CommerceCafe - The Finance World: law

Showing posts with label law. Show all posts

Sunday, 17 April 2016

Audit Services by BIG4 needs to be checked to save SMP CA firms

Kind Attention!! Regarding the burning issues of our profession which need the urgent attention of the Council.

Our profession has definitely gone through a transformation that largely parallels the rapid expansion of the economy. It was in the last 15 years the growth of the profession went through on the footprints of Big 4. The only authority, i.e. The council of ICAI can only restrict them.

With due respect I would like to bring some important issues which need the kind attention of council on the issue that the working of Big 4 in India is not legal, according to the basic principle of law i.e. ” what cannot be done directly, that cannot be done in directly’ and same contention was given by the Bar Council of India for these Big 4 operations in India. These firms were hauled up for alleged practice of law with Bar Council of India claiming that they are carrying on unauthorized practice of law & contravenes section 29 of Advocates act which provides that only Indian Citizens who are enrolled with the state bar councils as advocate have the right to practice the profession of law in India and accordingly put ban on these Big 4 consultant firms to practice law in India. These auditing firms are circumventing laws while providing audit services in the country. They are using the permission granted for doing consultancy work but carrying out other services that they are not permitted to do. India does not allow FDI in the field of accounting, auditing, book keeping, taxation & Legal services.

Technically BIG4 cannot provide audit service so they collaborated with Indian Chartered Accountancy Firms and doing audit services Indirectly in the Name of Such Indian Firms. These firms employ Chartered Accountants and are rendering audit services contrary to the CA act and are engaged in unauthorised practice of audit & one of the senior partner of the Indian CA firm is either major holder or Board of Director of the master Flag. These big 4 have in a surrogate manner engaged in practice of audit also the Chartered Accountant of big 4 attend partners meeting of their network. These big 4 are involved in determining the business strategy to meet clients and cross refer work to each other and that there is a modus operandi between their international network. Indian firms registered in their flagship uses the logo & share common office space, address, etc. And only one statement come from big 4 that they maintain highest level of professional standards and do not contravene any provision of law.

My submission is that now the time has come where the council has to interfere on the operations of Big 4 in India otherwise it will be real blow for the SMP CHARTERED ACCOUNTANTS and soon their will be a day where majority of the CA firms which are looking for opportunities of organised sector will loose all their importance and all the firms will be working under the umbrella of Big 4 and than no Independence will be their, which will clearly violate the CA act and regulations. When we will be working on sub contract basis than that day will be the black day of our profession and for this we only will be responsible.

Sir, my humble request to react on it as now no representations are going to work in the days to come as we have already seen in extension of date of Tax Audit Report, thus my utter submission to make some kind of regulations and involve the network of Chartered Accountant branches in India to get the maximum inputs so as to arrive at the policy which will help SMP’s.

Sincere Regards,

CA.Rohit Ruwatia (Agarwal)

Chairman- Young Members Empowerment Committee

Regional Council Member, CIRC

(Disclaimer- Above views are personal view of Author)

TAX

FAQ's about Credit Scores

Sainath Gupta 17:24:00

India is an incredible country and boasts of a rich ethnic culture. India’s vast population make up a huge market and create vast demands for goods and services. Therefore credit plays such a vital role in our economics. Citibank’s Asia Pacific Global Consumer Group Head Stephen Bird said to a newspaper in 2007, that India’s credit market was in its infancy and that there was a wide scope for expansion. Truly we have moved way ahead since then in the credit world.

Although we have grown in leaps and bounds, yet there are several questions that people are struggling with regarding their credit scores. The purpose of this article is to educate our readers and provide them with answers to questions bubbling in their minds.

Q1) What is CIBIL?

CIBIL stands for Credit Information and Bureau (India) Limited. It was founded in the year 2000. Its primary function is to collect individual and company credit data from its member institutions. Such data on the history of advances taken, credit cards used and any other credit facility availed, is then recorded, updated and maintained by CIBIL in the form of Credit Information Report (CIR). Its authority is limited to updating records as per information received from banks and other financial institutions. It cannot make any changes on its own or at the behest of an individual. The reports are updated on a monthly basis as per information received.

These reports are kept confidential and can be withdrawn only by a borrower for personal introspection or by a prospective lender while assessing a loan application by the customer. Based on this report and using their proprietary formula, a CIBIL score or a credit score is calculated.

Q2) What is a credit score?

A credit score is the summary of your report, numerically represented. This is a three digit number ranging between 300 & 900. The higher this score the better it is. On a general note, any score above 750 is considered a good score and borrowers having this score or more are favoured by lenders. Through this score banks judge your probability of default in future. A lower score would mean a high probability of default while a higher score means lower probability.

Q3) Why should I be worried about my credit score and credit report?

Earlier banks and other lenders would do a manual background check on a prospective borrower. This had a high margin of error and several banks were duped of their money. Thus there was a need felt for an organisation who would maintain past records of repayments on a loan by an individual.

Since the inception of CIBIL, credit scores have become an indispensible part of the loan assessment process. Infact, the first thing lenders do is to withdraw the credit report and analyse. It will not be an overstatement to say that more than 90% of loan applications are approved if the credit score is more than 700.

Now that, your credit score is so vital to the evaluation process, it is obvious that it must mean more than just a number to you. You should be careful about what factors affect it, if you have a lower score then look for ways to improve credit score and maintain it at a decent level so that you don’t have to face an embarrassing situation if you need to apply for a loan in future.

Q4) How can I use a good credit score?

It would be wrong to say that your credit score is what you should fear. Rather, if you are in the elite club and can boast of a good credit score then you can avail debt easily, you may be able to negotiate on terms and take advantage of a lower rate of interest. Banks are always willing to partner with people who are genuine borrowers with a good intent. More than anything they want their money back with interest. That is how their business runs. A higher score will help you build that image.

Q5) Am not happy with my score. Can I raise a dispute?

You can certainly raise a CIBIL dispute if you have spotted errors in your CIR. By raising a dispute you bring to their notice on what needs to be corrected on your report or if you have information which you do not identify. Do bear in mind that there are humans who update thousands of report daily and they may have erred. A clarification is sought from the lender involved and only if the issue is resolved in your favour then the report is updated.

