Business standard news and legal digest 1-4-2013

LEGAL DIGEST

SC revives 25- year- old suit The Supreme Court has ordered retrial of a suit which started in 1988 in the matter of purchase of five diesel vehicles from Tata Engineering & Locomotive Co Ltd. The apex court said the Bombay High Court applied wrong legal principles and, therefore, the purchaser, Shantilal Gulabchand Mutha, should be allowed to present his case. The Supreme Court also said Mutha was not given a hearing and his application was rejected by the high court without giving adequate reasons. Mutha had given eight bills of exchange through Mercantile Bank Ltd for purchase of the vehicles but the company disputed the interest element and moved the suit. Mutha did not file a statement under the impression that the amounts due had been paid. For that reason, ex parte decree was passed against him. He moved appeals but the high court exercised its discretionary power under the Civil Procedure Code and rejected those on the ground that he had failed to file his statement. In the final appeal, the Supreme Court held the high court was wrong and ordered retrial expeditiously, after providing Mutha the opportunity to file his statement. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Gratuity does not bar pension The Supreme Court has dismissed the appeal of Allahabad Bank and ruled that an officer, who opted for voluntary retirement from service and paid gratuity and provident fund, was also entitled to pension. In this case, Allahabad Bank vs A C Aggarwal, the officer retired and was paid gratuity. Then, he asked for pension. The bank rejected it, saying benefits under the pension scheme was subject to the condition of refund of the amount of gratuity already paid to him and submission of an irrevocable undertaking that he will be getting pension in lieu of gratuity. He challenged the bank’s stand in the Allahabad High Court, arguing that it was against the bank rules and constitutional provisions. He further argued that State Bank of India was paying gratuity to its employees in addition to other retiral benefits and, therefore, there was no justification to discriminate the employees of another public sector bank. The high court accepted the argument and asked the bank to pay pension. It moved the Supreme Court. The apex court rejected the appeal and said the law regarding payment of gratuity has overriding power over other rules and regulations. Moreover, the judgment noted the bank had earlier unsuccessfully tried to get exemption from the gratuity law, but the government had rejected its request. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Cotton seed firms lose case The Delhi High Court has dismissed two writ petitions moved by Maharashtra Hybrid Seeds Ltd and Nuziveedu Seeds Ltd relating to a new cotton seed called ‘ C- 5193’. The first firm filed an application to register its novel variety of cotton, which was published by the Protection of Plant Varieties and Farmers’Rights Authority in the Plant Variety Journal 2008. Another firm opposed the registration on several grounds. But the objection came after the time fixed by the rules. The time was extended by the registrar. This became the main bone of contention between the parties. The high court said “ the legislation in question is in the nature of a beneficial legislation to provide for an effective system for protection of plant varieties and the rights of the farmers and plant breeders”. Therefore, it should be given a liberal interpretation. The registrar can extend the time period for filing the application for opposition. The court also noted the intention of the government, represented by an additional solicitor general, that after a detailed discussion among the relevant ministries, it has been decided to amend Rules 32 ( notice of opposition) to clear the confusion in this respect. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Bar on starting new venture In a dispute between two firms, Jay Ushin Ltd and U- Shin Ltd, the Delhi High Court has restrained the latter from entering into any competing business or to undertake any activity prejudicial to the interest of the former company till such time the arbitrator passes his interim order. Jay Ushin said the opposite firm was in the process of starting competing business in India, despite a joint venture agreement of 1986 was still subsisting between the parties. The technology purchased from U- Shin still vested in the Indian firm. It was further argued that according to the conditions set up by the Government of India as well as the Reserve Bank of India, the terms could not be varied. However, U- Shin has already announced to join hands with M/ s Minda Valeo Security System Ltd in Delhi. The new arrangement is similar to the one which is in existence between the contesting parties and, thereby, is a competing business arrangement. According to the foreign firm, the 1986 agreement has lapsed. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> PSUs penny- wise, pound- foolish The National Consumer Commission has imposed penalty on Oriental Insurance Company for moving five revision petitions three months after the limitation period. The payment will go to the ‘ Consumer Welfare Fund’ set up under the Consumer Protection Act. It followed aSupreme Court judgment which said that “ PSUs (public sector units) spend more money on contesting cases than the amount they might have to pay to the claimant. In addition, precious time, effort and other resources go down the drain in vain. PSUs are possibly an apt example of being penny- wise, pound- foolish.” MJ ANTONY THINKSTOCK

