mastering the art of getting along with people and demonstrating a confident and positive attitude – are decisive for success up the ladder in the organization.
Special Moment: Release of e-Souvenir of Milaap 2013 On 24th February 2013 by CS. Gopalkrishna Hegde, Central Council Member of ICSI. CS. Nagendra Rao, Secretary SIRC of ICSI, CS. Manjunatha Reddy, Chairman, ICSI Bangalore Chapter, CS. Sharada, Cice Chairman, Bangalore Chapter of ICSI joined hands for the release of the eSouvenir. CS. Dattatri , Secretary Bangalore Chapter of ICSI facilitated the release. CS. Ravishankar Kandhi spoke on behalf of judges and explained the criteria of judging.
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One Person Company – an Overview
Sukanya Sontha
Professional Programme [email protected]
As the name suggests, One Person Company (hereinafter referred as ‘OPC’) is a Company with only one member and where legal and financial liability is limited to the company only and not to that person. (i.e. liability is limited).. It is the new concept introduced in the Companies bill 2012 (hereinafter referred to as ‘Bill’). It is considered as revolutionary step taken by government to encourage unorganized proprietorship business to enter in to organized corporate world. It is a concept parallel to existing sole proprietorship form of entity wherein OPC is recognized as a separate legal entity distinct from its promoter or proprietor. The concept of OPC is widely accepted in some of the developed countries like China, USA, Singapore and many more and shall pave its way in India once the bill is passed in Rajya Sabha. Membership: Section 2(62) of the Bill defines OPC as a Company, which has only one person as a member. It is essentially a legal entity which functions on the same principle as a Company, but with only one member. It can be an alternative option for Individuals, who runs risky proprietorship business. Status : Section 2(68) of the Bill provides for the definition of private company to include OPC. It also explicitly excludes OPC from the condition form minimum number of members i.e., two 2 for its formation. This implies that all the provisions of the Act which is applicable to private company shall also applicable to OPC unless otherwise it is specifically excluded from its compliance. Also section 3 of the Bill further clarifies the fact that OPC shall be treated as a private company for all legal purposes with only one member. Some of the important and special features of OPC Nomination – Section 3 of the Bill states that at the time of incorporation of OPC, the Memorandum of OPC shall include the name of the other person, with his consent,
who shall become the member of the company in case of death or incapacity to contract, of the subscribing person. The consent of such other member shall be in prescribed form and it should also be filed with the Registrar. The Bill further provides that the nominee/ other person can withdraw his consent at any time and the member/Shareholder of OPC may change the nominee/other person at any time, by giving notice to the other person and intimate the same to Company. OPC should intimate such change to the Registrar within the prescribed time. It also provides that such a change in the name of the other person shall not be deemed to be an alteration in the Memorandum. In case of the death of member/shareholder or his incapacity to contract, then the person nominated by such member shall: (i) have title to all the shares of the deceased
member; (ii) the nominee on becoming entitled to such shares
in case of the member’s death shall be informed of such event by the Board of the company;
(iii) such nominee shall be entitled to the same dividends and other rights and liabilities to which such sole member of the company was entitled or liable;
(iv) On becoming member, such nominee shall nominate any other person with the prior written consent of such person who, shall in the event of the death of the member, become the member of the company.
Name clause – The name clause of the OPC shall include the words ‘One Person Company’ within brackets below the name of the company wherever its name is printed, affixed or engraved.
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Some of the important relaxations provided to OPC:
Cash flow statement need not be included in the financial statements of OPC
The financial statements shall be signed by only one director irrespective of number of directors. And annual return shall be signed by Company Secretary, or where there is no Company Secretary by the director of the company.
In case of OPC, the report of Board of Directors need not disclose specifically the statement of declaration by independent directors and any explanations or comments as required under Section 134(3);
OPC shall file with the Registrar a copy of the financial statements duly adopted by member, along with all the documents which are required to be attached to such financial statements, within 180 days from the closure of the financial year.
OPC need not to hold any AGM (Annual General Meeting) in each year. Provisions relating to AGM, extra ordinary general meeting, notice convening such meeting and procedures to conduct general meetings does not hold good for an OPC.
As an alternative to the general meetings, the Bill provides that any business which is required to be transacted at an AGM or other general meeting of a company, by means of an ordinary or special resolution, it shall be sufficient, if in case of OPC, the resolution is communicated by the sole member to the company and entered in the minutes book and signed and dated by the member. The resolution will be effective form the date of signing such minutes.
One Person Company can appoint maximum 15 directors, but minimum should be one director. The directors shall be appointed according the provisions of Articles of Association of OPC. Member/
Shareholder of the One Person Company acts as first director, until the Company appoints director(s) or where there is no provision in the Articles of Association of the OPC for appointment of director.
If the OPC is having only one director, there is no compulsion to conduct Board meetings. But if the OPC is having more than one director, at least one meeting of Board of Directors should be conducted in each half of a calendar year and gap between two meetings should not be less than 90 days. In such a case, provisions relating to notice convening such meetings, quorum and passing of resolutions by board shall be applicable to OPC.
If the OPC is having only one director on its board, any business which is required to be transacted at the meeting of the Board of Directors of the company, it shall be sufficient if, the resolution by such director is entered in the minutes book required and signed and dated by such director. The resolution shall become effective from the date of signing such minutes by the director.
Conclusion: In view of above, it can be said that the government has tried to provide several relaxations to promote the concept of OPC. OPC will give greater flexibility to an individual or a professional to manage his business efficiently and at the same time enjoy the benefits of a company. The concept of OPC will also help many foreign companies, which need to appoint a minimum of two nominees now when they form a wholly‐owned subsidiary. OPC will open the
avenues for more favourable banking facilities, particularly loans, to such proprietors. Besides, the concept will boost flow of foreign funds in India as the requirement of nominee shareholder would be done away with. However, its actual benefits shall be felt only when it is well recognized by the other legislations such as Income Tax Act as well as banking sector.
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Listing of Securities Kept
in Abeyance at the Time of Amalgamation
Krishn Murthy P R, Bellary Professional Programme [email protected]
Introduction: All listed companies in India are governed by the Companies Act, 1956 as well as Listing Agreement and other applicable laws of the country. In the interest of stakeholders and to ensure clear compliance of law, Companies while issuing or allotting new securities have to coordinate with various regulatory authorities. When a Company is going for Merger, drafting of Scheme of Amalgamation, ascertainment of Share swap ratio, making application to the respective high courts, obtaining in principle approval from the stock exchanges, allotment of shares to the shareholders of Transferor Company etc. are the routine procedures during the process. When any shareholder of the Transferor Company is unascertainable, his shares will be kept in abeyance and will be credited to Demat Suspense Account until such shareholder is ascertained. Allotting of shares kept in abeyance to the respective shareholder is one of the rarest activities for a company secretary. There are some procedures to be followed for listing of securities, earlier kept in abeyance. Illustration: a) Amalgamation1: A Transferor Company gets
amalgamated with Transferee Company as per the scheme of amalgamation approved by the High Court.
