source Business standard
CS A Rengarajan
|
Three years on, biz valuation rules yet to see light of day |
|
New Delhi, 18 February Ithas been more than three years since the ministry of corporate affairs (MCA) had issued the draft rules on valuation of businesses, under the Companies Act, 2013. These are yet to be finalised. However, MCA has clarified that Securities and Exchange Board of India (SEBI)registered merchant bankers and chartered accountants with 10 years of experience will do valuation of shares and debentures until the final rules come in. The draft rules had been issued in September 2013. The rules defined who could bearegistered valuer,aprocess of registration and deregistration, and methods of valuation. An email query to ministry officials on when these rules would be finalised elicited no response. Chander Sawhney, partner and head, valuations and deals at Corporate Professionals Capital, said there were no standards for valuation of businesses, specifically for unlisted and private companies in India. He said in many cases, valuation process lacks uniformity and generally accepted global valuation practices. He said there were organisations which regulate the valuation process globally, such as the Valuation Standards of American Institute of CPAs ,American Society of Appraisers ,Institute of Business Appraisers ,National Association of Certified Valuation Analysts and The Canadian Institute of Chartered Business Valuers. Asubstantial part of the litigation in mergers &acquisitions (M&A) takes place on the issue, as it involves an element of subjectivity that often gets challenged, Sawhney said. He said India had limited judicial guidance available on the subject. Saket Shukla, partner at Phoenix Legal, said while the intention of the rules is to ensure fair valuation to protect the interest of the nonpromoters, these seem to microregulate the process, avoidable, especially when India continues to rank 130th on the ease of doing business rankings of the World Bank. He said the ministry should perhaps takealeaf out of the Reserve Bank´s books, which no longer prescribe the methodology to determine the value of shares inadeal between residents and nonresidents. He also said the provision setting out the requirement for valuers to register needs reconsideration, as the valuers proposed to be covered are already subject to supervision by professional bodies such as the Institute of Chartered Account of India (ICAI). Parliament´s standing committee on finance in its report on the Companies Bill, 2011, had suggested only those valuers already subject to rules on professional conduct required to be registered. Sebi has its own valuation guidelines for listed companies on takeovers, preferential allotment of shares and so on. Sawhney, however, said absence of any stringent course of action and nonregulation under any statute is also leading to loose ends. Thoughaconsensus is building among professional valuers on generally accepted approaches, methods, and procedures, numerous conceptual controversies remain even among the most prominent practitioners, he added. He said the concept of registered valuers was likely to have huge impact on professionals, shareholders and government. Depending upon who would be eligible to register, with the increase in the number of valuation requirements, professional opportunities shall emerge. Also,aproposed provision of personal liability on misleading or incorrect information would lead toatrue, fair and complete view, he added. Stakeholder confidence would largely get boosted with the transparency and fairness the system of valuation indicates, Sawhney added. 1 Chartered accountants, company secretaries, or cost accountants with at least 5 years of experience 2 Sebiregistered merchant bankers with at least 5 years of experience 3 Members of the Indian Institution of Engineers at least with 5 years of experience 4 Members of the Institute of Architects with 5 years of experience 1 & 2 will be financial valuers and 3 and 4technical valuers Ifavaluer defaults with an intention to defraudafirm, he could be imprisoned for up toayear and fined up to ~5 lakh Standing committee on finance in its report on the Companies Bill, 2011, had suggested only those valuers not already subject to rules on professional conduct Who could become valuer? WHAT THE DRAFT SAYS While no explanation has been given by the government for the delay, experts feel implementation will createamore fair and transparent system |
Practising Company Secretary
Chennai
Mobile 93810 11200
CS A Rengarajan
|
The unmaking of shell companies |
|
