India Inc pays directors far less than Companies Bill ceiling
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DEV CHATTERJEE & M SARASWATHY
Mumbai, 19 December
This would make India Inc happy, though the directors might not share the happiness.
Indian firms pay far less to their directors than the cap in the Companies Bill.
The Bill has made it mandatory that a director’s remuneration should not exceed five per cent of the company’s net profit. Higher salary can be paid only after the companies concerned take special permission.
But a Business Standard Research Bureau analysis shows the average salary of the 100 best- paid directors is only one per cent of their respective companies’ net profit. The average would have been far lower, but for 27 directors whose pay packet exceeds the five per cent cap.
These 27 directors may have reasons to complain but others are generally happy with the Bill provision. “ This is the right step. I am in agreement,” says Bajaj Auto Chairman Rahul Bajaj.
Naveen Jindal, chairman and managing director JSPL, was the highest- paid executive in India and took home a salary of ₹ 74 crore last financial year but that figure was just 3.48 per cent of his company’s net profit. Mukesh Ambani, chairman and managing director of Reliance Industries Ltd ( RIL), India’s largest company, was paid ₹ 15 crore, 0.07 per cent of RIL’s profit. The salaries of many corporate leaders like Aditya Birla Group Chairman Kumar Mangalam Birla and Wipro Chairman Azim Premji are far below the ceiling. They, in fact, either took a salary cut or did not take any raise from the company last year.
The Companies Bill has maintained a director’s remuneration should be below five per cent of his company’s net profit; and when there are more than one wholetime directors, they can all together get a remuneration not exceeding 10 per cent.
It adds, if a firm has to re- state its financial statement due to a fraud or non- compliance, it can recover the amount paid in excess of five per cent of the original net profit from its director during that period.
“Promoter directors also earn from the dividend announced by companies. So, the salary and the commission on profit are not the only source of income for them. They can easily afford to take a cut,” said a consultant at one of the four big firms. “ But the good news is there’s a big scope for salary hike for those directors who are paid less than five per cent of net profit,” he said. “It’s interesting that no one is talking about aceiling on dividend income,” he added.
Anandorup Ghose, head of executive compensation at Aon Hewitt, said none of the country’s big companies violated the clause. “ Directors’ compensation at prominent firms has never exceeded five per cent. In fact, those are far below it. However, one implication of the regulation would be on disclosures. Companies have to disclose these facts in a transparent way,” he added.
Average salary of the 100 best- paid directors is 1% of their companies’ net profit
COMPANIES 2 >
>Now, one person can start a company >Investor protection to get a big boost >India Inc seeks tax sops on CSR >Auditors to face penalty if found involved in fraud SOME FAT PAY PACKETS
Top- 5 CEOs whose remuneration exceeds the 5% cap
Name Designation Pay (₹ cr) % of net profit*
Kalanithi Maran Executive Chairman, Sun TV 57.01 8.21 PR Ramasubrahmaneya Rajha Chairman & MD, Madras Cements 29.34 7.62 BG Raghupathy Chairman & MD, BGR Energy 25.98 11.62 Jayadev Galla MD, Amara Raja Batteries 17.36 8.07 Prathap C Reddy Executive Chairman, Apollo Hospitals 17.16 7.43
*Remuneration as % of their company’s net profit for FY11- 12 ( standalone); Filtered for BSE 500 Companies Data Source Capitaline; Compiled by BS Research Bureau
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Shareholder directors’ term in govt banks, insurers may be capped
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VRISHTI BENIWAL
New Delhi, 19 December
The government is planning to cap the term of shareholder and nonofficial directors on the boards of public- sector banks, insurance companies and financial institutions at six years. At present, there is no limit on this for such directors. The proposed move is aimed at improving corporate governance practices in these institutions.
Shareholder directors are usually nominated by minority shareholders.
The Department of Financial Services mooted the proposal after it noticed lack of transparency in the appointment of many of these directors on the boards of government- run lenders. The matter is being considered by the Reserve Bank of India ( RBI).
“The policy on the appointment of shareholder directors may be reviewed. We have proposed a cap on their term,” a finance ministry
official told Business Standard.
Concerns have been raised on the appointment of such directors on banks’ boards as most of them are usually chartered accountants ( CAs), who can use their position to influence boards’ decisions. The finance ministry wants to induct professionals from various fields on boards. Officials said many were appointed on boards because of their proximity with banks’ chairmen or by putting political pressure for appointment and reappointment.