New challenges for audit committee Dominant shareholder manages most Indian companies. In those companies, independent directors are de- facto appointed by the management. Similarly, it decides the remuneration of the top management personnel. As a result, the nomination and remuneration committees are non- starters. But the audit committee has established itself as an important institution within the board even in those companies. Is it a contradiction that the management, which does not want interference with the appointment of independent directors and in deciding the top management compensation, wants a watchdog to check earnings management and to protect independence of auditors? There is a contradiction if we assume that the board’s primary responsibility is to monitor the executive management and to protect minority shareholders’ interest. But there is no contradiction if we appreciate that the board in those companies plays more of an advisory role than the monitoring one. The audit committee’s approach is also consistent with the overall approach of the board. The management values the audit committee’s role in strengthening internal audit, internal control and risk management, which aim at protecting assets level. It values the committee’s management, if any. It seldom takes up strategy audit to ensure that shareholders’ money is not wasted in pursuing empire- building strategies or due to inappropriate strategies. An example is the downfall of Subhiksha. The audit committee hardly protects the independence of auditors. Both the internal auditor and the statutory auditor hold office at the pleasure of the management. The audit committee hardly gets involved in the process of selecting the auditors. It approves proposals placed before it by the management. The statutory auditor’s independence is protected only through regulations. This is the reason why the Companies Bill 2012 has introduced few new regulations to protect the audit independence. In spite of the above shortcomings, we must accept that the audit committee is doing a good job. It holds independent views on various issues to which it pays attention, although it avoids traversing the terrain that might be murky. The good job done by the audit committee has raised stakeholders’ expectations, including those of regulators. Increased expectations have widened the gap between what the audit committee can do and what stakeholders’ expect it to do. The Companies Bill 2012 mandates that the audit committee shall approve and modify, if required, related party transactions ( RPT) except those that are entered in the ordinary course of business on arm’s length basis. It shall obtain professional advice from external sources, if required. RPT is a two- way sword — some benefit the company, others hurt minority shareholders’ interest. There is a general belief that companies that are managed by the dominant shareholder abuse RPTs to tunnel minority shareholders’ wealth. Therefore, there is concern over abusive RPTs across the globe. Presumably, this concern has prompted the government to include the modified provision in the Bill. In order to determine whether a RPT requires its approval, the audit committee, has to either examine every RPT or establish criteria to test whether a transaction is on arm’s length basis. Unfortunately, it is difficult to establish straightforward criteria. Moreover, the committee has to form a judgement on whether a particular RPT is abusive. This situation challenges the independence of the audit committee. If, at a later date, aRPT approved by the committee is found to be abusive or the Income Tax Department considers that the transfer price was not on arm’s length basis, quite likely, the committee will join the management to defend the decision. This has the potential to impair the independence of the committee. The Bill also provides that the board report shall disclose where the board had not accepted any recommendation of the audit committee and the reasons therefore. Both the board and the committee will avoid such a situation. Therefore, in certain situations the audit committee might have to compromise with its independent views. A well- intended provision might have dysfunctional effects. The new provisions might strengthen the motivation of the management to appoint independent directors who are not independent. Those who can hold independence in an adverse situation might not join the audit committee because they will be required to spend more time than before to diligently carry out new responsibilities. They may also expect, and rightly so, higher compensation than that of other independent directors in the board. Higher compensation to members might impair the independence of the audit committee. Time will tell whether we have killed agolden goose due to over expectation from it. Affiliation: Head, School of Corporate Governance and Public Policy, Indian Institute of Corporate Affairs; Advisor ( Advanced Studies), Indian Institute of Cost Accountants; Chairman, Riverside Management Academy Private Limited Email: asish. bhattacharyya@ gmail. com ACCOUNTANCY ASISH K BHATTACHARYYA Overreach on buybacks AKILA AGRAWAL AND ANJALI PURI The Securities and Exchange Board of India ( Sebi) released adiscussion paper on proposed modifications to the framework for open- market buyback offers. The modifications appear irrational, bordering on excessive. It appears that the fundamental theme of the proposed amendments relates to “ manipulation of share prices through buyback offers launched with wrongful intent”. The only proposal that appears reasonable is the one on increasing the minimum buy quantity to 50 per cent of the offer size. The current Sebi regulations require the company to disclose the minimum number of securities that it proposes to buy back. However, the regulations do not fix a minimum buy quantity. In 2008, the Securities Appellate Tribunal had directed the minimum buy quantity to be one per cent of the offer size. In recent buyback offers, Sebi has, in practice, insisted on a minimum buy quantity of 25 per cent. This appears to be agreeable to most companies. The fact that most companies actually buy back more than 25 per cent of the offer size may be one reason for their acceptance of this