source Business Standard
CS A Rengarajan
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Unmasking shell companies |
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Two recent events, though unrelated, could haveawideranging impact on the abuse of shell companies for money laundering and tax evasion. The first isaprovision in the Companies (Amendment) Bill, 2017, that was recently cleared by the Lok Sabha. It proposes to define, for the first time, the term “beneficial interest inashare”. It further makes it mandatory to maintainaregister of persons withasignificant beneficial interest inacompany. The other event is the Securities and Exchange Board of India (Sebi) setting upacommittee on “fair market conduct” to suggest measures to improve surveillance of the markets. “The Companies (Amendment) Bill, 2017, gives an extremely wide and inclusive definition of ´beneficial interest inashare´ that recognises all the ´direct and indirect´ rights or entitlement of persons. Apart from the right to receive or participate in any dividend or distribution, the definition requires identification of ´any´ rights in shares as ´beneficial interests´,” says Sharad Abhyankar, partner, Khaitan &Co. Experts say that till now, “share” ofacompany was considered to be an integrated bundle of rights, privileges and obligations that cannot be separated and assigned to different persons. The proposed amendment seeks to givealegal recognition of the fact that for the same shares there could be multiple beneficial interest holders. Under Section 90 of the Act, the Bill proposes to make it mandatory to maintainaregister of significant beneficial interests inacompany. This, say experts, will help bring transparency about individuals, including trusts and persons not resident of India, who either have significant influence or control over the company. “This is likely to beaserious deterrent for nondisclosure of real interest holders. Further, Section 90 also imposesavery heavy burden of enquiry into beneficial interest holders, which may be difficult to discharge,” says Abhyankar. Inder Mohan Singh, partner, Shardul Amarchand Mangaldas &Co, points out thatalot depends on the final rules to make the new definition of ´beneficial interest inashare´ effective in preventing abuse of the provision. “The rules must help identify the ultimate beneficiary,” he says. Many securities law experts say the appointment of theTKViswanathan Committee on “fair market conduct” could not have come atabetter time. Most believe there is no need to change the Sebi Act, 1992, to prevent the abuse of shell companies. “Section 12A of the Sebi Act, read with the Prohibition of Fraudulent and Unfair Trade Practices Regulations is wide enough to deal with it,” says Sumit Agrawal, partner, Suvan Law Advisors. He is in favour of theTKViswanathan Committee suggesting specific steps to improve surveillance of shell companies and penny stocks. Yogesh Chande, partner, Shardul Amarchand Mangaldas &Co, says the real issue is supervising and tracking down such companies based on the filings made by them to stock exchanges. “Apart from seamless sharing and exchange of data among various regulators and authorities,athorough analysis could also be an efficient tool for stock exchanges to track suspected shell companies,” says Chande. Experts point out that the market regulator´s role till now has largely been focused on preventing tax evasion carried out through manipulation on the exchange platform. The best way forward for Sebi is to step up surveillance and enforcement, say experts. The first is to identify shell companies or penny stocks that could be used for manipulation. This would require imposition of strict trading curbs on them to avoid price rigging. The other area is acting against manipulators and companies who are involved in price rigging or colluding with individuals who launder money. So far, Sebi has identified 145 cases of longterm capital gains evasion. It has completed investigation in 85 cases and shared the report with the Central Board of Direct Taxes to take action in such cases. The market regulator aims to complete investigation in the remaining cases by the end of September. Legal experts sayastricter definition of ´beneficial interest inashare´ company law and strengthening of the monitoring mechanism of entities may help prevent abuse of shell companies COMPANIES (AMENDMENT) BILL, 2017 ´Beneficial interest inashare´ to be defined for the first to recognise ´direct and indirect´ rights or entitlement (under Section 89 of the Companies Act) Requires identification of persons who collectively hold beneficial interests Apart from right to receive or participate in any dividend or distribution, the definition requires identification ´any´ rights in shares as ´beneficial interests´ There isaneed to maintainaregister of significant beneficial interests inacompany, including those of individuals, trusts and persons not resident in India WHAT SEBI COULD DO Identify shell companies or penny stocks that could be used for manipulation Improve surveillance and enforcement under Section 12A of the Sebi Act along with the Prohibition of Fraudulent and Unfair Trade Practices regulations The recentlyappointedTKViswanathan Committee on ´fair market conduct´ could suggest specific measures to improve surveillance of shell companies HOW TO TIGHTEN THE SCREWS |
