HIGHLIGHTS OF NEW COMPANIES BILL 2011

The New Companies Bill, 2011 will be introduced in the Parliament in Winter Session.

1.Mandatory rotation of Independent Directors in every 10 years

2. Periodic rotation of Auditors after every 4 years

3. Profit-making companies above a certain threshold will have to spend at least 2% of the average profits  in  the preceding three years on CSR activities. This provision is not mandatory

4. Exit option must for minority shareholders in case of company gets new promoters

5. Definition of an “associate” company fixed at 20% of voting rights

6. Shareholders are now empowered with tools of class action suit like in US

7. Creditors are empowered to order restructuring if net worth of the borrower company falls

8. Shareholders’ approval must for Inter-corporate loans

9. It proposes to tighten laws for raising money from the public

10. The Bill aims to give more powers to the Serious Frauds Investigation Office (SFIO)

11. It seeks to prohibit any insider trading by company directors or key managerial personnel by treating such activities as a criminal offence

12. New corporate responsibility (CSR) framework, greater shareholder democracy and stricter corporate governance norms

INFLATION

What is Inflation

Inflation rate is the rate at which prices of goods and services increases in its economy it’s an indication of the rise in the general level of prices over time. Since its practically impossible to find out the average change in prices of all the goods and services traded in an economy due to the sheer number of goods and services present, a sample set or a basket of goods and services is used to get an indicative figure of the change in prices, which we call the inflation rate. Mathematically, inflation rate is calculated as the percentage rate of change of certain price index.

How does India Calculate Inflation

In India inflation is calculated on weekly basis. It uses the Wholesale Price Index (WPI) to calculate and then decide the inflation rate in the economy. WPI was first published in 1902 and was one of the most reliable economic indicator available to policy makers until it was replaced by most developed countries by the Consumer Price Index(CPI) in the 1970s.

     WPI is the index that is used to measure the change in the average price level of goods traded in wholesale market. In India a total of 435 commodities data on price level is tracked through WPI which is an indicator of movement in price of commodities in all trade and transactions. It is also the price index which is available on a weekly basis with the shortest possible time lag only 2 weeks. The Indian Government has taken WPI as an indicator of the rate of inflation in the economy.  

 According to research paper of prominent economist the CPI is official barometer in many countries such as USA, UK, Japan, France, Canada, Singapore and China. The Government there review the commodity basket of CPI once in every 4-5 years to factor in changes in consumption pattern.

  The various research papers say the main problem with WPI calculation is more than 100 out of 435 commodities included in the index have ceased to be important from the consumption point of view. India constitutes the last WPI series of commodities in 1993-1994 but has not updated it till now due to this economist argue the index has lost relevance and cannot be a barometer to calculate inflation. 

  WPI is supposed to measure impact of price on business. But India uses it to measure the impact on consumers. Many commodities not consumed by consumers get calculated in the Index and it does not factor in services which has assumed so much importance in the economy. 

Why India is not switching to CPI Method of calculating inflation

There are many intricate problem from shifting from WPI to CPI model. India there are 4 different types of CPI indices  which makes switching over to CPI from WPI fairly "Risky and Unwieldy"the 4 CPI series are

1. CPI Industrial Workers

2. CPI Urban and Non Manual Employees

3. CPI Agricultural Labour

4. CPI Rural Labour 

The CPI cannot be used in India because there is too much time lag in reporting CPI numbers. The WPI is published on weekly basis and CPI on monthly basis.

What is Consumer Price Index

A Consumer Price Index (CPI) is a measure estimating the average price of consumer goods and services purchased by household. CPI measures a price change for a constant market basket of goods and services from one period to the next within same area (City, Region or Nation). Its a price index determined by measuring the price of a standard group of goods meant to represent the typical market basket of a typical urban consumer. its one of several price indices calculated by most national agencies. The percent change in the CPI is a measure estimating Inflation. The CPI can be used to index wages, salaries, pension and regulated or contracted prices.
What are Myths of Inflation In India
Economist are of the view that there are 8 myths of inflation in India they are:-
1. Its all about Food Prices
2. The pick up in inflation is all due to base effects from last year's low inflation
3. Inflation will fall back to normal range on its own
4. Fresh capacity will come on-stream soon and alleviate constraints
5. Monetary tightening will kill the expansion
6. Administrative measures are as good as - or better than - monetary tightening to control  
    inflation
7. A stronger rupee does nothing to control inflation
8. Policy tightening will deny credit to small business and the common man as well as poor.

