EXCEPTION TO CONSOLIDATION: GUIDE TO THE MEANING OF SEVERE AND LONG-TERM RESTRICTIONS

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By Beni Agarwal (beni@vinodkothari.com)

Introduction

For the group enterprises, as the Companies Act provides, there is a requirement to prepare and present Consolidated Financial Statements. However there are a certain number of conditions which if satisfied may exclude a subsidiary from consolidation for preparation of consolidated financial statements. This article talks about one such restriction which deals with severe and long term restrictions. The purpose of the article is to throw more light and provide clarity to the meaning of “severe” and “long term” restrictions.

Background

Companies Act 2013, section 129(3) states that where a company has one or more subsidiaries, it shall, in addition to financial statements provided under sub-section (2), prepare a consolidated financial statement of the company and of all the subsidiaries in the same form and manner as that of its own which shall also be laid before the annual general meeting of the company along with the laying of its financial statement under sub-section (2). Schedule III of Companies Act 2013, provides that the financials should be prepared in accordance with the applicable Standards.

Hence, it is the requirement of companies act to prepare consolidated financial statements where there is a parent company and the economic activities of the group is presented in the financial statements. For the preparation of Consolidated Financial Statements, presentation is as per Schedule III and as per the rules stated in Accounting Standard 21( AS 21). The disclosure and presentation requirements as per schedule III are in addition to and not in substitution of the Accounting Standards.

The Standard lays down the rules for the preparation and presentation of Consolidated Financial Statements of the group enterprise under the control of the parent. These are in addition to the Standalone Financial Statements. Now the question arises as to what is the meaning of “control” that builds the subsidiary and holding relationship?

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LIQUIDATION PROCESS (SECOND AMENDMENT) REGULATIONS

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– Richa Saraf and Devisha Dhanuka (resolution@vinodkothari.com)

Pursuant to Notification No. IBBI/2017-18/GN/REG028, dated 27.03.2018, the very first amendment was brought into Regulation 32 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 w.e.f. 01.04.2018 to permit sale of the corporate debtor as a going concern. The insertion, as aforementioned, was brought in force keeping in view the object with which the Insolvency and Bankruptcy Code, 2016 (“Code”) was formulated, i.e. to provide for an opportunity of revival of the entity under distress.

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RBI’s Interoperability guidelines for PPIs- A move to promote Digitalization

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By Simran Jalan (simran@vinodkothari.com)

Introduction

Interoperability is the ability of customers to use a set of payment instruments seamlessly with other users within the segment. It enables a payment system to be used in conjunction with other payment systems. It allows Prepaid Payment Instruments (PPI) issuers and other service providers to undertake, clear and settle payment transactions across systems, without participating in multiple systems. All the service providers adopt common standards so as to make the PPIs interoperable. This interoperability shall facilitate payments among different wallets inter se and with banks. Paytm, Freecharge, Oxygen wallet, Airtel money, etc. are some of the digital wallets operating in India currently.

Last year, RBI issued Master Directions on Issuance and Operation of Prepaid Payment Instruments[1] (“Master Directions”) to regulate the prepaid payment instruments and to monitor the working of the PPI issuers. This was the much required legislative framework to supervise the prepaid payment industry. The Master Directions also provided for interoperability of the PPIs. It stated that the interoperability shall be enabled in the following phases for the PPIs:

The Master Directions mandated the first phase for all KYC compliant PPIs (bank and non-bank) issued in the form of wallets to have interoperability amongst themselves through UPI within 6 months from the issue of the Master Directions. This ensured fair competition between the different PPI providers as some providers used to spend exorbitantly to get merchants on-board and this would in turn eliminate competition.

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PRIORITY OF TAX DUES IN LIQUIDATION?

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By Kasturi Chowdhury (resolution@vinodkothari.com)

 

The manner of distribution of the assets of a company during liquidation is fraught with ambiguity and settlement of such claims arising out of it has inconvenienced the parties concerned since the advent of the Insolvency and Bankruptcy Code, 2016 (“Code”).  In a recent ruling, the judgement of the Hon’ble High Court of Hyderabad showed the path to be followed when there arose such conflict regarding priority of settling the dues of the Income Tax authority during liquidation of a Company. Read more →

RBI’s dissent on the PSS Bill, 2018

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By Simran Jalan (simran@vinodkothari.com)

Introduction

An Inter-Ministerial Committee was formed to finalise Payment and Settlement System Bill, 2018 to amend the Payment and Settlement System Act, 2007 (“PSS Act”). The Bill seeks to foster competition, consumer protection, systemic stability and resilience in payment sector and establish an independent Payments Regulator Board (“PRB”) to regulate the same. The proposals of the Government to amend the PSS Act at length is covered in our previous Article- Major recommendations of the Committee on Payment Systems.
Reserve Bank of India (“RBI”) had raised various objections in the Bill and has, further, issued dissent note[1] to bring out into public domain the fact that RBI is not happy with the government’s attempt to take control of payment and settlement systems.

Dissent of RBI

The RBI has given the dissent on the following recommendations of the committee:

• On composition of PRB

RBI has contended that there has been a major departure with respect to composition of the PRB from what was proposed under the Finance Bill, 2017. Initially, the Finance Bill proposed that the PRB shall be constituted with the Governor of RBI as the Chairman, however, the PSS Bill states that the Chairman of the PRB shall be appointed by the Government in consultation with the RBI.

Further, the Finance Bill, 2017 suggested that the PRB must be built into the overall framework and the RBI, however, the PSS Bill states that the PRB shall be an independent body. Payment and settlement system being a sub-set of the currency management system, keeping the PRB independent of RBI would not be appropriate. The Monetary Policy has a huge impact on the payment systems and therefore, the power to regulate the payment systems should be with the monetary authority.

