Companies Bill 2012 made easy ~ Better Corporate Governance, Stringent Disclosure Norms, CSR and more..

ANALYSIS OF THE NEW COMPANIES BILL 2012 

RELIANCE INDUSTRIES LTD

Posted by ~ Er Tejas Somaiya

Prelude

The Companies Bill 2011 was laid before the Parliament in December 2011 and was referred to Parliament Standing Committee on Finance. The Standing Committee submitted its report in June 2012 and based on Standing Committee's report, the Companies Bill 2011 was amended and was introduced as the new Companies Bill, 2012. The Bill was passed by the Lower House of Parliament on 18th December 2012. The Bill is pending the Upper House of Parliament-the Rajya Sabha and therefore, may undergo further changes.

The Bill is divided into 29 chapters and contains 470 clauses as against 658 sections in the existing Companies Act, 1956.

Corporate Governance: Concept of Independent Directors ("ID") has been introduced for the first time in Company Law. Some of the important points relating to IDs are mentioned below:

• Maximum number of directors has been increased from 12 to 15 directors. Further, no Central Government's permission in required to increase the maximum number of directors beyond 15. RIL's board presently comprises of 12 members with 7 Independent Directors. Thus, one of the clause (of the New Companies Bill) which mandates at least 1/3rd of total number of directors as IDs is already satisfied even if the number is increased to 15 members.
• Appointment of at least one woman director on the board has been made mandatory (for prescribed class or classes of companies). Presently, there is No Woman Director in RIL and hence, it is entitled a transition period of one (1) year for the compliance of this provision.
• Every company shall have at least one director resident in India for at least 182 days in previous calender year, is made mandatory for all companies. At present, all directors can be foreigners not residing in India.
• ID cannot be granted any stock options in companies and this appears to be in direct conflict with Clause 49 read with the applicable SEBI guidelines as per which, IDs may be granted stock options. Stock Options, granted to directors (Executive Directors), shall be included in the remuneration.
• A person cannot be director in more than 20 companies as against 15 companies in the existing Companies Act, 1956 and out of these 20 he cannot be an ID in more than 10 public companies.

Auditors and Accounts: The last audited accounts signatory for RIL includes - Chaturvedi & Shah, Deloitte Haskins & Sells and Rajendra & Co., Chartered Accountants

•  Every company must appoint an individual or a firm as an auditor at the first AGM, who shall hold office till the conclusion of its fifth AGM and thereafter till the conclusion of every fifth meeting. Further, the Bill mandates rotation of individual auditors in every five years and for audit firms every ten years.
• Auditors are prohibited from rendering specified services to the company/ its holding company/ subsidiary company which includes - internal audit, investment banking services, outsourced financial services, actuarial services, investment advisory services and other management services.
• Companies having subsidiaries are required to prepare consolidated financial statement of the company and all subsidiaries; the consolidated financial statements are also required to include financial statements of associate companies and joint ventures.

Corporate Social Responsibility (CSR)

• CSR has been made mandatory for companies with a Net Worth of INR 500 crores (INR 5 billion) or more, or a turnover of INR 1000 crores (INR 10 billion) or more, or a Net Profit of INR 5 crore (INR 50 million) or more during any financial year.
• Such companies must spend 2% of their Average Net Profits the company made during three immediately preceding financial years.
• Such company is required to constitute - Corporate Social Responsibility Committee of the board which shall include three (3) or more directors and one (1) independent director. This committee would formulate and recommend CSR activities to the Board.
  RIL on it's part is committed to 'safety of persons over all production targets'.

Mergers and Amalgamations:

• Merger of Indian company with foreign company is allowed under the New Companies Bill. The Companies Act, 1956 does not permit merger of Indian company into a foreign company.
• Mergers between two small companies or between holding company and it's wholly owned subsidiary has now been simplified without the requirement of the court process. Notice has to be issued to Registrar of Companies (ROC) and Official Liquidator (OL) first and objections/ suggestions have to be taken before the members in general meeting. Objections to such arrangement can be made by persons holding 10 percent of the shareholding or having outstanding debt of at least 5 percent of total outstanding debt as per latest audited financial results.

Serious Fraud Investigation Office (SFIO)

• Central Government shall establish an office called the SFIO to investigate frauds relating to a company; one such instance being SFIO investigating INR 850 crore (INR  8.5 billion) fraud in accounts of Reebok India.
• SFIO is empowered to arrest in respect of certain offences involving frauds. 

The Bill is passed by Loksabha and introduced in Rajyasabha, still waiting to be passed. Post passing by Rajyasabha consent of President of India will be necessary before the Bill becomes an Act.

