Is Companies Act, 2013 actually Changing Fortunes?

Is Companies Act, 2013 actually Changing Fortunes?

The Companies Act, 1956 had been in need of a substantial revamp for quite some time. The 1956 Act was passed in the first decade of free India and the business landscape has changed radically ever since. The opening of the Indian economy in the early 1990s posed newer and greater challenges for the corporate world. The Companies Act, 2013 seems to focus on the factors which have an impact on the governance of the company such as risk management, due diligence, etc. In several other areas also an attempt has been made to harmonise the law with international requirements. The new Act is a modern legislation which would enable growth and greater regulation of the corporate sector in India in a rapidly changing economic, commercial and technological environment, both nationally and globally. The new Act emphasises on two concepts i.e. democracy of shareholders and supremacy of shareholders. The new Act facilitates stricter enforcement of provisions, higher levels of transparency, business friendly corporate regulations, improved corporate governance[1] norms, e-management (electronic management), enhanced accountability on the part of key management and auditors, protection of interest of investors, employee friendliness, whistle blower protection[2], and corporate social responsibility[3].

One of the major objectives behind the new Act is Shareholders democracy. It has been considered as a mode of Corporate Governance which also increases independence of shareholders with a view to make the shareholders more knowledgeable and informed about their rights. As specified in the new Act[4], all major transactions such as inter-corporate investments, guarantees, securities, managerial remuneration, related party transactions etc., need approval from shareholders. The concept of class action suits has also been introduced under Section 245 which provides for shareholder rights or protection because it gives scope to consumer organizations to bring claims on behalf of large groups of consumers.

The concept of e-governance tends to reduce paper work and provide higher level of transparency and disclosure as the important and specified documents such as financial statements have to be available on the company’s website. It also tries to promote user friendly environment by making maintenance and inspection of the documents easier, simpler and faster. The concept of e-voting and video-conferencing in meetings facilitates the participation of the shareholders and directors from around the globe and these have been introduced under Sections 174 and 175 of the Companies Act, 2013 where the quorum for the meetings of board and passing of resolutions can be achieved through audio visual means. The new Act also lays emphasis on higher levels of transparency as well as enhanced accountability on the part of key management by introducing some new regulatory bodies such as National Company Law Tribunal under Section 408, National Financial Reporting Authority under Section 132, and Special Courts for speedy trial under Section 435.

The new Act seems to be employee friendly as it mandates the disclosure of difference of salaries of the Directors and the average employees. It also gives a provision for Auditor rotation after every 5 years which will increase efficiency of the company as it will bring the books of accounts of the company under fresh eyes which may help to point out issues which the previous Auditor may not have been able to identify. Also, the Auditors tend to lose their independence after a certain period of time if they keep working for the same company as they come under the dominance of the key managerial personnel.

Making it mandatory for the audit firms to rotate is one of the measures of improving the independence, objectivity, and professional scepticism of auditors.[5] The rotation of Auditors is now mandatory not just for listed companies but for all companies including private companies covered in class of companies mentioned in Rule 5 of Companies (Audit and Auditors) Rules, 2014.[6]

Every listed or any other company as prescribed under the Act has to mandatorily establish a vigil mechanism for staff and Directors for reporting genuine concerns under Section 177(9). This mechanism needs to be established to provide safeguards against victimization of the whistleblower, who may be an employee, Superior Officer or any Designated Officer.[7] It ensures anonymity of whistle blower. The details of this mechanism have to be disclosed on the company’s website as well as in the Board’s report.

Every company having a net worth of INR500 crores or more or a turnover of INR1000 crores or more or a net profit of INR5 crores or more in any financial year shall constitute a Corporate Social Responsibility (CSR) Committee.[8] This CSR committee will formulate and recommend CSR activities to the Board. The Committee will recommend the amount to be incurred and monitor the CSR activities of the company. The company should comply with the policies of the committee and disclose the policy in the Board Report. In case of any failure, reasons have to be disclosed in the Report. The company should give preference to the local area where it operates, for spending the amount earmarked for CSR activities. This will help in improving the conditions of the weaker sections of society, in return for which the company will gain in terms of goodwill and long- term survival.

The new Act not only brings some new provisions but also strikes off some old provisions which have become obsolete with time. A large number of sections have not been notified yet and the other provisions are largely to be tested. A number of provisions still need some clarifications.

