NTPCprotests accounting norms on forexriskprovision
JOE CMATHEW & JYOTI MUKUL
New Delhi, 21 January
Power major NTPC has protested against the new accounting norms that require companies to provide for foreign exchange risks in their contracts.
The change is part of the International Financial Reporting Standards (IFRS), proposed to be made mandatory for all companies. The recently notified Accounting Standard 39 (AS 39) norm recognises and measures financial assets, financial liabilities and some contracts to buy or sell nonfinancial items. Called ‘embedded derivatives’, companies are required to state upfront the perceived changes in the foreign exchange component of the contracts given out by them every year, by making a provision in the profit and loss account.
A foreign exchange component is present even in contracts given to domestic suppliers such as Bharat Heavy Electricals, to arrive at a fair system of comparison with competing foreign companies. On an average, the forex component comprises nearly athird of NTPC’s total contract values. AS 39 defines derivatives as a financial instrument or other contract whose value changes in response to currency exchange rate fluctuations. What has irked NTPC is the need to account for the variation in fair value of the advance contracts entered with suppliers in foreign currencies (embedded derivatives) as separate entries in the profit and loss account. It has sent a letter of protest it has sent to the Institute of Chartered Accountants of India (ICAI), the accounting standards body, against the new norms. AS 39 was prepared by the Accounting Standards Board of ICAI, vetted by the National Advisory Committee on Accounting Standards and notified by the ministry of corporate affairs.
NTPC feels AS 39 is fraught with serious consequences for Indian companies, particularly rate-regulated entities (where a government regulator determines the rate for the product or service) such as those in the power sector.
Currently, all expenditure towards equipment procurement is included in the asset cost. According to NTPC’s director (finance) A K Singhal, the Central Electricity Regulatory Commission (CERC) allows generation companies to capitalise foreign exchange risks. “Any rate variation is a pass through in tariffs (rates),” he said.
Companies like NTPC follow the Construction Work In Progress (CWIP) method for accounting, where a general ledger records the costs directly associated with constructing an asset. Once the asset is placed in service, all costs associated with it that are stored in the CWIP account are shifted into the most appropriate fixed account asset.
If AS 39 is followed, it would impact the asset costs and increase the volatility of earnings reported by Indian corporate entitties, says NTPC’s letter to ICAI.
Feels AS 39 is fraught with serious consequences for Indian companies
NTPCfollows the CWIP method for accounting, in which a general ledger records the costs directlyassociated with constructing an asset
Is yoursuccession plan in place ?
ARVIND RAO
Entrepreneurship is wrought with challenges, ranging from scaling up and administration to resource issues and succession planning. While most of these issues get the entrepreneurs attention, succession planning often remains a blip on their radar. A dangerous mistake, one that can hamper the business continuity in the long run.
Small business owners prefer to keep the ownership and business management under their control, extending it at most to family. This helps the owner manage the everyday affairs - compliance with government authorities, maintaining accounting records and formulating business policies and so on.
Consequently small businesses, generally, operate as sole proprietorships or partnership firms (requiring minimum two partners for the firm to be incorporated under the Indian Partnership Act, 1932). This helps with tax optimisation as well. In partnerships, the partners are typically spouses, who share profits / losses in an agreed proportion. They may continue to operate with just two partners even after scaling up operations.
There is a risk here though. The sudden death of the business owner can lead to continuity issues. Lack of proper succession planning can even result in an abrupt closure of business. For instance in the above mentioned case of a partnership firm with spouses as partners, the owners death calls for immediate dissolution, as per the provisions of the Act.
Life covers do not help either: When an individual takes a life cover, personal obligations like childrens education, marriage and spouses expenses are prioritised. No provisions are made for business-related obligations, especially, when there is athin line of demarcation between business and personal liabilities, which in turn, would add to the financial pressures on the family.
The best bet then is to find yourself a worthy successor who can take the business further. A tough task as children settling abroad or branching out on their own can limit your options.
Nonetheless, succession planning begins with the search for identifying the ideal candidate and then grooming him to step into your shoes. A succession plan ensures seamless transfer of management, besides preparing the employees and the investors about how the company aims to run its business once the chairman or chief executive demits office.
Traditional Indian companies are mostly family-run where the eldest son is usually tipped to assume the mantle on his fathers death. This remained the case in most large corporate houses, such as the Birlas, which started as small entrepreneurial ventures four or five generations ago.