Asthe government looks at measures to stop the practice of using shell companies as conduits for money laundering and tax evasion,akey legal challenge facing enforcement agencies relates to piercing the corporate veil behind which such companies operate. Arelease from the Prime Minister´s Office points out: Of 1.5 million registered companies in India, only 600,000 file their annual returns. The challenges are in gathering data and distinguishing genuine business transactions from those that are not. Incorporatingacompany in India does not requireaperson to disclose the beneficial ownership of the firm´s shareholders. “This makes it easier for the ultimate beneficial owners of such companies to set up multiple entities, without being traced,” notes Vivek Sriram, principal associate, Khaitan &Co. This makes any investigation of the operations of shell companies tedious andalongdrawnout affair. “Any investigation requires, first of all, identifying the operator, listing the various companies set up by him, identifying the bank accounts of each such company and obtaining copies of the same, and finally establishing the trails of each transaction in the bank accounts from its starting point to the end beneficiary through the various companies,” says Chandrasekhar Tampi, partner, Kochhar &Co. Legal experts say there must be disclosures of beneficial ownership at the time of registration and action against shell companies that do not file annual returns. Legal experts say it is difficult to distinguish between genuine and fraudulent shell corporations at the registrar of companies (RoC) level. Section 248 of the Companies Act, 2013, empowers the RoC to remove the names of companies in two situations: First, if they fail to start business withinayear of its incorporation, and second, ifanondormant company does not do business for two successive financial years. Pavan Kumar Vijay, founder managing director, Corporate Professionals, points out that the law recognises the genuine business needs of nonworking companies and has provided for the concept of dormant companies in the Companies Act, 2013. “The issue is whether the owners of such companies are willing to close them,” says Vijay. Legal experts point out that the Benami Transaction (Prohibition) Amendment Act, 2016 and the Prevention of Money Laundering Act (PMLA), 2002, to some extent, help in curbing the misuse of shell companies. For instance, ifaproperty has been bought in the name ofashell company, the Benami Act is equipped to first confiscate the property, levyapenalty and initiate imprisonment proceedings for seven years against the benamidars, noted Rakesh Nangia, managing partner, Nangia &Co. However, enforcing these laws in cases where the shell companies have been set up outside India could prove to beachallenge, says Anand Mehta, Partner, Khaitan &Co. Using concepts such as “place of effective management” ofacompany could help to curb misuse of shell companies created for retaining income outside the country. Shahid Khan, senior partner, Kochhar &Co, says the PMLA imposes an obligation upon banking companies, intermediaries and financial institutions to collect and verify client information after authentication. Legal experts point out that there has beenaflurry in creating shell companies after the removal of the minimum capital requirement criteria. “Earlier the minimum capital requirement was ~1 lakh, which has been removed to facilitate an easy registration ofacompany,” says Vijay. Further, depositing the initial capital in the bank account of the company is not required. Experts are of the view that the underlying problem with shell companies is that there is no information regarding the real owners of such corporations, and this needs to be legislated upon. Moreover, India needs to strengthen clauses on exchanging information in its bilateral trade agreements with other countries. This will make it easier to get information on entities set up in foreign jurisdictions. Legalexpertssayrevealingtheidentityoftherealownersofsuchentitiesmustbemademandatory ILLUSTRATION: VINAY SINHA Are shell companies illegal? The term ´shell company´ is notalegally defined term. It generally refers to companies which comply with all legal or regulatory requirements of the Companies Act, Income Tax Act, other tax laws and KYC norms, but in actual reality do not carry out genuine business transactions. “What makes shell corporations suitable for illegal behaviour is the anonymity they provide their ultimate owners, hidden behind layers of complex corporate structuring,” says Shahid Khan, senior partner, Kochhar &Co. Do shell companies serve any business need? Shell companies have legitimate uses as investment, asset and value holding vehicles. They serveabroad need in terms of transaction structuring as well as business optimisation. “Shell companies are legitimately used by multinational corporations, investment firms, real estate companies and family businesses to satisfy real world business needs within the four walls of laws,” says Pallav Pradyumn Narang, partner, Arkay &Arkay. The mere use ofashell company does not in any way signify illegality or abuse of tax and regulatory provisions, adds Narang. Whatcouldhelptheireasier identification? Transactions without business or economic rationale Unusual transaction patterns Large cash deposits and withdrawals Large offmarket transactions Large volume of transactions in previously dormant accounts Which businesses or industries are seen to use shell companies more often? The use and abuse of shell companies are most visible in sectors such as real estate, trading and infrastructure. Most large business groups have several inactive investment companies. “The highest number of such companies may be found in real estate groups,” says Vijay of Corporate Professionals. |
|
BRIEF CASEN |
|
