When law takes effect

Business Standard takes stock of key changes in the legal and regulatory environment in the course of the year, and how it impacted businesses

Consider penalty on govt for role in mine allocation: Firdose Vandrevala

Supreme Court decisions on natural resources like spectrum, coal and soon iron ore is good news in the long-run, but not in the short-run. The apex court has clearly established that natural resources belong to the people of the country and ownership is multi-generational. It stresses that long-standing illegal practices do not make the practice legal and no person or institution is beyond the reach of the law of the land.

Supreme Court definitely clears the mess created in the past and paves the way for a clearer path ahead in the long-run. Now, the judiciary and legislature are on the same pitch for formulation of policies to give long-term benefits.

 

However, in the short-run there is chaos and pain. Chaos rises from the fact that legislative framework is still not in place to handle the past legacy. In FY 15, 12 million tonnes of iron ore are likely to be imported, even as huge dumps of mined iron ore lie unutilised for want of clear legislative norms. Issues like how much compensation to be paid and by whom are still being debated.

 

As a collateral damage, many ethical mining companies are feeling the brunt of mine de-allocation. The process of reallocation remains painfully slow. The government should take "Quikr" - pun intended - actions in laying new policies for transparent, sustained mining.

Compensation to cancellation through granting Right of First Refusal should be considered in the new Acts. It will also be just and befitting to consider a penalty on the government for its role in illegal allocation. The amount thus collected can be corpus for compensation. The apex court should make an example by making the government pay to reinstall the belief that no wrong, does not matter how powerful, would be allowed to go scot-free.

Firdose Vandrevala
Executive Vice-Chairman, Essar Steel India Ltd

Need effective shareholder communication: Sai Venkateshwaran

Year 2014 was one when the pendulum swung both ways. While prior to April 2014, the related-party provisions were in favour of promoters, under the 2013 Act, it swung to the other extreme, empowering minority shareholders significantly. And with the numerous clarifications and the latest amendments, some of that imbalance has been rectified. Companies Act 2013 brought in a whole new concept of self-governance through shareholder democracy, empowering minority shareholders significantly. The listing agreement moved in tandem to address concerns around abusive related-party transactions. With the universe of related parties becoming wider, several companies are facing challenges in compiling a full list of all their related parties, largely on account of unavailability of information related to business interests of relatives of directors and key managerial personnel.

On the approval of transactions by the audit committee, a practice evolved where many companies are obtaining omnibus approvals at the beginning of the year, demonstrating whether these are at arm's length and in the ordinary course of business. Many of the companies are also aligning the methodology used under the company law and the tax law for determining arm's-length basis.

Obtaining shareholders' approval however, has been a bigger challenge for many companies, as they have a tough balancing act between disclosing too much at the risk of competitive harm or not disclosing enough, and facing the risk of rejection by minority shareholders. This is an area where corporates would need much more effective shareholder communication and engagement to ensure that business interests are not hurt.

Sai Venkateshwaran
Partner and Head of Accounting Advisory Services, KPMG in India

Strengthen institution of independent directors: Sidharth Birla

The Companies Act, 2013, is a major leap forward for the corporate governance mechanism in India. Besides brevity, the new law has introduced numerous concepts of governance and management into law, which are aimed to lead to greater shareholders' democracy, transparency, clarity, accountability and oversight in managing businesses.

There are many praiseworthy parts in the Act, but gaps are seen in areas where it tries to reinvent the wheel. In an anxiety to provide enhanced protection for minority investors, there are conflicts with time-tested principles of majority rights. Protection for minority investors is healthy, but can swiftly lose merit if their decisions can dominate by just an exercise of rights but without accountability.

As another example, the Act denies protection to non-executive promoter directors without reference to powers, knowledge or action. We support the need for a robust mechanism to address wrongdoing, but at the same time there is also a need to build trust on promoters as a class. Any underlying concept of sweeping all promoters with one brush does not equate with the spirit of balancing that the Act reflects.

Amongst the many new concepts introduced, the requirement of independent directors has been mandated with a view to bring in independent judgment on the board. Significant amount of responsibility and duties has been entrusted to independent directors. While the reliance on 'knowledge test' for ascertaining their liability will go a long way in ensuring unyielding performance, it is important first to holistically strengthen the institution of independent directors in the country. The imposition of onerous duties may discourage many persons who could have potentially added a lot of value as independent directors. While the Ministry has been trying to assuage the challenges in implementation of the new Act through circulars, notifications and the Companies (Amendment) Bill, 2014, there still remain areas of concern.

