CII Global Regulatory Update, October 2013


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Global Regulatory Update”, a compilation of global and domestic news, opinions on regulatory issues, CII initiatives and representations on regulatory issues.

The Update is aimed at keeping CII membership apprised of developments in the international and domestic corporate governance and regulatory landscape.

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CII Global Regulatory Update, October 2013

  1. 1. Confederation of Indian Industry GLOBAL Regulatory DATE UP October 2013, Volume 3, Issue 11 I de si n 4 10 5 1 E AT E D AT UP D AL UP B L LO NA G IO AT S N LE IC RT A
  2. 2. DISCLAIMER CLAUSE This Regulatory Update has been compiled with a view to update readers and CII membership of changes on the covered topics in the Corporate Governance & Regulatory Affairs domain in the international as well as the domestic front. The compilation must not be taken as an exhaustive coverage of announcements and news nor should it be used as professional advice. Although, every endeavour has been made to provide exhaustive information, no claim would be entertained in the event any information/data/details/text is found to be inaccurate, incomplete, at variance with official data/information/details released through other sources prior or subsequent to release of the issue. This is only a compilation and not a reproduction of announcements / articles / items. CII does not subscribe to the views expressed in the items. These reflect the author’s personal views and in the event of any violation of IPR by the subscribers, CII would not be held responsible in any manner. Further, no part of this Update may be reproduced, copied or used without the prior permission of CII.
  3. 3. Contents DOMESTIC UPDATES National Updates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Appointments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 GLOBAL UPDATES International Updates . . . . . . . . . . . . . . . . . . . . . . . . . . 8 ARTICLES REPORTING AND COMPLIANCE Emerging Issues in Recognition . . . . . . . . . . . . . . . . . . . . . . 13 of Revenue by Real Estate Developers New Companies Act – . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Facilitating Business Or…? CII Submits detailed industry views on the . . . . . . . . . . . . . . 21 1st and 2nd Tranches of Draft Rules under Companies Act, 2013 1
  4. 4. GLOBAL REGULATORY UPDATE NATIONAL By : DOMESTIC UPDATES Release of 3rd and 4th tranche of draft Rules under Companies Act 2013 The Ministry of Corporate Affairs has hosted the 3rd and 4th tranche of draft Rules for views from stakeholders. The draft Rules cover Deposits, SFIO, National Financial Regulatory Authority (NFRA) and IEPF. The rules are attached and also available on the Ministry's website for comments from stakeholders. The URL of the weblink is I. SEBI UPDATES Standard Operating Procedure for Stock Exchanges in case of companies not complying with listing conditions SEBI by its circular dated September 30, 2013 has decided to do away with the practice of suspending the trading of shares of listed companies which have defaulted, as the suspension has turned out to affect the interests of non-promoters much more than those of the promoters. In case of noncompliant companies, other penalties such as imposition of fines, freezing of shares of the promoter and promoter group, transferring the trading in the shares of the company to separate category, would be taken before suspending the shares of the company. The Standard Operating Procedure ('SOP') to be followed by the Stock Exchanges will be as follows: Imposition v of fines (on per day basis) on the company for non- 2 compliance and delay in compliance with continuous listing conditions. v In case of non-compliance for 2 consecutive quarters, moving the shares of the non-compliant company to "Z" Category, where the trades would be settled on "Trade for Trade" basis. v In case non-compliance continues, freezing the shares of the promoter and promoter group. v In order to provide an exit window to the non-promoters, after 15 days of suspension of the trade, the nonpromoters on the first day of every trading week for a period of 6 months would be able to trade their shares on the "Trade for Trade" basis.
  5. 5. SEBI permits contracts for preemption and options in shareholders agreements SEBI by its notification dated October 3, 2013 has permitted contracts for incorporating clauses including right of first refusal, tag-along or dragalong rights contained in the shareholders agreements or articles of association of the companies. The contracts entered into by listed companies can now contain an option for purchase or sale of securities subject to the following: (a) the title and ownership of the underlying securities are held continuously by the selling party for a minimum period of 1 year from the date of entering into the contract; (b) the price or consideration payable for the sale or purchase of the underlying securities pursuant to exercise of any option contained therein, is in compliance with all applicable laws; and (c) the contract has to be settled by way of actual delivery of the underlying securities. The contracts permitted under this notification shall be in accordance with the provisions of Foreign Exchange Management Act, 1999. Further, this notification shall not affect or validate any contract which has been entered into prior to the date of this notification. This notification supersedes the earlier SEBI notification, i.e., S.O.184 (E) dated March 1, 2000. SEBI (Listing of Specified Securities on Institutional Trading Platform) Regulations, 2013 SEBI has released the SEBI (Listing of Specified Securities on Institutional Trading Platform) Regulations, 2013. This is to allow listing and issue of capital by small and med ium enterprises on institutional trading platform without initial public offering. Under these regulations, the minimum amount for trading or investment on the Institutional Trading Platform ('ITP') is to be Rs. 10 Lakh with an easier exit option for entities such as Angel Investors, Venture Capital Funds and Private Equities. The regulations provide that the company would not make an IPO while its specified securities are listed on ITP but can raise capital through private placement or rights issue without an option for renunciation of rights. Eligibility Criteria: To be eligible for listing on an ITP, the SME company has to satisfy certain conditions including not appearing on the defaulters list of the RBI; no pending winding up petition; no regulatory action has been taken against the company within five years prior to the date of application for listing; and the company has at least one full year's audited financial statements, for the immediately preceding financial year at the time of making listing application. The regulations also provided that an SME seeking to list on ITP needs to fulfill any of the investment criteria which is either a minimum investment of Rs 50 lakh in its equity shares by a category of fund approved by the regulator; or by a Qualified institutional buyer or a merchant banker with a lock-in period of three years from the date of listing; or an investment in the equity capital has been made in the SME by a specialised international multilateral agency or domestic agency or a public financial institution; or it has received money from a scheduled bank for its 3 project financing or working capital requirements and a period of three years has elapsed from the date of such financing and the funds so received have been fully utilized. Promoter Holding Lock-in: The regulations require 20% of the post listing capital to be held by the promoters for a period of three years from date of listing. Exit Norms: Regarding exit norms, a company can exit from ITP subject to the shareholders approving the exit proposal by a special resolution passed through postal ballot where 90% of total votes and the majority of non-promoter votes have been cast in favour of the proposal, and the stock exchange approves such exit. A company whose securities are listed on ITP will have to exit the ITP if its securities have been listed for 10 years, the company has paid up capital of over Rs 25 crore, revenue of more than Rs 300 crore and market capitalisation of more than Rs 500 crore. Delisting: The company can be delisted if it does not comply with the corporate governance norm(s) for more than one year or with the listing regulations specified by the recognized stock exchange.