Do note that CIBIL cannot update any information on its own. It is only a “data storage centre” and has no autonomy over the reported data. It entirely depends on information received from banks. The issue raised by you and thereby resolved in your favour, may have a direct or indirect bearing on your score. It may help your score to ascend a few points. However, you cannot raise a dispute if you are not happy with the score itself. You can adopt ways to improve credit score. On our blog we have covered ways on how to enhance your score. Or you could seek an expert’s help for credit repair.

Dealing with credit scores is no rocket science. It does involve expertise in finances but by observing diligence in payments to your creditors and using credit with a firm hand will take you a long way ahead in the credit space.

Tuesday, 9 February 2016

law

Why Anticipatory Bail?

Sainath Gupta 18:02:00

The necessity to grant anticipatory bail arises mainly because sometimes influential persons try to implicate their rivals in false case for the purpose of disgracing them or for other purpose by getting them detained in Jail for some days to get their work done indirectly. In recent times since the rise of property prices and many civil case coming up by the plaintiff to seek their rights and if the opposite party feels that the plaintiff has good case to win, the opposite party plans and in fact start to file the false and frivolous criminal cases against the plaintiff to put a pressure and this is where the Anticipatory bail becomes a much needed thing (I have been dealing with some cases personally wherein the opposite parties by making the false and forged documents are filing the false criminal cases and trying to harass the plaintiff either to withdraw the present case or settle on their terms) But indeed the legislature in its wisdom have felt the atmosphere going around as many a cases were coming before the courts with the same pattern therefore the present provision of Anticipatory Bail is brought in the Cr.P.C which was not there originally. Apart from false cases, where there are reasonable grounds for holding a person accused of an offence is not likely to abscond or otherwise misuse his liberty while in bail, there seems no justification to require him first to submit to the custody, remain in prison for some days and then apply for bail.

Anticipatory bail means grant of bail to a free person in anticipation of his possible arrest for some offence and in the absence of any order of arrest against him. Grant of bail presupposes that the person is in custody of police or court, and if not in custody, is required to surrender to such custody. Hon’ble Supreme Court in catena of cases has laid down the following guidelines/ propositions regarding Anticipatory Bail:-

1. The distinction between an ordinary bail and anticipatory bail is that the former being after the arrest means release from custody of Police, the latter being in anticipation of arrest is effective at the very moment of arrest.

2. The High Court and the Sessions Court have been given wide powers- discretionary- left free in the use of their judicial discretion to grant bail on the facts and circumstances of each case.

3. The court must apply its own mind and decide the question without leaving it to be decided by the magistrate under section 437 and when occasion arises.

Not Blanket Order

4. The applicant must show by disclosing specific facts and events that he has reasons to believe, the existence of which is sine qua non of the exercise of power by the court and non vague apprehension that he may be arrested for a non-bailable offence so that court may take care to specify the offence or offences in respect of which alone the order will be effective and not a blanket order.

5. Though the power conferred under section 438 of the Code can be described as of an extraordinary character, but this does not justify the conclusion that the power must be exercised in exceptional circumstances only because it is of an extraordinary character. Nonetheless, the discretion under the section has to be exercised with due care and circumspection depending on circumstances justifying its exercise.

6. The filing of the FIR is not a condition precedent to the exercise of power under section 438. The imminence of a likely arrest founded on a reasonable belief can be shown to exist even if an FIR is not yet filed.

7. An Anticipatory Bail can be granted even after an FIR is filed so long as the applicant has not been arrested.

8. An interim bail order can be passed under section 438 of the Code of the code without notice to the Public Prosecutor but notice should be issued to the Public prosecutor or to the Government Advocate forthwith and the question of bail should be re-examined in the light of respective contentions of the parties. The ad-interim order too must conform to the requirements of the section and suitable conditions should be imposed on the applicant even at that stage.

9. Both the High Court as well as the session’s court have the competence and jurisdiction to entertain the anticipatory bail application. It is for the applicant or the petitioner to choose either of these; Onkar Nath Agrawal V.State, 1976 Cr LJ 1142.

10. Two basic principles to be kept in mind while considering the question of grant of anticipatory bail are:

a. That there should be no likelihood of the accused absconding :

i. The length of his residence in community;

ii. His employment, status, history and financial condition;

iii. His family ties and relationships;

iv. His reputation, character and monetary condition;

v. His prior criminal record including any record of prior release on re-cognizance or on bail;

vi. The identity of the responsible members of the community who would vouch for his reliability;

vii. The nature of the offence charge, and the apparent probability of conviction and the likely sentence in so far as these facts are relevant to the risk of non-appearance;

viii. Any other factor indicating the ties of the accused to the community or bearing the risk of willful failure to appear.

ix. There should be no likelihood of the accused misusing his liberty.

Some Illustrative Case Laws are:

• Kusum Rani Bansal v. State of Punjab, 1978 Cur LJ (Cr) 235 (236) (P&H); The investigation was on and over eight months had passed but nothing incriminating had been discovered. The conditional pre-arrest bail to the petitioners was granted. The condition was that they will/would be available for investigation as and when required.

• Chand Mohd v. State, Cr LR 507 (508) (Raj). It was observed that it would not be unreasonable to enlarge the accused on bail where it appeared that the condition of the injured had been improved and injuries caused by a sharp object was not sufficient to cause death.

• Dilbag Singh Deleka v. State, 1997 Cur LJ 237 (247), it has been held that vague allegations in the FIR and the same remained unsubstantiated up to the date of hearing of the petition, is a fit case for the grant of anticipatory bail.

• K.S.Mathur V. State of Rajasthan, 1981 Cr Cas 281 The main consideration where anticipatory bail should not be refused are: the nature of the accusation and the evidence besides the status of the accused.

Since the grounds abovementioned are not exhaustive, merely illustrative and every bail application has to be decided on its own facts and circumstances.

(Kapil Chandna Advocate (Practicing in The Supreme Court of India)-Mobile- 9899011450,9911218741, Email- Advocate.kapilc@gmail.com)

Monday, 1 February 2016

TAX

Highlights of Companies (Amendment) Bill, 2016

Sainath Gupta 17:20:00

On March 16, 2016, a Bill to further amend the Companies Act, 2013 was introduced in the Lok Sabha (Upper House of the Parliament) to address the difficulties raised by various stakeholders and to improve the ease of doing business in India.