The new Act which has a number of new provisions faces a few challenges as well:

The term ‘shareholders democracy’ which sounds so fascinating is not that easy to attain. The challenge which the new Act faces is whether this objective of shareholders’ democracy is actually attainable? Also, it is not only the shareholders whose interests have to be safeguarded by the company; there are some other people also who are related to it. Any person directly or indirectly related to the company is referred to as ‘stakeholder’. Now the question that arises is will this democracy improve the conditions of non-shareholders i.e., ‘stakeholders’ such as employees, creditors, consumers, etc?

The Companies Act, 2013 has tried to change the rules of the game by providing provisions for mandatory approval from shareholders in certain cases by making them the major players, but these major players i.e., the shareholders are often ill-informed to take important decisions such as intercorporate investments, managerial remuneration, etc.

The new Act creates a doubt as to whether making CSR will actually benefit the society or will it just provide tax benefit to the companies. It can be seen now that these companies are the way for emergence of CSR consultants who help companies to make tax beneficial policies.

The companies Act has tried to change the fortunes of the companies by changing the rules for them. Now, the major questions that arise after the new Act are: Can an Act become redundant in six decades? Whether the 1956 Act has become totally obsolete? Whether the companies will be able to adapt to the new Act when it needs a plethora of clarifications? It can be hoped that the MCA and the concerned regulatory bodies will soon address such challenges to truly make the new Companies Act, an exemplary reformative step forward in empowering India Incorporated.[9]

[1] Corporate Governance: The system of rules, practices and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests of the many stakeholders in a company – these include its shareholders, management, customers, suppliers, financiers, government and the community. Since corporate governance also provides the framework for attaining a company’s objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure.

[2]Whistle blowing’ is when a worker reports suspected wrongdoing at work. Officially this is called ‘making a disclosure in the public interest’.

A worker can report things that aren’t right, are illegal or if anyone at work is neglecting their duties, including:

  • someone’s health and safety is in danger
  • damage to the environment
  • a criminal offence
  • the company isn’t obeying the law (like not having the right insurance)
  • covering up wrongdoing

[3] Corporate Social Responsibility is a management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders.

[4] Section-185: Loan to Directors

Section-186: Intercorporate Loans or Investments

Section-188 and Rule 16: Approval and Disclosure of Related Party Transactions

Section-197: Managerial Remuneration

All the above-mentioned provisions need shareholders’ approval

[5] As specified under Section 139(2) of the Companies Act, 2013

[6] http://www.caclubindia.com/articles/companies-act-2013-rotation-of-auditors-20274.asp#.VP2gdvmUeuA

[7] As per Section 177(10) of the Companies Act, 2013

[8] As provided under Section 135 of the Companies Act, 2013

[9]http://www.grantthornton.in/assurance-tax-regulatory-framework/companies-act-2013implementation-challenges

What can you do if someone owes you money and does not pay you back?

Before legal action is taken against a debtor,the claim should be brought to his or her notice to make sure that the debtor is aware of the fact that the debt has not been paid back. A letter should be sent to the debtor containing important details and specifics. This should include information concerning the debt, for instance, how the debt was incurred, the original amount of the debt, when the last payment was made, and the current amount that is due to be paid back. The letter should also mention information regarding the paymentarrangement, providing the debtor with a phone number or an address in order to get back to the creditor.Most importantly, a due date should be provided to the debtor mentioning by which date he or she must make payment arrangements in totality. The idea is to choose a reasonable date and allow the debtor some time after he or she reads the letter to repay the debt. Also time must be given for the debtor to respond. At this stage, it is better to motivate the debtor rather than throw him/her into panic. A copy of this correspondence should be saved.

If this date passes without any payment of the debt being made or any indication of it being paid in the near future, one could send a letter of demand from a lawyer’s office, before commencing any legal action. The problem may be solved by way of negotiation[1].

If this too fails, either by way of the debtor not responding or refusing to make the payments, it may be necessary to institute legal proceedings against the debtor. Relevant papers in one’s possession that are related to the amount due (debt)debt or any documents of a similar sort including a copy of the correspondence between oneself and the debtor should be kept.