directive. In this context, increasing the minimum buy quantity to 50 per cent seems a fair proposal given the objectives of increasing the actual number of shares bought back and discouraging the use of buyback offers to manipulate share prices. Of course, the company is not forced to buy back any shares if the shares trade at a price higher than the maximum price announced by the company. On the other hand, the proposal to limit the maximum period of buyback to three months is devoid of logic. Both the Companies Act and the Companies Bill, 2011 state that the shares should be bought back within 12 months from the date of the shareholder/ board resolution. Sebi’s proposal to reduce the time period is contrary to the flexibility provided in the Companies Act. If Sebi intends to impose a minimum buy quantity, it is only fair that companies be provided adequate time to comply with it. Reducing the buyback period neither serves the interests of the investing public nor the companies that make such offers. Then again, Sebi has proposed that 25 per cent of the maximum buyback amount be placed in escrow. Currently, open market buyback offers do not entail an escrow mechanism. Sebi’s proposal, intended to ensure that only “serious” companies launch buyback offers, appears arbitrary, given that such offers are executed through a registered stockbroker after complying with the requisite norms on margin money and so on. Given that other capital market transactions of this nature ( such as an offer for sale on the stock exchange and block deals that are conducted on the floor of the exchange) do not entail depositing funds into escrow, Sebi should continue to dispense with an escrow requirement for open market buyback offers, too. Sebi’s proposal prohibiting a further issue of shares for two years after a buyback issue closes also seems unreasonable. Both the Companies Act and the Companies Bill, 2011 prescribe a six- month cooling- off period. Given that the legislature has, in its wisdom, reduced the period from two years to six months in 2001, Sebi’s current proposal merely on the ground that “ companies should have a long- term view on utilisation of funds when launching a buyback” appears excessive. This is especially so after having imposed a minimum buy quantity of 50 per cent to ensure that the offer is not frivolous or manipulative. Currently, the cooling- off period of one year between two buyback offers is limited to offers made solely following a board resolution. No cooling- off period is prescribed in the Companies Act if the offer is made after a shareholder resolution. Sebi has proposed that a oneyear cooling- off period for all buybacks be imposed in case the company has failed to exhaust the maximum offer size in its first buyback. It is interesting to note that the Companies Bill, 2011 also prescribes aone- year cooling- off period between two buybacks ( irrespective of whether they are launched following a board or shareholder resolution). Therefore, an increase in the time period in order to align with the Companies Bill, 2011 seems rational — but an increase in the time period as a form of penalty seems extremely unreasonable and onerous. Further, Sebi is of the view that abuyback of 15 per cent or more of paid- up capital and free reserves must be only by way of a tender offer. Sebi thinks buyback offers through the tender offer process are more favourable to investors since they are generally at a premium to the market price. Openmarket buyback offers are normally done closer to the market price (and, naturally, between a willing buyer and seller). Sebi’s proposal to limit open- market buyback offers to 15 per cent will only result in future buyback offers being made with an offer size of 14.9 per cent of paid- up capital and free reserves. It will not result in any benefit to shareholders — since it is fairly clear that companies prefer the open- market purchase method over the tender offer process. Given the scope and ambit of the Sebi ( Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, which adequately cover offences of manipulation of share prices and fraudulent or unfair trade practices, the market regulator should utilise them to address any mischief, rather than make wholesale changes to the existing buybackrelated rules. Sebi should also reconsider proposed amendments that are in contradiction to the provisions of the Companies Act. Agrawal is a partner and Puri is an associate in the corporate transactions team of Amarchand Mangaldas. These views are their own Sebi’s proposed changes to these regulations appear irrational ‘Take corporate governance seriously’ BS REPORTER Mumbai, 31 March It is important for companies to focus on the details of ways to improve corporate governance, stresses Mazars India in asurvey on the subject. Mazars is an international organisation, specialising in audit, accounting, tax and advisory services. Its report says companies vigilantly monitoring their strengths and weaknesses would go far in improving their processes. This includes having a whistleblower framework to report unethical behaviour, actual or suspected fraud or violation of the company’s code of conduct and ethics policy. “For any whistle- blowing policy to be successful, attentiveness and strong leadership is required by the board and senior levels of management to create aculture that is open, honest and encourages people to speak out, without fear of retribution,” said Sunil Sangar, chief internal auditor, Tech Mahindra. About 85 per cent of firms with a whistle- blower mechanism stated they provided complete anonymity and protection to anyone who reported amatter. Two- thirds of survey respondents ( it covered 500 companies from a diverse array of sectors) stated an Ombudsman directly reported to the audit committee. A little over half of the respondents said members of the audit committee, including directors, had called independent external for an objective assessment of aspects in their management reports. “Companies are facing strong demands for transparency and accountability. It is, therefore, important for directors to have independent perspectives, particularly when making difficult decisions,” said Arvind Chopra, group president, group assurance and cost control, Essar Group.