The Supreme Court has held that an interim order made before, during or even after an award by an arbitrator will continue in force till the award is enforced. Interpreting Section 9 of the Arbitration and Conciliation Act, the court stated so in the appeal of UltraTech Cement Ltd against the judgment of the Rajasthan High Court which had ruled in favour of the state Vidyut Utpadan Nigam Ltd. In this case, the two parties signed an agreement by which UltraTech was allowed to take away fly ash free for five years and thereafter at the rate fixed by the Nigam. Afterafew years, the Nigam invited tenders for sale of fly ash. The cement company moved the civil court seekingarestraint. The judge allowed it. But the Rajasthan High Court set it aside. The cement company moved the Supreme Court, pointing out that arbitration was pending and therefore the rate should not be changed. The court passed an interim order restricting the sale of fly ash. After the award, the question arose whether the interim order survived. The court ruled that the interim order lasted till the enforcement of the arbitral award as prescribed in law. Capital gains tax demand quashed If land is acquired compulsorily, the owner is not obliged to pay capital gains tax on the compensation paid to him, the Supreme Court held in the case, Balakrishnan vs Union of India. The court set aside the Kerala High Court judgment which held the opposite view. The government took over 27 acres of paddy field in 2006 for extending the Techno Park in south Kerala. The owner contested the compensation amount, but later agreed to sell it atagiven price to avoid long litigation. Then the revenue department entered the scene and demanded capital gains tax on the amount. It argued that the transaction was sale and not compulsory acquisition exempted under Section 10(37) of the Income Tax Act. The high court agreed. The land owner appealed. The Supreme Court noted that the owner had objected to the compensation and later “succumbed to the government” only to avoid litigation and to salvage whatever the amount was offered. All procedures under the Land Acquisition Act had been gone through. Therefore it was notasale but compulsory acquisition exempted from capital gains tax. Foreign vessels coming for repairs The Supreme Court has ruled thataforeign vessel arriving in an Indian port for repairs cannot be imposed duty under the Customs Act as it is not “utilised” within the territorial waters. “Mere repair ofavessel is not putting the vessel to use in India and would not result in home consumption,” stated the judgment in the case Commissioner of Customs vs Aban Loyd Chiles Offshore Ltd. “Repairs were carried on the vessel and not to utilise the vessel. It would not amount to utilisation or operation of the vessel/rig in India. Thus, it cannot be said that the vessel was imported into India,” the judgment said while dismissing the appeal against the order of the tribunal. In this case,aforeign rig was brought to Mumbai port twice and left the port after repairs. The authorities demanded ~28 crore as duty with threat of penalty and confiscation. The tribunal held the Customs authorities´ action illegal, and that view was upheld by the Supreme Court. Taxmen feud over payment to ´mafia´ The alleged payments made by developers to the “land mafia” becameabone of contention between the Commissioner of Income Tax and the IT Settlement Commissioner and the Bombay High Court last week upheld the order of the Settlement Commissioner. The commissioner of Income Tax argued that the property developers had paid amounts to the mafia and the Settlement Commissioner had not taken that into account while allowing the settlement applications of the developers. The Commissioner of Income Tax pointed out the reference to land mafia in the commissioner´s order to contend that they were illegal payments which were ignored by the Settlement Commissioner. Therefore the settlement order was wrong on this and other counts. The developers submitted that payments to the socalled mafia was not for illegal activity but only for “protection of men and property”. The high court rejected all contentions of the Commissioner of Income Tax. Its judgment clarified that “what has to be seen is not the person to whom the amount has been paid but the reasons for making the payment. If the payment is made for illegal purposes, then the payment is to be disallowed. The disallowance is on account of the purpose for which the payment is made and not upon the person to whom the payment is made. Therefore even if the payment is made to an alleged criminal, to do legal work, it is allowable. The disallowance is not personspecific but expenditurespecific; i. e. the expenditure must be prohibited by law or must be an offence.” Coops fall under RTI Act The Bombay High Court ruled last week that cooperative banks in Maharashtra are covered by the Right to Information Act, rejecting the objection of Jalgaon Jilha Urban Coop Banks Association. Financial institutions under the umbrella of the association argued that coops were not public authorities as defined in the Act; they didn´t receive state aid, nor were they underastate authority. Banking laws prevented divulgence of confidential information. Rejecting the contention, the high court stated that such arguments were put forward by the Reserve Bank of India and the Supreme Court had rejected all of them last year inadetailed judgment. Coops are not private bodies and the authorities under coop law have pervasive control over those statutory bodies, which can even get state subsidies. Borrowers told to move DRT The Gujarat High Court last week stated that it would not entertain petitions by borrowers against creditors as there are alternative remedies available to them from the Debt Recovery Tribunal (DRT). In this case, Om Shiv Lumbers Ltd vs Corporation Bank, the company alleged that the bank wrongly declared its loan asanonperforming asset and the eauction of property was illegal. The bank denied the charges and asserted that the high court should not hear the complaint as the debt recovery laws have specified different forums to adjudicate such issues. The high court agreed with the bank and dismissed the petition. MJANTONY Aweekly selection of key court orders |