The limitation period for filing a civil recovery suit in India is 3 years. After that the claim is barred by time. It is imperative to decide which Court of law one should file their suit for recovery. In India, according to the Civil Procedure Jurisdiction, the pecuniary or monetary jurisdiction of the Courts depends on the state in which the cause of action arises. The pecuniary jurisdiction of the Court divides the Court on a vertical basis, which means that depending on the valuation of the suit filed, there are different levels of Courts with different monetary jurisdictions, and the suit will have to be instituted in the Court which has the required jurisdiction.  For example, the pecuniary jurisdiction of the Courts in Delhi areas follows:

  • Suits amounting to Rs.1 – Rs.20, 00,000/- lie before District Courts.
  • Suits over and above Rs. 20,00,000/- lie before the High Court.

It is essential to remember that the amount of pecuniary jurisdiction is different for all High Courts in India. This limit is decided by respective High Court Rules and in many states the High Court has no pecuniary jurisdiction. All civil suits go before the District Courts, and only appeals lie before the High Court.  The creditor, that is the one who owes the will have to determine in which Court the claim can be filed, which in turn shall be determined in accordance with the amount claimed. If the Court finds that it has no jurisdiction to entertain the, it shall transfer the suit to the Court having jurisdiction. In order to verify the pecuniary jurisdiction of the Courts in a particular state, one must refer to the rules determining the pecuniary jurisdiction of the district courts which have original jurisdiction[2].

The parties can appear in Court on their own, but it is not uncommon to be represented by a lawyer. If one does not appear, the Court or Tribunal can dismiss or adjourn the case. If either party does not appear, the other may obtain the judgment by default. Any promissory note, contract made, or any other documentary evidence of the debt should be provided to the Courtby the debtor, or his or her attorney. One should make such copies of any evidence to be submitted. Both parties will be given the opportunity to explain their stands before the court. If the court gives judgment against the debtor the amount that the debtor has to pay, including court costs becomes payable immediately from the date of judgment. This judgment could be obtained following the hearing of the case,or in the situation of the non-appearance of one of the parties, on default. If one is dissatisfied with the judgment, one can always appeal to the High Court. In case one finds the proceedings to be long winded or elaborate, it is best to consider hiring a lawyer, who are well-versed in the procedures of Courts and Tribunals.

[1] :“Contracts. Illegal Contracts. Recovery of Money Paid”, Virginia Law Review, Vol. 4, No. 8 (May, 1917

[2] Civil Procedure with Limitation Act, 1963 by C.K. Takwani (Thakker), 7th Edition, 2013, Reprinted 2015, along with Sanjiva Row’s The Limitation Act, 1963, II Vols. 9th Edition

The Importance of Being Importer Friendly

By Ashwini Tallur, National Law University Jodhpur

PART I

We all realize the importance of trade and commerce and most of us are aware of the World Trade Organisation (WTO), the only global international organization dealing with the rules of trade between nations[1], formed in 1995. The WTO replaced the General Agreement on Tariffs and Trade (GATT), an agreement signed in 1947. The replacement now has four major documents: a major revision of the original GATT, General Agreement on Trade in Services (GATS), The Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS), and the Dispute Settlement Understanding (DSU).

Until then, the GATT set out important rules governing trade between countries, and had been the forum for negotiating lower customs duty rates and other trade barriers. Since 1995, the updated GATT has become the WTO’s umbrella agreement for trade in goods.[2] Article VIII of the GATT 1995, in particular caught my attention. You can read the Article here. The Article basically states that countries that are a part of the WTO, must ensure that the importers or exporters must not be subject to too many burdensome formalities and requirements.

This was when I thought, how easy is importing for our own importers? The GATT seeks to prevent one country’s protective measures against another. But what about the importers within the same country? There are importers I know, who, despite living in Kolkata, which is closer by sea to Hong Kong (where they import goods from), route it through other cities, like Mumbai, despite the round-about route, simply because it is less burdensome, faster, and people are generally more eager to work.  So which states are most businessman friendly, especially when it comes to importing?