  6. 6. GLOBAL REGULATORY UPDATE SEBI- Streamlining Investor Grievance Redressal Mechanism SEBI to streamline the investor grievance redressal mechanism and make it more investor friendly, has by its circular dated September 26, 2013 decided to give monetary relief to investors having claims up to Rs.10 Lac from the Investor Protection Fund of Stock Exchange ('IPF'). Some of the salient features of the initiatives include: a) The Investor Grievance Redressal Committee ('IGRC') in addition to the conciliation process can decide upon the admissibility of claims, wherein if the complaint is not resolved upon the conclusion of the conciliation proceedings, the IGRC would ascertain the claim amount admissible to the investor, which the Stock Exchange ('SE') would block from the deposit of the concerned member. Subsequently the SE would give 7 days from the date the member signs IGRC's directions to inform the SE, if he intends to move to the next level of resolution i.e. arbitration. b) In case, the member does not opt for arbitration, the SE would, release the blocked amount to the investor after the aforementioned 7 days. c) In case, the member opts for arbitration and the claim value admissible is not more than Rs. 10 lac, monetary relief would be given as mentioned below: i. 50% of the admissible claim value or Rs. 0.75 lac, whichever is less, would be released to the investor. ii. In case the arbitration award is in favour of the investor and the member opts for appellate arbitration then a positive difference of 50% of the amount mentioned in the arbitration award or Rs. 1.5 lac, whichever is less and the amount already released to the investor at clause (i) above, shall be released to the investor. iii. I n c a s e t h e a p p e l l a t e arbitration award is in favour of the investor and the member opts for making an application under Section 34 of the Arbitration and Conciliation Act, 1996 to set aside the appellate arbitration award, then a positive difference of 75% of the amount determined in the appellate arbitration award or Rs. 2 lac, whichever is less and the amount already released to the investor at clause (i) and (ii) above, shall be released to the investor. iv. The amount payable by the investor for appellate arbitration has been reduced from `.30,000/- to `10,000/-. To address the complaints received as regards 'unauthorised trades', the SEs' have to ensure that the contract note issued by the member for transactions owing to noncompliance of margin calls bears a remark specifying the same and that the member maintains a verifiable record of having made such margin calls and the clients not having complied with the same. SEBI releases draft of Real Estate Investment Trusts Regulations, 2013 for public comments SEBI has sought public comments on the draft REIT Regulations by October 31, 2013 under which it has proposed 4 the listing of Real Estate Investment Trusts ('REITs'). The REITs would under the regulations be allowed to list on stock exchanges through Initial Public Offer ('IPO') and would be allowed to raise funds further through Follow-On Offers. Qualified REIT: In order to be listed the REIT would need to be first registered with SEBI in the prescribed manner. Compliances: Amongst the compliances which the REIT would have to undertake, it would be mandatory for all REITs to declare its net asset value at least twice a year post listing. In case of an IPO, the size of the assets would need to be at least Rs 1,000, the same proposed to ensure that initially only large assets and established players enter the market. The minimum initial offer size of Rs 250 crore and minimum public float of 25 per cent is specified to ensure adequate public participation and float in the units. Raising Funds: The REIT would be able to raise funds from any investors, resident or foreign. However, initially, till the market develops, it is proposed that the units of REITs may be offered only to High Net Worth individuals /institution and therefore the minimum subscription size is proposed be Rs 2 lakh and unit size to be Rs 1 lakh. Sponsors are also expected to compulsorily maintain a certain percentage of holding in the REIT "to ensure a 'skin-in-the-game' at all times.
  7. 7. Investments: REITs will be able to invest in properties directly or through SPVs. The REIT would not be allowed to invest in vacant land or agricultural land or mortgages other than in mortgage backed securities. The investment would be restricted to assets based in India. Investor's Approval: To safeguard the investors' interests, their approval has been made mandatory for cases such as certain related party transactions, transactions who's value exceeds 15% of the REIT's assets, change in sponsor, change in investment strategy or delisting of units. SEBI approves draft SEBI (Foreign Portfolio Investors) Regulations, 2013 SEBI in its Board meeting held on October 5, 2013 has approved the draft SEBI (Foreign Portfolio Investors) Regulations, 2013 ("Regulations"). The SEBI (Foreign Portfolio Investors) Regulations, 2013 have been framed in light of the provisions of SEBI (Foreign Institutional Investors) Regulations, 1995, Qualified Foreign Investors (QFIs) framework and the recommendations of the "Committee on Rationalization of Investment Routes and Monitoring of Foreign Portfolio Investments". (a) "Category I Foreign Portfolio Investor" which shall include Government and Government related foreign investors; (b) "Category II Foreign Portfolio Investor" which shall include appropriately regulated broad based funds, appropriately regulated entities, broad based funds whose investment manager is appropriately regulated, university funds, university related endowments, pension funds; or (c) "Category III Foreign Portfolio Investor" which shall include all others not eligible under Category I and II foreign portfolio investors. 4. All existing FIIs and sub accounts may continue to buy, sell or otherwise deal in securities under the FPI regime. 5. All existing Qualified Foreign Investors (QFIs) may continue to buy, sell or otherwise deal in securities till the period of one year from the date of notification of this regulation. In the meantime, they may obtain FPI registration through DDPs. The salient features of the Regulations include: 6. The registration granted to FPIs by the DDPs on behalf of SEBI shall be permanent unless suspended or cancelled by SEBI. 1. Existing FIIs, Sub Accounts and Qualified Foreign Investors (QFIs) shall be merged into a new investor class termed as "FPIs". 7. FPIs shall be allowed to invest in all those securities, wherein Foreign Institutional Investors (FIIs) are allowed to invest. 2. S E B I a p p r o v e d D e s i g n a t e d Depository Participants (DDPs) shall register FPIs on behalf of SEBI subject to compliance with KYC requirements. 8. Category I and Category II FPIs shall be allowed to issue, or otherwise deal in offshore derivative instruments (ODIs), directly or indirectly. 3. The FPI shall be registered as one of the following: 5 SEBI - Issues pertaining to primary issuance of debt securities SEBI has been holding discussions with issuers and various other market participants regarding the issues concerning development of Corporate Bond Market. Based on the suggestions received in the aforesaid meetings, it has been decided to implement the following measures: I. Disclosure of Cash Flows: cash flows emanating from the debt securities shall be mentioned in the Prospectus/Disclosure Document, by way of an illustration. II. Withdrawal of requirement to upload bids on date-time priority: allotment in the public issue of debt securities should be made on the basis of date of upload of each application into the electronic book of the stock exchange. However, on the date of oversubscription, the allotments should be made to the applicants on proportionate basis. III. Disclosure of unaudited financials with limited review report: listed issuers (who have already listed their equity shares or debentures)
  8. 8. GLOBAL REGULATORY UPDATE who are in compliance with the listing agreement, may disclose unaudited financials with limited review report in the offer document, as filed with the stock exchanges in accordance with the listing agreement, instead of audited financials, for the stub period, subject to making necessary disclosures in this regard in offer document including risk factors. IV. Disclosure of contact details of Debenture Trustees in Annual Report: It has been decided to amend the Listing Agreement for Debt Securities as specified by inserting a clause stating that the companies, which have listed their debt securities, shall disclose the name of the debenture trustees with contact details in their annual report and as ongoing basis, on their website, to enable the investors to forward their grievances to the debenture trustees. The provisions in Para I of this circular shall be applicable for the debt securities issued, in accordance with SEBI (Issue and Listing of Debt Securities) Regulations, 2008, on or after December 01, 2013. The provisions in Para II and III of this circular shall be applicable for the draft offer document for issuance of debt securities filed with the designated stock exchange on or after November 01, 2013. The provisions in Para IV shall be applicable from December 01, 2013 and all stock exchanges are advised to carry out the amendments in their Listing Agreement. (STAs) and the Depositories / Issuer companies (in-house STAs) for effecting transmission of securities held in physical as well as dematerialized mode. With a view to make the transmission process more efficient and investor friendly, it has been decided that: In case of transmission of securities in dematerialized mode, where the securities are held in a single name without a nominee, the existing threshold limit of ` 1,00,000 (Rupees One lakh only) per beneficiary owner account has now been revised to ` 5,00,000 (Rupees Five lakh only), for the purpose of following simplified documentation, as already prescribed by the depositories vide bye-laws / operating instructions. In case of transmission of securities held in physical mode: a. where the securities are held in single name with a nominee, STAs/issuer companies shall follow the standardized documentary requirement b. where the securities are held in single name without a nominee, the STAs/issuer companies shall follow, in the normal course, the simplified documentation, for a threshold limit of ` 2,00,000 (Rupees Two lakh only) per issuer company. However, the Issuer companies, at their discretion, may enhance the value of such securities. The timeline for processing the transmission requests for securities held in dematerialized mode and physical mode shall be 7 days and 21 days respectively, after receipt of the prescribed documents. Standardisation and Simplification of Procedures