Most of the amendments proposed in the Bill are to implement the recommendations of the Company Law Committee. The Bill, once passed, would become the second amendment to the Act within a period of two years. There have been a number of notifications, rules, orders, circulars, clarifications, etc. issued already.

This Bill proposes over 70 amendments. Some of the key amendments are listed below:

Insertion of new Section 3A: If If at any time the number of members of a public company or a private company is reduced below the statutory limit, and the company carries on business for more than six months, every person who is a member of the company during that time that it so carries on business after those six months with cognisant of the fact that it is carrying on business with less than seven members or two members, as the case may be, shall be severally liable for the payment of the whole debts of the company contracted during that time, and may be severally sued therefor.”.

Amendment of Section 4(1)(c): The Bill proposed to allow the Companies to have a generic object clause or to to pursue any specific object or objects, as per the law for the time being in force. Provided that in case a company proposes to pursue any specific objects or restrict its objects, the Memorandum shall state the said object or objects for which the company is incorporated and any matter considered necessary in furtherance thereof and in such case the company shall not pursue any act or activity or business, other than specific objects stated in the Memorandum.

Amendment of Section 4(5)(i): The period of name reservation is proposed to be reduced to 20 days from sixty days from the date of approval or such other period as may be prescribed.

Insertion of two new section after Section 4(6): 1. Section 4(6A): A company may adopt the model memorandum applicable to such a company; 2. Section 4(6B): Any company which is registered after the commencement of the Companies (Amendment) Act, 2016, in so far as the registered memorandum of such company does not exclude or modify the contents in the model memorandum applicable to such company, those contents shall, so far as applicable, be the contents of the Memorandum of that company in the same manner and to the extent as if that was contents of the duly registered memorandum of the company.

Amendment of Section 7(1)(c): A declaration from each of the subscribers to the memorandum and from persons named as the first directors, if any, in the articles that he is not convicted of any offence in connection with the promotion, formation or management of any company, or that he has not been found guilty of any fraud or misfeasance or of any breach of duty to any company under this Act or any previous company law during the preceding five years and that all the documents filed with the Registrar for registration of the company contain information that is correct and complete and true to the best of his knowledge and belief;

Amendment of Section 12(1): The Company shall have a registered office within thirty days of its incorporation.

Amendment of Section 12(4): Notice of every change of the situation of the registered office, after the date of incorporation, shall be given to the Registrar within thirty days of the change.

Subsititution of section 42: Entire section 42 is substituted. The key highlights of section 42 proposed by the Bill are as follows:

A company shall not utilise monies raised through private placement unless allotment is made and the return of allotment is filed with the Registrar in accordance with sub-section (8) of section 42;
A company making any allotment of securities under this section, shall file with the Registrar a return of allotment within fifteen daysfrom the date of the allotment;
The maximum amount of penalty is amount raised through the private placement or two crore rupees, whichever is lower.

Subsititution of section 62(2): The notice referred to in sub-clause (i) of clause (a) of sub-section (1) (offer letter) shall be dispatched through registered post or speed post or through electronic mode or courier or any other mode having proof of delivery to all the existing shareholders at least three days before the opening of the issue.

Amendment of Section 73(2)(c): depositing, on or before the 30th day of April each year, such sum which shall not be less than twenty per cent. of the amount of its deposits maturing during the following financial year and kept in a scheduled bank in a separate bank account to be called deposit repayment reserve account;”;

Omission of section 73(2)(d): The requirement for deposit insurance is omitted.

Insertion of 4th proviso to Section 77(1): Creation of such charges are not required which are in consultation with the Reserve Bank of India (RBI).

Amendment of Section 78: In case the Company fails to register the Charge within a period of thirty days, the Registar may, on an application by the company, allow such registration to be made within a period of three hundred days of such creation on payment of such additional fees as may be prescribed:

Subsititution of section 90: The key highlights of section 90 are as follows:

Concept of significant beneficial owners in a company has been introduced and if they holds beneficial interests, of not less than twenty-five percent or such other percentage as may be prescribed, shall make a declaration to the Company, if any person fails to make a declaration, he shall be punishable with fine which shall not be less than one lakhs rupees but which may extend to ten lakh rupees;
Every company shall have to maintained a register of interest declared by individuals having beneficial interest in the Company and this register is open to inspection by any member of the Company on payment of such fees as may be prescribed;
Every company shall file a return of significant beneficial owners of the Company and changes therein with the Registrar;

Insertion of proviso to Section 92(1)(c): The Central Government may prescribe abridged form of annual return for one person and small company.

Omission of section 93: Return in case of promoter’s stake changes and top ten shareholders is proposed to be omitted.

Amendment of Section 96(2): Annual General Meeting of an unlisted company may be held at any place in India if consent is given in writing or by electronic mode by all the members in advance.

Amendment of Section 100(1): An extraordinary general meeting of the company, other than of the wholly owned subsidiary of a company incorporated outside India, shall be held at a place within India.

Amendment of Section 101(1): a general meeting may be called after giving shorter notice if consent, in writing or by electronic mode, is accorded thereto-

1. In case of AGM- by not less than 95% of the members; and

2. In the case of any other general meeting, by members of the company-

a) company having a share capital- not less than ninty-five per cent. of such part of the paid-up share capital of the company

b) company having no share capital-not less than ninty-five per cent. of the total voting power exercisable at that meeting

Amendment of Section 117(2): 1. The fine on failure to file form MGT-14 has been reduced; 2. No need to file MGT-14 for power exercised by the Board of Directors of any of the powers under clause (a) and (c) of section 180(1).

Amendment of Section 123(3): The Board of Directors of a company may declare interim dividend during any financial year or at any time during the period from closure of financial year till the holding of the annual general meeting out of the surplus in the profit and loss account or out of profits of the financial year or out of profit generated in the financial year till the quarter preceding the date of declaration of the interim dividend.

Amendment of Section 129(3): The Company having subsidiaries or associate companies, it shall prepare a consolidated financial statement of the Company and and of all the subsidiaries and associate companies in the same form and manner as that of its own and in accordance with applicable accounting standards. It shall also attach along with its financial statement, a separate statement containing the salient features of the financial statement of its subsidiary or subsidiaries in such form as may be prescribed.