Issue of Shares pursuant to the Amalgamation: Post Amalgamation, Transferee Company issues fully paid‐up equity shares to the shareholders of Transferor Company in the ratio X: Y i.e. Y fully paid‐up equity shares of Transferee Company for every X equity shares held in Transferor Company as consideration for amalgamation. Hence, Transferee Company issues Y shares in total to erstwhile members of Transferor Company as consideration for the amalgamation, out of which details of an erstwhile shareholder of Transferor Company to whom Y1 shares of Transferee Company to be issued couldn’t be identified by the Transferee Company.
b) Reason for Abeyance2: As the details of shareholder
regarding Y1 shares to be issued, is not known to Transferee Company, these shares cannot be considered under the paid up capital of the company and consequently cannot be listed and shall be credited to Demat Suspense Account.
c) Claim for Shares3: When such unidentified shareholder, whose shares are kept in abeyance, got the knowledge about the same, he may make an application to claim Y1 shares from the Transferee Company.
1Section 391 to 394 of Companies Act, 1956 Contains provisions relating to Compromise, Arrangement and Reconstruction and Amalgamation of Companies
2Clause 5A I of the Listing Agreement provides that where any of the shares issued in any public issue or any other issue, remains unclaimed for no details regarding the allottee’s, the same shall be credited to Demat Suspense Account opened with one of the Depository Participant.
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3 Sub Clause (d) of Clause 5A I of the Listing Agreement provide that, as and when the allottee approaches the issuer, the issuer shall credit the shares lying in the Suspense Account, to the Demat Account of the allottee to the extent of the allottee’s entitlement after proper verification of the identity of the allottee.
Procedure of Allotment and Listing of Shares held in abeyance: In‐principle approval: The first step, the company has to follow is to obtain in‐principle approval from the stock exchanges where the company’s securities are listed as per Clause 24 (a)4 of the Listing Agreement for allotting shares kept in abeyance by providing following information: 1. Complete scheme of amalgamation and order
received from the High Court. 2. Copies of original share certificates of Transferor
Company as surrendered by the Shareholders (in case of physical share certificate).
3. Copy of the advertisement issued in the newspaper about allotment of shares to the shareholders, to know any persons has any objection to the allotment.
4. Affidavit obtained from the shareholders. Allotment: Company shall convene Board meeting for allotment of shares kept in abeyance and shall intimate outcome of the Board meeting with stock exchanges. Filing of Corporate Action Form (CAF) with NSDL/CDSL: Once the Company receives the preliminary in‐principle approval from stock exchanges, it shall file CAF with NSDL/CDSL for the purpose of admitting the subject shares for dematerialization. Final Listing approval: The Company shall receive dematerialization confirmation letter from depository. On the basis of confirmation from depository, Company Shall approach stock exchanges and obtain their final listing to the shares allotted by the Company which were earlier kept under abeyance and admitted the aforesaid shares for dealing on the exchange.
Quick look on Allotment and Listing of Shares Kept in Abeyance Following point should be kept in mind while allotting and listing of shares kept under Suspense Account:
Intimate Stock exchanges where company’s shares are listed, about the details of any shares which are kept under Suspense Account due to non‐availability of allottee’s details
Take in‐principle approval from the Stock Exchanges(s) where company’s shares are listed, before allotting shares kept under Suspense Account.
File Corporate Action Form (on letter head of the Company) with both the Depositories i.e. NSDL and CDSL for admitting issued shares for dematerialization.
File the dematerialization confirmation received from the depositories with Stock Exchanges for getting their Final Listing and Trading Approval.
If the further issue of shares kept in abeyance causes increase in the listing fees payable to the Stock Exchanges, then listing fees as increased by further allotment needs to be paid.
Conclusion: Security market is meaningless in the absence of investors. Any law pertaining to securities protects the interest of the investors or shareholders. Shareholders in such case, where their shares kept in abeyance, they can avail such shares under the securities law. Shareholders shall have the knowledge about day to day developments in corporate world as it may leads to maximise their wealth. In this regard, proper information about shareholders may minimize the consequences like non receipt of dividend, annual report etc. and helps In smooth functioning of Companies
4 Sub Clause (a) of Clause 24 of Listing Agreement: The Company agrees to obtain ‘in‐principle’ approval from the exchanges having nationwide trading terminals where it is listed, before issuing further shares or securities. Where the company is not listed on any exchange having nationwide trading terminals, it agrees to obtain such ‘in‐principle’ approval from all the exchanges in which it is listed before issuing further shares or securities.