But in recent years, traditional business houses have also tilted in favour of succession planning in keeping with the changing times and to fulfil the aspirations of other members of the family. Large corporate houses such as the Godrej group, Mahindra & Mahindra, Dabur and the Murugappa Group have succession plans in place.
Succession planning could become complex or fail in its purpose if there is a lack of consensus or shortage of talent. Generation gap between the outgoing and incoming chiefs is another challenge that could result in differences in vision, values and approach.
Remedies: To begin with, small business should stop thinking of succession planning as something restricted to large conglomerates. In fact, it should be a part of every companys strategic plan to be able to see the company go forward in the future. Private family matters should never interfere in or be a part of the business.
Entrepreneurs may start off the proprietorship way. But once the business finds its own feet, it is important for the owner to change forms. A gradual upgrade to a partnership firm and then a private limited company is the key.
Converting to a private limited company format will bring in a board of directors and even a professional management, doing away with a definite succession planning need to acertain extent. If this is not possible, identifying a successor to take command and run the business smoothly may be your only option. The owner should not shy away from exploring options beyond his own family, if a suitable successor is not identified from within the family. Or wherever possible, engage professionals for the mentoring and development of the younger generation.
In case of partnerships with just two partners, add at least one more partner in the firm. This provision would help in the firms continuity on the death of any one partner and prevent any compulsory dissolution. Partners have to take special note of the provisions of the partnership act, which states that an individual can become a partner in a firm only by contract and not from status. In other words, on death of a partner, his son / daughter would not become a partner in the firm automatically. More so, even if the individual provides for his children to become partners in the firm on his death, by way of a specific clause in his / her will, the same is technically not valid.
An efficient way would be to induct one or more efficient partners in business during the owners lifetime. The business owner also has to provide for an equitable distribution of his share in the business to his heirs, in case the same is wound up.
It is important for owners to seek professional assistance for drafting a business succession plan and appoint competent advisors for the same. Growing complexities in the business or any changes in the family structure over time should trigger a review of the succession plan. More importantly, succession must be planned years in advance of expected needs. A skillful succession planning will not only bring peace of mind for the owner but also to family members post his death.
The writer is a certified financial planner
Seek professional help for drafting it and make sure you plan well in advance
MONEYMATTERS
|What is succession planning? The process of scouting, identifying and grooming potential candidates to fill up critical positions in a firm.
| How is a successor chosen? Family-run businesses prefer someone from within the family, multinational companies adopt a more broadbased approach and choose from internal and external candidates.
| Why is it important? It ensures seamless transfer of management, prepares the employees and investors about how the company aims to run its business after the present chairman / chief executive | What are the challenges? Lack of consensus or shortage of talent; generation gap between the outgoing and incoming chiefs
Source Business Line 22-1-2012
Vodafone judgment will speed up cross-border deals
K.R. Srivats
Revenue Dept may get more refund claims from non-residents who deposited tax for similar transactions
New Delhi, Jan. 21:
If there is an important fallout of the Supreme Court's Vodafone judgment, it is that the time taken to conclude cross-border deals or offshore transactions involving Indian assets will come down.
This will be the case to the extent that the structure adopted in such deals follows the Vodafone transaction or the principles enunciated in the Vodafone judgment, say tax experts.
The time taken for concluding cross-border deals is expected to come down as the parties involved in the transactions will not spend considerable time in sorting out tax indemnity issues, applying for advance rulings, withholding tax certificates, etc. “Tax indemnities will not be phased out as a corollary to the Vodafone judgment. The extent of significance of tax indemnities would depend upon extent of applicability of Vodafone judgment and principles settled by it. But the time taken will come down as the Vodafone judgment has settled certain principles of law,” Mr Amit Singhania, Principal Associate, Amarchand & Mangaldas, told Business Line.
Currently, parties involved get into negotiations, consuming significant time on who would control litigation, what would be the point of invocation of indemnity and other issues. This is all the more required to deal with situations where notices are served by revenue authorities on the buyer for not withholding tax or making them the representative assessee. Time spent on such aspects can be productively utilised with the apex court ruling on Vodafone establishing that transfer of shares between non-residents would not be subjected to tax here even if the underlying assets are situated in India.
Mr Amrish Shah, Partner and National Leader for Transaction Tax, Ernst & Young, said that the time taken for concluding cross-border deals will come down post the Vodafone judgment.