for Transmission of Securities SEBI amends formats under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011(Regulations). SEBI has reviewed the process being followed by the Share Transfer Agents In order to ensure that adequate disclosures are made to help investors 6 in taking an informed decision, it has been decided to modify the formats for disclosures under regulation 29 (1), 29 (2) and 31 of the Regulations. II. RBI UPDATES Branch Opening Regulations extended The RBI by its circular dated September 19, 2013 has decided to extend its permit in allowing the well managed domestic scheduled commercial banks to open branches in Tier 1 centres of the country subject to their fulfilling certain criteria. The banks seeking to open branches in Tier 1 centres will have to ensure that (a) 25% of the total number of branches are opened in unbanked rural centres i.e. Tier 5 and 6 centres of the country; and (b) the total number of branches in Tier 1 centres do not exceed the total number of branches opened in Tier 2 to 6 centres and in all the centres in the North Eastern States (including) Sikkim. Further in case the bank is unable to open all the branches it is eligible to open, in Tier 1 centres in a year, it may carry-over and open them in the succeeding 2 years. However the shortfall in respect of opening branches in Tier 2 to 6 centres, or in unbanked rural centres (Tiers 5 to 6 centres) during the financial year, must necessarily be rectified within the next financial year. RBI issues norms for UCBs to be included as financial institutions The RBI by its circular dated September 27, 2013 has decided to consider applications from Urban Cooperative Banks ('UCB') for being treated as a 'financial institution' under Second Schedule of the RBI Act, 1934. The UCB eligibility criteria requires the
  9. 9. fulfillment of the following financial conditions: a) Demand and Time Liabilities of not less than `750 crore on a continuous basis for one year; b) CRAR of minimum 12%; c) Continuous net profit for the previous three years; d) Gross NPAs of 5% or less; e) Compliance with CRR / SLR requirements and f) N o m a j o r r e g u l a t o r y a n d supervisory concerns. Export Credit Limits in Foreign Currency The RBI after receiving representations on account of the depreciating rupee value has by its circular dated September 25, 2013 decided to protect the exporters from the rupee fluctuations. The banks are now permitted to set monthly export credit limits for the borrowers in foreign currency based on the prevalent position of their current assets, current liabilities and exchange rates. No Refinancing of ECB at a higher all-in-cost The RBI from October 01, 2013 has decided to discontinue allowing borrowers to raise ECB at a higher allin-cost to refinance / reschedule an existing ECB. However, the borrowers can raise fresh ECB at a lower all-incost, subject to the condition that the outstanding maturity of the original ECB is either maintained or extended. Discontinuance of submitting details pertaining to expenses incurred in maintaining Branch Offices situated abroad By its circular dated September 20, 2013, the RBI has decided to discontinue the practice of requiring the AD to submit half yearly statements in Form ORA to the Regional Office of RBI which constitute the details pertaining to the remittances and recurring expenses incurred by the Indian companies for maintaining their trading office / nontrading office / branch office/ representative office established abroad. However, the ADs may continue to keep records of the approvals granted for the opening of such offices by the Indian companies. Clarification for ECB proceeds for acquisition of shares under the Government's disinvestment programme of PSUs The RBI has issued a clarification on September 30, 2013 by which the ECB can be availed for multiple rounds of disinvestment of the PSU shares under the Government disinvestment programme and not restricted to the first stage of acquisition of shares and the mandatory second stage offer to the public. Lowering of maturity period for foreign currency borrowings undertaken by AD till November 30, 2013 The RBI by its circular dated September 25, 2013 has decided to lower the maturity period from 3 years to 1 year for the foreign currency borrowings made by AD Category- I banks made on or before November 30, 2013 for the purpose of availing of the swap facility from the RBI. After the aforesaid date, the said borrowings will have to be of a minimum maturity of 3 years. APPOINTMENTS l Mr Melwyn Rego elevated as Deputy MD at IDBI Bank Bajaj l Allianz appoints Mr Anuj Agarwal as Managing Director Mr Vikram Kirloskar is new SIAM l President Mr Ashok Vemuri appointed as CEO l of iGate Mr Ashok K. Kantha appointed as l next Ambassador to China Mr M.K. Goel appointed PFC l Chairman Mr Tom Albanese joins Vedanta l Resources Holdings Zenith l Optimedia appoints Ms Anupriya Acharya as group CEO Mr V l Bhaskar appointed as the Chairman of AP Electricity Regulatory Commission NSEL lappoints Mr Saji Cherian as new CEO & MD Mr Ravi l Bangar appointed as High Commissioner to Cyprus Mr Pawan Goenka appointed as l Mahindra's executive director BPL Medical Technolgies appoints l Mr MK l Lokesh is new ambassador to Switzerland Mr Sunil Khurana as CEO PepsiCo l names Mr Sanjeev Chadha Escorts l appoints Mr Nikhil Nanda as Managing Director Ascendas appoints Mr Lee Fu Nyap l as CEO of India operations Tata Steel names Mr TV Narendran l as MD; to assume operations from November 1 Hitachi l Home & Life Solutions appoints Mr Shoji Tsubokuta as new MD 7 as CEO, AMEA region NDTV lappoints Mr Soli Sorabjee as independent ombudsman SKS Microfinance reappoints Mr R l Ramachandra Rao as MD & CEO Mr Sundeep Sikka appointed l chairman of AMFI
  10. 10. GLOBAL REGULATORY UPDATE GLOBAL By : INTERNATIONAL UPDATES FRC consultation on UK Corporate Governance Code The Financial Reporting Council (FRC) is consulting on whether the UK Corporate Governance Code requires to be changed in light of the new directors' remuneration reporting and voting framework. The proposed amendments: Extend l the clawback provisions. Deter l the appointment of nonexecutive directors (NEDs) who are also executive directors in other companies as members of the remuneration committee. Specify the action companies l should take when a significant minority of shareholders votes against the directors' remuneration report. The consultation document was published on 2 October 2013 and the deadline for responding is 6 December 2013. Philippines - Firms told to post corporate governance reports online Philippines - SEC has ordered listed firms to make their annual corporate governance reports more accessible to the public. In line with the peer review process that is being undertaken by corporate governance experts within the Southeast Asian region, all publicly listed companies are mandated to post their annual 8 corporate governance reports (ACGR) in their respective websites,. European Union judgment on strict liability of professionals On 19 September 2013, the Court of Justice of the European Union ('CJEU') gave its interpretation on "professional diligence" as a major element of companies' liability under the Parliament and Council Directive ('the Unfair Commercial Practices Directive') on the reference for a preliminary ruling by the Austrian Supreme Court. The case brought before the Austrian Supreme Court concerned an Austrian travel agency which in its brochure stated that it had exclusivity rights on
  11. 11. booking services for certain hotels. In fact the hotels concerned had, by contract, guaranteed such exclusivity to the travel agency, but they did not honour it. Thus the information contained in brochures was objectively incorrect and constituted, from the viewpoint of the average consumer, a misleading commercial practice. need to ensure, in case of misleading commercial practices, a very high level of consumer protection. However this ruling is also somewhat disorienting for professionals which vis-à-vis consumers will have no defense if not by demonstrating the objective truth of their advertising. UK brings changes to Companies Act, 2006 Article 5(2)(a) of the Unfair Commercial Practices Directive provides that a commercial practice would be considered 'unfair' if it is contrary to the requirements of professional diligence. In addition, Article 6(1) also states that a commercial practice shall be regarded as 'misleading' if it contains false information and is therefore untruthful or is likely to deceive the average consumer. The remuneration report must now include two separate sections - the remuneration policy and the implementation report. The CJEU ruled that if a commercial practice satisfies all the criteria set out in Article 6(1) of the Unfair Commercial Practices Directive for being categorised as a misleading practice in relation to the consumer, it will not be necessary to determine whether such a practice is also contrary to the requirement of professional diligence, as referred to in article 5(2)(a) of the Unfair Commercial Practices Directive, in order for it to be regarded legitimately as unfair and, therefore, prohibited. The company has to make payments in terms of remunerating a current, former or future director, as per the remuneration policy. Any payment which is inconsistent with an approved policy will be held by the recipient in trust and can be recovered by way of a derivative action. The amendments make the directors jointly and severally liable for approve payments outside the scope of the remuneration policy to indemnify the company against any loss resulting from the payments. However the The recent amendments brought to UK's Enterprise and Regulatory Reform Act 2013 will introduce certain new provisions to the Companies Act 2006, providing a framework for shareholders' approval for the director's remuneration policy. Therefore the CJEU isolated the notion of misleading practice from the general notion of unfair commercial practice. It concluded that the requirement of professional diligence is not satisfied even by compliance in good faith, it amounts to strict liability for the professional. This ruling of the CJEU sheds a new light on the Unfair Commercial Practices Directive since given by the 9 director may escape liability if he shows that he acted honestly and reasonably and the court considers that, in all the circumstances, relief ought to be granted. The implementation report must set out how the remuneration policy has been implemented in the relevant financial year. Shareholders will have an annual advisory vote on a resolution to approve the implementation report. Antitrust confidentiality waiver updated by US Federal Trade Commission and Department of Justice With a view to providing a balanced benefit to authorities and companies to the extent of conducting investigations and complying with the filings and making the procedure less cumbersome, the US Federal Trade Commission ('FTC') and the Antitrust Division of the Department of Justice ('DOJ'), have on 25 September 2013, jointly released an updated model waiver of confidentiality for use in civil matters involving non-US competition authorities. Confidentiality waivers allow for the sharing of confidential company information among the competition agencies of different countries and jurisdictions. The model waiver has revised the manner of how the FTC and DOJ will