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Body Language – an
Effective Communication
Asha Vijay Chougule Belgaum
Professional Programme [email protected]
When we move confidently and carry our body confidently, we not only feel more confident but others assume that we are. But it’s surprising to know that only 7% of the information you transmit to others is in the language we use. The remainder comes from: 38% How we speak ‐ quality of voice, accent, voice projection, emphasis, expression, pace, volume, pitch etc. 55% Body language ‐ posture, position, eye contact, facial expression, head and body movements, gestures, touch etc. Whereas people often try to disguise their true feelings in their utterances, they communicate them freely through their non‐verbal. When your body language tells a different story from your spoken words, guess which is believed? The answer is your body language. It imparts eight times as much information. Body language or Kinesics is a science of non‐verbal communication. Body Language is the unspoken communication including gestures, postures, expressions etc. That goes in every Face‐to‐Face encounter with another human being. Body Language supposedly accounts for 75% of most conversations. Presenting the proper Body Language can go long way towards successful communication. Because of heavy communication requirements of most jobs, recognizing and properly utilising body language can make a noticeable difference at the end of each day. The words of conversation probably would not be noticed as a direct lie. It is more likely to be the body signals that give one away. Darting eyes, shifting from one foot to
another, hand covering mouth or fingers tugging at the ears are clues. Some of the obvious body language elements which are easily apparent and noticeable: Fidgeting Crossing arms Tapping your foot Doodling on paper Touching your face or playing with your hair Looking away or hesitating before or while speaking Voice COMMON GESTURES Handshake A Well gripped and strong handshake creates a positive impression. The handshake too conveys a lot about the personality of a person and his attitude towards a person. A weak, limp, dead fish handshake gives an impression of a disinterested and a cold person, it also signifies lack of enthusiasm where a strong, well gripped handshake gives an impression of warm friendly and enthusiastic person. Handshake is an integral part of one’s personality and modifying your handshake can improve your initial image. Practise a strong well gripped and vertical handshake. Eye Contact Remember the saying “face is the index of mind”, if it is so, then eyes are 50% of it. When we are not interested to listen to something, we tend to break the eye contact or look somewhere else. Shutting eyes for a brief period or blinking it more than the normal pace is an indication of
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our disbelief and disinterest in the subject of discussion. It is also an escapist reaction, indicating desire to avoid discussing the matter. Closing eyes or to steer them towards blank while conversing is also an indication of concentrating and recollecting something. Rapid glancing to and fro and shifting the eyes from the other person to something away and then back while talking gives an impression as if the person is looking for a more interested companion. Too fast blinking and flickering of the eyelids indicates nervousness. Short eye contact which is frequently broken while talking indicates, that the person is shy or that the person is telling a lie. So the best practice looking above the eyes, near the forehead of the person while speaking. Body Movements Telling a lie is not easy; our body is more honest than our words. When a person is telling a lie, his body tends to balance the deed by absorbing the discomfort. This discomfort is apparent in many ways. Covering the mouth with the hand. Rubbing, stoking or scratching the nose quite frequently. Moving the hand to scratch or rub the ear. Scratching the side of the neck with fingers. Rubbing the eye, etc. are all an indication of an un–truthful statement being made. Because of the fear while telling a lie, the mouth may become drier which causes the person to lick his lips more often and may be to swallow nervously. Even the breathing is prone to become more uneven and the throat clearing is more often. Crossing the arms and legs while telling a lie is also common, crossing the legs and arms give a feeling of self defence or protection against a challenge to the liar. The above gestures and shifty eyes are a sure shot sign of dishonesty. During interviews one should avoid any hand to face gestures (even if you get actual physical itch), also avoid all unnecessary body movements like tapping with your feet or crossing the legs, arms, etc. Sit straight and erect and do not change your posture quite often. Understanding body language is fairly simple and involves 3 basic components: Distance Posturing Focus
Keeping the right distance: The most important aspect of body language for making a person feel comfortable or
uncomfortable is respecting their personal space, which is an invisible circle around them. Each culture is different but in every culture there are the same three distances: Public, Personal and Intimate distance. “What you see is what they say: if you see someone who looks like they are “carrying a heavy load physically (sloped shoulders, bowed back) then they are probably carrying a heavy emotional burden and might appreciate you or someone else relieving them of some of their responsibilities. At least don’t add any more to their load without some offset. How open they appear is an indication of how open to conversation they are. Someone who crosses their arms or legs tightly is likely to have some walls up and is feeling defensive. It probably means that you need to stop and listen to their viewpoint some more. As they do this, you will usually notice that they start “opening up “both physically and in conversation. On the other side would be someone who puts their hands behind their head and puts their feet up. This posture says that “I feel no need for protection, and I am not going anywhere.” May I have your attention please? Focus is another simple and obvious thing that is often overlooked, and yet can have a strong residual effect on how someone feels about us. Eye contact with the person shows confidence and honesty. Looking down is perceived as some level of shame. Skirting eyes are perceived as less than honest. CONCLUSION Remember that body language is not a study of single isolated movements and gestures but rather it is about a chain of gestures and movements. Studying single gestures and movements may be deceptive at times. So care must be taken while reaching at conclusions. As the global village continues to shrink and cultures collide, it is essential for all of us to become more sensitive, more aware, and more observant to the myriad motions, gestures, and body language that surround us each day. And as many of us cross over cultural borders, it would be fitting for us to respect, learn, and understand more about the effective, yet powerful "silent language" of gestures.
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Role of CS under the
Companies Bill, 2012
K. Subhash CS Executive
The Companies Bill, 2008 introduced on October 23, 2009, lapsed due to the dissolution of the LokSabha and was reintroduced on August 3, 2009 which was referred to the Standing Committee on Finance (SCF). The Report of the Standing Committee was placed before the LokSabha on August 31, 2010. Later Companies Bill, 2011 was introduced in LokSabha on December 14, 2011 which is amended and approved by the LokSabha as Companies Bill, 2012. The much awaited Companies Bill, 2012 (hereinafter referred to as “the Bill”) is passed by the LokSabha on December 18, 2012 replacing the 56 years old Companies Act, 1956 (hereinafter referred to as “the Act”) The Bill seeks to consolidate and amend the law relating to Companies and intends to improve Corporate Governance and to strengthen regulations for Corporates. Role of Company Secretaries under the Bill 1. Inclusion of “Company Secretaries” in the definition
of Key Managerial Personnel ‐ Definition of “Key Managerial Personnel” under Clause2(51) includes Chief Executive Officer, Managing Director, Manager, Company Secretary, Chief Financial Officer and such other officer as may be prescribed.
2. Inclusion of strict compliance with regard to
appointment of Company Secretary ‐ Currently Section 383A provides a defense of “Poor Economic Condition” for non‐appointment of Company Secretary which has been removed by the Bill to prohibit the Companies from escaping the liability.
3. Provision of penalty for non appointment of Company
Secretary ‐The Act provides a penalty of Rs. 500/‐ per day for every day during which the default continues,
but considering the importance of appointment of Company Secretary, the Bill has proposed the below penalty
On Company ‐ Rs. 1,00,000/‐ which may extend to Rs. 5,00,000/‐
On every Director and Key Managerial Personnel who is in default ‐ Rs. 50,000 and Rs. 1,000 per day if the contravention continues.
4. 4. Increased role in certification of Annual Return ‐ As per
Clause 92 of the Bill, every Company shall prepare its Annual Return in the prescribed form containing detailed disclosure as they stood on the close of the Financial Year (It is as at the date of AGM as per Section 159 of the Act) The certification requirements are as follows:
In case of Private and Public Companies ‐ A Director and the Company Secretary or where there is no Company Secretary, by a Practicing Company Secretary.
In case of Listed Companies and Companies having such paid up capital and turnover as may be prescribed ‐in addition to the signature of the Company Secretary in employment, a Practicing Company Secretary should certify that the Return states the facts correctly and adequately and that the Company has complied with the provisions of all applicable laws.
In case of One Person Company‐ The Company Secretary or where there is no Company Secretary by one director.
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5. 5. Functions of Company Secretary ‐ Clause 205 of the Bill has proposed for the functions of a Company Secretary for the first time, which shall include ‐
To report to the Board about compliance with the provisions of this Act, the rules made thereunder and other laws applicable to the Company
To ensure that the Company complies with the applicable Secretarial Standards issued by ICSI and approved by Central Government
To discharge such other duties as may be prescribed.