Amendment of Section 134(1): The financial statement, including consolidated financial statement, if any, shall be signed by the chairperson of the company or by two directors out of which one shall be managing director, if any, and the Chief Executive Officer, the Chief Financial Officer and the company secretary of the company, wherever they are appointed, or in the case of One Person Company, only by one director, for submission to the auditor for his report thereon.

Insertion of sub section (3A) to section 134: The Central Government may prescribe an abridged Board’s report for One Person Company or small company.

Amendment of Section 135(1): The provision of CSR is applicable to companies which fall under the threshold limit of net worth or turnover or net profit during any financial year. The Bill proposed to replaced the words “any financial year” by the words “preceding financial year”. Provided that where a company is not required to appoint an independent director under sub-section (4) of section 149, it shall have in its Corporate Social Responsibility Committee two or more directors.

Amendment of Section 135(5): For the purposes of this section “net profit” shall not include such sums as may be prescribed, and shall be calculated in accordance with the provisions of section 198.’.

Insertion of new proviso to section 135(1): where a company is not required to appoint an independent director under sub-section (4) of section 149, it shall have in its Corporate Social Responsibility Committee two or more directors.”

Omission of first proviso to section 139(1): Ratification of Statutory Auditor by the shareholders is proposed to be omitted.

Subsititution of section 149(3): Every company have a residental director during the financial year.

Amendment of Section 149(6)(c): The Bill proposes to specify limits with respect to pecuniary relationship to determine the independency of a person to be appointed as an Independent Director and to equipped with the SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015 with respect to material’ pecuniary relationships.

Insertion of proviso to section 153: Any identification number, prescribed by the Central Government shall be treated as Director Identification Number for the purposes of this Act (The Companies Act, 2013 read with The Companies (Amendment) Act, 2016.

Insertion of proviso to Section 160(1): The requirements of deposit of Rs. 100,000 shall not apply in case of appointment of an independent director or a director recommended by the Nomination and Remuneration Committee, if any, constituted under sub-section (1) of section 178.”.

Insertion of explanation to Section 165(1): For reckoning the limit of directorships of twenty companies, the directorship in a dormant company shall not be included.

Amendment of Section 167(1)(a): In case a director incurs disqualification under sub-section (2) of section 164, he shall vacate the office in all the companies, other than the Company which made default.

Amendment of Section 177(1) : It is proposed that every listed public company shall constitute an Audit Committee.

Amendment of Section 177(4)(iv): It is proposed that in case of transaction, other than transactions referred to in section 188, if not approved by the Audit Committee, it shall make recommendation to the Board.

Amendment of Section 178(1): It is proposed that every listed public company shall constitute the Nomination and Remuneration Committee.

Amendment of Section 178(2): It is proposed that the Committee shall specify the methodology for effective evaluation of performance of Board, its committees and individual directors to be carried out either by the Board, by the Nomination and Remuneration Committee or by an independent external agency.

Amendment of Section 178(4)(c): The Nomination and Remuneration policy shall be disclosed in the website of the Company, if any, and the salient features of the policy and changes therein, if any, along with the web address of the policy, if any, shall be disclosed in the Board’s report.

Amendment of Section 180(1)(c): It is proposed that to calcualte the borrowing limit, aggregate of paid-up share capital, free reserves and securities premium shall be considered.

Subsititution of Section 185: Some of the key highlights are:

a) Restriction on advancing of any loan, including any loan represented by a book debt to, or give any guarantee or provide any security in connection with any loan taken by any director of company, or of a company which is its holding company or any partner or relative of any such director; or any firm in which any such director or relative is a partner.

b) Loan can be granted to the parties covered under explanation to section 185(2) subject to special resolution passed, explanatory statement to notice shall contain the full particulars of the loans given, or guarantee given or security provided and the purpose for which the loan or guarantee or security is proposed to be utilised by the recipient and the loans are utilised by the borrowing company for its principal business activities.

Amendment of Section 186: Key highlights are:

Omission of Section 186(1);

Employee will not be included in the ambit of section 186(2);

Where the Investment, Loan made and Guarantte ot secutity provided exceed the limit prescribed under section 186(2), Special Resolution shall be required;

No approval of shareholders shall be required where a loan or guarantee is given or where a security has been provided by a company to its wholly owned subsidiary company or a joint venture company, or acquisition is made by a holding company, by way of subscription, purchase or otherwise of, the securities of its wholly owned subsidiary company.

Amendment of Section 188(1): It is proposed that the requirement relating to restriction on voting by relatives in the general meeting shall not apply to a company in which ninety per cent. or more members, in number, are relatives of promoters or are related parties

Amendment of Section 188(3): It is proposed that the non-ratified transaction shall be voidable at the at the option of the Board or, as the case may be, of the shareholders.

Omission of Section 194 (prohibition on forward dealing in securities of company by director or KMP) & 195 (prohibition on insider trading of securities)

Amendment of First proviso to Section 197(1): It is proposed that the no Central Government approval shall be required in case of payment of remuneration exceeding 11% of net profit of the Company.

Amendment of Second proviso to Section 197(1): It is proposed that the Special Resolution shall be required for payment of remuneration exceeding the limit prescribed under the second proviso to section 197(1).

Amendment of Section 366(2): It is proposed to allow conversion of partnership firms, LLP, society or any other business entity formed under any law for the time being in force into companies with two or more members.

Amendment of Section 447: It is proposed that any person who is found to be guilty of fraud involving an amount of at least ten lakh rupees or one percent. of the turnover of the company, whichever is lower shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud.

Provided further that where the fraud involves an amount less than ten lakh rupees or one per cent. of the turnover of the company, whichever is lower, and does not involve public interest, any person guilty of such fraud shall be punishable with imprisonment for a term which may extend to five years or with fine which may extend to twenty lakh rupees or with both.

Author: CS Manohar Mishra-Associate Member of the ICSI & a Commerce Graduate from Calcutta University, he can be contacted atcsmanoharmishra@gmail.com

Tuesday, 29 December 2015

law

What is Forensic Audit ?

Sainath Gupta 11:39:00

Forensic Audit can be termed as an examination and evaluation of a firm’s or individual’s financial information for use as evidence in court.

A forensic audit can be conducted in order to prosecute a party for fraud, embezzlement or other financial claims.

