Regulatory
environment: Change,
challenge and
opportunities
Vinod Kothari
1012 Krishna
224 AJC Bose Road
Kolkata – 700017
Phone 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.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
Mumbai
of
Kolkata,
• 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
5
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
6
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 201516
▫ 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
12
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
14
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,
(Amendment) Bill 2014
Parliament
passed
Securities
Laws
▫ 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
16
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
Registry, called CERSAI
with
Central
 No effect on validity of the charge, but penal
provisions apply
▫ Assignment of receivables by a factor also requires
registration
17
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
18
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
19
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
comprehensive reforms in arbitration law
• Major recommendations
is
dedicated
to
▫ 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