  12. 12. GLOBAL REGULATORY UPDATE treat privileged information. If the FTC and DOJ receive information from another competition authority that would be legally privileged in the United States, the agencies will treat such information as if it were inadvertently produced and will return, sequester or destroy that information in accordance with the Federal Rules of Evidence and Federal Rules of Civil Procedure. The agencies have also asked the companies to clearly identify privileged documents to make privilege determinations easier. The model waiver also makes clear that it applies to both merger and non-merger civil investigations and to matters where international cooperation between competition authorities is involved. The model waiver provides clarity on the treatment of confidential information disclosed to non-US authorities and received by the FTC and DOJ by separating such information in two sections. The waiver provides that information disclosed by the FTC and DOJ will be treated as confidential by the non-US authority in accordance with the laws of the jurisdiction in which that authority operates. The waiver further provides that any information indirectly received by the FTC and DOJ will be treated as if it were obtained directly by the FTC and DOJ, including with respect to confidentiality, destruction of documents and exemption from Freedom of Information Act disclosures. The model waiver is a reflection of the growing international cooperation between US and international antitrust authorities and the desire by the US agencies to eliminate obstacles to co-operation with other antitrust authorities. UK's HM Revenue and Customs Authority introduces alternative dispute resolution mechanism The HM Revenue and Customs Authority ('HMRC') has made available a form of alternative dispute resolution ('ADR') to small and medium enterprises ('SME') and individuals as a means of resolving tax disputes in a time bound and efficient manner. SMEs and individuals can now apply to HMRC to use a facilitation-based form of ADR in connection with outstanding tax disputes. This involves the appointment of a trained HMRC facilitator who will work with the taxpayer and the HMRC case owner in order to try to broker an acceptable agreement. The process is intended to be relatively informal. HMRC will only accept cases if they are considered to be suitable for ADR and are within the framework of HMRC's litigation and settlement strategy. However, HMRC will not accept cases for ADR if they involve issues requiring clarification in the wider public interest or which are linked to other appeals. ADR may, however, be useful mode of reaching a negotiated settlement which the SMEs and individual taxpayers involved in prolonged disputes with HMRC can now consider. European Union upholds parental liability in cartel The Court of Justice of the European Union ('CJEU') has made it clear that even if a parent company is unable, by reason of the ownership structure of the joint venture, to impose certain decisions on the joint venture, it 10 remains possible for the parent to exercise "decisive influence". The CJEU dismissed appeals filed by Dow Chemical Company ('Dow') and E.I. du Pont de Nemours and Company ('DuPont') related to the European Commission's ('Commission') decision in the chloroprene rubber cartel. The CJEU upheld judgments which found DuPont and Dow to be jointly and severally liable for the conduct of their 50-50 joint venture, DuPont Dow Elastomers LLC ('DDE'), on the basis that they each exercised "decisive influence" over it. The CJEU while dismissing the appeals, highlighted on the reasoning of the General Court which other than the settled principle of 'decisive influence' relied on a wider assessment of the economic, organisational and legal factors that linked DDE to both of its two parent companies and particularly their involvement in their joint venture, which was responsible for supervising the business of DDE and approving certain matters pertaining to its strategic management. EU Commission proposes regulation on indices used as benchmarks in financial instruments and financial contracts The EU Commission has published a proposal for regulation on indices used as benchmarks in financial instruments and financial contracts. It covers a variety of benchmarks
  13. 13. including interest rate benchmarks such as LIBOR and commodity benchmarks, benchmarks used to reference financial instruments admitted to trading or traded on a regulated venue, such as energy and currency derivatives; benchmarks that are used in financial contracts such as mortgages and those that are used to measure the performance of investment funds. It seeks to improve the governance and controls over the benchmark process through prior authorisation and ongoing supervision at national and European level, and requiring administrators to avoid conflicts of interest where possible. New IOSCO standard on crossborder cooperation The International Organization of Securities Commissions ('IOSCO') has on 18 September 2013 adopted measures to encourage non-signatory members to sign the IOSCO Multilateral Memorandum of Understanding on cooperation and exchange of information ('MMoU') which is an instrument used by securities regulators globally to establish an international benchmark for cooperation and information sharing. Committees will be suspended from 30 June 2014; and l the voting rights of all remaining non-signatory members will be suspended from 30 September 2014. The resolution will restrict the nonsignatories' ability to influence key IOSCO decisions due to the limited support they can provide to IOSCO's enforcement efforts. SEC announces settlements in enforcement actions for short selling The Securities and Exchange Commission ('SEC') has reached a settlement with 22 of the 23 firms against which it announced enforcement actions for short selling violations. The firms charged in the enforcement actions are alleged to have bought offered shares in a follow-on public offering after having sold short the same security during the restricted period which the law prescribes to be 5 days prior to the date of the public offering. The enforcement action shows the commitment of the SEC towards preventing firms from improperly participating in public The highlights of the measures are: l all outstanding non-signatory members cannot nominate candidates from their organisation for election to leadership positions from 30 September 2013; l all outstanding non-signatory members in leadership positions will be asked to step down from 31 March 2014; l the participation of non-signatory members in IOSCO Policy 11 stock offerings after selling short those same stocks. UK Competiton Commission finalises measures to open up audit market The Competition Commission (CC) has published changes that will open up the UK audit market to greater competition and ensure that audits better serve the needs of shareholders in future. The main measures the CC has proposed are as follows: l 350 companies must put FTSE their statutory audit engagement out to tender at least every ten years. This differs from guidance introduced by the Financial Reporting Council (FRC) in 2012, which encouraged companies to go to tender on a 'comply or explain' basis. No company will be able to delay beyond ten years, and the CC believes that many companies would benefit from going out to tender more frequently at every five years. If companies choose not to go out to tender this frequently, the Audit Committee will be required to report in which financial year it
  14. 14. GLOBAL REGULATORY UPDATE shareholders on the findings of any AQR report concluded on the company's audit engagement during the reporting period. l A prohibition of 'Big-4-only' clauses in loan agreements (ie clauses that limit a company's choice of auditor to a preselected list or category), although it will be possible to specify that any auditor should satisfy objective criteria. l must be a shareholders' There vote at the AGM on whether Audit Committee Reports in company annual reports are satisfactory. plans to put the audit engagement out to tender and why this is in the best interests of shareholders. lFRC's Audit Quality Review The (AQR) team should review every audit engagement in the FTSE 350 on average every five years. The Audit Committee should report to l quality global journalism High requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email to buy additional rights. e 2 - 2 a a 9 - 1 1 e 3 - a d e 3 00144feab7de.html#ixzz2jCv41pDJ Competition and Markets Authority unifying OFT with Competition Commission launched UK's biggest overhaul of competition regulation for decades has taken place as the Competition and Markets Authority officially came into existence. The CMA has been created by unifying the Competition Commission with most functions of the Office of Fair Trading - tackling price fixing, monopolies and unfair mergers. The agency will not start taking on its own investigations or market studies until April, with the two legacy regulators running their respective cases until then. CONTACT Krishnayan Sen / Dipankar Bandyopadhyay Mumbai 24 M. C. C. Lane Fort Mumbai 400023 E: T: +91 22 22834130 / 01 F: +91 22 22834102 India member firm of: New Delhi E-177 Lower Ground Floor East of Kailash New Delhi 110065 E: T: +91 11 26215601 / 02 F: +91 11 26215603 Kolkata 10 Old Post Office Street Ground Floor Kolkata 700001 E: T: +91 33 22308909 F: +91 33 22487823 Winner: Best Newcomers: India Business Law Journal Awards 2012 W: 12 Hyderabad Chamber#103 Ground Floor 6-3-252/A/10 Sana Apartments, Erramanzil Hyderabad 500082 E: T: +91 40 39935766