Let us look at the overall figures. Gujarat stands at the top of a number of lists[3]. According to the Economic Freedom of the States of India Report- 2013, Gujarat is not only the freest state, but it has also registered the fastest rate of improvement with an average growth of 12%.[4] In the same report in 2005, its overall score was 0.46 (Rank 5), which is 0.65 (Rank 1) in 2013. There is also a very wide gap between Gujarat and the second in rank, in the report (Tamil Nadu, with a score of 0.57). In a report by the CLSA[5], the reasons that Gujarat seems to be doing so well is that: firstly, unlike the other states who jumped from an agrarian economy directly to a service sector centric economy, Gujarat made sure that it has many manufacturing industries, which provide for large scale employment. Even so, it did not ignore its agrarian sector. The report goes on to say, that agriculture contributes 13 per cent to Gujarat’s GDP and supports 53 per cent of the population. Yields in food grains are almost double the country’s average. Secondly, its long coastline and entrepreneurial nature of its people are certainly a plus. Thirdly, its dependence on funds from the centre has been low, with 84% of its revenue coming from taxes. Also, the report point out, Gujarat does not ignore the expenditure on medical and educational facilities by replacing it with social security in welfare, a mistake made at the national level.

In the Economic Freedom report, Gujarat and Tamil Nadu are followed by Andhra Pradesh, Haryana and Himachal Pradesh.

It is believed that Tamil Nadu is ranked so high up, because of the effective legal machinery. With a low rate of dacoity and robbery reported in 2012 (no cases, according to the National Crimes Records Bureau); people in general afraid to break the law; bribes being low, and sometimes nil; zero tolerance for communal violence; and swift arbitration and conciliation, Tamil Nadu, many believe[6], deserves to stand at Rank 2. However, its points get docked when it comes to its high rate of labour disputes and severe shortage of power, to which there seems to be no solution so far.

The regulation of labour and business is a very important factor for a businessman, which is one of the three factors the Economic Freedom Report looks at.[7] Gujarat has been rank 1 since 2005, till 2013[8]. Tamil Nadu, Himachal Pradesh, Uttarakhand, Karnataka, Maharashtra and Kerala follow respectively.[9] Once again, there is a very large gap between the score of Gujarat and Tamil Nadu, making Gujarat the most conducive for business in this category, without question. According to the report, there has been a sharp decline in man-days lost due to strikes, higher market wage rates, and a decline in pendency of cases.[10]

As for Andhra Pradesh, which ranks 3rd in the report, it seems to be by virtue of it being a large base for Agro and Food Processing (especially since the state accommodates seven different agro-climatic conditions); the “mineral house of the country”; the “bulk drug capital” of the country, with 1/3rd of the country’s Bulk Drug Production; and a huge IT economy.[11] However, with the state being split into two,[12] we have to see how things will work out for each of the two new states.

In my next blog post, I will be concluding my article after looking at how individual cities fare at treating importers.

 

PART II

In my previous blog post, I discussed the import-friendliness of states. Let us now look at the performance of individual cities and where India stands as a nation, and why all this matters.

When it comes to ease of importing in cities, Bhubaneswar seems to be the friendliest city, according to the Doing Business Report by the International Finance Corporation and the World Bank[13], with 16 days taken to import goods.[14] Ahmedabad does come a close second with 18 days taken to import. The costliest city according to the report is Jaipur (at US$1,384 per container).[15] A clothes merchant based in Kolkata, who wishes to remain anonymous, told me that Chennai and Vishakapatnam are also very friendly when it comes to imports. He categorically states that Kolkata is quite hostile to importers. The Kidderpore port in Kolkata, for instance, is badly maintained and under-utilised. There seems to be an unwillingness to create a business friendly environment, he said, labeling the attitude as "babu-giri".

India doesn’t seem to fare that well in the world, being ranked 48 according to Bloomsberg Ranking[16]; Rank 98 according to Forbes[17]; and Rank 134 in the Doing Business Report 2014[18]. The Doing Business Report puts India at Rank 132 for ease of trading across borders, a 3-Rank fall from the previous year. It takes 11 documents, on an average, to import something into India, compared to 10 for the South Asian countries and 4 for the OECD.[19] It takes an average of 20 days to import something into India, while it takes on 10 days for the OECD.[20]

India’s economic freedom has undoubtedly increased since the 1990s, yet India’s ratings remain low on the global index. As the Economic Freedom report rightly states, as India opens its national markets to international investment and commodity flows, it cannot afford to constrain its own entrepreneurs. India is a very centralized country, especially compared to China.[21] Yes, we use the phrase “centre-state relations”, but as the report has correctly pointed out, it “reflects a patronizing mindset, suggestive of a centre and a periphery”. Perhaps this is a legacy of our independence struggle, one which we seem to have inherited unknowingly, due to the predominance of a single party back then.[22] Ironically, the “Centre” so far seems to suffer from a lack of interest and/or ability to change things, thus putting the burden on the “states”.