NEW TAKE OVER CODE

Till now take over of company was not so expensive.Companies can merely acquiring 15% stake and then make open offer for next 20% to remaining shareholders and due to this small share holder were biggest losers, but now a potential acquirer will have to pick up the entire quantum of remaining shares once the threshold limit of 25% is triggered. This will make take over much more expensive from current level. But before analyzing new takeover code its worth knowing following fact.

• In last 5 years more than 100 take over has been done only in less than  15% of the open offers did the acquirer offer to buy more than the mandatory 20%. 
• As per international standards the acquirer agrees to buyout all remaining shares
• The takeover code was amended many times before 1997 it was 10% then it was changed to 15% and now its proposed to 25%
• Today, the mean and median of promoter shareholdings in listed companies are at 48.9% and 50.5% of the total equity capital and the number of companies that are controlled by promoters holding 15% or less is less than 8.4%.
• Internationally countries like UK, European Union, Singapore and Hong Kong threshold limit ranges between 30-35%

 Based on above facts it  was expected that this trigger limit may be higher but what the committee has done is to allow promoters who already have a stake of 25% to continue to make a creeping acquisition of up to 5% a year, without making an open offer up to the maximum permissible non-public shareholding limit or 75%. That gives the promoters the flexibility to beef up their stake in the company, over a period of time.

Ideally, the market price should not form part of the criteria to decide the open offer price since the price negotiated between the buyer and the seller is the best indicator. However, the committee has decided that although the market price may not always be relevant, it should be retained for some more time as one of the criteria used to determine the offer price. The committee has, however, tweaked the rules to try and ensure that the market price of the shares in question cannot be manipulated by suggesting the use of a volume-weighted average price for the last 60 days, instead of the average of the weekly highs and lows for 26 weeks. Clearly, it would be more expensive to tamper with prices because the volume will now be taken into consideration. All in all, any buyout will become more expensive for acquirers now because the open offer will also have to take into account any non-compete fee that they pay to the seller.

But in my opinion this takeover code can be misused by the company at times though now trigger point is 25% but what happens when a company offers share to acquirer up to 25% making it equal partner in the company for example like case of United Breweries Ltd were the Indian and foreign partner holds equal share and they manage the company. This type of activity will make teasing effect on small investors with only cash coming in the company but not to investor.

Though looking at mean and median we say that 25% is good but one should not forget that this percentage is substantial and one can block resolution of company etc. so I feel that this code would have given a rider that

If acquirer is Indian Company then
25% of equity capital
                 or
25% of promoter’s holding which ever is Higher
If acquirer is foreigner etc.
25% of equity capital
           or
Promoter’s shareholding which ever is higher

This would have resulted in more clear picture and would have not resulted in teasing of small share holders, because if any foreigner acquiring shares of 25% or less they cannot sit on the board which would have resulted in takeover with out any benefit of share holders. by above recommendation they would have to make open offer and this code would not be misused by them. further its pertinent to mention that going forward China and Indian market will be be drivers of growth and consumption driven market so many foreign companies, PE funds will take over Indian companies this will result in part by part selling so cap should be give in this regard. otherwise this amendment is better compare to old one.

HIGHLIGHTS OF NEW DIRECT TAX CODE

The New Direct Tax Code prima facie looks like give common man much more relief to spend more by saving tax on income. Further for India Inc also its time to celebrate since surcharge will be removed and tax rates have been drastically reduce so giving more room for good dividend to investors / reinvest for expansion. This one can think as indirect stimulus by directly giving goodies for common man. Now there is a caveat, this draft Tax code will be discussed in parliament in the winter session and if it gets the green signal will be implemented for assessment year 2011. So we have atleast couple of years to live with current Tax structure.

Highlights of the Draft Tax Code Bill

1. Lowers the incidence of tax on corporate and individual incomes
2. Reintroduces wealth tax and capital gains tax, albeit at lower levels
3. Scope of income tax expanded to include value of perks, gifts, profit in lieu of salary and capital gains but excludes farm income.
4. Removal of most exemptions
5. All long-term savings to come under EET
6. Tax exemption to PPF and other pension schemes on withdrawals accumulated up to March 31, 2011.
7. The code proposes to abolish STT.
8. Capital gains on shares and securities to be taxed as income.
9. Distinction between long-term and short-term capital assets to go.
10. Wealth tax cap to be hiked to Rs 50 Lac.
11. Wealth to be taxed on net basis; Amount in excess of Rs50lac to be taxed at 0.25%
12. Moves the base year for calculation of capital gains tax to April 2000
13. Hike in tax deduction limit on savings to Rupees 3 lakhs
14. Higher income tax slabs, lowering net payable taxes.
15. Tax breaks on housing to be removed
16. Dividend will continue to be tax-free in the hands of investors
17. Effective corporate tax rate at 25% with no surcharge or cess
18. MAT to be levied on gross assets as against book profits now
19. MAT carry forward to be disallowed
20. Business losses to be carried forward indefinitely
21. No tax deduction on interest payable on any government security
22. Wealth tax liability to be discharged by payment of prepaid taxes
23. Income from certain transfers not to be treated as capital gains
24. Rationalization of taxes for all non-profit organizations
25. Annual disclosure of profits of non-life insurance businesses
26. Govt may enter overseas agreements for double taxation avoidance
27. No tax deduction on interest payable to banking firms and insurers