6. Introduction to Secretarial Audit ‐ Under the existing Act, Secretarial Audit is not mandatory and is only for listed Companies. The parliament Standing Committee recommended Secretarial Audit for listed as well as companies belonging to other class as may be prescribed. Clause 204 proposes the following:
Every listed Company and Companies belonging to such other classes as may be prescribed shall annex Secretarial Audit Report given by a Practicing Company Secretary along with its Board’s Report.
The Company is duty bound to give all assistance, details, documents and facilities to the Practicing Company Secretary for auditing.
The Board in its report shall explain in full any qualification or observation or other remarks made by the Practicing Company Secretary in the Secretarial Audit Report.
Penalty: If a Company or any officer of the Company or the Practicing Company Secretary contravenes the provisions of this section, the Company, every officer of the Company or the Practicing Company Secretary, who is in default, shall be punishable with fine not be less than Rs. 1,00,000/‐ but which may extend to Rs. 5,00,000/‐. 7. Compulsory application of Secretarial Standards ‐
For the first time, the Secretarial Standards has been provided statutory recognition in the Act. As per Clause 118(10) of the Bill “every Company shall observe Secretarial Standards with respect to General and Board Meetings specified by the Institute of Company Secretaries of India
constituted under Section 3 of the Company Secretaries Act, 1980 and approved by the Central Government.”
8. Other Provisions giving recognition to Company
Secretaries –
Under Clause 291 a Company Liquidator can seek professional assistance with the sanction of the Tribunal and appoint one or more professionals to assist him in the performance of his duties and functions.
Under Clause 140 a Practicing Company Secretary has the power to immediately report to the Central Government, if he has reason to believe in pursuance to his duties that an offence involving fraud is being committed against the Company.
Clause 432 of the Bill corresponds to Section 10GD of the Act, which provide that a party to the proceeding may appear in person or authorize a Company Secretary or Legal Practitioner to present the case before the Tribunal or the Appellate Tribunal.
Clause 140 requires a Company Secretary engaged in the formation of a company to declare in the form as may be prescribed by the Central Government that all requirements of the Act and rules made thereunder in respect of registration and the matters precedent or incidental thereto have been complied with.
Conclusion: With the introduction of the Bill there will be huge requirement for the Company Secretaries in the market, as it has placed a lot of emphasize on their role. It is to be noted here that there is a vast demand and supply gap in the availability of qualified Company Secretaries in the Country as the number of Companies which are required to appoint Company Secretary are more than the availability of Company Secretaries in the market. This would result in creation of employment opportunities for the Company Secretaries and encourage many youngsters to take up the Company Secretary Course.
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Committees as per Companies Bill 2012
Pooja R Kukreja Professional Programme [email protected]
Section 292 of the Companies Act, 1956 (“Act”) deals with the powers of the Board and proviso to the section mentions “that the Board may, by a resolution passed at a meeting, delegate the power to any committee of Directors to borrow moneys otherwise than on debentures, to invest funds of the Company and to make loans.
Meaning:
The term Committee means group of persons or Directors appointed by the Board and typically consisting of persons appointed to carry out specified functions, programs or projects in an organization. Types of Committees:
Compulsory / Mandatory: As per Section 292A of the Act, the Audit Committee shall be constituted by every public Company having a paid up capital of Rupees Five Crore or more and a Shareholder Grievance Committee is to be constituted where clause 49 of the listing agreement is applicable. The new Companies Bill, 2012 (“Bill”) provides for constitution of Committees such as: Corporate Social Responsibility Committee(Clause 135), Audit Committee(Clause 177), Nomination and remuneration Committee(Clause 178), Stake holders Relationship Committee (Clause 178).
Voluntary / Non‐Mandatory: As per the Act, constitution of committees such as Remuneration Committee, Nomination Committee and Corporate Governance committee are not mandatory. As per the Bill, constitution of committees such as Advisory committee (Clause 287), Committee of Creditors
(Clause 257), winding up committee (Clause 277 read with clause 315)is not mandatory.
Directors and members in various committees: Committees include a combination of executive directors, non‐executive directors and/or independent directors or such other persons as may be decided by the board or tribunal as the case may be. Significance and importance: Why: Committees help the board in handling issues that require expertise and focus. They help to develop specific expertise on areas like compliance management, risk management, financial reporting and also help to enhance the objectivity and independence of the board’s judgment. When: A Committee is constituted to avoid issues in becoming too complex or numerous to be handled by the board and/or when they are mandatory in nature. The functions of each of the committees mentioned above are explained in brief below:‐
a) Audit committee The bill makes it mandatory for every listed Company to constitute a committee who shall be responsible for liaison with the management and compliance with statutory auditors and internal controls. The committee shall consist of 3 directors out of which 2 shall be independent directors and the same has to be disclosed in the Boards’ Report prepared as per sub‐section 3 of clause 134 of the Bill. The members who constitute the
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committee shall be financially literate and shall understand the financial statements of the Company. Audit committee is given a right to be heard in the general meetings of the Company, but they shall not have a right to vote at the meeting. Penalty for non‐compliance shall be as follows:‐ the Company shall be punishable with fine of Rupees
One lakh and which may extend to five lakh rupees and
the persons in default shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than twenty‐five thousand rupees but which may extend to one lakh rupees, or with both:
b) Nomination and Remuneration Committee This clause shall be applicable to every listed company and shall consist of three or more non‐executive directors out of which at least half shall comprise of Independent Directors. The chairperson of the company whether executive or non‐executive can be a member but shall not have the right to chair the committee. They have to mainly put together the criteria in determining the qualifications, positive attributes and independence of a director, evaluate and recommend a policy to the board to be disclosed in the Board’s report relating to the remuneration of directors, KMP and employees. Penalty for non‐compliance is same as mentioned in cl. 177.