There have been cases of people being appointed shareholder directors after serving as the government’s nominee directors for years.
“If all boards are loaded with CAs, it can’t be a coincidence. A bank’s board should have people from diverse fields,” the official added.
A board of a public sector bank usually comprises a chairman & managing director, one or two executive directors, a nominee each of the government ( mostly a finance ministry official) and RBI, two employee union nominees, up to three shareholder directors and non- official directors.
Until a few years ago, all six independent directors could be shareholder directors but the number was reduced to a maximum of three when the rule was changed in 2007.
IMPROVING CORPORATE GOVERNANCE
|Likely tenure: The maximum duration for which a shareholder or non- official director could serve on the board of a govt bank, insurer may be limited to 6 yrs |Aim: Improving corporate governance at govt institutions |The concern: Boards of many banks are dominated by CAs, who could use their position to influence boards’ decisions |Shareholder directors: They are nominated by minority shareholders |Usual break- up: The board of a public sector bank usually comprises a chairman & MD, 1- 2 executive directors, an RBI nominee, a govt nominee, up to 3shareholder directors and non- official directors
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Now, one person can start a company
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NCOMPANIES BILL: A NEW CORPORATE WORLD N NSUNDARESHA SUBRAMANIAN
New Delhi, 19 December
Passage of the Companies Bill in Parliament will pave the way for a new concept of ‘one person’ company’ ( OPC). Under the Companies Act, 1956, it required at least two people to form a company. The new concept will provide an opportunity to Indian entrepreneurs to enter the corporate world without even adding a family member to the venture, which they, at times, do just for the sake of a second name.
“This will bring the unorganised sector of proprietorship into the organised version of a private limited company. The organised version of OPC will open the avenues for more favourable banking facilities, particularly loans to such proprietors,” says Pavan Kumar Vijay, managing director of Corporate Professionals, a corporate financial advisory firm.
“Proprietors always have unlimited liability. If such a proprietor does business through an OPC, then liability of the member is limited. This will open all options for Indian entrepreneurs, with pros and cons, and leave it in the hands of such promoters to decide the best options. It will help many foreign companies, which just need to appoint nominees for the sake of a minimum two members, when they form a whollyowned subsidiary ( in India),” Vijay adds.
Various small and medium enterprises, doing business as sole proprietors, might enter into the corporate domain. The concept would boost the flow of foreign funds into India, as the requirement for a nominee shareholder would be done away with. However, the mandatory clause that a resident indian director should be on the board could be a bottleneck, experts say.
An OPC can be formed by subscribing the name of a person to the memorandum and complying with the requirements of the Act in respect of registration. As regards the name of an OPC, the Act provides that the words “ one person company” shall be mentioned in brackets below the name of such a company, wherever its name is printed, affixed or engraved.
The law comes with provisions that cover various situations arising in such a new format.
For example, any business, which is required to be transacted at an annual general meeting or any other general meeting of a company by means of an ordinary or special resolution, shall be done in the case of an OPC by passing a resolution, which shoud be communicated by the member to the company and entered in the minutes book required to be maintained under law.
This will give a chance to the entrepreneurs to enter the corporate world, without adding a family member to venture
The ‘ one person company concept’ will bring an SME, doing business as asole proprietor, into the corporate domain
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Investor protection to get a big boost
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NSUNDARESHA SUBRAMANIAN
New Delhi, 19 December
Though the Companies Act, 1956, provided for several provisions to protect the interests of shareholders, it did not keep pace with the changing business environment. The new Companies Act addresses several investor concerns and seeks to provide a more hospitable environment for minority shareholders, especially in the wake of scams and scandals, such as the one that hit Satyam Computer Services in 2009.
Virendra Jain, president of Midas Touch Investors’ Association, a non- profit organisation working for safeguarding investors’ interest, recalls how the association could not maintain a class action suit in the Satyam case as there was no provision under the Companies Act, 1956, for such an action.
“We had to move under the Consumer Protection Act and the case was dismissed eventually by the Supreme Court. We worked actively with the ministry to bring in the class action provisions, which will be a big boon for investors,” Jain said.
Satyam’s founder- chairman, B Ramalinga Raju, shook the Indian corporate world in January 2009 when he confessed to falsifying the software company’s accounts.