With the reported increase in imports[23], it is high time that the “centre” learns something from the leading states and implements the same. With US$489 billion worth of imports, India is ranked the 10th biggest importer in the world, by the WTO, accounting for 2.6% of the world’s imports.[24] You can see how much of each product India imports here. You can also check out the import tariffs for agricultural products here.

The WTO realizes how important it is to protect its members from harassment in the form of delays and unnecessary rules. It is time we realize the same. Is the proposal of letting the Major Ports decide tariff rates going to serve this purpose?[25] Maybe, maybe not. Perhaps, with the ex-CM of the leading state of Gujarat as our new Prime Minister for the next sixty months, we might see some improvement for the importers. The Modi government promised the country: achhe din aane waale hain (Good days are going to come). Only time will tell how good the days of the future are going to be. We can only hope and wait for them to fulfill this promise of theirs.

[1] As per the website, www.wto.org.

[2] http://www.wto.org/english/thewto_e/whatis_e/inbrief_e/inbr03_e.htm

[3] See, for instance this, this or this. You could also read this article, which gives five things that make Gujarat different from other states.

[4] Economic Freedom of the States of India Report- 2013, Bibek Debroy, Laveesh Bhandari, Swaminathan S. Anklesaria Aiyar. Available at http://www.cato.org/sites/cato.org/files/economic-freedom-india-2013/economic-freedom-states-of-india-2013.pdf.

[5] See http://www.business-standard.com/article/economy-policy/five-reasons-why-gujarat-is-different-from-other-states-clsa-112101603014_1.html for five things that make Gujarat better than the other states.

[6] See http://www.rediff.com/money/slide-show/slide-show-1-column-why-tamil-nadu-is-one-of-the-best-states-for-doing-business/20131209.htm#1

[7] The report looks at the size of the government: expenditures, taxes and enterprises; legal structure of the state; and regulation of labour and business in the state, and awards points accordingly.

[8] With a score of 0.87.

[9] Scores: 0.51, 0.46, 0.46, 0.44, 0.43, 0.42 Respectively. See Table 1.6 of the Report.

[10] Page 34 of the Report.

[11] Read the detailed report by Commiserate of Industries and FICCI on how Andhra Pradesh is a great state for business here.

[12] See http://www.business-standard.com/article/politics/telangana-foundation-day-on-june-2-114030500314_1.html.

[13] See http://www.doingbusiness.org/ in general, and http://www.doingbusiness.org/data/exploretopics/trading-across-borders/india in particular.

[14] See how the time and all related parameters are calculated here

[15] However, this could be because the report takes into account goods imported by sea transport.

[16] See http://www.bloomberg.com/visual-data/best-and-worst/best-for-doing-business-countries.

[17] See http://www.forbes.com/best-countries-for-business/list/.

[18] See http://www.doingbusiness.org/rankings.

[19] See http://www.doingbusiness.org/data/exploreeconomies/india#trading-across-borders

[20] The number takes into account: Documents preparation; Customs clearance and technical control; P orts and terminal handling; And Inland transportation and handling. The documents considered are: Bill of Entry, Bill of Lading, Cargo release Order, Certificate of Origin, Technical standard Certificate, Commercial Invoice, Foreign Exchange Control Form, Inspection report, Packing list, Product manual and Terminal handling receipts.

[21] Bardhan, Pranab (2010). Awakening Giants, Feet of Clay, Assessing the Economic Rise of China and India. Oxford University Press, in the Economic Freedom of States in Inida Report (Page 73).

[22] For more on this, see Report of the Commission on Centre-State Relations, available at http://interstatecouncil.nic.in/volume1.pdf

[23] India's imports gained while exports grew negligibly from FTAs: ASSOCHAM study. Article available here.

[24] See Appendix table 3 here. Also see a detailed report on India’s imports and exports, by The Guardian here.

[25] http://articles.economictimes.indiatimes.com/2014-02-02/news/46923648_1_major-port-trusts-tamp-new-tariff-guidelines