TAX RATE UNDER NEW DIRECT TAX CODE

  

The new Direct Tax code is only at draft stage and its still not approved.Under New Tax code its proposed to make tax structure simplyfied so main benefit will be given to individuals and corporates were tax rate have been reduced. however still this has not been approved so i expect that Tax rates for Individuals may again be modified from proposed levels. in case of corporates the tax will be reduced from current level of 30% besided surchage will be removed.
 
1.Tax Rates for Individual / HUF

Upto 1,60,000 :- Nil
1,60,001 to 10,00,000 :- 10%
10,00,001 to 25,00,000 :- 20%
Above 25,00,000 :- 30%

2.Tax Rates for Women Below 65 Years 
Upto 1,60,000 :- Nil
1,60,001 to 10,00,000 :- 10%
10,00,001 to 25,00,000 :- 20%
Above 25,00,000 :- 30%

3.Tax Rate for Co-operative Society
Upto 10,000 :-10%
10,001 to 20,000 :- 20%
Above 20,000 :- 30%
In Case of Any Other Society its 30% of Total Income

4.Incase of Non Profit Organization 15%
5.Incase of Every unincorporated body 30%
6.In case of Local Authority 30%
7.The Tax structure for Companies will done as follows
    (i) MAT will be based on asset value and not book profits
    In Case of Banking Companies 0.25% & Other Companies its 2%on the value of Gross Assets
    (ii) Normal Tax Rate is 25%
8.Dividend Distribution Tax is 15% whether interim / Final etc (Exempted in hands of Investors)
9.Tax On Branch Profit is 15%
10.Non Resident
  A. Investment income by way of
          • Interest :- 20%
          • Dividend (on which Distribution tax is not paid) :- 20%
          • Capital Gains :- 30%
          • Any Other Investment Income :- 20%
  B. On Income From Royalty / Fees for Technical Services :- 20%
 11. Non-resident sportsman, who is not citizen of India :- 10%
 On income by way of participation in India in any India game [other than a game the winnings here from are taxable under sub-item (b) of item 4] / sport / advertisement /contribution of articles relating to any game or sport in newspapers, magazines / journals in India
 12.Non-resident sports Association / Institutions :- 10%
On income by way of guarantee money in relation to any game (other than a game the winnings
Where from are taxable sub-item (b) of item 4) or sports played in India.
 13. Any Assessee :- 30%
Any lottery or crossword puzzle / race, including horse race (not being the income from the activityof owning and maintaining race horses) / card game or any other game /gambling or betting.

MOST EXPENSIVE CORPORATE FRAUDS.