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Narayana Murthy´s regret — reflection on board structure |
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Narayana Murthy, cofounder of the company, who held the position of executive chairman, and steered the company for over 30 years, decided to retire and handed over the management toateam headed by Vishal Sikka, who would operate under the guidance and supervision ofaprofessional board. Currently, the board has 10 members, of which only two are executive directors (CEO and COO) and others are independent directors. The chairperson is an independent director. Until 2014, Infosys had adoptedacorporate governance model where an individual holds both the positions of chairperson and CEO. Murthy was at the helm of the affairs of Infosys till 2011 as chairman and CEO (19812002) and as ´chairman and chief mentor´. In June 2013, he was called back to take charge of the company as executive chairman. During his tenure, Infosys became the bellwether of corporate governance. Most experts would consider Infosys´ new corporate governance structure to be an ideal one. Although, there is no conclusive evidence that separation of the positions of the CEO and the chairperson improves the performance of the company, there is almostaconsensus among experts that separate persons should be appointed to the post of chairperson and CEO, to balance the power between the CEO and the board. One of the Securities and Exchange Board of India´s (Sebi´s) discretionary requirements is that separate persons should be appointed to the positions of chairperson and CEO. In an interview with CNBC 18 on July 17, Murthy said that his biggest regret is that he decided to retire in 2014. Murthy´s regret perhaps comes from his displeasure that the board has failed to uphold the culture and values he established. He had expressed his displeasure on several corporate governance issues, such as transparency, severance pay, higher compensation to the CEO and other members of top management compared to the median pay, and excessive office expenses incurred by the CEO. Murthy might be feeling that had he continued as executive chairman for some more years, he could mentor and help Sikka to imbibe the Infosys culture and values, and could have persuaded the board to take decisions based on his own understanding of the philosophy of ´compassionate capitalism´. The present board is adhering to ethical standards acceptable to regulators and shareholders, including institutional shareholders, who together hold more than 58 percent of the outstanding shares. Sebi´s enquiry and enquiry by the external consultant appointed by the board to enquire into the allegations ofawhistleblower have cleared the management and the board from alleged wrongdoing. But, Murthy is unhappy, as company´s corporate governance and ethical standards fall short of Murthy´s own culture and values. The Infosys case highlights the fact thatafullyprofessional management, without the engagement of the promoter with the board, cannot fully appreciate, safeguard and manage the culture and values of the promoter (and the business family). Culture and values cannot be described fully due to their complexity, although those are observable into daytoday operations of the business. They evolve with industry changes and leadership transition but permanence of ´core´ family culture and values provide competitive advantage to the business and also attract investments. Therefore, in familymanaged companies, it is preferable that someone from the family should occupy the position of chairperson to ensure family values are represented on the board. Although, it is most appropriate that the promoter or someone related to him/her chairs the board, it enhances the risk that the board acts only as an advisory board and its monitoring function gets diluted. In order to address that risk and protect the interest of noncontrolling shareholders, Sebi requires that if the chairperson is an executive chairperson or if the nonexecutive chairperson is the promoter or someone related to the promoter, half of the board should comprise independent directors, while in other cases, onethird of the board should comprise independent directors. Sebi should consider mandating appointment of ´lead independent director´. He/she provides leadership to independent directors and liaises with the CEO, on behalf of independent directors. The practice of electingalead independent director by independent directors has emerged asagood practice globally. Promoter´s active engagement in governance ofafamily business is appropriate. The challenge is to strengthen the institution of independent directors. The writer is adjunct professor in the Institute of Management Technology (IMT) Ghaziabad; and Chairman of Riverside Management Academy; email: asish.bhattacharyya@gmail. com The Infosys case highlights the fact thatafully professional management, without the engagement of the promoterwith the board, cannot fully appreciate, safeguard and manage the culture and values of the promoter EXPERT EYE ASISHKBHATTACHARYYA |
Practising Company Secretary
Chennai
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