  15. 15. Emerging Issues in Recognition of Revenue by Real Estate Developers By Mr. Koosai Lehery, Director, Accounting Advisory Services, KPMG, India C urrently there is no separate Accounting Standard (AS) in India for recognition of revenue by real estate developers. The accounting and reporting for such transactions is based on principles specified in Guidance Note (GN) on Accounting for Real Estate Transactions, which was issued by the Institute of Chartered Accountants of India (ICAI) in February 2012 and as supplemented by the guidance in AS 9 - Revenue Recognition and AS 7 Construction Contracts. The 2012 GN has replaced the 2006 GN of the ICAI on Recognition of Revenue by Real Estate Developers. The 2006 GN required certain principle based conditions (risk and reward of ownership and effective control being transferred, revenue being measurable and no significant uncertainty on ultimate collection) and specific conditions (price risk being transferred to the buyer, and buyer being able to transfer right in the property during construction period) to be met before any revenue 13 is recognised from real estate transactions. Such principle based conditions in 2006 GN had resulted in diversity in practice since these principles were interpreted and applied very differently by different real estate developers in deciding and applying their accounting policies. The increase in complexity of real estate transactions had also contributed to the increased diversity. To address this diversity in practice, the 2012 GN mandates the application
  16. 16. GLOBAL REGULATORY UPDATE of the percentage of completion ('POC') method in most cases and gives certain 'bright-lines' (viz. all critical proje ct approvals are obtained; 25 percent of the actual construction costs (excluding cost of land and development rights) are incurred; at least 25 percent of the saleable project area is secured by contracts; and at least 10 percent of the revenue is collected on individual contracts for determining the eligibility of real estate transactions for revenue recognition. The 2012 GN is applicable to real estate projects which are commenced on or after 1 April 2012 and also to projects which have already commenced but no revenue is recognised up to 1 April 2012. This article discusses some of the emerging issues in real estate revenue recognition, especially on implementation of the 2012 GN. Transition period - While the 2012 GN gave an early adoption option, most of the real estate developers have applied it prospectively from 1 April 2012. This has resulted in most companies following two separate policies for the same accounting period, i.e. policy as per the 2012 GN for projects where the revenue is recognized for the first time post 1 April 2012 and that as per 2006 GN for projects where even a small amount of revenue was recognized before 1 April 2012. Typically, the real estate projects are long gestation projects and therefore, the diversity in revenue recognition is likely to continue until the projects where the revenue recognition is based on 2006 GN are complete. smallest group of units, plots or saleable spaces which are linked with a common set of amenities in such a manner that unless the common amenities are made available and functional, these units, plots or saleable spaces cannot be put to their intended effective use. Since there is no further guidance in the 2012 GN on 'common set of amenities', determination of what constitutes a project (complete township, cluster of towers or an individual tower) has been subject to diverse interpretation. This interpretation may impact the determination of whether the project is eligible for revenue recognition. For example, if an individual tower is determined to constitute the project and 25 percent of the saleable area relating to that tower is sold, the requirement of the 2012 GN relating to minimum sale would be met. However, in the same situation if a cluster of towers is determined to constitute the project, this criterion may not be met if there are insufficient sales in other towers within the cluster. Since most companies applied the 2012 GN prospectively for projects 'Project' - a unit of account - The unit of account under the 2012 GN is a 'project', which is defined as the 14 where the revenue is recognized for the first time post 1 April 2012, the determination of the unit of account has also been critical from the perspective of transition. For example, if the entire cluster or a phase has been determined to be a project and if a small amount of revenue is recognized on sale of units in any of the buildings within the cluster or a phase, then the entire cluster or a phase may be outside the scope of the 2012 GN. Critical approvals - The 2012 GN also requires that all critical approvals such as environmental clearances; approvals of plans and designs; title to land or other development rights; are obtained before any revenue is recognized from the project. For real estate projects in India, it is common for developers to start the construction activity based on partial approvals. For examples, if the overall project is of 30 floors, initially the developer gets approvals for 10 floors. However, the budgets and financial projections are for the overall project size of 30 floors. Such situations could be subject to different interpretations, one interpretation
  17. 17. could be that since the approvals for the entire project are not obtained, however likely they are, that particular project does not meet one of the criteria for revenue recognition and no revenue should be recognized from that project. Cost of land and development rights Cost of land and development rights is defined in the 2012 GN as all costs related to the acquisition of land, development rights in the land or property including cost of land, cost of development rights, rehabilitation costs, registration charges, stamp duty, brokerage costs and incidental expenses. In a typical redevelopment project, a real estate developer incurs various costs related to rehabilitation of the slum, such as payments to the slum dwellers for vacation of the land, rental charges for temporary housing of the slum dwellers, construction cost of rehabilitation units etc. Based on this, costs related to the slum rehabilitation (including construction cost of rehabilitation units) would be part of land and development right and needs to be excluded from calculation of 25 percent threshold for revenue recognition. There may be diversity in practice in such cases. Continuing defaults in payments - The 2012 GN requires that the recognition of project revenue by reference to the stage of completion of the project activity should not at any point exceed the estimated total revenues from 'eligible contracts'. 'Eligible contracts' are defined as contracts where at least 10 percent of the contracted amounts have been realised and there are no outstanding defaults of the payment terms in such contracts. Hence, the 2012 GN puts a cap on overall revenue recognition from a project. For example, if a company has sold 100 flats in a project and if there are defaults in payment on 5 flats, then the revenue from that project cannot be more than the estimated total revenue on 95 flats. This is a very challenging area, especially when a project is nearing completion and if there are defaults from many buyers, theoretically the 2012 GN may require reversal of revenue already recognized from the project. Capitalization of borrowing costs The 2012 GN requires capitalization of borrowing costs as project costs in accordance with AS 16, Borrowing Costs. However, it is not clear from the 2012 GN if the borrowing costs are excluded from the calculation of threshold for revenue recognition. While paragraph 5.3(b) only permits construction and development costs to be considered for calculation of threshold, but the same paragraph also refers to paragraph 2.5 which allows allocation of borrowing costs to cost of construction and development. Further, AS 16 requires that the capitalisation of borrowing costs 15 should be suspended during extended periods in which active development is interrupted. Therefore, in a real estate project, if there are delays (in obtaining approvals, in the construction process etc.) that are not necessarily part of the construction process, the capitalization of the borrowing cost during the periods of delay should be suspended. However, determining the actual period of delay and hence, in arriving at the amount of borrowing costs to be charged to profit and loss could be very subjective and may be an area of inconsistent application in practice. Joint developments - In the recent times, Joint Development Agreements (JDA) have become very common, wherein the land owners contribute the land and the real estate developer constructs and markets the project. In some cases the land owners take active part in the day-today construction and development activities while in most cases the developer takes care of the execution of the project and land owner is only an investor. There are various forms of
  18. 18. GLOBAL REGULATORY UPDATE arrangement, some developers do record an upfront cost of development right based on an estimated cost of construction of the area attributable to the land owner. Such upfront cost may become part of the percentage of completion workings for revenue recognition once the thresholds as per 2012 GN are met. Some other developers do not record any upfront cost of development rights and they would only record revenue from their share of the area and charge full cost of construction, including for the land owner's area to the profit and loss, thereby factoring the free area to be given to the land owner. JDAs such as profit sharing, area sharing, revenue sharing or a combination. Even though the 2012 GN does not give guidance on the accounting in the books of developer or the land owner for JDAs, it applies to the accounting for the projects which are under JDA model. In the absence of any specific guidance, the accounting for JDAs is diverse in the books of both the land owners as well as the developers. The accounting treatment is driven mostly from the conclusion if the arrangement is under a joint control. If there is joint control on the project, generally, the accounting in the books of both the land owners as well as the developers is based on the guidance in AS 27, Financial Reporting of Interests in Joint Ventures. In case the project is not subject to joint control, the arrangement is generally in the nature of a barter transaction; whereby the land owner gets a constructed area or a share of profit or revenue in exchange for the land. For barter transactions, the accounting practices are diverse with respect to recording the upfront cost of development rights in the books of the developers. In an area share Authored by: Mr. Koosai Lehery Director Accounting Advisory Services KPMG, India 16 Even though the revised GN has been subject to a few issues which could be interpreted differently (some of them have been highlighted above), it has managed to significantly reduce the diversity in accounting practices, at least for projects on which revenue is recognized for the first time post 1 April 2012. Lastly, the accounting treatment given in 2012 GN is inconsistent with Ind-AS (i.e. IFRS converged standards issued by the Ministry of Corporate Affairs) and therefore, companies need to keep an eye out on the implementation of these standards.
