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Overlaps confound corporate India
November, 18th 2013

India is waking up to the implications of the new company law. As sections get notified in tranches and the rules are put out for public comments, several areas of overlap with other laws and regulations are emerging, which need to be sorted out, say legal experts.

Some of the key areas where the overlaps are seen include issues related to taxation, related-party transactions, issue of preferential shares, corporate social responsibility, revision in financial statements, provisions related to securities in listed companies, cross-border mergers, and auditor assignment, among others. Unless clarified in time, the conflicting provisions may lead to confusion.

Some of the provisions of the new companies Act overlap certain key norms made by other financial sector regulators. They include regulations in SEBI Act, I-T Act, competition law, accounting standards and other sectoral regulations. Business Standard takes a look at some of these overlaps in the companies Act which has left many corporate lawyers, accountants, auditors, and CXOs confused. Some of the points of concern are over:
Insider trading regulations
Schemes of arrangement
Purchase of minority shareholding
Related party transactions
Corporate social responsibility
Definition of the term ‘Control’
Consolidated financial statements
Issue of preferential shares
Cross border merger and its taxability or tax neutrality
Revision in financial statements
Revision in depreciation
Stamp Act, state legilations
Accounting standards / Indian accounting standards

Yogesh Sharma, partner, assurance, Grant Thornton India LLP, an assurance, tax and advisory firm, says: "It is expected that other regulatory requirements will have to get aligned to the provisions of the new Companies Act. In case the alignment is not done in time, it may leave corporate India confused."

For instance, the Securities and Exchange Board of India (Sebi), which has drafted several regulations and prescribed the listing agreement that governs the functioning of listed firms, has already commenced the process by which the new Act's provisions will be interpreted and aligned with the existing Sebi regulations.

Sebi & the Companies Act
One of the areas of overlaps with Sebi is the issue of preferential shares. The new Act has provided that preferential issues now require a registered valuer to value the shares.

"Issue of preferential shares has got several dimensions, the key being that pricing considerations are commercially driven. In any case, you have Sebi guidelines for listed companies, RBI guidelines for cross-border share issues, and several deeming fictions (and litigation) in tax legislation. In this context, clearly, a regulatory overkill, not to speak of confidentiality concerns where external parties are involved in share valuation," says Ketan Dalal, joint leader (tax and regulatory services), PricewaterhouseCoopers.

Another area where Sebi regulations will come into play is the insider trading provisions. While Sebi already has insider trading provisions for listed companies, now this will also cover unlisted companies. Moreover, the new Act has included several key functionaries in the definition of the insider. Sebi regulations need to be amended accordingly. "Sebi can provide for stricter terms, thresholds and penalty for listed firms, but these can't be lower than what is provided in the companies Act," said a former Sebi official.

Similar issues are likely to come up with the Institute of Chartered Accountants of India (ICAI), say experts.

Accounting Standards and the companies Act
Dalal of PwC points to the stringent provisions provided for related-party transactions. The earlier Act did not provide for any definition of related-party. But the new Act has provided for the widest possible definition of the related-party transactions, he said. Another issue bothering many tax experts while considering any related-party transactions is that the threshold of ownership is different between I-T Act and the companies Act. Transfer pricing regulations look at 20 per cent or more ownership of voting power, whereas the companies law looks at control of 20 per cent or more of total share capital (including preference share capital), say experts. Under the new Act, a company having one or more subsidiaries will also prepare Consolidated Financial Statement (CFS) of the company, and of all the subsidiaries in the same form and manner as that of its own. The draft rules issued by Ministry of Corporate Affairs (MCA) for this purpose states that the consolidation of financial statements of the company shall be done in accordance with the Accounting Standards. However, by the requirements of the existing Accounting Standards and the Indian Accounting Standards placed on MCA's website, there is no such requirement, which has been so prescribed. Therefore, there is an inconsistency between the two to that extent, point out experts.

Provisions relating to consolidated financial statements may also clash with the listing agreement. Under the new Act, companies need to prepare the consolidated statements using the applicable Accounting Standards. However, under the listing agreement, currently, the listed companies are given the choice of preparing the CFS either by Indian Accounting Standard or under IFRS (International Financial Reporting Standards). Experts point out this may lead to a situation where companies either prepare CFS additionally under IFRS on a voluntary basis, or decide not to prepare these at all.

As per the new Act, the maximum number of audit assignments undertaken by a chartered accountant cannot exceed 20. However, this Act, unlike the old Act, does not prescribe the types of companies and other assignments, which will be included or excluded for the purpose of calculating this limit. The vagueness will remain till the time MCA and ICAI clarify the combination, says audit experts.

Tax related implications
The new Act mandates spending for corporate social responsibility (CSR) by companies. However the Central Board of Direct Taxes (CBDT) is still examining the issue of giving tax breaks on CSR spending. Auditors point out that under Section 135 of the new Act, the CSR committee in a Board shall have at least one independent director. However, under Section 149(4) and the Rules framed thereunder, a private company is not required to have an independent director. This dichotomy needs further clarity from the ministry, say experts.

On restatement of financial statement, the reported profits of the company are likely to undergo a change, if the restatement relates to a profit and loss item. This could potentially impact the Minimum Alternate Tax (MAT) calculations of the company. However, the ability of the company to revise its MAT calculations could be restricted if the tax laws are not suitably amended to permit revision of returns for periods that match the periods for which financial statements can be revised, points out Sai Venkateshwaran, partner and head (accounting advisory services), KPMG India.

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