Sidharth Birla
Chairman, Xpro India, Immediate Past President, FICCI

Need to learn from the Chinese about IP arena: Anuradha Salhotra

India's patent regime, while being in compliance with the TRIPS requirements, is evolving to become fairly dynamic and competitive worldwide. The system, through a combination of legislative, judicial and administrative actions has become not only conducive to the development of innovation, entrepreneurship, business and research and development activities, but also balances the needs of the public and industry.

Evidence of the patent regimes growth can be seen in the exponential increase in the number of filings in India. In 1999-2000, the number of patent applications filed was 4,824 (2,206 by Indian applicants, 2,349 by foreign applicants and 269 Patent Corporation Treaty (PCT) national phase applications); by 2012-2013, the number of patent applications filed had increased to 42,561 (9,911 by Indian applicants, 4,215 by foreign applicants and 28,435 PCT national phase applications).

However, patent application filing by Indian nationals still needs to multiply, specifically from individual, small and medium size enterprises (SMEs) and academic institutions.

In addition, the case law pertaining to India's modern patent system is developing fast. The past year has seen a large number of groundbreaking and precedent setting judgments, including those setting unique precedents for the country's unique circumstances. The provision of making public annual statement regarding commercial working of patents under the Indian patent law provides a clear picture to the public as to how the inventions are being utilised.

The Indian Patent Office has achieved a high degree of transparency in their transactions and they are competing with developed patent systems like US Patent and Trademark Office (USPTO) and European Patent Office (EPO) in providing open access of the applications to the public.

However, while the measures taken are indeed laudable, there is still scope for improvement by increasing and improving public engagement in the patent regime. The government is currently working to establish a National IP Policy, seeking adoption of best practices to be followed in IP Offices, setting up a mechanism for enforcement of intellectual property rights (IPR) and also a strong IP policy for creation and commercialisation of IPR.

It is hoped that the new IP policy would help in strengthening the IP system in India, but we need to learn from the Chinese who have become the most challenging player in the IP arena.

Anuradha Salhotra
Founding Partner, Lall Lahiri & Salhotra

Conversion of CSR benefits never so challenging: Rajib Kumar Debnath

The challenges imposed on India Inc by the Companies Act, on the CSR component is not the spend. Rather, it is on how it has to be spent, as stakeholders concerned would now, not just see it as a benevolence, but also from the perspective of accountability.

Conversion of CSR's qualitative benefits into quantitative impact, to be able to monitor, evaluate, measure and demonstrate the degree of improvement has never been so challenging. To combat such challenges, progressive companies are embracing concepts like 'Social Returns on Investment', followed by third-party evaluation of performance, according to widely accepted ISAE 3000 of International Auditing and Assurance Standards Board.

While for India Inc, the financial framework is quite robust, challenges however remain with respect to assessment of material risks and compliance issues emanating primarily from the environment, health, safety and social (EHS&S) domain. Unlike the finance-based laws, it is more of a challenge, since the focus of compliance of EHS&S-based laws is more on the basis of actual implementation at the site rather than on documentation. Moreover the EHS&S domain calls for an understanding of umpteen advance science related technical terms.

Ignorance of appropriate domain knowledge and technical understanding of the operations and processes could lead in inappropriate scanning of risks/legal requirements, leading to a risk of release of an inappropriate Board of Directors' statement and thereby inviting attention from stakeholders and primarily the enforcement authorities.

Rajib Kumar Debnath
ED & Leader of Sustainability & CSR, Grant Thornton India LLP

MNEs seeking certainty through mitigating options: Milind S Kothari


India has acquired the dubious distinction of being considered a challenging tax jurisdiction for multinational enterprises (MNEs) insofar as transfer pricing affairs are concerned, as several of them face varied adjustments in India that are currently locked in dispute before the appellate authorities. While it is contended that the revenue authorities are aggressive, one cannot put past instances where transfer pricing did not get its due share of attention by MNEs, as they structured their transfer price positions that led to disputes. MNEs now choose to implement global best practices that enable them to mitigate transfer pricing risks in India.

An increasing number of MNEs are investing considerable time and efforts in formulating comprehensive group level policies to act as the barometer for all material inter-company pricing decisions.

MNEs are also seeking certainty through mitigation options such as Advance Pricing Arrangements and safe harbours. Most MNES now prefer to treat transfer pricing as an independent function that delivers on strategy, regular monitoring and dispute mitigation as key deliverables. This is enabled by in-house teams that collaborate with external professionals, especially with the intention of remaining updated with the changing landscape of the Indian law, understanding expectations of revenue authorities and evaluating options to mitigate disputes, even as the world prepares for significant transfer pricing repositioning on account of Base Erosion & Profit Shifting initiative led by the OECD.

Milind S Kothari
Managing Partner & Head - Direct Tax, BDO India LLP