Regulatory environment:
Change, challenge and opportunities
Vinod Kothari
1012 Krishna224 AJC Bose RoadKolkata – 700017Phone 033-22811276/ 22813742/7715
E-mail – [email protected]
601-C, Neelkanth, 98 Marine Drive,Mumbai 400002 Phone 022-22817427 E-mail: [email protected]
www.vinodkothari.comEmail: [email protected]
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Copyright
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About Us• Vinod Kothari & Company,
Company Secretaries in Practice▫ Based out of Kolkata,
Mumbai
• We are a team of consultants, advisors & qualified professionals having recently completed 25 years of practice.
Our Organization’s Credo:
Focus on capabilities; opportunities follow
Change in the regulatory environment
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Overview of change in the regulatory environment
Implemented/ Proposed change
state of implementation
Corporate laws Replacement of the 1956 law by a new law
Enactment complete; several sections enforced
Accounting standards Alignment with IFRS Pending implementation, expected from FY 16-17
Financial sector regulation Recasting the regulation of financial sector, with integrated financial regulator
Pending implementation
Insolvency laws Rewriting of age-old insolvency laws
No effective steps taken yet
Securities laws and listing regulations
Consolidation of securities and listing regulations
Securities Law (Amendment) Bill passed; listing regulations may be consolidated
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Overview of regulatory environment changes
Implemented/ Proposed change
state of implementation
Security interests and lenders’ interest
Replacing /making amendment in the regime of security interests
Central Registry enforced; makes mortgages registrable
Arbitration and alternative dispute resolution
Amendment of arbitration law
Law Commission Report made comprehensive suggestions for amendments
Stamp law Re write of the age-old stamp law
Stamp Law Amendment Bill put for public comment
Direct tax laws Re writing of direct tax laws
Finance Minister promised a road map
Indirect tax laws Consolidation of indirect taxes into a comprehensive GST
Finance Minister promised a road map
New financial instruments Introduction of new instruments
SEBI proposed crowd funding; already approved REIT and InvIT regs.
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Replacement of the Companies Act• Companies Act is the other legislation affecting
working of companies▫ Evidently, companies take commanding share of
the country’s GDP in developed countries▫ India is, still, an informal economy; an estimated
18% of the GDP comes from the corporate sector• Corporate sector consists of approx 9 lac active
companies, of which 92% companies are private
• The exercise to completely rewrite the Companies Act has been ongoing for several years
• Eventually, Bill was passed in December 2012; being implemented in tranches
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Major highlights of the new Act -1• Controls on companies
▫ Loans to directors/directors entities prohibited▫ Interest-free or below-sovereign-rate loans prohibited▫ Material Related party transactions to require special-majority-
of-minority consent▫ Acquisition of options/futures in securities of companies by
KMPs prohibited• Corporate governance
▫ Independent director mandated in public companies above a certain size
▫ Women directors in all listed companies, and companies above a certain size
▫ Auditors’ rotation made mandatory in certain companies• Compliance and filing
▫ Major requirements on filing of board resolutions▫ Secretarial audit mandated on certain companies
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Major highlights of the Companies Act -2
• Embracing technology▫ Video conferencing “permitted”, though prohibited for
several businesses▫ Electronic maintenance of records “permitted”▫ E-voting made mandatory for certain companies
• Introduction of “one person companies”▫ However, turnover limit Rs 2 crores
• Shareholder remedies▫ Service of notices by shareholders:
Imposition of “floor of shareholding” Rules impose the maximum shareholding
▫ Shareholders may take freeze action▫ Rectification of register of members▫ Forced Revision of company’s accounts▫ Pursuit of action against oppression and mismanagement
Even a single shareholder now has statutory protection▫ Pursuit of class action by groups of shareholders
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Major highlights of Companies Act -3• Financing of companies
▫ Private placements put under several restraint▫ Raising of member deposits and public deposits by companies
permitted with several safeguards▫ Debenture issuance put under several restrictive provisions▫ Priority of charges shifts from date of creation of charge to date of
filing of charges• Sickness and Revival of companies
▫ Criteria of sickness changed from “inability to pay” to “failure to pay”
▫ Automatic moratorium removed; limited period moratorium only based on orders of the NCLT
▫ Almost entire proceedings creditor-driven• Winding up of companies
▫ A new method of “summary winding up” introduced for small sized companies
▫ Voluntary winding up of healthy companies substantially simplified with intervention of Official liquidator completely eliminated
▫ Merger of companies also simplified
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Accounting standards• Finance Minister in his Budget speech 2014 made a specific
mention that Indian companies will move to IFRS in FY 2015-16
▫ Financial and insurance companies will move to IFRS based on their sectoral regulators’ decision
• As per IFRS 1, if an entity has to move to IFRS on 31st March 2016, it has to start implementing IFRS from 1st April 2014
▫ 2 years ahead▫ ICAI has given a new roadmap in March 2014, saying previous
year’s comparables for FY 15-16 may be as per IFRS The standards are likely to be applicable for both CFS and SFS
from 1st April 2015 In the meantime updation is going on
• Currently, Ind AS-es have been announced for IAS 1 to IAS 40, and IFRS 1 to IFRS 8
▫ Several IFRSes promulgated by IASB subsequently have not been Indianised
▫ Several changes in IFRS also not incorporated as yet