The objective of forensic audit is to relate the findings of audit by gathering legally tenable evidence and in doing so the corporate veil may be lifted (in case of corporate entities) to identify the fraud and the persons responsible for it (a criminal offence).

While conducting forensic audit regularity and propriety of off balance-sheet items (like contracts, etc.) are examined.

Forensic auditing aims at legal determination of whether fraud has actually occurred. In the process, it also aims at naming the person(s) involved (with a view to take legal action).

Forensic auditing[1] is focused on the identification, interpretation, and communication of the evidence of underlying strategic economic and reporting events. It not single-event based, like a fraud examination, and a forensic audit is not used to render an audit opinion. As such, forensic audits are easily adapted to a principles-based accounting environment with broad guidelines applied to a variety of accounting investigations without using rule-based audit approaches or more narrowly-focused fraud practices.

As put forth by the new Companies Act’2013 in terms of Section 143(3), now Auditor is required to report on frauds.

Hence, both nationally and internationally, Auditor’s legal liabilities for not discovering their client’s fraudulent financial actions are simply not going to disappear. It is hard to understand how the liability for undiscovered frauds or other malfeasance can be reduced by continuing to strongly rely on the present rule-based, audit-reporting model. When forensic accounting practices are incorporated into a separate forensic audit, they have the potential to overcome problems associated with identifying financial malfeasance within the traditional audit-reporting model.

Big Four along with Grant Thornton and BDO International released a white paper entitled “Serving Global Capital Markets and the Global Economy” herein the “Global Report” (Global Public Policy Symposium 2006). The Global Report is concerned with the legal liabilities accounting firms are facing from a host of expanding lawsuits based on stockholders’ and others’ losses from after audit negative financial events such as fraud. To counter this hostile legal climate and protect the firms from liabilities judgments, the Global Report’s authors suggest that all public companies have forensic audits.

The Public Company Oversight Board (PCAOB) issued Release No. 2007-001 in January 2007. The Release defines forensic accounting as operating outside the courtroom and applying “special skills in accounting, auditing, finance, quantitative methods, certain areas of the law, and research, and investigative skills to collect, analyze, and evaluate evidential matter and to interpret and communicate findings (Public Company Oversight Board 2007)

The PCAOB has stated that “forensic audits can be performed to achieve various objectives and can include a variety of different procedures”.

Taking into account the above developments globally perhaps it is time to start learning A,B,C of Forensic Audit.

(Author CA Piyush Baranwal, DISA, Certified FAFP(ICAI),Certified in International Taxation(ICAI) can be reached at mail@baranwal.in or 9818133880,Articles can be accessed and read at forensicpundit.com)

[1] Relevant extract from Journal of Digital Forensics, Security & Law,Vol.4(1)Defining a Forensic Audit by G.Stevenson Smith & D.Larry Crumbley.

Thursday, 24 December 2015

law

Key Aspects of Proposed Merger of Reliance Communications and Aircel

Sainath Gupta 21:31:00

Reliance Communications Ltd (R-Com)entered into talks with Aircel Ltd for a potential merger a month after it announced that it would buy the local unit of Russia’s Sistema JSFC. If the Proposed Merger takes place it will change the present scenario of Indian Telecom Industry and will be an event to analyse.

In this article I will discuss some of the key aspects of the Proposed “Reliance – Aircel” Merger.

R-Communications has entered into a 90-day exclusive period of discussions with Malaysia based Maxis Communications Bhd & Sindya Securities and Investments Pvt. Ltd, the shareholders of Aircel.

The three-way deal, if it materializes, will create a telecom firm with 150 million subscribers that will hold the most spectrum in the country—around 19.3% of the total airwaves available with telecom operators.

Benefits :

i. The talks will consider the potential combination of the Indian wireless business of R-Communications and Aircel to mutually derive the expected substantial benefits of incountry consolidation, including opex (operating expenditure) and capex (capital expenditure) synergies and revenue enhancement.

ii. Post-merger, Reliance Communications will be debt-free, with over Rs 10,000 crore transferred to the separately-listed combined entity. Deal would create an entity with revenue of around Rs 25,000 crore annually and EBITDA (earnings before interest, taxes, depreciation, and amortization) of around Rs 6,000-7,000 crore.

iii. R-Com shareholders will receive free shares in a new combined wireless entity and R-Com’s debt of over Rs.10,000 crore will be transferred to this company.

iv. The potential combination will exclude R-Com’s towers and optical fiber infrastructure, for which R-Com is proceeding with an asset sale, as announced on 4 December 2015.

Approval:

The discussions between R-Com and Aircel are non-binding and any transaction will be subject to due diligence, along with shareholders and other third-party like ROC , SEBI , Competition Commission of India & TRAI.

Prospect of the Merger:

i. The future combination indeed looks very promising as TRAI’s data shows that Aircel had 83,995,783 connections at the end of November 2015 and that 70.11% of its connections were active. The Active connection data represents peak VLR (Visitor Location Register) data for the month.

ii. While Reliance Communications showed that it had 110,385,303 mobile connections at the end of the period with 97.06% of its connections were active.

iii. If the deal goes through, the combined entity of RCom, Sistema, and Aircel will become a formidable player with about 200 million subscribers, heating up the consolidation in the telecommunications sector in India, the world’s second largest market by subscribers.

- CS Rahul Harsh, An Associate Member of The ICSI and A Commerce Graduate from Kolkata, Currently Employed as an Assistant Company Secretary with Aanchal Ispat Limited.

Email : csrahulharsh@gmail.com

Tuesday, 13 October 2015

law

SOURCES OF FUNDING – Private Limited Company

Sainath Gupta 17:40:00

Background:

If Promoters are starting a business (Company) or trying to grow an existing business (Company), all certainly will need money. This money can come from various sources.

Source of Funding:

Roughly speaking, Investments break down into two different forms: Debt and Equity.

Debt Funding: Debt means money borrowed from lenders by the company and it pay the interest on that investment. Companies are required to repay the money with interest over time. Debt include debentures, loans and borrowing etc.

Equity Funding: Company can take on an equity investment – in which Company can sell a portion of the Company to an investor in return for cash or something else of value. Equity funding includes shares (Equity/Preference Shares).

Generally first source of capital will probably be the loan from promoters. Few businesses are entirely funded by parties other than the entrepreneur. There are definite advantages for promoters here: 100% control and ownership. Promoters own the whole company, control the show, and stand to reap the gains so that your venture become valuable.