  19. 19. New Companies Act – Facilitating Business Or…? By Mr. Lalit Jain, Senior Vice President & Company Secretary, Jubilant Life Sciences Ltd. L ast fewmonthssaw a euphoria over the enactment of a new company law. Congratulatory messages flew. At various professional seminars, Government functionaries attempted to showcase the bright side of the new law. Professionals were enthralled at the new vistas opening up. However, asthe euphoria subsides, as minute details of the law sink in and as the real impact of various provisions dawns, companies are realizing that there would be far too many restrictions and hurdles on conducting business. Let us consider some areas of concern. Some Provisions that Hamper Business l Section 185of new law, a Under company cannot give loans to its director or "any other person in whom the director is interested"nor provide guarantee / security in connection with such loan. "Any other person in whom the director is interested"includes any body corporate, theboard of directors or Managing Director or Manager whereof is accustomed to act in accordance with the directions/ instructions of the board/ any director(s) of the lending company. In case of a proposed loan to a wholly owned subsidiary company, its board members can be said to work under the administrative control of the board of directors of holding company and as such, the Board of this subsidiary can be said to be accustomed to act in accordance with directions or instructions of the board of holding company. 17 As a result, the holding company just cannot give any loan to such subsidiary company, not even with shareholders' approval. There is no provision to do so with Government approval also. Earlier, the corresponding section 295 specifically exempted loans from holding company to subsidiary companies; so this problem did not arise. l Section 186of new law, a As per company can make investments through maximum of 2 layers of investment companies. Many large companies, that have more than 2 layers already, would not be able to make any future investments. This will seriously affect their planned investments and business.
  20. 20. GLOBAL REGULATORY UPDATE l Section 372A restricted only Earlier inter corporate loans and deposits beyond prescribed limits. Now, under Section 186 of new law, loans to any person are covered. As a result, a Rs 1000 loan to an employee would require following compliances: - passing a unanimous board resolution. - ensuring that the loan carries interest at not less than prescribed rates. - making entry in a register, which would be open to the inspection of members. - disclosing in annual financial statement, full particulars of loan, recipient, purpose etc. One can just see the extent of needless paper work and hassles that would be created, without serving any purpose. And failure of compliance can lead to imprisonment. Related l party is now defined to include a subsidiary company also. As per Section 188of new law, no transactions above a specified amount or by a company with higher than prescribed capital, can be entered into with a related party, without a special resolution of shareholders. However, no related party can vote on such a special resolution. providing that in case of transactions between holding company and wholly owned subsidiary, the special resolution passed by holding company shall be enough and no separate resolution of subsidiary company would be required. But still there would be many cases where resolution cannot be passed. For example, in case of a transaction between S1 and S2, both being wholly owned subsidiaries of H, who will vote? H- the holding company is not a party to transaction and hence not required to pass a special resolution.S1 and S2 need to pass special resolutions, but in both the cases, H-being sole shareholdercannot vote being a related party to both. There could be more examples. Take a case of H, the holding company, having S as 75% subsidiary. A- an associate company, holds balance 25% shares in S. Here also, in case of a proposed transaction between H and S, both H and A, being related parties, cannot vote on the special resolution of S,. Tough Regime for Private Companies Many provisions in erstwhile law, which were not applicable to private In case of a transaction with a wholly owned subsidiary,the holding company would not be able to vote. So, who would vote on such a resolution? How would the resolution be passed? The draft rules attempt to contain the fallout of this anomaly, by 18 companies, would now be applicable to these companies as well. The important ones are: l a private company could just Earlier allot shares to any one by passing a board resolution. Now, formalities of 'private placement' would have to be completed. This implies issuing an "offer letter", setting out such details as may be prescribed. l in a Board meeting, Earlier interested directors could vote on resolutions where directors were interested. This enabled transactions with related parties usually family members or associate firms. Now a director cannot vote on such resolutions. This would lead to a situation where many items of business cannot beconducted at Board level. Normally in such situations, shareholders'approval should be obtained. However new provisions prescribe that in certain types of related party transactions, even in a general meeting, related parties cannot vote. How then, will many transactions take place? There is no provision even for doing this with government approval! l Earlier a private company could commence business upon incorporation. Now even a private company would have to file prescribed documents just like
  21. 21. public companies, before commencement of business. l a private company could Earlier, give loans to a director or related parties. Now, a private company cannot give loans to a director or related parties -not even with shareholders' approval. And there is no provision to seek government approval. l companies could earlier give Private loans to or make investment in other companies without restriction. Now restrictions have been imposed as applicable to public companies. l a private company was free Earlier, to have special provisions relating to general meetings, including for notice, explanatory statement, quorum, proxies, poll etc. Now, it will be governed by the same provisions as apply to public companies. They would usually be related parties and interested in many transactions. Recognizing this fact, legislation in most countries, provides easy regime to facilitate running of private companies. India also had similar regime, which is now sought to be changed. Given that over 90 percent of companies in the country are private, the new law would make working difficult for such companies. One wonders whose interests are sought to be protected? Excessive Powers to Government The Constitution's scheme is that law making body should be separate from enforcing agency. Further, judiciary should be separate. It is fraught with danger to combine all powers in one entity. This principle of separation of powers is universally acclaimed. l a private company was free Earlier, to have any kinds of capital, apart from equity and preference share capital. Now, this is no more permitted. l members of Earlier, a private company could have voting rights on shares in a proportion different to the proportion of shareholding. Now this is not allowed. l New provisions relating to insider trading, are sought to be made applicable to private companies also. The new law thus, attempts to paint private and public companies with same brush, without considering the fact that most of the private companies are family entities wherein family members are shareholders as well as directors. 19 The scheme of new law militates against this cardinal principle. Through extensive rule making power given to government, law making and enforcing has been combined in Government hands. To add to this, adjudication powers would be given to government officials (which was not provided under earlier law), who would now act in judicial capacity also! Independent Directors Increased Responsibilities The criterion of independence under the law is very stringent and states that a person to be independent, should not have had any pecuniary transaction with the company/associates/ promoters during current year or preceding 2 years. No minimum threshold is defined. Even the word 'material' is not used. As a result, a small transaction with the company or
  22. 22. GLOBAL REGULATORY UPDATE associates, could result in the director being non-independent. Further, independent directors now are in danger of: l class action suits which are in a way being encouraged by law l more stringent penalties l of imprisonment even for threat minor and technical offences Simultaneously, their remuneration is being restricted with ESOPs being stopped! Remuneration to Managerial Personnel Earlier, as a part of liberalizing, the Government through a circular, allowed professional directors, who are unrelated to promoters and not having any stake in the company, to be paid any amount of remuneration, even in cases of low profits or no profits. This provision is not included in the new Act. As a result, all such cases will go to Central Government for approval. Draconian Punishments Excessive and severe punishments are being proposed. Earlier law provided different punishments for different violations. Technical violations like late filing, nondisclosure of directors' interest, etc. were visited by minor fines. The new law provides at many places, same severe punishments for substantive as well as technical offences. For example: l Section 299 of the Act Earlier provided for optional annual disclosure by a director of his interest in other companies, firms etc. in Form 24AA. Non submission of such annual disclosure had no repercussion. However, it was mandatory to disclose his interest at the time of actual contract, if not already done earlier and violation carried a fine upto Rs 50,000. Under the new law, Section 184 requires disclosure annually and also at the time of actual contract. Violation of any one is a ground for imprisonment. Thus, a simple omission of a company's name in annual disclosure, even where no actual transaction with that company takes place,may land a director in jail. 20 l under section 394, in a Earlier scheme of arrangement, non filing of court orders with Registrar within 30 days could invite a fine of Rs. 500. Now, under Section 232 of new law, it could be punishment upto one year and/ or fine between Rs 1 lac and Rs 3 lac. Unde lr S e c t i o n 3 7 2 A o f o l d Actrelated to inter corporate loans and investments, punishment for non- maintenance of register was Rs 5000 plus further daily fine in case of a continuing offence. Under the corresponding new Section 186, for any violation, including nonentry in the register, the officer in default shall be punishable with 'imprisonment plus fine' (it is not even 'imprisonment or fine')! Conclusion It is clear that the law is poorly drafted and creates huge compliance issues for large companies. Private companies are equally hit with increased paper work and regulation. Auditors are genuinely worried about the potential liabilities and the looming threat of class action suits. Independent directors are concerned about increasing responsibilities (and decreasing remuneration, as no ESOPs would be allowed to them). The only persons happy with it would be government officials - who would wield more power now than ever, and lawyers - who would be called upon to give interpretations or represent the companies or officials in prosecutions against them! How should then one describe such a law? Is it a facilitator of business or……..?