c) Stakeholders Relationship Committee – This committee shall be set up by the Board of Directors when the company comprises of more than 1000 shareholders, debenture holders, deposit or any other security holders during any time in a financial year to mainly resolve the grievances of security holders of the Company. The chairperson shall be a non‐executive director and the board shall have the power to decide the other members of the Committee. The chairperson or any authorized representative is required to attend the general meetings of the Company. d) Corporate Social Responsibility committee
This is a new concept where in both Public Companies and Private Companies are treated alike and every company having a net worth exceeding rupees five crore or turnover of rupees one thousand crore or net profit of rupees five crore will be required to constitute this committee. The board of this committee shall comprise of three or more Directors out of which at least one director shall be an independent Director. The committee is required to prepare a policy which shall include activities like promotion of education, eradicate extreme hunger and poverty, empower women, ensure environmental sustainability, social business projects etc. e) Committee of Creditors
In case of sick companies the interim administrator appoints this committee comprising of seven members who represent each class of creditors. The interim administrator decides the procedures to be followed at such meetings and also the chairperson to be appointed. f) Advisory Committee
In case of winding up, an advisory committee shall be constituted by an order of the tribunal to advise the Company Liquidator (who shall chair the meeting) and report such matters as required by the tribunal. The committee shall comprise of twelve members and shall consist of creditors and contributories. The company Liquidator is required to convene a meeting of the creditors and contributories within 30 days from the date of the order to help the tribunal decide the members of the Committee. g) Winding up Committee in case of liquidation
This committee shall be constituted to assess and monitor the proceedings of liquidation when the Company Liquidator makes an application to the tribunal within three weeks from the date of passing the order. The committee shall comprise of the official liquidator, nominee of secured creditors and a professional nominated by the tribunal.
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Withholding Tax
Amith K. Management Trainee@Hemanth, Biswajit& Co.,
In a broad sense, the concept of ‘Withholding tax’, by its virtue, is being developed as an effective antidote for evasion of tax throughout the world. It is generally a government requirement for the payer of an item of income to withhold or deduct tax from the payment, and pay that tax to the government. Withholding tax in India Chapter XVII‐B of the Income Tax Act, 1961 provides for deduction of tax at source on payments made by any assessee. These provisions are also applicable in case of payment made to non‐residents. Section 195 of the Act casts an obligation on the person responsible for payment to non‐resident to deduct tax at source at the time of payment or at the time of credit of the sum to the account of the non‐resident. Withholding tax for NRIs and foreign companies Withholding Tax Rates for payments made to Non‐Residents are determined by the Finance Act passed by the Parliament for each financial year. These rates are also based on the Double Taxation Avoidance Agreements between the Government of India with that of the other countries of the world. Director of Income Tax (International Taxation) Statutory functions in respect of taxation of foreign companies and non‐residents and withholding tax on remittances abroad are performed by the Director of Income Tax (International Taxation). There are five DITs in Delhi, Mumbai, Kolkata, Chennai and Bangalore.
Permanent Account Number and filing of returns The amendment made applicable from April 1, 2010 relates to the requirement of a foreign company being the recipient of income to obtain a Permanent Account Number (PAN) i.e. to register with the Indian Tax authorities. Now, the foreign company is required to furnish a Permanent Account Number to the payer in India as prescribed by the law. If the recipient fails to provide the PAN, the withholding tax rate would be the higher of the existing rate as per the ITA or treaty, or 20 percent. This would result in additional withholding taxes in India, for which there may not be any credit available in foreign country. Also, in the absence of a PAN, the Indian Tax authorities will not entertain any application from the recipient for a lower withholding tax rate. Currently though, the Indian law requires all foreign companies to file return of income, with respect to income being earned from India – even if the applicable taxes have been paid in India. It would thus be advisable for foreign companies to initiate the process for obtaining a PAN especially if they are receiving certain royalties/fees/interest from their Indian group companies/collaborators. Taxability of technical, managerial or consulting services provided by foreign companies to the Indian clients performed outside India Another important amendment relates to the taxability of technical, managerial or consulting services provided by foreign companies to the Indian clients; when such services are performed outside India. Foreign companies
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were taking a stand that such services should not be taxable in India, since they were not performed in India and had no territorial nexus with India. Their stand was vindicated by the Supreme Court in the case of Ishikawajima‐Harima Heavy Industries Ltd., Vs DIT (2007) [288 ITR 408], the apex court held that services should be rendered as well as used in India for being taxed in India. It therefore held that if both conditions were not fulfilled, the fees for technical services were not chargeable to tax in India. Recent developments
Samsung case On 24 September, 2009, the High Court of Karnataka reversed the order of the Bangalore Income Tax Appellate Tribunal (ITAT) on the applicability of withholding tax on the purchase of "shrink‐wrap" or "off‐the‐shelf" software. This issue has been very controversial, with the ITAT concluding that payments made for the purchase of such software are not a royalty and, consequently, there was no liability for the payer to withhold tax. While the appeal addressed separate ITAT decisions affecting different taxpayers/years, the High Court considered the facts of Samsung Electronics Co. Ltd (assessee) in holding that any payment to a nonresident would attract withholding tax in the absence of an order from the tax authorities providing for a zero or reduced rate of withholding (Samsung Electronics Co. Ltd and others, ITA No.2808 of 2005). Thus, in this case, the Karnataka High Court held that every overseas payment would be liable to withholding tax, whether or not that payment was ultimately taxable as income in India.
Van Oord case In the case of Van OordAcz India (P) Ltd, the Delhi High Court had the opportunity to examine the withholding obligation in the case of an Indian entity remitting monies to its overseas parent towards reimbursement of mobilization and demobilization costs. In a landmark ruling, the Delhi High Court also held that the obligation to deduct tax at source arises only if the non‐resident is chargeable to tax in India as against the Karnataka High Court decision in the Samsung case (stated above).
Vodafone case Vodafone International Holdings BV (“Vodafone“) entered into a Share Purchase Agreement (“SPA”) with Hutchison Telecommunications International Limited (“HTIL”), a Cayman Island entity, for purchasing the shareholding of CGP Investment (Holdings) Ltd (“CGP”), a Cayman based subsidiary of HTIL. CGP, directly and indirectly, owned approximately 52 percent of the share capital of Hutchison Essar Limited ('HEL"), an Indian entity. In addition, under separate framework agreements, Vodafone also became entitled to certain call options on shares in HEL held by some other entities having indirect shareholding in HEL. The SPA, with the framework agreements resulted in acquisition by Vodafone of approximately 67 percent effective economic interest in HEL. The Revenue authorities issued a notice to Vodafone, holding it in‐default for failure to withhold taxes on gains arising to HTIL on the transfer of shares of CGP which later had to be reversed by the Supreme Court of India considering the facts of the case and provisions of law in force. The Supreme Court of India pronounced a landmark ruling that Vodafone Group ('Vodafone') was not liable for withholding taxes on its 11 billion $ acquisition, in 2007, of a single share of a Cayman Islands company. The Vodafone case is an eye‐opener of what India lacks in regulatory laws and what measures India has to take to meet the various unprecedented situations without sacrificing national interest. The DTC envisages creation of an economically efficient and effective direct tax system by proposing a GAAR (General Anti Avoidance Rules) Conclusion Tax treaties: The non‐resident beneficiaries can yet take shelter under the tax treaties, especially India’s tax treaties with countries like Singapore, USA, UK, etc. that have a narrow definition on fees for technical services.