Business standard news updates 31-3-2013

UBI first bank to file winding- up petition against UB Holdings

MANOJIT SAHA Mumbai, 30 March Kolkata- based United Bank of India ( UBI) has filed a petition to wind up Vijay Mallya- promoted United Breweries ( UB) Holdings in the Karnataka High Court, after Kingfisher Airlines ( KFA) defaulted on the loan. The lender had the corporate guarantee of UB Holdings for the loan, which was extended to the grounded airline. On failure to honour the guarantees, as KFA defaulted on loans, the petitioner has invoked the guarantees. Banks can invoke these if the principal creditor defaults. UBI is the first lender to file awinding- up petition, though some of the lessors of aircraft had filed similar petitions. The petition, filed on March 19, is pending for admission in the court. The governmentowned lender has an exposure of about ₹ 400 crore, including both guarantees and loans. The move came after Finance Minister P Chidambaram, at a meeting with chiefs of publicsector banks recently, asked lenders to act tough on corporate defaulters. “ We cannot have an affluent promoter and a sick company,” he had said. Confirming the development, a senior UBI official said the bank would be aggressive in loan recovery. In October last year, the Directorate General Of Civil Aviation had suspended the airlines’ operating permit, which expired in December. Banks had started classifying the KFA account as non- performing from the third quarter of 2011- 12. A large part of the loan was unsecured, so most made 100 per cent provisioning for exposure.

Transfer pricing circulars may lead to more litigation

NSUNDARESHA SUBRAMANIAN New Delhi, 30 March The recent circulars issued clarifying the government’s position on taxation of development centres maintained by multinational companies ( MNCs) are likely to lead to an increase in disputes and litigation rather than resolving them, some tax experts have said. Earlier this week, the Central Board of Direct taxes ( CBDT) issued two circulars on transfer pricing issues. Circular no. 2/ 2013 dealt with Application of Profit Split Method ( PSM), while Circular no. 3 dealt with the conditions relevant to identify development centres engaged in “ contract R & D (research and development) services with insignificant risk.” In case of the first circular, though the subject mentions the application of profit split method, the circular implicitly in some places and explicitly at other places concludes that in case of R & D activities, use of Cost Plus/ Transactional Net Margin Method ( TNMM) is not the appropriate. For example, it mentions that there is no correlation on cost incurred on R & D activities and return on an intangible developed through R &D activities. The circular clearly states PSM has to be applied to estimate the value of intangibles. Application of PSM requires information about the tax payer and the associated enterprises (AEs). The circular requires the taxpayer to furnish the good and sufficient reason for non- availability of such information. It means that tax payer will be required to furnish the detailed information/ documents of the AEs. Even if transfer pricing officer (TPO) considers other methods such as TNMM as an appropriate one, he will be required to make an upward adjustment taking into account transfer of intangibles, location savings & locationspecific advantages, according to the provisions. Samir Gandhi, tax partner, Deloitte, “ Though the CBDT is of the view that the circular will help in providing certainty on transfer pricing issues relating to development centre, it seems this may not be exactly true. The circular in fact lays down that PSM is the most appropriate method for R & D centre and not the Cost Plus method. It is possible that this will increase the litigation rather than resolving/ preventing the disputes and may lead to India may not considered as a preferred location to set up development centres.” Similarly, the second circular lays down five conditions to be cumulatively complied with. The important being that foreign principals perform most of the economically significant functions involved in development cycle and provides economically significant assets including intangibles. The Indian development centre will work under direct supervision of the principal through strategic decisions and monitoring of activities on regular basis. The Indian development centre will have no legal or economic ownership right on outcome of research. The satisfaction of the above conditions should be evidenced by the conduct of the parties and not merely by the contractual term, according to the circular. Experts said though the emphasis is on the risk in the subject matter of the circular, a lot of weightage is given to the function performed by the foreign principal and the Indian development centre. The only reference to risk is that mere bearing of contractual risk will not be the final determinant. “Further, if the foreign principal is located in widely perceived as low or no tax jurisdiction such as Mauritius or Cayman Islands, it will be presumed that foreign principal is not contracting the risk,” added Gandhi of Deloitte.