1. ENRON
Enron’s collapse in 2001 from a company worth $63.4 billion, to one seeking bankruptcy reorganization, came as a shock to the general public. Considered to be a major accounting failure, it led to the dissolution of Arthur Anderson, one of the world’s largest accounting firms also. Over 15,000 employees of the corporate had most of their savings in stock, which fell from $83.01 in early 2001 to $0.01 in October 2001.
2. BERNIE MADOFF
On June 29, 2009, Bernie Madoff was sentenced to 150 years in prison, the maximum sentence that could be given to anyone convicted of corporate fraud. He ran an amazing ‘Ponzi” scheme for his clients, showing falsified profits, and gains with the money that they had given him for investment. SEC authorities believe the actual net fraud will be between $ 14 - $17 billion.
3. SUBPRIME MORTGAGE CRISIS
This was not the crisis of a single corporate but it led to the demise of many other corporate. The repercussions can still be felt throughout the US and even Europe. It has had an adverse effect on most of the banks and financial institutions, and has led to large scale reform in the financial sector rules and regulations. It’s pertinent to mention that crisis had washed out trillion’s of dollar effecting USA and European banks at large.
4. SATYAM COMPUTERS
India’s biggest corporate scam was disclosed when Ramalinga Raju, the CEO of company declared that profits had been overstated for many years. Inflated bank figures, understated liabilities and over 10,000 non-existent employees were among the many fraudulent practices being indulged in to cross 7000 crone rupees.
5. WORLDCOM
On July 21, 2002, when WorldCom filed for bankruptcy under Chapter 11, it was USA’s largest corporate failure. The accounting scandal covered $ 11 billion and it seems the workings of the company were masked by painting a false picture of growing profits and margins. In 2004, it emerged from the bankruptcy proceedings with $5.7 billion in debt and $ 6 billion in cash.
6. BARLOW CLOWES
One of England’s largest corporate scandals, it led to the collapse of the company, after it was disclosed that it’s co-owner Peter Clowes, had spent over $100 million of his clients money in items such as luxury yachts, private aircrafts and cars. A gilts management service, in the 1980s, it controlled millions of pounds of it’s clients funds.
7. DAEWOO
Prior to is dismantling in 1999, Daewoo was the second largest corporate in Korea. It collapsed due to bad financial management, due to the worldwide financial crisis and due to growing labor unrest. The collapse led to losses in billions of dollars and became a political crisis.
8. FANNIE MAE and FREDDIE MAC
Before their collapse in 2008, these two companies owned more than half of USA’s $ 12 trillion mortgages. In September that year they had to be placed in conservatorship by Federal Housing Finance Agency, as “one of the most sweeping government interventions in private financial markets in decades”.
9. AIG
An American Insurance Company, AIG went into a crisis mode when in 2008, its credit rating were downgraded to below “AA’ levels and they were unable to access any funds to tide over their crisis. Once the 18th largest company in the world, it’s disclosure of financial losses and frauds, led to its downfall.
10. PHAR-MOR
In 1992, Phar-Mor had over 300 stores and over 25,000 employees. It ran a successful chain of discount drugstores throughout America, and it ran on a policy of small profits, but large quantities of merchandise. However, the owners in 1992 were accused of large scale embezzlement, deceptive inventories and fudged data.  (Sources by websites)

ALL LISTED COMPANIES REQUIRED TO MAINTAIN 25% PUBLIC HOLDING

The Government has made amendments to The Securities Contract (Regulation) Rule to increase the public holding Minimum 25% level. The Salient features of amendment are as follows:
• The minimum threshold level of public holding will be 25% for all listed companies.
• Existing listed companies having less than 25% public holding have to reach the minimum 25% level by an annual addition of not less than 5% to public holding.
• For new listing, if the post issue capital of the company calculated at offer price is more than Rs.4000Cr., the company may be allowed to go public with 10% public shareholding and comply with the 25% public shareholding requirement by increasing its public shareholding by at least 5% per annum.
• For companies whose draft offer document is pending with Securities and Exchange Board of India on or before these amendments are required to comply with 25% public shareholding requirement by increasing its public shareholding by at least 5% per annum, irrespective of the amount of post issue capital of the company calculated at offer price.
• A company may increase its public shareholding by less than 5% in a year if such increase brings its public shareholding to the level of 25% in that year.
• The requirement for continuous listing will be the same as the conditions for initial listing.
• Every listed company shall maintain public shareholding of at least 25%. If the public shareholding in a listed company falls below 25% at any time, such company shall bring the public shareholding to 25% within a maximum period of 12 months from the date of such fall.
             The Securities Contracts (Regulation) Rules 1957 provide for the requirements which have to be satisfied by companies for the purpose of getting their securities listed on any stock exchange in India. A dispersed shareholding structure is essential for the sustenance of a continuous market for listed securities to provide liquidity to the investors and to discover fair prices. Further, the larger the number of shareholders, the less is the scope for price manipulation. Accordingly, the Finance Minister in his Budget speech for 2009-10, inter- alia, proposed to raise the threshold for non- promoter, public shareholding for all listed companies. To implement the Budget announcement the Securities Contracts (Regulation) (Amendment) Rules, 2010 have been notified.
        The companies  / promoters can increase public holding by any of the mode which is viable to them that is IPO / FPO / Rights Issue / Private Placement etc. The real benefit is to investor who can get shares of various PSU etc. this move was made so that disinvestment process can be started quikly. further at present around 180 companies have be identified which has less public holding. Further if companies follow this rule then market should be ready to invest in these shares which will require around 2,00,000 croes or say around $45billion so this kind of money market does not have even till date FII investment in india is $65billion so this will be only possible when companies disinvest around 5-10% to retail investor and balance can be possible with QIP / Private Placement with FII's, DII, Hedge funds, Mutual Funds etc. so that long term capital will help companies to bring down debt level and for GOI it will be helpful to bring down deficit which is balloning.