Regulatory environment:

Change, challenge and opportunities

Vinod Kothari

1012 Krishna224 AJC Bose RoadKolkata – 700017Phone 033-22811276/ 22813742/7715

E-mail – corplaw@vinodkothari.com

601-C, Neelkanth, 98 Marine Drive,Mumbai 400002 Phone 022-22817427   E-mail: bombay@vinodkothari.com

www.vinodkothari.comEmail: vinod@vinodkothari.com

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Copyright

•The presentation is a property of Vinod Kothari & Company. No part of it can be copied, reproduced or distributed in any manner, without explicit prior permission.

•In case of linking, please do give credit and full link

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About Us• Vinod Kothari & Company,

Company Secretaries in Practice▫ Based out of Kolkata,

Mumbai

• We are a team of consultants, advisors & qualified professionals having recently completed 25 years of practice.

Our Organization’s Credo:

Focus on capabilities; opportunities follow

Change in the regulatory environment

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Overview of change in the regulatory environment

Implemented/ Proposed change

state of implementation

Corporate laws Replacement of the 1956 law by a new law

Enactment complete; several sections enforced

Accounting standards Alignment with IFRS Pending implementation, expected from FY 16-17

Financial sector regulation Recasting the regulation of financial sector, with integrated financial regulator

Pending implementation

Insolvency laws Rewriting of age-old insolvency laws

No effective steps taken yet

Securities laws and listing regulations

Consolidation of securities and listing regulations

Securities Law (Amendment) Bill passed; listing regulations may be consolidated

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Overview of regulatory environment changes

Implemented/ Proposed change

state of implementation

Security interests and lenders’ interest

Replacing /making amendment in the regime of security interests

Central Registry enforced; makes mortgages registrable

Arbitration and alternative dispute resolution

Amendment of arbitration law

Law Commission Report made comprehensive suggestions for amendments

Stamp law Re write of the age-old stamp law

Stamp Law Amendment Bill put for public comment

Direct tax laws Re writing of direct tax laws

Finance Minister promised a road map

Indirect tax laws Consolidation of indirect taxes into a comprehensive GST

Finance Minister promised a road map

New financial instruments Introduction of new instruments

SEBI proposed crowd funding; already approved REIT and InvIT regs.

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Replacement of the Companies Act• Companies Act is the other legislation affecting

working of companies▫ Evidently, companies take commanding share of

the country’s GDP in developed countries▫ India is, still, an informal economy; an estimated

18% of the GDP comes from the corporate sector• Corporate sector consists of approx 9 lac active

companies, of which 92% companies are private

• The exercise to completely rewrite the Companies Act has been ongoing for several years

• Eventually, Bill was passed in December 2012; being implemented in tranches

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Major highlights of the new Act -1• Controls on companies

▫ Loans to directors/directors entities prohibited▫ Interest-free or below-sovereign-rate loans prohibited▫ Material Related party transactions to require special-majority-

of-minority consent▫ Acquisition of options/futures in securities of companies by

KMPs prohibited• Corporate governance

▫ Independent director mandated in public companies above a certain size

▫ Women directors in all listed companies, and companies above a certain size

▫ Auditors’ rotation made mandatory in certain companies• Compliance and filing

▫ Major requirements on filing of board resolutions▫ Secretarial audit mandated on certain companies

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Major highlights of the Companies Act -2

• Embracing technology▫ Video conferencing “permitted”, though prohibited for

several businesses▫ Electronic maintenance of records “permitted”▫ E-voting made mandatory for certain companies

• Introduction of “one person companies”▫ However, turnover limit Rs 2 crores

• Shareholder remedies▫ Service of notices by shareholders:

Imposition of “floor of shareholding” Rules impose the maximum shareholding

▫ Shareholders may take freeze action▫ Rectification of register of members▫ Forced Revision of company’s accounts▫ Pursuit of action against oppression and mismanagement

Even a single shareholder now has statutory protection▫ Pursuit of class action by groups of shareholders

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Major highlights of Companies Act -3• Financing of companies

▫ Private placements put under several restraint▫ Raising of member deposits and public deposits by companies

permitted with several safeguards▫ Debenture issuance put under several restrictive provisions▫ Priority of charges shifts from date of creation of charge to date of

filing of charges• Sickness and Revival of companies

▫ Criteria of sickness changed from “inability to pay” to “failure to pay”

▫ Automatic moratorium removed; limited period moratorium only based on orders of the NCLT

▫ Almost entire proceedings creditor-driven• Winding up of companies

▫ A new method of “summary winding up” introduced for small sized companies

▫ Voluntary winding up of healthy companies substantially simplified with intervention of Official liquidator completely eliminated

▫ Merger of companies also simplified

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Accounting standards• Finance Minister in his Budget speech 2014 made a specific

mention that Indian companies will move to IFRS in FY 2015-16

▫ Financial and insurance companies will move to IFRS based on their sectoral regulators’ decision

• As per IFRS 1, if an entity has to move to IFRS on 31st March 2016, it has to start implementing IFRS from 1st April 2014

▫ 2 years ahead▫ ICAI has given a new roadmap in March 2014, saying previous

year’s comparables for FY 15-16 may be as per IFRS The standards are likely to be applicable for both CFS and SFS

from 1st April 2015 In the meantime updation is going on

• Currently, Ind AS-es have been announced for IAS 1 to IAS 40, and IFRS 1 to IFRS 8