EPFO- NPS turf war: Companies tread neutral ground

SREELATHA MENON, VRISHTI BENIWAL &BIBHU RANJAN MISHRA New Delhi/ Bangalore, 30 March The Employees’ Provident Fund Organization ( EPFO) and the National Pension System ( NPS), the two pension scheme operators in the country, seem to be heading for a turf war. The NPS is wooing subscribers from the private sector, earlier a domain of the EPFO. NPS has reported so far, 522 private companies, including Reliance Industries Limited ( RIL), Reliance Group, Colgate Palmolive, Cognizant, Capgemini, Pantaloons and Wipro, have opted for it. However, companies have chosen to remain neutral in their stance. For instance, Wipro told Business standard its relationship with NPS didn’t mean an end to its EPFO membership. “ NPS is over and above the mandatory contribution towards EPF,” said Samir Gadgil, general manager and global head (compensation and benefits), Wipro Technologies. He added for Wipro, NPS was introduced in July 2011, and this was voluntary. Annual NPS funds from Wipro vary according to the contribution amounts opted for by individual subscribers. On an average, annual contribution stood at ₹ 4- 6 crore, Gadgil said. For RIL employees, too, NPS membership is voluntary. In Delhi, the company issued a circular to its employees, asking them to choose between NPS and the company’s EPFO pension scheme. An RIL employee said no staff member was being forced to opt for NPS. Infosys said from April 1, it would introduce the NPS option for its employees. “ We are looking to facilitate a process where employees can choose to have NPS as part of their retirement benefits from 2013- 14,” the Bangalorebased company said. EPFO denies it has lost any of its subscribers to NPS. A senior EPFO official said, “ We are not aware of any EPFO subscriber leaving us for NPS. You show us one person who has left us for NPS.” Officials in the Pension Fund Regulatory and Development Authority (PFRDA) said their system couldn’t track whether companies had entirely shifted from EPFO to NPS. They, however, said a lot of private companies were showing interest in joining NPS. “Many companies from the private sector have joined NPS. But we can’t track from where the money is coming. NPS has the advantage of lower costs and higher returns,” said PFRDA Chairman Yogesh Agarwal. EPFO gives 8.5 per cent returns to subscribers. As of August- end, 2012, returns offered by NPS stood at six- 11 per cent. Recently, Finance Minister P Chidambaram had exhorted private companies to promote NPS, a call that led to discomfort within EPFO. Analysts say the scales tip in favour of EPFO, as it offers guaranteed returns, unlike NPS. For investors, the primary aspect was security and EPFO had the most reliable fund, said financial analyst Amit Sethi of AMVI Financial. He added the difference in rates wasn’t significant. The government wouldn’t want to harm EPFO, which had a bigger subscriber base than NPS, he said. EPFO’s recent announcement of investment in private bonds, as well as a more aggressive entry into the bond market in general, pointed to better returns in the future, Sethi said. In two years, EPFO returns would stand at 8.759.25 per cent, while NPS returns weren’t expected to see such a rise, he said, ruling out a threat to EPFO. While EPFO has a corpus of ₹ 4.5 lakh crore, in four years, NPS has raised only ₹ 28,493 crore. On an average, EPFO adds ₹ 50,000 crore to its corpus every year. EPFO is pushing for an amendment to the EPF Act to raise the salary ceiling for employees from ₹ 6,500 to ₹ 10,000 or ₹ 15,000. This would ensure the scheme is attractive to those earning high salaries as well. EPFO is mandatory for those earning up to ₹ 6,500 a month; for the rest, it is voluntary. Number of Corpus under NPS Employer / Sector subscribers ( in ₹ crore) Central government 11,25,871 17,047 State government 15,85,349 9,780 Private sector 2,02,679 1,254 NPS- Lite 15,79,690 412 Total 44,93,589 28,493 SECURING THE FUTURE A status check on National Pension System NPS subscription Status of NPS implementation by states Number of States States joined NPS 23 States notified joining NPS but have not taken 2 any further steps ( Maharashtra, Tamil Nadu) States not joined NPS ( West Bengal, Tripura), 3 Kerala has given in- principle approval for joining NPS from April 1, 2013 Source: Labour ministry