  23. 23. CII Submits detailed industry views on the 1st and 2nd Tranches of Draft Rules under Companies Act, 2013 CII has submitted detailed recommendations on the 1st and 2nd Tranches of draft rules prepared under various provisions of the Companies Act, 2013. The Act relies heavily on subordinate legislation for the implementation of these sections. Chapter VI - Registration of Charges Chapter VIII - Declaration and Payment of Dividend Chapter IX - Accounts of Companies Chapter X - Audit and Auditors First Tranche: Chapter XI - Appointment and Qualification of Directors The first tranche of Rules covered the following 16 chapters: Chapter XII - Meeting of Board and its Powers Chapter I - Preliminary Chapter XVI - Prevention of Oppression and Mismanagement Chapter II - Incorporation of Company and Matters Incidental Thereto 21 Chapter XVIII - Removal of Name of Companies from the Register of Companies Chapter XIX - Revival and Rehabilitation of Sick Companies Chapter XXII - Companies Incorporated Outside India Chapter XXIII - Government Companies Chapter XXIV - Registration Offices and Fees Chapter XXVI - Nidhi
  24. 24. GLOBAL REGULATORY UPDATE Chapter XXIX - Miscellaneous Some highlights of CII recommendations are as follows: lAct introduces many new The concepts such as establishment of vigil mechanism, appointment of internal auditor, performance evaluation, appointment of key managerial personnel etc. Time must be given for the concepts to evolve and be absorbed. l finalizing the thresholds for While determining the applicability of various provisions, ground-level challenges should be recognized and due consideration given to the same. A staggered approach should be adopted in introduction, with larger companies being asked to comply first. l is a need for ensuring There balance between ownership and management to foster entrepreneurship and trade. India has to be seen as a jurisdiction with progressive regulations impediments and hindrances for corporates must be removed. l It is imperative to ensure that rules enable unambiguous interpretation ultimately ensuring minimal litigation for future. Senior l management and persons There l is a need to harmonize the one level below executive directors need to be excluded from the definition of Related Party requirements as there are fundamental differences in the approach of SEBI and MCA with regard to transfer of shares to the Suspense Account. If the shares are already lying in the demat account of the shareholder, the said shares should not be required to be transferred to IEPF even if the dividend in respect of those shares would have been transferred on completion of seven years from the date of declaration and the amount of dividend remaining unpaid. There l is a need to modify Rules to provide for 'dependant' relatives and to narrow down the list of 'Relatives' to dependent. The definition should include only immediate financially dependent relatives meaning financially dependent parents or children who may be expected to influence, or be influenced by, that individual in his/her dealings with the entity concerned In the l definition of total Share Capital which provides for aggregate of equity and preference share capital, only that part of preference share capital which is convertible into equity, as per the terms of issuance of the preference capital, should be included. A transition period till 31st March, 2015 for adoption of the new definition should be given. Juri ls t i c p e r s o n s ( b o d i e s corporate) should also be allowed to form One Person Company without any limitations. Rule l s should provide for consolidated accounts only at the group company level and not for each intermediate holding company level except where such intermediate holding companies are listed companies. For disclosure of related party l transactions, it may be clarified, t h a t o n l y t h o s e transactions/contracts/arrangem ents which are not entered in the ordinary course of business, or are not on an arm's length basis are required to be reported in the Board's report. Mandatory internal audits should l be made applicable to all companies meeting the threshold criteria instead of only "public companies", considering involvement of borrowed funds. The thresholds need to be increased substantially. l Private companies which are neither subsidiaries of listed companies nor have substantial borrowings from banks or financial institutions should be exempted from certain provisions of the Act, e.g. rotation of auditors, provisions relating to loans and investments, sharing of unpublished price sensitive information, etc. Such companies should not be treated at par with other public interest entities. The l requirement of having independent director (in the CSR Committee) for companies which are otherwise not required to have independent directors in terms of section 149 read with draft Rules (relating to appointment of Independent Directors) - may be relaxed. Requirement of having at 22
  25. 25. least 3 directors in the CSR Committee may also be considered to be relaxed for private companies which are allowed to have only 2 Directors debt) should be exempted from this requirement. Subsidiaries with more than 90% shares held by a single company; materially important unlisted subsidiaries; closely-held unlisted companies and companies not having fixed deposits or borrowings from public like debentures or optionally convertible instruments should also be exempt l Corporates should be allowed adequate legroom to comply with the CSR provision in a selfresponsible manner. The CSR Policy should be broad based and specific provisions about project/ programmes should not be part of operating rules. l rules prescribe public The l Accounting standards prescribing accounting treatment of the CSR expenditure must be formulated to obviate ambiguity surrounding the treatment of CSR expenditure in various circumstances. The term "Net Profit" should be defined as post tax profit. l A clarification should be provided to the effect that contribution to the corpus fund of the Trusts or Section 8 Companies, or Societies or Foundations, through which a company may choose to carry out its CSR activities would be eligible to be counted towards company's 2% spend on CSR in that year. l A clarification / carve-out may be considered to be provided exempting transactions with trusts or Section 8 Companies, or Societies or Foundations from the provisions of related party transactions l Rotation of auditors may be considered to be made effective prospectively and tenure of auditors should be considered from the date of implementation of the new Act. Period for which the auditor has held office prior to the notification of secion 139 must be disregarded from the calculations of 5/10 years at the time of commencement of Act. Only India-listed companies should be subject to firm rotation and private companies and public companies which do not have substantial public funding must be exempt from the provision l Thresholds for appointment of a woman director may be changed to "every listed company and every other public company" having a paid up share capital of Rs 500 Crore or more or turnover of Rs.1000 Crore or more. linstitution of independent The directors must be given time to evolve and till such time, the provision should be made applicable very selectively. Limits may be revised as follows: o paid up share capital of Rs. 500 crores or more; o turnover of Rs. 1000 cores or more; o loans, borrowings, deposits exceeding of Rs. 500 crores. Wholly-owned subsidiaries of companies having no external funding (in the form of equity or 23 companies having paid-up share capital of Rs. 100 crores or more OR having aggregate outstanding loans or borrowings or debentures or deposits exceeding Rs. 200 crores or more shall be required to constitute an Audit Committee and a Nomination and Remuneration Committee of the Board. Thresholds, being too low, may be revised lAct indicates these related The party transactions rules applies to all companies. Private companies should be excluded and the provision should be applicable to only public companies l For appointment to office or place of profit, limit on remuneration should be increased from Rs. 1 Lac per month to Rs. 10 Lac per month l Legislation should balance interests of multiple stakeholders and shareholders' equity must apply to both big and small shareholders to avoid 'reverse oppression' i.e. oppression of the majority. A higher threshold, in terms of number of shareholders, be set out for class action suits. Second Tranche: The second tranche covers 9 chapters which were hosted on 20 September 2013. A similar 30 day window has also
