An era of transformation in law

Discussion on the recent changes in Indian Corporate legal environment including a brief on IFRS, GST in India, Direct Tax Code, Company Bill 2009, New Takeover Code

Discussion on the recent changes in Indian Corporate legal environment

Indian Regulators are sitting on the edge, recreating and revamping the legal framework for Indian Incorporations. Significant alterations have been due from long time; however owing to the rigidity of Indian legal system the process have been outstretched. But better late than never!!!! Call it for the fall of Lehman Bros in Sept 2008, recession in world economy, Satyam scam in Dec 2008, or crunch in Indian business, the Regulators are finally here making a difference to the Indian Corporate Sector by making the law healthier and easier.
law for corporatesIndia is one among the top developing countries with incredible growth history and favorable economic conditions. The Country’s Commerce & Industry is on an ever-changing spree, competing on a world-wide scale. The gigantic pool of resources, diverse options of income, enormous consumer market warrants growth potential in India. Exports in the country have increased with leaps and bounds and India is sought as one of the favorable avenue of investment by international investors. The business and number of corporate organizations have increased manifold over the years. In this dynamic era, one cannot think of sticking to age-old legal regime. A legislation which is too old will lose its relevance and jeopardize the objective for which it was enacted. India has stretched its arms to a new constitutional framework governing its body corporate to meet the requirements of changes globally.
We shall briefly discuss here, the forthcoming changes, both certain and expected, in Indian legal regime:

  1. International Financial Reporting Standards
  2. The International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) are increasingly being recognised as Global Reporting Standards. More than hundred countries, including the countries of the European Union, Australia and Russia, currently require the use of IFRSs in their countries. The implementation of IFRS would help Indian companies to speak the same accounting language as their foreign counterparts in countries like UK, Canada, Singapore and Australia.

    In view of the globalisation, uniformity in accounting statements for companies all over the world had become a necessity. India proposes full convergence of Indian accounting standards with the IFRS by April 1, 2011. The framework states that the objective of financial statements is to provide information about the financial position, performance and changes in the financial position of an entity that is useful to a wide range of users in making economic decisions, and to provide the current financial status of the entity to its shareholders and public in general. Adopting IFRS will be a major challenge for Indian Companies, but undoubtedly will reap benefits in the long run.

  3. Goods and Service Tax
  4. The Finance Ministry has declared introduction of Goods and Services Tax (GST) by the year 2010 in India. France was the first country to introduce GST, and now more than 140 countries are already following GST taxation system. GST would replace the principal broad-based consumption taxes i.e. CENVAT and the Service Tax levied by the Centre and the VAT levied by the states. GST is basically tax on final consumption, to be levied concurrently by both levels of government. The GST will work as a centralised taxation system with collection of all the Tax going to the Central Government and then shared by the states.

    Goods and Service Tax is a tax on goods and services, which is leviable at each point of sale or provision of service, in which at the time of sale of goods or providing the services the seller or service provider can claim the input credit of tax which he has paid while purchasing the goods or procuring the service. While the white paper of GST is yet to be released, there is a lot of speculation on the exact model to be introduced in our country.

  5. Direct Tax Code
  6. taxA brand new Direct Taxes Code (code) has been released that will replace the 1961 Income Tax and other direct tax laws, when adopted by the Parliament in the winter session. The code is a complete rewriting of Indian tax regime; radically improvising on the taxation structure by making it simpler and thus warranting better compliance.

    The thrust of the code is to improve the efficiency and equity of taxation system by eliminating distortions in the tax structure, introducing moderate levels of taxation and expanding the tax base. The attempt is to simplify the language to enable better comprehension and remove ambiguity to foster voluntary compliance.

    The code’s thrust on clarity, certainty and an effective dispute resolution is quite commendable, and should go a long way in boosting India’s image as a friendly investment destination. All the direct taxes have been brought under a single code and compliance procedures unified. This will eventually pave the way for a single unified taxpayer reporting system. The separate concepts of ‘previous year’ and ‘assessment year’ are replaced by a unified concept of ‘financial year’. The provisions relating to capital gains taxation have been altered, such as any investment asset transferred at gain is taxable for the respective assessee, removing the concept of short-term and long-term gain; further sale of any business asset will be considered as business income and taxed accordingly, thus heavily impacting mergers and acquisitions. The Securities Transaction Tax (STT) is proposed to be abolished and the gain or loss arising out of sale of securities or units is proposed to be taxed as capital gain. The code moderates income tax rates, such as the tax rate up to an annual income of Rs 25 lakh is just 20 per cent, additional tax benefits are extended to women and senior citizens. Corporate tax rate for both foreign and Indian companies is proposed at 25%, however an additional branch profit tax of 15% on after tax income for foreign companies has been proposed. Even though the corporate tax rate is lowered, minimum alternate tax at 2% of gross assets without deducting liabilities will be a huge blow to the dream of paying less tax by corporate houses. The Direct Code is under review and the comments and critics are being made, hopefully the resulting law meets the aspirations of all, in the country.

  7. Company Bill 2009
  8. The Companies Bill 2009 was introduced by the Finance Minister in Lok Sabha on 3rd August 2009. The new bill is a clone of Company Bill 2008, with the only difference of Bill and Republic year. Even though some major episodes occurred during the transition period of the two Bills, Regulators have not modified the provisions of the earlier bill; hence ignoring the demands of changed times of corporate sector. The Bill introduced with a purpose “to consolidate and amend the law relating to companies”, has focused on structural and some procedural changes in law. A list of provisions of listing agreement has been incorporated in draft company law, irrespective of the fact that a separate statutory body, SEBI, is governing such provisions, does it invite for dual governance and conflicting approach of MCA and SEBI over these provisions? There has been only a vague attempt to simplify the language or bring more clarity in legal provisions. The most sought feature, i.e. more autonomy for corporate following more transparency, and impetus for self driven corporate governance has been missing in the draft company law….

    Important provisions like Section 383A requiring appointment of Company Secretaries or compliance certificate from Whole-time Practicing Company Secretaries have been arbitrarily removed. Shorter process and single forum for approval of mergers and acquisitions is recognised, however the advantage is mainly to merger of holding and wholly owned subsidiaries or among small companies having paid up capital and turnover less than amount as specified. Law makers have missed the fact that simpler language and conceptual clarity is more required than mere structural changes and add or less of certain provisions. Indian corporate structures are unique in its own way, with majority of companies being closely held. We would certainly need more revamping of provisions and making the law more user friendly for attracting more compliance and at the same time promoting growth.

  9. Revision of Takeover Code
  10. SEBI had come out with Substantial (Acquisition of Shares and Takeover) Regulations way back in 1997, almost a decade ago. The 12-member Takeover Regulation Advisory Committee (TRAC), set up on September 4, is likely to look into the entire takeover code address issues related to norms for overseas acquisitions, creeping acquisitions, increasing the threshold for open offers, and non-compete fees. The new takeover code which is probably more reflective of thinking on revitalizing the takeover code and being more responsive to institutional investors and the sentiment around the world where large institutional investors want to have a say in how things are done.

Apart from the above legal and regulatory changes which are in pipeline, there have been few changes which have already taken place such as enactment of Limited Liability Partnership Act, 2008, coming of SEBI (Issue of Capital and Disclosure Requirements) Regulations 2009 (ICDR Guidelines). Probably, the law makers want to tone up the legal statutes to meet the demands of time, and we are hopeful that the results are constructive, and build up India’s image as a law compliant nation. A simple and friendly law will be credible by all Indians as well as foreign countries who propose to invest in India.

Author: Neha Singhi
Contact: +91-33-40083385
Date: October 20, 2009

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