Business standard news updates 30-3-2013

Coming soon: Pre- filled I- T return forms

Govt may take tax simplification drive a step ahead by pre- populating parts of info VRISHTI BENIWAL New Delhi, 29 March In a bid to increase tax compliance, the income- tax department is considering providing pre- populated forms for filing returns. A good portion of information, such as data received from employers and third- party sources, may be pre- filled by the tax department in these forms — in line with the global practice. “Additional information and data will be available so that the taxpayer is required to give only necessary details. Contact details like name and address, PAN, and details of tax already deducted may be pre- filled,” said an incometax department official who did not wish to be named. The department would use information from sources like the Annual Information Returns, Form 16A given by employers, and Form 26AS. Details of home loan, house rent, insurance policies, savings and investments, besides tax deducted at source by employer, are available in Form 16A. Form 26AS, on the other hand, provides details of other TDS. As taxpayers would be responsible for the details filed in returns, they would be free to correct any information pre- filled by the tax department in the form. For a given year, some fields in the new form might come pre- populated with data from the form filled the previous years. The pre- filled forms might be optional for taxpayers and, initially, only those filing returns electronically might be provided this facility. The system is likely to reduce cost of compliance for many taxpayers who currently have to take the services of chartered accountants or agents for filing their returns. For those currently filing their returns on their own, it would save time, as well as trouble of locating multiple records. However, there are concerns, too. There’s fear that these forms might dissuade taxpayers from disclosing information the revenue authority is not already aware of. Besides, getting information in case of non- salaried taxpayers could also be difficult. Therefore, the government countries in early 2000s. Chile, Slovenia, Spain, Australia, forms.