More claims
Another fallout of the judgment is that the Revenue Department will now get more refund claims from those non-residents who deposited tax for transactions similar to the Vodafone-Hutch deal.
“The Vodafone judgment will have impact on revenue not only on account of refund of the deposit paid by the telecom giant but it will attract the refunds in other similar transactions,” Mr Singhania said, adding that a sizeable number of offshore transactions involving Indian assets have happened since 2007 post the Vodafone-Hutch deal.
Mr Amrish Shah said that the number of transactions similar to Vodafone-Hutch deal size may not be that many, but certainly sellers will now claim refunds of tax withheld in offshore transactions.
Reacting to the Vodafone judgment, Mr Rohan Shah, Managing Partner, Economic Laws Practice, said that the judgment takes a clear position on India's territorial jurisdiction to tax. It holds that transfer of shares outside India is not taxable in India.
The verdict will bring a certainty in the minds of global investors regarding Indian tax consequences in case of sale of their investments, said Dr Suresh Surana, Founder of RSM Astute Consulting Group.
krsrivats@thehindu.co.in
Keywords: Supreme Court, Vodafone judgment, cross-border deals, claims
When do shareholder rights matter more?
D. MURALI
Share • print • T+
Firms in which the shareholder finds it easier to forecast the effect of a particular management action on the future value of the firm benefit much more from such shareholder rights than do their less transparent counterparts, says a preliminary paper titled ‘‘Signal quality and the option value of shareholder rights'' by Abhiroop Mukherjee of the Department of Finance, Hong Kong University of Science & Technology (www.ssrn.com).
When the information environment in which the firm operates is relatively transparent, the manager understands that the shareholder will find it easy to interpret the impact of management decisions or actions on firm value, the author explains. “Thus, if the manager does not act in the shareholder's best interest, the shareholder will readily become aware of this. If the shareholder has strong rights, she can then bring the governance rules for reprisals into play.”
On the other hand, as the paper distinguishes, when information quality is poor, the shareholder might find it difficult to figure out whether or not the manager is acting in her interest. As a result, in these less transparent firms, the manager might get away without triggering any reprisal, even if he acts contrarily to the shareholder's interest, and even if the shareholder has strong rights to punish bad management, cautions Mukherjee. He concludes by observing, therefore, that shareholder rights matter more for firms that operate in a better information environment; and that for firms that operate in sufficiently opaque environments, shareholder rights do not have any value at all.
A case for greater transparency that can benefit the shareholders.
Peak of life cycle wealth
Who is wealthy? This is the question that Stefan Hochguertel of the VU University Amsterdam, and Henry Ohlsson of the Uppsala University explore in ‘‘Who is at the top? Wealth mobility over the life cycle.'' In the authors' view, the answer is, “Probably an individual in his 60s, married, living in a big household and with more than twelve years of education. He would have been born in the capital city region. The employment income of the household would be high but variable. The macroeconomic environment would be characterised by economic growth, increasing stock market prices, and increasing house values.”
The study, based on a large administrative sample from Sweden covering the years 1968-2005, finds age-wealth probability patterns to be consistent with the life-cycle model of savings and wealth accumulation. Wealth first increases and then decreases, and the peak in the probability of being wealthy occurs when people are about 65 years old, the authors note. “This is close to the age when retiring for most.”
Interestingly, the probability of being wealthy is higher when households experience high income uncertainty, one learns. This is consistent with precautionary motives for savings and wealth accumulation, although effects are small, reason the authors.
Of educative value about wealth movements across generations
SEBI directs bourses to set up grievance redress panel
Our Bureau
Mumbai, Jan. 20:
To facilitate speedy grievance redressal, SEBI has mandated all stock exchanges – functioning on their own and through other exchanges — to set up an investor grievance redressal committee (IGRC) at every investor service centre.
For claims up to Rs 25 lakh, the IGRC will comprise one person, and for claims higher than Rs 25 lakh, the committee would have three members.
Further, the three-member committee shall have independent persons qualified in the area of law, finance, accounts, economics, management or administration. They will also have experience in financial services especially the securities market.
In addition, one member of the committee should be a technical expert capable of handling complaints related to technology issues such as internet based trading, algorithmic trading, etc).
Finally SEBI said the members of the IGRC should not be associated with a trading member in any manner.