In this article we will discuss funding of Private Limited Company by Debt .

As per sub-clause (iii) of Clause 68 of Section 2 of Companies Act, 2013 definition of Private Company “means a Company which by its articles prohibits any invitation to the public to subscribe for any securities of the Company;

Loan & borrowing:
A. [1]SECTIONS INVOLVED

Section 179(3) The Board of directors of the Company shall borrow money on the behalf of Company means of resolutions passed at meetings of Board of Directors.
Section 2(31) Includes any receipt of money by way of deposit or Loan or in any other form by a Company.
[2]Section 73 Prohibition on acceptance of deposits from public.
B. RULES INVOLVED:

Rule 4,5,6,7 of (The Companies (Acceptance of Deposits) Rules, 2014– Forms and particulars of advertisements or circulars, manner and extent of deposit, Creation of security and of Trustee for deposits
Rule 18 of The Companies (Share Capital and Debenture) Rules, 2014
C. CIRCULAR INVOLVED:

♠ G.S.R. 464(E) dated 5th June, 2015 –

According to this circular there is no need to file MGT-14 by Private Limited Company on acceptance of loan.
Section 180 does not apply on the Private Limited Company.
Clause (a) to (e) of sub-section (2) of Section 73 shall not apply to Private Limited Company which accepts any monies from its members monies not exceeding 100% of aggregate of the paid up share capital and free reserves, and such Company shall file the details of monies so accepted to the Registrar in such manner as may be Specified.
♠ G.S.R. 695(E) dated 15th September, 2015– The Companies (Acceptance of Deposit) second amendment Rules, 2015’

D. FORMS INVOLVED:

No form is required to be filed with ROC in case of acceptance of Loan by Private Limited Company.

E. RESOLUTION INVOLVED:

For the acceptance of Loans by the Private Limited Company a “[3]Board Resolution” shall be passed in the Board Meeting of the Company.
Board Meeting can be held through video conferencing also.
I. Loan From Directors:
As per Chapter V, The Companies (Share Capital and Debenture) Rules, 2014 , point VIII of definition of Deposit.

Any amount receipt from a person, who at the time of acceptance was a Director of the Company, will not be considered as Deposit.

Note:

Position at the time of acceptance of Deposit will be considered.
Director will submit a declaration with the Company that amount is not being given out of the funds acquired by him by borrowing or accepting loans or deposits from others.
Company can accept any amount of Loan from the Director.
II. Loan from shareholders:

a. Private Limited Company can accept deposits from the Members upto 100% of aggregate of the paid up share capital and free reserves. (Clause (a) to (e) of Section 73(2) will not be applicable on Private Limited Company if deposit is upto 100% of paid up share capital and Free Reserve)
b. [4]If the Company wants to accept the deposits of more than 100% of paid up share capital and free reserve from the members of the Company then company can accept the same by following the procedure mentioned under Section 73.

III. Loan from Relatives of Directors:

As per Companies (Acceptance of Deposit) second amendment rules, 2015 in rule 2, in sub-rule (1), clause (c), of sub-clause (viii), the following shall be substituted, namely:-

(viii) any amount received from a person who, at the time of the acceptance of the amount, was a director of the Company or a relative of the director of the private limited company.

Any amount receipt from a person, who at the time of acceptance was a relative of director of the Company, will not be considered as Deposit.

Note:

Position at the time of acceptance of Deposit will be considered.
Relatives of directors will submit a declaration with the Company that amount is not being given out of funds acquired by him by borrowing or accepting loans or deposits from others.
Company can accept any amount of Loan from the relative of director.
The Company shall disclose the details of money so accepted in the Board’s Report.
IV. Loan from other Company:

As per sub clause (vi) of clause (c) of rule 1 of the Companies (Acceptance of Deposits) Rules, 2014, Deposit doesn’t include any amount received by Company from any other Company (Inter corporate Loans).

Conditions:

The Company which is giving the loan complies with the conditions of Section 186 and Section 185 of Companies Act, 2013. These sections are not applicable on the Company accepting the loan.

♠ Allowable Loan Foreign Holding to Indian Subsidiary.

Section 185 is applicable only when a ‘company’ gives loan to its director or any person in whom the director is interested. However, the definition of a ‘company’ under Section 2(20) means only a company incorporated under 2013 Act or any previous company law. So, the restriction in Section 185 will not apply when a holding company incorporated outside India gives a loan, guarantee or security to its Indian subsidiary.

♠ Loan Holding – Wholly Own Subsidiary

Any loan made by a Holding Company to its Wholly own Subsidiary Company or any guarantee given or security provided by a Holding Company in respect of any loan made to its wholly own subsidiary Company. Condition: loan made under this clause utilized by the wholly own subsidiary company for its principal business activity only.

♠ Company can accept Loan also from Section 8 Companies, one person Company.

Question: Whether LLP can give Loan to Company under this exemption: Solution: NO, LLP can’t give loan to Private Limited Company under this Clause. Because this clause cover only Company not Body Corporate.
V. Loan from employee of the company:

As per sub clause (x) if clause (c) of rule 1 of the Companies (Acceptance of Deposits) Rules, 2014, Deposit doesn’t include any amount received from any employee of the Company not exceeding his annual salary under a contract of employment with the company in the nature of non-interest bearing security deposit.

VI. Loan from government entities:

State/ Central Govt.