PowerGrid seeks shareholder nod to alter articles NSUNDARESHA SUBRAMANIAN New Delhi, 29 March In a significant victory for the proxy advisory movement in India, state- owned Power Grid Corporation is seeking shareholder approval to alter a key statutory document. PowerGrid has issued a postal ballot notice, under which it seeks to amend Articles of Association ( AoA), the document governing internal affairs of a company, under the Companies Act. PowerGrid is the first Indian company to accept a suggestion by a proxy advisory firm and act on it. A new clause ( Article 31 A) has been inserted. According to this, appointments to the board ( authorised by the President of India) would be made by the board and these appointments would be valid till the next annual general meeting ( AGM). The article adds the total number of directors cannot exceed that fixed by the articles. “PowerGrids existing AOA do not contain any provision relating to the appointment of additional directors, as provided under Section 260 of the Companies Act, 1956,” the company said in a statement. “Accordingly, it is proposed to have a provision in the AoA to empower the board to appoint the directors appointed/ recommended for appointment by the President of India as additional directors... and they will be appointed by the shareholders in the succeeding general meeting.” Though proxy firms have made several recommendations to shareholders and egged them to vote on key issues, so far, they have seen limited success, in terms of response from companies. While non- promoter shareholders have, in the past, responded by voting according to the recommendations of proxy firms, promoters have managed to have their way, owing to their majority shareholding in companies. In September, Stakeholders Empowerment Services ( SES), aMumbai- based proxy advisory, had raised the issue of appointment of additional directors without the approval of shareholders. Before PowerGrid’s AGM, SES, in a recommendation, said, “Shareholders should note that four directors--- Ravi P Singh, RP Sasmal, Santosh Saraf and Rita Sinha--- have been appointed on the board of directors since the last AGM. Their appointment is not ratified by the shareholders yet. Further, the company has not proposed any resolution for this in the ensuing AGM. The government of India ( promoter of the company) appoints directors on the board and does not take shareholders’ approval for this, as required under Section 255 of the Companies Act.” SES said it felt the Companies Act applied to all companies, unless specific exemption was given to a particular company ( after following the due procedure). The Department of Public Enterprise guidelines clearly stated all central public sector enterprises should follow corporate governance principles and comply with Securities and Exchange Board of India guidelines, the report said. Section 255 of the Act states at least two- thirds of directors on the board must retire by rotation and the posts would be filled by the company in its general meetings. Section 620 allows modification of this, in case of a government company. However, PowerGrid, in the prospectus for an initial public offering and a follow- on public offering, as well as its annual report, didnt disclose it was exempt from Section 255 of the Companies Act. Therefore, either the company wasn’t complying with the Companies Act or, even if it was, had failed to disclose material facts about the company to its shareholders, SES argued. Move follows SES report saying the company had flouted governance norms |Appointment of directors must be ratified by shareholders under the Companies Act |In September, SES said some govt- appointed directors didnt have shareholder approval |PowerGrids Articles didnt provide for appointment of additional directors |PowerGrid issues notice for postal ballot to amend Articles |Postal ballots to be submitted by April 22; results on April 27 CORRECTIVE ACTION FY13 IPOS: THE STORY IN NUMBERS |Although FY13 saw 24 IPOs, 19 of these were SME issues |Only four IPOs raised more than ₹ 100 crore; Bharti Infratel being the biggest |Excluding Bharti Infratel, all other IPOs put together raised less than ₹ 1,700 crore |Fourteen of 23 IPOs listed this year are currently trading above their market price |Nine IPOs are currently in the red with losses ranging from 2% to 33% Money matters Funds raised through IPOs in FY13 were 1.5 times more than the previous financial year, but 80% lower compared to FY11 Year Amount raised (₹ cr) No of issues FY09 8,426.3 24 FY10 24,163.8 66 FY11 29,381.0 48 FY12 2,318.0 12 FY13 5,786.7 24 Top five best- performing IPOs of FY13 Looks Health (May 2012) Offer size : ₹ 12.0cr Offer price: ₹ 40 Last close: ₹ 216 Gains: 440.0% Max Alert Systems (June 2012) Offer size : ₹ 8.0cr Offer price: ₹ 20 Last close: ₹ 95 Gains: 375.0% Comfort Commotrade (August 2012) Offer size : ₹ 6.0cr Offer price: ₹ 10 Last close: ₹ 24.75 Gains: 147.5% Esteem Bio Organic (January 2013) Offer size : ₹ 11.3cr Offer price: ₹ 25 Last close: ₹ 51.95 Gains: 107.8% EcoFriendly Foods (December 2012) Offer size : ₹ 7.5cr Offer price: ₹ 25 Last close: ₹ 37.6 Gains: 50.4% Bronze Infra- Tech (October 2012) Offer size : ₹ 8.6cr Offer price: ₹ 210 Last close: ₹ 169.2 Losses: -33.3% V- Mart Retail (July 2012) Offer size : ₹ 94.4cr Offer price: ₹ 20 Last close: ₹ 95 Losses: -19.4% PC Jeweller (November 2012) Offer size: ₹ 609.3 cr Offer price: ₹ 135 Last close: ₹ 114.35 Losses: -15.3% Bharti Infratel (September 2012) Offer size: ₹ 4,089.7cr Offer price: ₹ 210 Last close: ₹ 178.95 Losses: -14.8% Sangam Advisors (July 2012) Offer size : ₹ 5.1cr Offer price: ₹ 22 Last close: ₹ 19.2 Losses: -12.7% Top five worst- performing IPOs of FY13 Note: Repco Home Finance has not yet listed Source: Bloomberg