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Charges
Meetal M Jain CS Executive
Introduction on Charges: Charge is a security given for securing loans and debentures by way of mortgage on the assets of the company. As per section 124 of companies act, 1956 charges includes a mortgage, a lien and an equitable charge whether created by an instrument in writing or by the deposit of title deed. Kinds of Charges: a. Fixed charges: Fixed charges are those charges which are made to cover specific assets or are capable of being ascertained and defined at a time of creating charges. Ex: Land & Building. b. Floating Charge: Floating Charges are not attached to any definite property but covers the property of fluctuating type. Ex: Stock in trade. As per Section 125 of companies act, 1956 requires a company to file with Registrar Of Companies in Form‐8, within 30days after the date of the creation of charge, with complete particulars together with the instrument, if any, creating evidence or modifying the charge or a copy thereof verified in prescribed manner for registration, otherwise charge shall become void, the money there by shall immediately becomes payable. However the registrar may allow the particulars and instrument or a copy as aforesaid to be filled within 30days next following the expiry of the said period of 30days on the payment of such additional fees not exceeding ten times the amount of fees specified in schedule X and if the company specifies the registrar that it had sufficient cause for not filling the particulars and the instrument or a copy within the specified period. Banks shall insist to create charge for the loans provided to the company and such charge should have been registered (filed) with Registrar Of Companies. The following charges which are required to be registered:
1. A charge for the purpose of securing any issues of debenture.
2. A charge on uncalled share capital of the company.
3. A charge on any immovable property wherever situate or any interest therein.
4. A charge on any book debts of the assets.
5. A Charge not being a pledge on any movable property of the company.
6. A floating charge on the undertaking or any property of the company including stock in trade.
7. A charge on calls made but not paid.
8. Repetitive
9. A charge on goodwill or patent or license under a patent or on a trademark, or on copy right or a license under a copyright.
As per section 610B Form‐8 has to be filed by the company or any person therein within 30 days from the date of creation or modification of charge separate e‐Form‐8 is to be filled for each charge.E‐Form‐10 with a copy of resolution has to filed within period of 30 days from the date of creation or modification of charge for debenture. The e‐Form is required to be digitally signed by the trustee or debenture holders as well as managing directors or director, manager or secretary of a company in case of an Indian company and by an authorized representative, in case of a foreign company. Further the e‐Form is required to be pre‐certified by CA or CS (In whole time practice). In case of default the company or every officer of a company or other person who is in default shall be punishable with fine which may extent to Rs. 5000/‐ for everyday during which default continues, a further fine of Rs. 10000/‐ may be imposed on the company and every
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officer of the company for any other default relating to the registration of charges. Satisfaction of charges: Section 138 of the act requires that the company shall give intimation to the registrar, of the payment or satisfaction in full, of any charge relating to the company within 30 days from the date of such payment or satisfaction. The company shall intimate satisfaction of the charge in e‐Form17 within 30Days from the date of satisfaction. If failed to file the said form 17 within 30 days from the date of satisfaction no grace period of 30 days shall not allowed by the Registrar Of Companies. In such circumstances the company has to file condonation of delay with the Company Law Board and get permission (order) for filing the satisfaction of charge with Registrar Of Companies. Provisions for modification of charges: As per Section 135 of companies act, 1956 Whenever the terms or conditions, or the extent or operation, of any charge registered under this Part are or is modified, it shall be the duty of the company to send to the Registrar the particulars of such modification, and the provisions of this Part as to registration of a charge shall apply to such modification of the charge. Rectification by central government of register of charges: As per section 141 of companies act, 1956 (1) The Central Government, on being satisfied ‐ (a) That the omission to file with the Registrar the particulars of any charge created by a company or of any
charge subject to which any property has been acquired by the company or of any modification of any such charge or of any issue of debentures of a series, or that the omission to register any charge within the time required by this Part or that the omission to give intimation to the Registrar of the payment or satisfaction of a charge, within the time required by this Part, or that the omission or misstatement of any particular with respect to any such charge, modification or issue of debentures of a series or with respect to any memorandum of satisfaction or other entry made in pursuance of section 138 or section 139, was accidental or due to inadvertence or some other sufficient cause or is not of a nature to prejudice the position of creditors or shareholders of the company ; or (b) That on other grounds, it is just and equitable to grant relief, may on the application of the company or any person interested and on such terms and conditions as it may seem to the Central Government just and expedient, direct that the time for the filing of the particulars or for the registration of the charge or for the giving of intimation of payment or satisfaction shall be extended or,
as the case may require, that the omission or mis‐statement shall be rectified. (2) The Central Government may make such order as to the costs of an application under sub‐section (1) as it thinks fit. (3) Where the Central Government extends the time for the registration of a charge, the order shall not prejudice any rights acquired
in respect of the property concerned before the charge is actually registered.] As Ministry Of Corporate Affairs introduced MCA‐21 Portal system filing of forms are electronical and data of companies maintained in electronic mode, so that transference is maintained as these are available for public view. So companies and stakeholders are benefited immensely.
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Insider Trading
H Sandhya Management Trainee
Hemanth, Biswajit& Co. [email protected]
Introduction: ‐ It was only about three decades back that insider trading was recognized in many developed countries as what it was ‐ an injustice; in fact, a crime against shareholders and markets in general. At one time, not so far in the past, inside information and its use for personal profits was regarded as a perk of office and a benefit of having reached a high stage in life. The insider trading controversy involving Hindustan Lever Limited’s (HLL) purchase of 8 lakh shares of Brooke Bond Lipton India Limited (BBLIL) in March 1996, two weeks prior to the public announcement of the merger of the two companies has inspired this paper. The notice to HLL is the first time that SEBI has brought an insider trading action. An attempt has been made to analyze the Indian insider dealing provisions as they stand. Insider trading essentially denotes dealing in a company‘s securities on the basis of confidential information relating to which is not published or not known to the public used to make profit or loss. It is fairly a breach of fiduciary duties of officers of a company towards the shareholders. Who are insiders ? It is defined under the SEBI Prohibition of Insider Trading regulation 2 (e) Insider is the person who is “connected” with the company, who could have the Unpublished price sensitive information or receive the information from somebody in the company. For the purpose this definition, words “connected person” shall any person who is a connected person six months prior to an act of insider trading
Corporate officers, directors, and employees who traded the corporation’s securities after learning of significant, confidential corporate developments.
Friends, business associates, family members, and other types of such officers, directors, and employees,
who traded the securities after receiving such information.