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Regulatory regime of the financial sector
• The Financial Sector Legislative Reforms Commission under Justice B N Sarkaria submitted its report in March 2013
• Report suggests a major overhaul of the regulatory framework bringing financial sector under a “unified financial regulator”, on the UK model▫ SEBI, PFRDA, IRDA and FMC will get merged▫ RBI will continue to exist, but under a different role
• Proposes a Indian Financial Code, focusing on▫ Macro prudential regulation▫ Micro prudential regulation▫ Consumer protection etc
• Finance Minister’s Budget Speech made a mention of the implementation
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Insolvency law reform• One of the most neglected areas of legal reform in
India• After NL Mitra committee report, virtually nothing has
been done on insolvency reform▫ Finance Minister’s Budget speech made a mention of
allowing easy exit to MSMEs• India is no 121 out of 189 countries in insolvency
▫ Worse than Pakistan and Bangladesh• Companies Act may change the scene with voluntary
winding up becoming easier▫ But voluntary winding up does not apply in case of
insolvent companies• Current scenario provides overriding primacy to
SARFAESI Act, which seems to be treading over all insolvency issues
• It is high time to put this piece of law in order
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Securities laws and listing regulations
• Securities laws are still scattered over a large bunch of subordinate law
▫ SEBI Act itself was passed in 1992 with very sketchy legal provisions▫ No comprehensive reform of the securities law
Reactive, piecemeal changes continue to be done• On August 12, 2014, Parliament passed Securities Laws
(Amendment) Bill 2014▫ Some provisions have retrospective effect to maintain the powers
conferred by the earlier Ordinance• Major changes
▫ Information powers pertain to “any person”▫ Disgorged amounts to be put into SEBI’s IEPF▫ Deeming provision to treat any scheme with Rs 100 crore mop up as a
“collective investment scheme”▫ Minimum penalties introduced in several sections▫ Voluntary settlement provisions legalised▫ Provision for special courts▫ Search and seizure powers based on leave granted by a single
Magistrate in Mumbai
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Listing regulations•Sought to be consolidated by Listing
Obligations and Disclosure Requirements Regulations
•Consolidating rules pertaining to listing of▫Equities and convertible securities▫Debt securities▫Non convertible preference shares▫Asset backed securities▫Mutual funds▫May be, shortly, REITs also
•No major changes from the earlier rules•Of course, stock exchanges given penal
powers
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Security interest laws•SARFAESI Act continues to face
challenges before Courts on various counts
•DRT proceedings continue to be lackdiasical
•Registration of security interests ▫Mortgages require registration with
Central Registry, called CERSAI No effect on validity of the charge, but penal
provisions apply▫Assignment of receivables by a factor also
requires registration
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Stamp law•The Ministry of Revenue has prepared a
draft of Indian Stamp Amendment Bill 2014 and placed the same for public comment
•The Bill proposes a major rewrite of the 19th Century stamp law
•Harmonises duties on several documents across states
•Introduces duties on several instruments•Re-defines several words
▫May have major implications of stamp duty
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Direct tax laws•Direct Taxes Code 2013 has been in
public domain for more than a year now•Finance Minister in his Budget Speech
2014 said definite timeline for introduction of DTC will be announced
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Goods and Service tax•The Finance Minister’s Budget speech
also promised a definitive timeline for introduction of GST
•Currently, even the draft of the Bill is not visible on public domain▫http://www.empcom.gov.in/index.aspx
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Arbitration law• The 246th Law Commission Report is dedicated to
comprehensive reforms in arbitration law• Major recommendations
▫ Institutionalisation of arbitration proceedings rather than ad hoc arbitrations
▫ Introduction of “emergency arbitrator” ▫ Encouraging formation of arbitration centers by trade bodies▫ Discouraging adjournments and protracted proceedings
Says arbitral tribunal will hold continuous proceedings And will not agree to adjournment request unless sufficient grounds
exist▫ Curbing litigation on existence of arbitration agreement and
appointment of arbitrator No appeal against High court orders
▫ Sec 34 and 58 applications to be disposed max within 12 months▫ Curtailing pre-arbitration powers [sec 9] only in limited cases▫ Filing of a sec 34 application will not automatically put a stay on
enforcement of the award▫ Fraud expressly made arbitrable
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Challenge and opportunity
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Change throws challenge..• Every change brings challenges
▫ Understanding▫ Implementation▫ Compliance▫ Prosecution
• With his KMP designation, a company secretary is placed at par with senior management and is clearly liable to be prosecuted
▫ Recent SEBI orders have put stiff penalties on compliance officers
• A CS in practice attesting secretarial audit report will be reporting on compliance of several laws
▫ Specifically applicable• A CS in practice is liable
▫ For penal action u/s 204▫ For fraud u/s 448▫ For class action u/s 245 (1)(g) (iii)
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Challenge in corporate governance•The rise of the institutional shareholder•Emergence of Proxy voting•Proxy voting coupled with legal provisions
on majority of minority vote may make a huge difference on corporate consensus
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However, every challenge brings an opportunity
•A pessimist sees a difficulty in every opportunity; and optimist sees an opportunity in every difficulty
•Underlying every challenge, there is an opportunity
•Focus on capabilities; opportunities follow