Cos Bill Report: Bharat Vasani

RELATED NEWS Standing comm submits Cos Bill 2009 report in parliament

It's a process that started in 2004. That is when the first concept paper came out. Thereafter it took at least four years for a new Companies Bill to be tabled in Parliament. Unfortunately, both houses had to be dissolved because we went into the election and the Companies Bill 2009 was tabled in Parliament once again last year.

 

It went then to a Parliamentary Committee that's the Standing Committee on Finance, which today, on the last day of this session of Parliament, has submitted its report. It's a comprehensive report and has several important things to say with regards to the financial aspects of running companies, independent directors and auditor liability.

 

CNBC-TV18's Corporate Editor, Menaka Doshi discussed with Tata Group's, General Counsel, Bharat Vasani, about the new Companies Bill and its pros and cons for India Inc.

 

Below is a verbatim transcript. Also watch the accompanying videos.

 

Q: Several different things addressed by the Parliamentary Committee. Let's start with the financial aspect. For instance, this committee has asked for the bill to allow for differential voting rights (DVRs) shares as well as to allow companies to be able to access public deposits, also from non-shareholders. The Companies Bill 2009 had in fact disallowed DVRs and said that companies will not be able to accept public deposits except from their shareholders. Both of those are positive moves and moves that India Inc wanted, right?

A: I completely agree. In fact, we were surprised when the Companies Bill provided for discontinuation of DVRs, as it is the corporate India is starved of the variety of instruments which it can use to raise capital. In the Western world, there are large numbers of instruments available. We used DVRs in Tata motors and it was very successful. Even government can use it when they divest public sector undertakings (PSUs), without losing control over some of the strategic undertakings. They can use the DVR mechanism to raise capital for the government.

 

It's good that the standing committee has recommended its continuation and so is the case with public deposits. Public deposit is such a simple instrument. People who are retired and do not want to go through the complexities of investing in mutual funds or get into the stock market, they find this fixed return coming to their houses every quarter or every six months and if they trust the management why not continue? It provides all the safeguards which the committee has recommended. I think it's a positive feature of this recommendation of the Parliamentary Committee.

 

Q: There have been new restrictions recommended by this Parliamentary Committee with regards to inter-corporate loans and investments. For instance there is a withdrawal of all exiting exemptions for investments in wholly owned subsidiaries, similarly for investments by private companies, a company should have only one investment company and a subsidiary company should not have its own subsidiary company. What does this mean for corporate India?

A: I am still absorbing the shock. This would have a strong reaction from India Inc. I do not think the Parliamentary Committee has understood the full gravity of the ramifications of what they have recommended. They have completely withdrawn the exemption of investment in wholly owned subsidiaries.

 

As you would see, most of India Inc's overseas acquisitions which have been done over the last five years, have been done through an special purpose vehicle (SPV) structure which means a company sets up a wholly owned subsidiary in a tax friendly jurisdiction and then the investments are further routed through there.

 

This helped the companies in two ways-one is that you could raise the capital abroad and second, most importantly is you do not have to go back to your shareholders in India, because the time in international bidding is very short; you have to bid along with other bidders from other jurisdictions.

Q: Just to make it clear you didn't have to go back to your shareholders because the Companies Act gave you an exemption from having to get shareholder approval in order to fund a wholly owned subsidiary. That is the exemption we are referring to which has been taken away now by this committee, is that correct?

A: Let me explain the concept. Currently the Companies Act which is Section 372 A and which is getting reincarnated as Section 164 of the Companies Bill, provides that if you invest beyond 60% of your networth, which is paid-up capital plus free reserves or 100% of free reserves, whichever is higher, up to that the board is empowered to make an investment, anything beyond that you require shareholders' approval, by a postal ballet in case of a listed company.

 

Now the way it functions is if you have a subsidiary overseas which is your wholly owned subsidiary, the investment which you make in wholly owned subsidiaries, you don't need to root it through the shareholders and what investments you have made is not counted in compute in this 60% and in this 100% limit.

 

What the Parliamentary Committee has now recommended, is remove all the exemptions, which means that every corporate which does the acquisitions whether domestic or cross border will have to count every investment it made in subsidiaries. Every time it wants to make further investment, it has to go back to the shareholders if you are crossing that limit.

 

I am not sure whether it will work out in practice. Perhaps they may have to cover some exemptions for cross border acquisitions. In fact Dr Irani Committee report specifically recommended that so that Indian companies are not priced out in any cross border deals where there are multiple bidders, you need to provide a cover for cross border deals. Unfortunately even that is sought to be withdrawn. In fact the Companies Bill which was presented to the Parliament provided for that cover which is sought to be taken away.

 

The other problem is that with this kind of all the freedom being taken away it means that companies will have to call their meetings again and again and go back to their shareholders. One positive feature is that the bill doesn't contemplate going back to the government, they say you go back to your shareholders, get their consent and that its fine.

 

Q: I know you are looking at this from the prism of M&A and all M&A requires speed and therefore this seems burdensome. Isn't it just broadly speaking principally in favor of good governance, to be able to go back to your shareholders, every time you are investing substantially large amounts of money even if you are investing them through a wholly owned subsidiary?

 

A: I don't disagree with the principle. I agree with you it's a good governance practice that you check with your shareholders when you are exceeding certain number. The volume of investments is so large. The problem you have is that when you are doing these M&A transactions the speed is the essence.

 

Many a times once you go back to your shareholders then at least the government should carve out  that you don't have to disclose every details of how much you are going to pay for the target because then you are virtually revealing the sensitive information about the bid which you are going to submit. I suppose at least that carve out is provided that in a cross border deal the companies will not be forced to disclose to their shareholders the final price they may agree to pay for the acquisition.

 

Q: So, in the interest of times, I will move on to the next couple of points, which we did definitely want to touch upon. This committee has also recommended the rotation of the appointment of an internal auditor be made mandatory, that companies rotate their audit firms every five years and audit partners every three years as well as incorporate within the bill, joint and individual liability of both the audit firm as well as the partner. Again that's a pretty broad set of changes that will come into the relationship between companies and their auditors, right?

 

A: These are quite sweeping changes. In practical terms how this will play out, I am not quite sure, I think only time will tell. My own experience suggests that it takes at least three years for the audit firm to understand the business of the company and the complexities involved in doing the audit. Five year period to me seems very short.

 

Again changing the audit partners every three years within that five year period as per my experience is very short. I am not sure how this will function in actual practice and whether it would really result in lesser number of frauds. My own sense is that they have provided for restrictor liability for auditors, which is a welcome step, but mandatory rotation of the audit firms every five years, my sense is that the period is rather too short for audit firm to really settle down and understand the business of the company.