Employees of law, banking, brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded.
Government employees who taught of such information because of their employment by the government other persons who misappropriated, and took advantage of, confidential information from their employers.
Why forbid insider trading? The prevention of insider trading is widely treated as an important function of securities regulation. Insider trading appears unfair, especially to speculators outside a company who face difficult competition in the form of insider trading. As per SEBI the Prohibition of Insider Trading is required to make Securities Market Fair & Transparent to have a level playing field for all the participants in the market For free flow of information & avoid information asymmetry. What is price sensitive information? The Price sensitive information is defined in Regulation 2(h)(a) of the prohibition of Insider Trading. “It means any information which relates directly or indirectly with the company & which if published is likely to materially affect the prices of the securities of the company”. The information which is deemed to be price sensitive are like Periodical financial results, Intended declaration of the dividends (both Interim & Final), Issue of securities or buy –back of securities, any major expansion plans or execution of new projects, Amalgamation & mergers or takeovers, disposal of the whole or substantial part of the undertaking, any significant changes in policies, plans or
operations of the company. (Continued in Page 104)
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Forensic Audit: Necessity
or an Option?
Aashish Jain Professional Programme
J. Sundharesan and Associates [email protected]
Introduction In the last Decade major corporate scams shocked the world like Enron, Satyam, Worldtel etc. In all the cases the financial statements were manipulated to benefit a few. Companies (Auditor’s Report) Order, 2003, requires Auditors to report, amongst others, “Whether any fraud on or by the company has been noticed or reported during the year. If yes, the nature and the amount involved are to be indicated”. In this background, the techniques of Forensic auditing have gained importance. Forensic auditing, sometimes referred to as forensic accounting, is used to investigate the financial records of a company in order to detect fraud, corruption, or misappropriation of assets. It is mainly used ‘after‐the‐fact’ when companies suspect that fraud has occurred within their organization. For those progressive companies that want to prevent fraud before it occurs then a risk analysis is the best course of action. Forensic auditing utilizes traditional accounting and auditing techniques combined with detective‐style analysis. Financial transactions tell a story and the forensic accountant gathers the pieces together that form the story’s plot. They perform a complex series of tests that identify potential problem areas for further investigation. Forensic auditors not only investigate the financial records of a company they normally offer litigation support in a court of law should the findings result in legal proceedings. Motives of Fraudulent Financial Reporting By Management
Peer Pressure: Management is under pressure, from sources outside or inside the entity, to achieve (perhaps unrealistic) target, where consequences of failure are significant. Price Manipulation: To increase the entity’s stock price or earnings trend.
Commitment: To keep the results attuned to knowingly unrealistic/non‐achievable forecasts/commitment made to creditors and lenders.
Wrongful Gains: Corporate frauds are results of manipulation of accounts and accounting jugglery designed to deceive others for wrongful gains.
Concealment of Truth: Absolute theft of money or money’s value (mainly relating to employees frauds). True results of operations, or financial position of the entity with a view to prevent timely detection of corporate frauds.
Objective of Forensic Audit
Objective of forensic audit is to find whether or not a fraud has taken place. Forensic auditor shall have to examine voluminous and in totality, records and witnesses, if permitted by law. Proper documentation is vital in substantiating the findings. The outcome shall focus on the following, in case of frauds:
Proving the Loss / Proving the responsibility for the loss
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Proving the method/motive, establishing guilty knowledge
Identifying other beneficiaries. Benefits of Forensic Audit A forensic audit will investigate and identify fraudulent behavior but can also serve as a springboard to establishing control mechanisms that help mitigate the risk of potential fraud. Forensic accounting can also: a) Identify areas of waste and to improve operational
efficiency b) Calculate the loss caused by the fraud. c) Investigate into any infringement. d) Ensure regulatory compliance. e) Investigate and quantify professional negligence
claim. f) Identify employee thefts or frauds.
Drawbacks of Forensic Audit
a) A poorly managed forensic audit could consume excessive amounts of management time and could become an unwelcome distraction for the business.
b) Forensic audits can have wide‐ranging scope across the business. Under certain circumstances, the scope of the audit may need to be extended, with a corresponding increase in the budget.
c) Some employees can interpret a proactive forensic audit as a slight on their integrity, rather than as a means to improve control procedures for the benefit of the business.
Detection Technique Critical Point Auditing: Critical point auditing technique aims at filtering out the symptoms of fraud. From regular and normal transactions in which they are mixed or concealed. For this purpose, financial statements, books, records, etc. are analyzed mainly to find out:
Trend‐analysis by tabulating significant financial transactions.
Unusual debits/credits in accounts normally closing to credit/debit balances respectively
Discrepancies in receivable or payable balances/inventory as evidenced from the non reconciliation between financial records and corresponding subsidiary records (like physical verification statement, priced stores ledgers, personal ledgers, etc.)
False credits to boost sales with corresponding debits to non‐existent (dummy) personal accounts
Cross debits and credits and inter‐account transfers
Weaknesses/inadequacies in internal control/check systems, like delayed/non‐preparation of bank reconciliation statements, etc.
Propriety Audit Propriety audit is conducted by Supreme Audit Institutions (SAI) to report on whether Government accounts, i.e., all expenditure sanctioned and incurred are need‐based and all revenues due to Government have been realized in time and credited to the government account. In conducting the propriety audit, “Value for Money audit” technique aims at lending assurance that economy, efficiency and efficacy have been achieved in the transactions for which expenditure has been incurred or revenue collected is usually applied. The same analogy, with modifications to the principles of propriety of public finance, applies in forensic audit to establish fraudulent intentions if any, on the part of the management. Financial frauds are results of wasteful, unwarranted and unfruitful expenditure or diversion of funds by the investigated entity to another entity. Conclusion Forensic auditing combines legalities alongside the techniques of propriety (VFM audit), regularity, investigative, and financial audits. The main aim is to find out whether or not true business value has been reflected in the financial statements and whether any fraud has taken place. It differs, altogether, in form and content from the statutory audits of financial statements. It may be beneficially applied in other areas where due diligence exercise is required to be carried out.
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Suggested Agenda for BM &
SHM Divya S.
Professional Programme Trainee with CS Vivek Hegde
Introduction: Agenda points which are discussed in the Meeting of a Company registered under the Companies Act, 1956 depends upon the business requirements, regulatory requirements arising from various statutes, rules and regulations as well as the Articles of Association and Shareholders Agreement/Joint Venture Agreement, if any. Board meeting: Board meeting is a formal meeting of the Board of Directors of a Company, which is normally held at definite intervals to consider strategic issues, policy matters, operational and regulatory issues. As per section 285 of the Companies Act, 1956 a company must hold its Board of Directors meeting at least once in three calendar months and there should be at least four meetings every year. There could be more number of meetings if required. Now as per the Companies Bill, 2012 (shortly to be enacted as law) the time gap between two consecutive meetings should not exceed 120 days. A minimum notice period of 7 days is envisaged which can be sent now by electronic means.