SEBI has advised large exchanges NSE, BSE, MCX and USEIL to open investor services centres in other large cities in a time-bound manner.
Exchanges have been asked to submit a list of such centres. The circular comes into effect immediately and exchanges have to communicate the implementation status of this circular in their monthly report to SEBI.
Keywords: stock exchanges, SEBI, investor grievance redressal committee (IGRC), investor service centre, algorithmic trading,
Investing overseas, the easy way
G. KARTHIKEYAN
S
Due to the Double Taxation Avoidance Agreement, the Indian Head Office can take credit of taxes already paid in Australia by the branch office.
Sudhir Rao, an Indian businessman with substantial interest in the winemaking and brewery sector, recognised the growing opportunity in Australia for investment in the vinification business. As this would be a perfect compliment to the vintner's Indian business, he contemplated investing a couple of million dollars in this business in Australia. The benefits of bilateral trade agreements between India and Australia are being explored by many business houses, especially in view of the fact that India has emerged as the 21st largest outward investor globally.
Sudhir completed a due diligence study, and was satisfied with the report on the probability of establishing a successful business model in Australia. The next logical step, of course, was to study the statutory compliances and related aspects of making a foreign investment. The essential first step was to decide on the type of entity to be set up in Australia, in consonance with various laws such as Securities and Exchange Board of India guidelines, Companies Act, Income Tax Act, RBI and FEMA guidelines etc.
SUBSIDIARY COMPANY
The common practice is to set up a subsidiary company in Australia, carry on operations, pay taxes and have the dividends repatriated to the parent company in India. However, the choice of entity could vary, if one examines the benefit of taxation on the subsidiary company versus a branch office at Australia. Purely from a taxation point of view, the following facts deserve consideration. Let us say, the profit of the Australian entity is Rs 100, and assuming that the tax rate is 35 per cent, the profit after tax is Rs 65 in both situations (the subsidiary model and branch model in Australia).
If the subsidiary company declares this profit of Rs 65 as dividend, the Indian parent company needs to pay a tax of Rs 20 (at 30 per cent tax rate in India), and thus the outflow of tax in total would be Rs 55. Whereas, if it is a branch model, the Indian company will have to include the profit of the Australia branch viz. Rs 100, and pay a tax of Rs 30 (at 30 per cent). Since India and Australia have signed a Double Taxation Avoidance Agreement, the Indian Head Office can take credit of the extent of taxes already paid in Australia by the branch office.
Thus, the Indian Head office takes credit to the extent of taxes payable in India i.e. Rs 30, and the effective outflow of tax in total is limited to Rs 35. It must be remembered that though the Australian branch has paid Rs 35, the credit cannot result in refund in India. Thus, the effective tax rate for the branch model is 35 per cent, as against the subsidiary model, at a formidable 55 per cent. It will be very relevant to consider the taxation aspects, in addition to the some other factors for the entity selection.
COMPLIANCES
Having decided the entity, Sudhir needs to plan for compliances with RBI/FEMA regulations. The Reserve Bank of India has simplified the foreign investment procedure to the extent that its designated authorised dealers (specific branches of commercial banks) may allow customers remittances abroad without prior permission upto US$ 200,000 per fiscal year, per person, including a minor. The provisions of FEMA do require that the applicant should have maintained the bank account with the bank for a minimum period of one year, but the said branch, at its discretion, based on the declaration, proof of funds and Income Tax returns of the applicant, can affect outward remittance.
Sudhir's initial requirement of investment is one million dollars. The plan is to carry this out with the help of his family members, with each of them investing $200,000, without seeking specific permission of the RBI. The second phase of investment would be done via the five persons in the next financial year, viz after the month of April. Sudhir's company also has the choice of investing abroad from the balance lying in its EEFC account (Exporter Earner's Foreign Currency Account). The company can invest up to 400 per cent of its net worth abroad without prior RBI approval. The ceiling doesn't apply if the investment is made out of balances held in EEFC account.
Sudhir will have certain reporting duties as well. Sudhir would need to receive a share certificate as evidence of investment, repatriate dues receivable to India and submit an Annual Performance Report for the subsidiary to RBI, through the authorised dealer. In cross-border transactions, it is equally important to comply with various regulations, to be within the framework of the law.
(The author is a Coimbatore-based chartered accountant.)
Keywords: Sudhir Rao, Exporter Earner's Foreign Currency
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