The Bill also provides for a formal mechanism for co-ordination between PRB and RBI. The RBI is of a view that the operations of PRB should be integrated and not co-ordinated with RBI.

Further, banks are the most important parties of the payment systems, RBI being the banking regulator makes it logical to keep integrate PRB within the operations of the RBI.

It will additionally provide holistic benefits since a single regulator will decrease the compliance costs as compared to the costs incurred if there are multiple regulators and will be more effective.

Further, the Bill stated that it was necessary to distinguish the role of the Central Bank as an infrastructure institution providing settlement function from its role as a regulator of the payment sector. In respect to this statement, RBI commented that the payment systems are nothing but digital substitutes of currency. RBI creates currency and distributes them through banks. Major concern of RBI was that the non-banks were ascribed the job of creating money via payment systems.

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Gist of amended Schedule III of Companies Act, 2013

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Board interlock restrictions apply to existing IDs too

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SEBI clarifies in recent informal guidance

Sundaram Finance (applicant company) on 28th August, 2018 requested SEBI to issue informal guidance for getting clarity/better understanding of the wording use in new Regulation 17 (1A) and Regulation 25 (1) both of which use the word “continue” which is absent in Reg.16(1)(b)(viii).

The below note give’s a summary  with regard to Informal Guidance issued by SEBI dated 15th October, 2018 which gives a better understanding/clarity with respect to the above regulations.

Discussion under Kotak Committee report[1]

Independent director function as an oversight body in monitoring the performance of the company and should raise red flags whenever suspicious occurs, and one of the  most  important elements being “independence”, the Kotak Committee felt that the evaluation of “independence” of an Independent director should  entail  both  objective  and  subjective  assessments  and  such  assessments  should  be  both continuing and genuine.

Another  trend  that  was  brought  to  the  attention  of  the  Committee  and  found  to  be  undesirable from a good governance standpoint, is “board interlocks” which may run a structural vulnerability of quid-pro-quo (a favor or advantage granted in return for something) which may harm the independence of an independent director.

Board interlocks can be good or bad depends on case-to-case basis. Some can use it in ethical manner and can be useful to bring business to companies and some might use them in a wrongly manner/misuse the power for their personal benefit and can cause harm to long-term interest of the company.

Requirement under SEBI (Listing Obligation and Disclosure Requirements), 2015[2]

SEBI has provided clarity in regards to the informal guidance issued to Sundaram Finance Private Limited based on three regulation provided under SEBI (Listing Obligation and Disclosure Requirement), 2015:

Regulation 16 (1)(b)(viii):

“Independent director means a non-executive director, other than a nominee director of the listed entity:

Who is not a non-independent director of another company on the board of which any non-independent director of the listed entity is an independent director.”

Regulation 17 (1A):

“No listed entity shall appoint a person or continue the directorship of any person as a non-executive director who has attained the age of seventy five years unless a special resolution is passed to that effect, in which case the explanatory statement annexed to the notice for such motion shall indicate the justification for appointing such a person.”

Regulation 25 (1):

“No person shall be appointed or continue as an alternate director for an independent director of a listed entity.”

Interpretation of Sundaram[3]

Sundaram Finance Limited requested for informal guidance to be issued for their clarity in regards to Regulation 16 (1)(b)(viii), Regulation 25 (1), Regulation 17 (1A) which are as follow:

  1. There were 12 directors on the board of the listed company, out of which 6 were independent directors. One of the independent directors is non-independent director on the board of another company. One of the directors of other company who is non-executive director is an independent director on the board of Sundaram Finance Limited.
  2. Regulation 16(1)(b)(viii) introduced with effect from 1st October 2018 does not apply to existing independent directors, whose term will expire as per the tenor approved by the shareholders. In the company’s view, the stance is further strengthened by the wordings of Regulation 17(1A) and Regulation 25(1) which use the word, “continue”, which is absent in Regulation 16(1)(b)(viii). Therefore, this provision should apply to directors to be appointed or re-appointed as independent directors only.

SEBI’s informal guidance for the same[4]

Regulation 16(1)(b)(viii) of the SEBI LODR Regulation (inserted by the SEBI Listing Obligations and Disclosure Requirements  Amendment ) Regulations, 2018 were notified on 9th May, 2018. The said amendment has come into effect from October 01, 2018. Hence all listed companies were given time till October 1, 2018 to comply with the said clause (viii) of Regulation 16(1)(b) of said amended regulations. The said regulations shall apply to both to existing directors and to new appointment/ re-appointment of directors with effect from October 1, 2018.

Analysis and conclusion

The rationale behind the above is that the independent directors is a critical instrument for ensuring good corporate governance and it is necessary that the functioning of the institution is critically analyzed and proper safeguards are made to ensure efficacy.

These types of interlocks have garnered significant regulatory and academic attention because they raise concerns about whether a director charged with overseeing an executive who is, in a different context, acting as one of his own directors, can be truly independent.

This will help in maintaining the “independence” of independent directors and will safeguard the interest of the company in long run.

 

[1]https://www.sebi.gov.in/reports/reports/oct-2017/report-of-the-committee-on-corporate-governance_36177.html

[2]https://www.sebi.gov.in/sebi_data/attachdocs/1441284401427.pdf

[3] https://www.sebi.gov.in/sebi_data/commondocs/oct-2018/sundaraminfgui_p.pdf

[4]https://www.sebi.gov.in/sebi_data/commondocs/oct-2018/sebisundaraminformal_p.pdf