CS A Rengarajan
|
Infy, Tata battles make directors run for cover |
|
ABHINEET KUMAR Mumbai, 23 February The boardroom tussles at the Tata group and Infosys have raisedanew fear in the minds of both executive and independent directors and key management professionals: What if they fall out of the board´s favour, and if there are legal liabilities on them individually? This apprehension has led to companies reaching out to insurance companies for individual cover for these professionals, so that they could be retained. Corporate directors have already been on guard since the new Companies Act assumed directors and the key management personnel to be the sentinels of governance. The attribution of criminality to the “officer who is in default” is established under section 2(60) of the Companies Act, 2013, with individuals having been made liable to penalty or imprisonment. Amere awareness of any wrongdoing makes an official liable to penal action and/or individually liable, says the Act. Anup Dhingra, senior vicepresident, Finpro practice leader, Marsh India Insurance Brokers, said, “After the recent boardroom battles, the demand for individual cover under the directors and officers liability insurance has increased.” “Earlier, companies largely had blended cover for their and individual directors. But to retain the highperforming directors, who now also fear falling out of the board´s favour, companies are looking for individual cover with additional features that can take care of their liabilities. This is being used asaretention tool for highperforming directors,” Dhingra added. These liabilities include cover for legal cost, the cost of actual settlement, payout, regulatory and civil fines. Globally, over 60 per cent of Marsh´s clients buy individual cover for directors, called ´Side A´ cover, but in India it´s still limited to USlisted or very large Indian companies. In India, the leading global insurance broker has over 1,000 blended policies but only 15 of these have separate SideApolicies. Depending on companies, these individual policies are bought for $5 million (~33.5 crore) to $100 million (~670 crore). The premium would be about $2,000 (~ 1.34 lakh) for cover worth $1 million (~ 6.7 crore). As major renewals are from April 1, Marsh said enquiries from companies for quotes for SideApolicies or existing buyers looking at higher limits were rising. The insurance broker said this interest should translate into purchase in the coming weeks. Turn to Page 16 >ABC OF INSURANCE SIDE A: Directors and officers directly SIDE B: Directors and officers indirectly by covering the claims paid by companies SIDE C: Companies for securities litigation claims and special claims not covered by general liability policies BLENDED POLICY: With Side A,B |
Infy, Tata battles make directors run for cover
These SideApolicies respond even when the main policy fails, and they are also
very broad in scope and have few exclusions, mainly related to personal profit.
ICICI Lombard, the leading private sector general insurer, is expecting the demand forSideAcover to increase in the background of the recent boardroom fights.
“The recent developments in closelyheld companies have highlighted the need foraDirectors and Officers (D&O) policy even in unlisted companies,” said Sanjay Datta, chief of underwriting and claims at ICICI Lombard General Insurance.
SideAcover in D&Oinsurance provides indemnification to board members when they are not indemnified by the organisation.
This could be because the organisation is not allowed by law to indemnify the directors or if the organisation is bankrupt and has no resources to do so.Asituation in which an organisation cannot indemnify directors is when they are named inaderivative shareholder action.
This is when shareholders sue directors on behalf of the organisation, citing mismanagement at the organisation.
The proceeds of such litigation are paid by the directors to the organisation itself, instead of the shareholders.
“If in either the Tata Group of companies or at Infosys, such actions are brought, thenaSideApolicy could address the issue,” says Datta.
Additionally, blended cover under D&Opolicy, which is what most companies purchase, excludes claims where both the litigating parties are covered under the same policy.
Thus, under SideBcover,acompany board oracompany director suing another company director will not be covered.
“Directors haveagenuine concern about situations where they could be pulled into undesired legal tussles.
They are evaluating enhanced D&Ocover and expect their companies to take care of these concerns,” says Sai Venkateshwaran, partner and head accounting advisory services at KPMG.