New Schedule VI – Generally Asked Questions & Answers (GAQA)

In the Part 1 and Part 2 of the ‘Ten Minutes’ series of New Schedule VI an overview of the Balance sheet and Profit and Loss account changes were dealt with. In this last Part I’d like to touch upon my perspective of certain practical issues in putting Schedule VI in place.

Issue 1:

The aggregate amount of both long term and shot term loans guaranteed by directors or “others” under each head is to be disclosed. Who does this “others” signify?

Solution:

The words “others” would mean any person or entity other than a director. It is therefore, not restricted to mean only promoters or related parties. In the normal course, a person or entity will generally guarantee a loan of the company only if it is associated with the company in some manner.

Issue 2:

A liability is to be classified as current if the company has an unconditional right to defer its settlement for at least 12 months after the reporting date. How will a 5-year loan which the company has taken is repayable on demand? Based on the past experience, it is not expected that the lender will demand the repayment within next 12 months.

Solution:

As the company does not have an unconditional right to defer the settlement of loan for at least 12 months after the reporting date, it will classify the loan as current. This is despite the fact that based on the past experience, it is not expected that the lender will demand the repayment within the next 12 months.

Issue 3:

Do we need to classify Capital advances between non-current and current categories? If yes, on what basis?

Solution:

Capital advances are advances given for procurement of fixed assets which are non-current assets. Companies do not expect to realize them in cash in the next 12 months or within their normal operating cycle. Rather, over the period, these get categorized as one or more fixed assets. Hence capital advances should be treated as non-current assets.

Issue 4:

In the New Schedule VI “Proposed Dividend” needs to be disclosed in the footnotes. Earlier proposed dividend was being disclosed under the head “Provisions”. Does it mean that proposed dividend is not required to be provided for going forward?

Solution:

The Indian Accounting Standard (AS) 4 – Contingencies and Events Occurring after the Balance Sheet date requires that dividends in respect of the period covered by the financial statements, which are proposed or declared by the company after the balance sheet date but before approval of financial statements, should be adjusted. The new schedule VI has stated an accounting standards override. This simply means that accounting standards will override the New Schedule. The companies will have to continue to create a provision for dividends in respect of the periods covered by the financial statements and disclose the same as provision in the balance sheet. 

TRUE & FAIR: HOW MUCH?

While reading through the annual report of one of the listed company (TRF Ltd – A Tata Enterprise) in India my attention was drawn to a small paragraph in the ANNEXURE TO NOTICE - Explanatory Statements pursuant to Section 173(2) of the Companies Act, 1956. Although, the paragraph was concise but it provided enormous information on the company’s profitability.

Reasons for loss or inadequate profits:

The financial mis-statements were noticed in a particular division for earlier years. This was done by a group of officers who were discharged from the Company and Company has initiated necessary legal proceedings against them. A new team, who had taken charge of the division had reviewed the costs of the projects under execution and corrected the same where ever necessary. Consequently, the Company had to book losses in the division bringing down the overall profits of the Company.

This paragraph quite evidently mentions “mis-statements” by group of officers in a division. The company has initiated legal proceedings against them. Is it an indication by the company that money has been siphoned off by this group of officers or alternatively can we believe that the company has detected fraud in this division?

The highlights section in the annual report throws light on the profitability.

Consolidated PBT 2009- 10: 7,387 lakhs Rupees

Consolidated PBT: 2010- 11: 712 lakhs Rupees

Fall in profits by: 90.36%

The company has a functioning audit committee since 1997 which meets the representative of internal auditors (Big 4 company) and statutory auditors (another Big 4 company) regularly. To any one’s guess what is discussed regularly in such meeting with representatives of Big 4s.

The auditor’s report (Big 4 is a statutory auditor) states that:

Based on our audit and on consideration of the reports of other auditors on separate financial statements and on other financial information of the components, and to the best of our information and according to the explanations given to us, in our opinion the Consolidated Financial Statements give a true and fair view in conformity with the accounting principles generally accepted in India

Few questions which I do not know who will answer:

Did the auditors not detect the fraud when the company initiated legal action against a group of officers of a particular division?

Did the auditors not read the annual report of the company?

Did the auditors not find the drop in profitability compared to earlier year by 91% alarming and material?

What was the corporate governance from the audit committee’s perspective?

Who is answerable to the present shareholders of the company?

And finally;

HOW MUCH TRUE & FAIR WERE/ ARE THE FINANCIAL STATEMENTS AS OPINED BY THE AUDITORS?

For your reference and read as a case study of corporate governance link of the company annual report is attached.