Under the new Act, a prescribed number of members and depositors can file an application against the management or the company “ if its affairs are conducted pre- judicial to their interest or the interest of the company and may call for specified orders in such respect”.
An application might be filed or any other action taken under this section by any person, group of persons or any association representing the persons affected by any act or omission. Further, if the members seek any damages or compensation or demand any other suitable action from or against an audit firm, the liability shall lie on the firm and of each partner involved.
The companies Act also gives protection to whistleblowers who may bring out some wrongdoing in the company. The Act contains provisions to enable the directors and employees to report concerns. Such a vigil mechanism will place adequate safeguards against victimisation of persons .
Investors are also entitled to an exit option if a company changes its objects. “Specific provision has been formulated to provide exit opportunity by the promoters to the dissenting shareholders being those shareholders who have not agreed to the proposal to vary the terms of contracts or objects referred to in the prospectus,” Corporate Professionals, a corporate financial advisory firm, said in a note describing the provisions in the new law.
Class action, whistleblower protection and exit option likely to bring back investor confidence
Under the Bill, investors are entitled to an exit option if a company changes its objects
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India Inc for tax sops on CSR
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BS REPORTER
Mumbai, 19 December
With the Companies Bill making it mandatory for the Indian companies to spend two per cent of their profits on corporate social responsibility ( CSR), India Inc has started lobbying with the government to compensate them by giving tax incentives on the funds spent on CSR.
It is estimated that 2,500odd companies will have to spend between ₹ 10,000 crore and ₹ 15,000 crore a year on CSR after the Companies Bill was cleared by the Lok Sabha yesterday. Many India Inc CEOs say the expenses incurred towards CSR should be treated as tax- deductible expenditure. “ Any such expenditure by corporates towards the thrust areas defined by the government should be provided aweighted tax deduction of 150 per cent,” said a Mumbaibased CEO. The spend on CSR has to be calculated on the basis of two per cent of the average net profits of the last three years. If the spend falls short of the mandatory ceiling, then the management has to give reasons.
Others say this is good for the country in the long run. “This will mean a significant increase in investment in the social sector. For the companies, this means a more structured approach to CSR, which now has to be a part of the boards agenda, with greater accountability on spend and outcomes,” said Sudipta Das, partner and leader - climate change & sustainability services, Ernst &Young.
Das said the initiatives listed for CSR were those related mainly to the millennium development goals ( MDGs), to which India has an obligation. India’s past performance on the MDGs has been falling short of the targets, which need to be met by 2015, he added. “ So, one can probably expect positive implications for the companies, the economy, as well as the country,” he added.
While the expenditure on CSR will come as a jolt to many, especially those among tier- II companies, big companies will not face pressure to set aside money for CSR activities. A Birla spokesperson said most of the group’s companies were spending two per cent of net profits on CSR. Tata Group companies are also spending alot on CSR.
Clause 211: Constitution of the serious fraud investigation office Clause 75: Acceptance of deposits from the public, subject to a more stringent regime Clause 221: Inspection, enquiry and investigation Clause 229: Punishment for falsification during inspection Clause 228: Inspection and investigation of foreign companies Clause 139 ( 2): Rotation of auditors Clause 149 ( 7): Code for independent directors
Source: Ingovern Research
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Auditors to face penalty if found involved in fraud
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SUSHMI DEY
New Delhi, 19 December
Putting in place stringent regulations for corporate governance, the new Companies Bill prescribes harsh measures for auditing firms and their partners. According to the amended legislation, if partners of an audit firm are found involved in a fraud or abetting or colluding in any fraud, they will be penalised under the law. The earlier legislation lacked such penalty specifically for auditing partners.
While the exact amount of the auditors’ liability will be notified as part of the rules to be notified by the ministry of corporate affairs, industry sources suggest it is expected to be hefty.
According to experts, the idea is to make auditors accountable for their job and promote good accounting practices.
“The investors often make investments based on remarks of the auditor. The auditor must, therefore, be responsible if investors lose any money because of auditor recommendations. This shall ensure the auditors be more vigilant and accountable in their conduct in performance of its duties,” said Pavan Kumar Vijay, managing director, Corporate Professionals.
The amended Bill also mandates every company to appoint an individual or a firm as an auditor at its first annual general meeting (AGM). The auditor shall hold office from the conclusion of that meeting till the conclusion of its sixth AGM and thereafter, till the conclusion of every sixth meeting. The appointment of the auditor is to be ratified at every AGM.