▫ Several IFRSes promulgated by IASB subsequently have not been Indianised

▫ Several changes in IFRS also not incorporated as yet

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Regulatory regime of the financial sector

• The Financial Sector Legislative Reforms Commission under Justice B N Sarkaria submitted its report in March 2013

• Report suggests a major overhaul of the regulatory framework bringing financial sector under a “unified financial regulator”, on the UK model▫ SEBI, PFRDA, IRDA and FMC will get merged▫ RBI will continue to exist, but under a different role

• Proposes a Indian Financial Code, focusing on▫ Macro prudential regulation▫ Micro prudential regulation▫ Consumer protection etc

• Finance Minister’s Budget Speech made a mention of the implementation

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Insolvency law reform• One of the most neglected areas of legal reform in

India• After NL Mitra committee report, virtually nothing has

been done on insolvency reform▫ Finance Minister’s Budget speech made a mention of

allowing easy exit to MSMEs• India is no 121 out of 189 countries in insolvency

▫ Worse than Pakistan and Bangladesh• Companies Act may change the scene with voluntary

winding up becoming easier▫ But voluntary winding up does not apply in case of

insolvent companies• Current scenario provides overriding primacy to

SARFAESI Act, which seems to be treading over all insolvency issues

• It is high time to put this piece of law in order

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Securities laws and listing regulations

• Securities laws are still scattered over a large bunch of subordinate law

▫ SEBI Act itself was passed in 1992 with very sketchy legal provisions▫ No comprehensive reform of the securities law

Reactive, piecemeal changes continue to be done• On August 12, 2014, Parliament passed Securities Laws

(Amendment) Bill 2014▫ Some provisions have retrospective effect to maintain the powers

conferred by the earlier Ordinance• Major changes

▫ Information powers pertain to “any person”▫ Disgorged amounts to be put into SEBI’s IEPF▫ Deeming provision to treat any scheme with Rs 100 crore mop up as a

“collective investment scheme”▫ Minimum penalties introduced in several sections▫ Voluntary settlement provisions legalised▫ Provision for special courts▫ Search and seizure powers based on leave granted by a single

Magistrate in Mumbai

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Listing regulations•Sought to be consolidated by Listing

Obligations and Disclosure Requirements Regulations

•Consolidating rules pertaining to listing of▫Equities and convertible securities▫Debt securities▫Non convertible preference shares▫Asset backed securities▫Mutual funds▫May be, shortly, REITs also

•No major changes from the earlier rules•Of course, stock exchanges given penal

powers

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Security interest laws•SARFAESI Act continues to face

challenges before Courts on various counts

•DRT proceedings continue to be lackdiasical

•Registration of security interests ▫Mortgages require registration with

Central Registry, called CERSAI No effect on validity of the charge, but penal

provisions apply▫Assignment of receivables by a factor also

requires registration

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Stamp law•The Ministry of Revenue has prepared a

draft of Indian Stamp Amendment Bill 2014 and placed the same for public comment

•The Bill proposes a major rewrite of the 19th Century stamp law

•Harmonises duties on several documents across states

•Introduces duties on several instruments•Re-defines several words

▫May have major implications of stamp duty

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Direct tax laws•Direct Taxes Code 2013 has been in

public domain for more than a year now•Finance Minister in his Budget Speech

2014 said definite timeline for introduction of DTC will be announced

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Goods and Service tax•The Finance Minister’s Budget speech

also promised a definitive timeline for introduction of GST

•Currently, even the draft of the Bill is not visible on public domain▫http://www.empcom.gov.in/index.aspx

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Arbitration law• The 246th Law Commission Report is dedicated to

comprehensive reforms in arbitration law• Major recommendations

▫ Institutionalisation of arbitration proceedings rather than ad hoc arbitrations

▫ Introduction of “emergency arbitrator” ▫ Encouraging formation of arbitration centers by trade bodies▫ Discouraging adjournments and protracted proceedings

Says arbitral tribunal will hold continuous proceedings And will not agree to adjournment request unless sufficient grounds

exist▫ Curbing litigation on existence of arbitration agreement and

appointment of arbitrator No appeal against High court orders

▫ Sec 34 and 58 applications to be disposed max within 12 months▫ Curtailing pre-arbitration powers [sec 9] only in limited cases▫ Filing of a sec 34 application will not automatically put a stay on

enforcement of the award▫ Fraud expressly made arbitrable

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Challenge and opportunity

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Change throws challenge..• Every change brings challenges

▫ Understanding▫ Implementation▫ Compliance▫ Prosecution

• With his KMP designation, a company secretary is placed at par with senior management and is clearly liable to be prosecuted

▫ Recent SEBI orders have put stiff penalties on compliance officers

• A CS in practice attesting secretarial audit report will be reporting on compliance of several laws

▫ Specifically applicable• A CS in practice is liable

▫ For penal action u/s 204▫ For fraud u/s 448▫ For class action u/s 245 (1)(g) (iii)

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Challenge in corporate governance•The rise of the institutional shareholder•Emergence of Proxy voting•Proxy voting coupled with legal provisions

on majority of minority vote may make a huge difference on corporate consensus

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However, every challenge brings an opportunity

•A pessimist sees a difficulty in every opportunity; and optimist sees an opportunity in every difficulty

•Underlying every challenge, there is an opportunity

•Focus on capabilities; opportunities follow