  26. 26. GLOBAL REGULATORY UPDATE special resolution (or in the relevant explanatory statement) to be passed by the shareholders for approving issue of preference shares, without having to amend the Articles of Association each time such shares are issued. The requirement of 'Shareholders' approval' should be deleted unless preference shares are convertible into equity. l Rule restricts the directors, KMP's been provided for these Rules for industry and other stakeholders to submit their views. Chapter III - Prospectus And Allotment Of Securities Chapter IV - Share Capital And Debentures Chapter VII - Management and Administration Chapter XIII - Appointment And Remuneration Of Managerial Personnel Chapter XV - Compromises, Arrangement And Amalgamations Chapter XVII - Registered Valuers Chapter XXI - PART I. - Companies authorized to register under this Act Chapter XXVIII: (Rules in respect of Clause 442: Mediation And Conciliation Panel) National Company Law Appellate Tribunal Rules, 2013. Some highlights of the CII recommendations are as follows: l on Chapter III dealing with Rules Prospectus and Allotment of Securities should be harmonized with the SEBI ICDR Regulations It should be specified that l shareholders' approval for private placement of securities will be required only for securities that are convertible into equity shares at a future date and not for nonconvertible securities The restriction on the number of l private placements by a company in a financial year should be removed Private l companies must be given exemption from complying with the various requirements set out for issuance of equity shares with differential rights. The capping of total sweat equity l shares in a company at 25% of the total paid up equity capital of the company may be removed or at least permitted with the government approval. Companies should be allowed to l issue preference shares without any conditions particularly when issue is made to redeem the existing shares. Also the Rule should provide some flexibility to companies, inasmuch as companies should be permitted to specify the terms and conditions of issue of preference shares in the 24 and Promoters and their relatives of the holding, subsidiary or associate of the Company to be trustee of the trust to hold shares for the benefits of the employees. The provision will defeat the intent of the law. The rules may restrict only the Promoters and Directors to be trustee in such Trust but should permit other employees to be appointed as trustees of such trust. l For ESOP, the provision regarding purchase of shares by employees / trustees to be made only through stock exchange should be deleted l should not be any restriction There on maximum tenure for debentures for any class of companies i.e. whether companies are engaged in infrastructure projects or not. The tenure of the debentures should be left upon the mutual understanding of the borrowing companies and the lenders. Alternatively, at least concept of renewal should be provided l providing for return of While changes in shareholding position of promoters and top ten shareholders to be submitted to ROC, a 'threshold limit' should be stipulated, upon crossing of which, either in one or more tranches, the requirement of filing such Return
  27. 27. should be mandated. This would also be in line with the approach adopted under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. l through electronic means Voting should be restricted to listed company only to begin with. ltaining of records in Main electronic form (ERP) should be optional and shall not be made compulsory l Per the Rules, there has to be disclosure of particulars of employee drawing remuneration in excess of INR 60 lacs. The disclosure should be limited to the employees drawing remuneration higher than the Directors of the Company or the employee holding certain percentage of shares in the Company / Holding / Associate etc. Alternatively, the amount may be revised to INR 1 crore. lA p p o i n t m e n t o f K e y For Managerial Personnel, the proposed paid-up capital criteria of Rs. 5 crores should be substantially enhanced. ln Whe the company has demonstrated that CDR has been approved by 75% of the secured creditors, it should be clarified that no separate approval of creditors would be required as part of the consent to the scheme under court convened meetings. l Pending matters before the Appellate Authority for Industrial and Financial Reconstruction which are at final stage (i.e. for which only final order is pending), should get transferred to the NCLT for final sanction/order instead of starting the proceedings afresh l of Section 233(1), the rules In terms have to prescribe such class or classes of companies which can undertake a merger or an amalgamation pursuant to the provisions of Section 233. However, the rules have not prescribed any such class of companies. Accordingly, the rules should provide for such class or classes of companies. Further, it is advised to include 'one person company', as one such class, which may take benefit of provisions of Section 233 25 l should be added in relation A rule to effective date of the scheme, and it should state that the scheme will be given effect to from the date on which the Tribunal's order is filed with the Registrar. New rule should be included to the l effect that except as required under the Act, the Tribunal may pass necessary orders which can act as Single Window Clearance for any specific requirements of the Act wherever any treatment has been provided under the scheme of compromise and arrangement which principle have been applied and confirmed by various courts in India.
  28. 28. ADVERTISEMENT FOR CII'S GLOBAL REGULATORY UPDATE This update would be circulated to the membership of CII; direct membership of over 7000 organisations from the private as well as public sectors, including SMEs and MNCs, and an indirect membership of over 90,000 companies from around 400 national and regional sectoral associations. We invite you to get associated with CII Global Regulatory Update by way of creating your own space in the update: CATEGORY Members Non-Members Back Cover Page (Inside) ` 50,000 ` 55,000 Full Page ` 30,000 ` 35,000 Half Page ` 20,000 ` 25,000 Section Sponsorship e.g xyz (Company name) presents “Global Udate” Also available; you may contact the undersigned. Benefits include an advertisement, write up about the contributor and its logo) 9th CORPORATE GOVERNANCE SUMMIT 2013 20 December, 2013: Mumbai Each year, CII Corporate Governance Summit brings together industry members representing various sectors to brainstorm on the global and domestic governance landscape. Though Governance has largely been portrayed as an issue of compliance; corporates are increasingly viewing good governance as good business. Companies that take a strategic approach to the challenge of complying with the new corporate governance requirements can create opportunities to strengthen their internal processes and enhance their business. This year too, the Summit would deliberate on how companies can use compliance efforts to build greater business value, the top global governance trends being adopted worldwide and their suitability and adaptability in the domestic context. Against the backdrop of the Companies Act, 2013; Industry experts will also deliberate on strategies that would be truly effective in improving corporate governance practices rather than confining them to the compliance checklist. For further queries: Prabhat Negi Corporate Governance & Regulatory Affairs Department Confederation of Indian Industry The Mantosh Sondhi Centre 23 Institutional Area, Lodi Road, New Delhi - 110 003 Tel: 011-41506492 Fax: 011-24615693 Email: 14 26
  29. 29. Notes
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  31. 31. Confederation of Indian Industry The Confederation of Indian Industry (CII) works to create and sustain an environment conducive to the development of India, partnering industry, Government, and civil society, through advisory and consultative processes. CII is a non-government, not-for-profit, industry-led and industry-managed organization, playing a proactive role in India's development process. Founded over 118 years ago, India's premier business association has over 7100 members, from the private as well as public sectors, including SMEs and MNCs, and an indirect membership of over 90,000 enterprises from around 257 national and regional sectoral industry bodies. CII charts change by working closely with Government on policy issues, interfacing with thought leaders, and enhancing efficiency, competitiveness and business opportunities for industry through a range of specialized services and strategic global linkages. It also provides a platform for consensus-building and networking on key issues. Extending its agenda beyond business, CII assists industry to identify and execute corporate citizenship programmes. Partnerships with civil society organizations carry forward corporate initiatives for integrated and inclusive development across diverse domains including affirmative action, healthcare, education, livelihood, diversity management, skill development, empowerment of women, and water, to name a few. The CII Theme for 2013-14 is Accelerating Economic Growth through Innovation, Transformation, Inclusion and Governance. Towards this, CII advocacy will accord top priority to stepping up the growth trajectory of the nation, while retaining a strong focus on accountability, transparency and measurement in the corporate and social eco-system, building a knowledge economy, and broadbasing development to help deliver the fruits of progress to all. With 63 offices, including 10 Centres of Excellence, in India, and 7 overseas offices in Australia, China, Egypt, France, Singapore, UK, and USA, as well as institutional partnerships with 224 counterpart organizations in 90 countries, CII serves as a reference point for Indian industry and the international business community. Confederation of Indian Industry The Mantosh Sondhi Centre 23, Institutional Area, Lodi Road, New Delhi – 110 003 (India) T: 91 11 45771000 / 24629994-7 F: 91 11 24626149 E: W: Reach us via our Membership Helpline: 00-91-11-435 46244 / 00-91-99104 46244 CII Helpline Toll free No: 1800-103-1244