Any amount received from the Central Government or a State Government, or any amount received from any other source whose repayment is guaranteed by the Central Government or a State Government or any amount received from a local authority, or any amount received from a statutory authority constituted under an Act of parliament or a state legislature;
Foreign Government/ other Sources:

Any amount received from foreign Governments, foreign/ international banks, multilateral financial institutions (including, but not limited to, International Finance Corporation, Asian Development Bank, Commonwealth Development Corporation and International Bank for Industrial and Financial Reconstruction), foreign government owned development financial institutions, foreign export credit agencies, foreign collaborators, foreign body Corporates and foreign citizens, foreign authorities or persons resident outside India subject to the provisions of Foreign Exchange Management Act, 1999 and rules and regulations made there under
Loan from Banking Company:

Any amount received as a loan or facility from any banking company or from the State Bank of India or any of its subsidiary banks or from a banking institution notified by the Central Government under section 51 of the Banking Regulation Act, 1949 (10 of 1949), or a corresponding new bank as defined in clause (d) of section 2 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (5 of 1970), or from a co-operative bank as defined in clause (b-ii) of section 2 of the Reserve Bank of India Act, 1934 (2 of 1934);
VII. Loan from other sources:

Any non-interest bearing amount received or held in trust;
Section 2(30) Debenture include debenture stock, bonds or any other instrument of a Company evidencing a debt. A Company may issue debentures under Section 71 of CA-2013.
6. Companies are not allowed to borrow from followings

I. [5]Loan to Companies fall under Section 185:

As per Section 185: No Company ( Private & Public)

Directly or Indirectrly
Advance any loan, including book debt,
to any of its directors or to any **other person in whom the director is interested
Other person in whom the director is interested:

i. Any private company of which director is a director or member

ii. Body Corporate in which 25% or more voting power rests with one or more directors

iii. Body Corporate whose Board accustomed to act on directions of BOD or Directorsof lending company.

It is clear from the above mentioned extract provision of Section 185 that, A Company can’t give the loan to Director and person in whom the director is interested.

Example:

If Mr. A is Director of Company XYZ (Private Limited Company) and Director of Company PQR. Then Company PQR can’t accept loan from Company XYZ.
If Mr. A is Director of Company XYZ (Private Limited Company) and member of Company PQR. Then Company PQR can’t accept loan from Company XYZ.
II. Loan from HUF:

The exemption under sub-clause [6](viii) of clause (b) of Rule 2 of the Companies (Acceptance of Deposits by Companies) Rules, 2014 would apply only to deposits received from directors or relative of director. The exemption will not apply to HUF in which all the members of HUF are Directors of the Company or Member of the Company.

Whether HUF can be treating as Relative of Director?

NO, It can’t be treated as relative of the Director. Because as per Companies Act Clause 2(77) “Relative with reference to any person, means they are member of HUF”.

Example: A, B, C, D being members of HUF (related to each other) are also the director of the Company. But HUF shall not be treated as relative of A,B,C,D.

Whether HUF can be Member?

As per Clause 2(55)(ii) of the Companies Act, 2013 “members in relation to a Company means-every other PERSON who agrees in writing to become a member of the Company and whose name is entered in the register of member of the Company.

In the case of a joint Hindu family, as it is not a person it cannot be a subscriber, though the Karta or manager may be one. A HUF can be member through its Karta or Manager.

Therefore, HUF can’t be a member directly; it can’t give loan to Company. If Company accept loan from HUF it will be treated as a deposit.

Whether Company can accept loan from HUF If, Karta is shareholder/Director of the Company:

No, Company can’t accept loan from a HUF even if its Karta is member /director of the Company. Because Company can accept loan only from person except Director/Member or Relative of the Director.

III. Loan from Partnership Firm:

The exemption under sub-clause [7](viii) of clause (b) of Rule 2 of the Companies (Acceptance of Deposits by Companies) Rules, 2014 would apply only to deposits received from directors or relative of director. The exemption will not apply to Partnership Firm in which all the Partners are Directors of the Company or Member of the Company.

Whether Partnership firm can be member?

Department’s Clarification.-“A firm, not being a person cannot be registered as a member of a company except where the company is licenced under section 25 of the Companies Act, 1956”. [Circular No, 4n2, dated 9-3-1972]

‘Person’ includes a company and on behalf of company as well as of any other person, an agent duly authorised may sign. But a ‘firm’ as such cannot sign, as a firm is not ‘person’. If the partners of a ‘firm’ subscribe, they become joint holders of the share or shares subscribed for. The Registrar will not accept the signature of the firm as a subscriber but only if the partners individually sign as joint subscribers. See Re, Land Credit Co. of Ireland, Weikersheim’s case, (1873) 8 Ch Appeal 83 1; Re, Glory Paper Mills Co., Dunster’s case, (1894) 3 Ch 473. Nor is a firm entitled to be registered as member in the name of the firm but only in the names of the individual partners. Re, Vagliano & Anthracite CDIlieries Ltd., (1910) 79 LJ Ch 769.

Partnership is merely an association of persons for carrying on the business of partners and ‘firm’, is a compendious method of describing the partners. A firm, however, is not a person. Bacha F. Guzdar (Mrs.) v. CIT, (1955) 25 Com Cases 1 : AIR 1955 SC 74. A pooling contract is not a partnership or an association, Madan Gopal v. Shewal Das, (1934) 4 Com Cases 339 (Lah), nor a chit fund, TP. Naidu v. A.S. Mudaliar, AIR 1919 Low Burma 102

Whether Company can accept loan from partnership Firm if, one or more partners are shareholder/Director of the Company:

No, Company can’t accept loan from a Partnership firm even if its partners are member /director of the Company. Because Company can accept loan only from person except Director/Member or Relative of the Director.

IV. Loan from Non Relatives:

Company can’t accept loan from relatives of the director as per Companies Act, 2013 But as per ‘The Companies (Acceptance of Deposit) second amendment Rules, 2015’ dated 15th September, 2015 G.S.R. 695(E) Private Limited Company can accept loan from the relative of the Director if relative furnish to the company at the time of giving the money, a declaration in writing to the effect that the amount is not being given out of funds acquired by him by borrowing or accepting loans or deposits from others.

LIST OF PERSONS TO WHOM COMPANY CAN ACCEPT OR CAN’T ACCEPT THE LOAN

Loans from Conditions, if any:
1.) Shareholder: Member: Yes, can accept, but subject to the condition specified in deposit Rules
2.) Director/Relatives of Director Yes, can accept, but the director/relative will give a Declaration in writing that money is not given out of borrowed funds and company will disclose it in the Board’s report.
3.) Employee Yes, can accept up to the employee’s annual salary ( there should be a contract of employment with the company) in the nature of non- interest bearing security deposit.
4.) Any other Individual Can’t accept because it is prohibited by the definition of Private Company.
5.) Proprietorship Firm ; Can’t accept because it can’t be director, Member or relative of Director.
6.) HUF Can’t accept because it can’t be director, Member or relative of Director.
7.) Partnership Firm Can’t accept because it can’t be director, Member or relative of Director.
8.) Any Company Yes, can accept, but also comply with Sec 179(3) wherein the conditions are specified for the lender
9.) Banks Yes, can accept
10.) Trust Yes, can accept, but loan received should be non- interest bearing.
11.) Outside India Yes, can accept, but subject to the provisions of the Foreign Exchange Management Act, 1999 and rules and regulations made there under.
12.) Govt. organization ( eg. SIDBI) Yes, can accept
13.) Any other Financial Institution which are not incorporated as Banks (eg. Religare, Fullerton, Barclays, Bajaj Finance).
Yes, can accept

OTHER SOURCES OF FUNDING FOR PRIVATE LIMITED COMPANY:

Except sources mentioned above private Limited Company can raise funds from the followings:

By issue of Debentures
By issue of Equity Shares
By issue of Preference Shares
I will discuss the provisions of issue of debentures/equity share/ preference shares in a separate article.