Directors can attend the meetings through video conferencing (VC) or other audio visual (AV) modes, and such presence will be counted as quorum for the meeting, subject to the condition that they are recorded and stored. However the Central Government may prescribe the matters which are not to be discussed in VC and AC. In the First Board meeting (under clause 173 of Companies Bill, 2012, it needs to be held within 30 days of Incorporation)
To appoint the chairman of the meeting
To note the Certificate of Incorporation, Memorandum and Articles of Association
To confirm the first Directors of the Company
To consider the appointment of first Auditors
To adopt the Common Seal of the Company
Approval for opening the Bank Account
To authorize printing of Share Certificates
To authorize to allot shares and issue share certificates to subscribers to MOA subject to receipt of subscription of money
Approval of declaration given by director in the prescribed form to the Registrar providing that the subscribers have paid the value of shares as agreed in MOA for issue of Commencement of Business Certificate
To take approval for various statutory registrations like PAN, TAN, PT, IEC, VAT & CST, Service Tax, Central Excise etc., and authorizing a person responsible to sign the relevant application and forms required
To consider the appointment of Key Managerial Personnel such as Chief Executive Officer, Managing Director, Manager, Company Secretary, Whole‐time Director and such other officer as may be prescribed
In the Subsequent meetings
All the matters which needs Shareholders approval needs to be approved in the Board Meeting
Filling up of casual vacancy of Board u/s 262
To make calls on shares, issue debentures, borrow loan and invest funds of the Company u/s 292
Taking on record the declaration given by the Directors u/s 274 (1)(g)
Taking on record the disclosure made by the Directors u/s 299 in Form 24 AA
Any alteration in Memorandum of Association such as increase in Authorized Capital, change in objects clause etc.,
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Appointment of Cost Auditor u/s 233(b) – Prior approval needs to be taken by Central Government by filing Form 23 C to MCA.as per Companies (Cost Accounting Rules) ,2011, if applicable
Approval of Policy and Procedures such as Travel policy, Employee Compensation policy, HR policy, Purchase policy etc.,
Approval for applying for allotment of Land under SEZ and related sanction
Approval for External Commercial Borrowing
Action taken reports ( action taken points from previous meeting )
Review of operations – MD / CEO need to brief the Board
Approval of Company Standards
Quarterly compliance Report
Purchase of Fixed Assets, Bad debts written off
Annual operating plan and budgets
Other Business related matters like major expansion, execution of new projects, new joint venture
Annual Filing
Approval and Authentication of Balance Sheet and Profit & Loss Account u/s215
Approval of Director’s Report u/s 217 – proposed act requires to even include explanation in the Directors Report on the remark made by the Auditor in his report and Company Secretary in Practice in his Secretarial Audit Report
Thereafter every year within 6 months of the close of the F/Y an AGM must be convened, unless an extension is granted by the Registrar (ROC)
Insider Trading (Continued from Page 100)
Regulation 3(B): This regulation states that there should be “Chinese Wall” within the company and one department should not know about what other departments are doing. Disclosures for prohibition of Insider Trading
Initial Disclosure like buying the stake greater than the 5% of the paid up capital of the company, within 2 working days intimation shall be given to Stock Exchange.
The new director should disclose all its trade position in equity or derivatives within 2 days of its appointment.
Continuous Disclosure If the director changes its holding by 2%.
Investment of Rs 5 Lacs or 25,000 shares or buying the 1% stake of the paid up capital whichever is the least should be disclosed.
Annual statement of all holdings
Any other disclosure of the company to stock exchanges.
SEBI’s Power to make inquiries and inspection (Regulation 4A) Chapter III of the SEBI Regulations contains provisions regarding SEBI's powers of investigation into insider
trading and matters incidental thereto. If the SEBI suspects that any person has violated any provision of these regulations, it may make inquiries with such persons. The SEBI may appoint officers to inspect the books and records of insider(s) for the purpose of inspection. The SEBI can investigate and inspect the books of account, records and documents of an insider on prima facie. SEBI can investigate into the complaints received from investors, intermediaries or any other person on any matter having a bearing on the allegations of insider trading. Conclusion The smooth operation of the securities market, its healthy growth and development depends to a large extent on the quality and integrity of the market. Such a market can alone inspire the confidence of investors. Insider trading, as it involves misuse of confidential information, is unethical amounting to breach of fiduciary position of trust and confidence. The objective of the Securities and Exchange Board of India (Insider Trading) Regulations, 1992 is to prevent and curb the menace of insider trading in securities. The company secretary has onerous obligations in the matter of preventing insider trading by company directors, officers and others, in terms of disclosure and reporting.
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NATURE – The Best Getaway (Inspired by the wonderful movie ‘Zindagi Na Milegi Dobara) Every day is a grind, for life is so hectic, I ponder over ways to free myself of this crazy cryptic. Things around me may make my existence look rosy, Yet these ‘things’ hardly make me feel content and cozy.
In these busy days and the restless night, There’s a need for something to keep me bright. With this mad quest to earn more Money, Have I forgotten to admire flowers and the Honey?
When the hours seem like waves of a rough sea, It is the calm breeze that brings in me a sense of glee. There are days when I get stressed out, It’s a cool swim in the pool that helps me chill out.
Whilst in moments when I live life just for its sake, I wonder how serene it would be to stroll by a blue water lake. Days when life resembles a room with a keyless lock, I wonder how it’d be to have a peaceful day on a hillock.
Amidst all the city’s deafening noise, I realize that Nature is the best getaway to regain my poise. Amazing are the views of sunset and sunrise I dream of a life filled with nature’s pleasant surprise !!
Leading Lights of Life...
At birth, God gives us Angels; we call ‘Mother and Father’, Then He introduces us to blessed souls; we call ‘TEACHER’!
TEACHERS help us learn math and words, And train our brains to resemble sharp swords!
With their immense patience and intellectual prowess,
They teach us to survive under any duress! Our transformation under their guidance is no less than a miracle,
For, they are our life’s leading lights to reach the pinnacle!
We may soar to any dizzy height, Yet, we ought to bow before a TEACHER’s might!
For, even the greatest rulers of Rome, Began their journeys with a TEACHER at home!!
Sagar Prakash Kulkarni
CS Professional Programme Bellary
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