According to the changes, individual auditors are now required to be rotated every five years and audit firm every 10 years in listed companies and certain other classes of companies, as may be prescribed. Earlier, there were no such clauses and in case of irregularities, only disciplinary actions were taken against auditors and the auditing firm by the Institute of Chartered Accountants of India, said Vijay.
While the moves are seen to favour investors and stakeholders, there are also concerns that the law threatens to over- regulate the auditing community and this may bring forth various challenges, such as capacity constraint and inconsistency.
“There is already adequate regulation in the law and over- regulation may destroy the industry.
An auditor is into a public service and he should be able to function without fear,” says N Venkatram, managing partner ( audit), Deloitte Haskins & Sells.
Although the legislation was long awaited, some experts feel the government should not have taken such reformative steps at once and should have evaluated regulations over a period of time, as there are not too many audit firms in the country. “ I am glad to see the Bill go through. While provisions like those on rotation of directors and auditors are welcome, they should first be applied to a small subset of the 8,000 listed companies, and based on experience extended further,” said Vishesh C Chandiok, national managing partner, Grant Thornton India LLP.
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Centre for stable tax regime, says Chidambaram
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BS REPORTER
New Delhi, 19 December
Finance Minister P Chidambaram today said the government would provide a stable tax regime that was in the interest of taxpayers and tax collectors.
Speaking at the fifth meeting of consultative committee attached to his ministry, he said the government was fully committed to provide best possible facilities to taxpayers for better tax compliance and revenue augmentation.
The finance minister stressed the need for systematic changes, including strengthening of the tax information system, for better collection.
He said 35 million people are filing income- tax returns and only 1.5 million have declared income of ₹ 10 lakh and above for tax purposes, which is not realistic.
India has moderate rate of income tax as compared with various developed countries, the minister said, as the peak rate of taxation is 30 per cent. Therefore, there is lot of scope for better tax compliance and tax collections, he added.
About 50 per cent of taxpayers are filing returns through the electronic mode, said Chidambaram, but there is a need for more taxpayers to electronically file returns as this will help in expediting tax processing and refund process.
Members of the consultative committee suggested various measures to improve the relationship with taxpayers. Some suggested efforts be made to keep the tax interest on refund be paid at least at the bank rate of interest, while others proposed widening of tax base for higher revenue collections.
Members also suggested tax facilitation centres be opened in rural areas, which would help in increased revenue generation. Tax awareness campaign for payment of due taxes on time could also be undertaken in the local language, they suggested.
Finance Minister P Chidambaram stressed the need for systematic changes for better tax collection
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RBI to expedite newbank licence process: Chakrabarty
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BS REPORTER
Mumbai, 19 December
The Reserve Bank of India will expedite the process of issuing final guidelines regarding the entry of new entities in the banking sector after the Lok Sabha’s passage of the Banking Laws ( Amendment) Bill.
The amendments give more power to the central bank, such as superseding bank boards, and allows it to inspect banks’ associates and subsidiaries. RBI had made it a precondition to get these powers before it allowed new entrants.
“Time we cannot say but the process will be expedited... I don’t think it should take much time,” said RBI deputy governor KC Chakrabarty, on the sidelines of an event.
Following the budget announcement by Pranab Mukherjee, former finance minister and now the country’s president, in 2010- 11 that companies and business houses would be allowed to apply for setting up new banks, RBI started the process of framing guidelines.
It issued a discussion paper in August 2010. A year later, it issued the draft guidelines.
In July this year, it released the gist of the comments it had got on the draft norms.
When asked whether RBI was comfortable giving bank licences to companies, Chakrabarty said it was difficult to say anything at the moment, as the final guidelines first needed to be issues.
The draft norms had said applications of both non- bank finance houses and business houses would be considered, while entities in real estate would not.
RBI is also expected to set up a committee to vet the applications of interested parties. NBFCs such as L& T Finance, Shriram Transport and Reliance Capital had expressed interest.
In the draft norms, RBI had suggested an initial minimum capital of ₹ 500 crore, while the aggregate non- resident shareholding in a new bank was to be capped at 49 per cent for the first five years.
NBANKING BILL: THE DAY AFTER N
RBI Deputy Governor KC Chakrabarty
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