TERMS USED IN THE ARTICLE

Meaning of- ‘Relative’

The term ‘Relative’ defined under Section 2(77) read with Rule 4 of Companies (Specification of definitions details) Rules, 2014 of the Companies Act, 2013

Members of HUF
Husband and wife
Father, Mother,
Son, Son’s wife
Daughter
Daughter’s Husband
Brother
Sister
Meaning of-‘Person’

Meaning of word Person is not defined under Companies Act, 1956 & Companies Act, 2013.

General Clauses Act, 1899: The word ‘person’ is not defined in this Act but in the General Clauses Act, 1899 [s. 3 (39)] as including a company or other association or body of individuals. Notwithstanding this, it has been held that the expression ‘persons’ in this section means only individuals and not bodies of individuals, Senaji Kapurchand v. Pannaji Devichand, AIR 1930 PC 300 affirming ILR 50 Mad 175. See also Akola Gin Combination v. North Cote Ginning Factory, AIR 1914 Nag 26, This confusion has been cleared by the decision of Madras High Court in Sri Murugan Oil Industries (P.) Ltd. v. A. V Suryanarayan Chettiar, (1963) 33 Com Cases 833 : AIR 1963 Mad 128 where it was held that in case a company enters into a partnership, the company shall be taken as one person. There is no reason why incorporated bodies which are legal persons and each of which consists of more than twenty members cannot form themselves into partnerships for carrying on joint business, provided that they are authorised by their memorandum of association. Nor can there be any legal objection for companies and individuals forming partnership firms for purposes of trade. For the purposes of the next section (s. 12), the word ‘person’ has been held as including companies and corporations (Cf. HALSBURY’sSLAWS OF ENGLAND, 51 (Vol. 7, Para 75, 4th Edo.)

Income Tax Act: As per clause 2(31) of Income Tax Act, 1961 Person Include (i) an individual,(ii) a Hindu undivided family,(iii) a company,(iv) a firm,(v) an association of persons or a body of individuals, whether incorporated or not (vi) a local authority, and(vii) every artificial juridical person, not falling within any of the preceding sub-clauses. In other word the term person include the term ‘person’ includes Individual, Hindu Undivided Families [HUFs], Association of Persons [AOPs], Body of individuals [BOIs], Firms, LLPs, Companies, Local authority and any artificial juridical person not covered under any of the above.

Distinction between Loan and Deposits:

For the Purpose of provisions of public deposits, all borrowings are ‘deposits’ unless excluded

In V srinivas v. Saraswathi Finance Corporation (2002), It was observed, ‘While a loan may include deposit, every loan is not a deposit.
In Sharda Talkies Firm V. Smt Madhulata Vyas AIR 1996, it was held that there is subtle distinction between a deposit and a loan. In case of loan, the amount is given by creditor to debtor at the request of and for requirements and dues of the debtor under certain terms and conditions, In case of a deposit; the depositee receives money at the instance of depositor. In case of loan, the debtor has to request the creditor to advance certain amount for meeting his requirements.
I. Borrowings which are excluded from the definition of Deposits?
i. Amount from government and guaranteed by government.
ii. Amount received from foreign government or foreign Bank.

iii. Loan from Banks and Financial Institutions.

iv. Amount received against commercial paper.

v. Inter corporate borrowing.

vi. Subscription to securities and call in advance.

vii. Amount from Directors.

viii. Secured Bonds/debentures.

ix. Convertible bonds/debentures.

x. Non-interest bearing security deposit from employee.

xi. Amount in trust.

xii. Advance and security deposit received by company.

xiii. Unsecured loans from promoters.

xiv. Amount accepted by Nidhi Company.

II. If deposit in the joint name of director and other person then how it will be treated? –
A deposit in joint names of director and another person, who may or may not be director, should be permissible, if name of director is first depositor, though there is no specific provision.
III. If a person ceases or resign from the post of director after giving loan then such loan will be considered as deposits or not?
Requirement of director will be check at the time of receipt of amount. Thus, later he may cease to be a director.
IV. If a person is director and shareholder of the Company and giving loan to Company whether it will be considered as loan from Director or Member
As per my understanding this should be treat as loan from the Director instead of the
Shareholder of the Company.

V. Question: Whether LLP can give Loan to Company under this exemption:
Solution: NO, LLP can’t give loan to Private Limited Company under this Clause. Because this clause covers only Company not Body Corporate.
[1] Private Limited Companies are exempted from the provisions of Section 180(1)(c) and 117(3)(g) w.e.f. 05th June, 2015.

[2] The word “Company” in Section 73 includes a public Company of any size and a private Company.

[3] Board resolution can’t be passed by Circular Resolution in case of acceptance of loan.

[4] Complete procedure for acceptance of Deposit from the Members are given in article Series No. 91. If anyone want that article drop me mail on csdiveshgoyal@gmail.com.

[5] **But after publication of Exemption Notification on Private Limited Companies (Dated 05.06.2015):

The above restriction will now no longer be applicable to the Private Companies which satisfies All The 3 Conditions mentioned below:

a. In whose share capital no other body corporate has invested any money;

b. If the borrowings of such a company from banks or financial institutions or any body corporate is less than [lower of (i) Two times of paid up share capital or (ii) Rs. 50 Crore]; and

[6] any amount received from a person who, at the time of the receipt of the amount, was a director of the company or a relative of the director of the private company

[7] any amount received from a person who, at the time of the receipt of the amount, was a director of the company or a relative of the director of the private company