New Companies Bill

New Companies Bill to fix responsibility at top
Sapna Dogra Singh / New Delhi December 12, 2008, 0:48 IST
The new Companies Bill 2008, which is before the standing committee of Parliament, for the first time has fixed responsibility and accountability on the top management instead of leaving it loose and broad-based as in the existing Companies Act. The draft Companies Bill 2008 has identified the three key managerial positions as chief executive officer (CEO), chief finance officer (CFO) and company secretary (CS).
By recognising these three key managerial positions, the Bill is fixing responsibility to bring out a system which is more accountable, transparent and workable, according to an official at the Ministry of Corporate Affairs (MCA). It would be mandatory to mention the names of people holding these three positions in the annual report of the company.
In the present system, it is the ‘officer in default’ who is held responsible for offences committed by a company. However, the definition of ‘officer in default’ is so vast in the Companies Act of 1956 that it is virtually impossible to put the blame on anyone.
“This is an era of self regulation where you need a team of competent professionals at helm who can be held responsible,” said NK Jain, secretary and CEO of the Institute of Companies Secretaries of India (ICSI). This will have a positive impact, added Jain.
Besides bringing accountability and transparency in companies, by recognising the three key managerial personnel, the draft Bill has provided relief to the honorary directors and independent directors and the non-executive members of the company.
In the existing Companies Act, the term ‘officer in default’ encompasses all the senior officials in a company, which include all directors both executive, non-executive and independent. In case of any offence or lapse, any one of them could be made responsible even if they have nothing to do with the actual business of the company, stated Pawan Jain, company secretary of the Abhishek Industries — a leading textiles company in the country.
He cites a recent example in which a leading Bollywood star was implicated because a cheque, issued by a company where the actor was an honorary director, got bounced and the person reportedly filed a suit against the actor.
Also, said Jain, in cases where companies have not filed their returns, action can be taken against anyone in the company under the definition of ‘offer in default’ and hence the new draft Bill will give respite to companies from such incidents.
The draft Bill aims to ensure financial integrity, corporate governance and risk management in the companies, said E Balaji, CEO of Ma Foi Management Consultants.
Many public sector companies feel that this would bring good governance in the companies. The bill is a good step in bringing corporate responsibility by giving statutory recognition to the role of CFO, said DK Saraf, CFO of Oil and Natural Gas Corporation.
Another important step that the draft Bill has proposed is doing away with the need for central government approval for appointments and fixing remuneration of the key managerial positions. It also envisage removal of the ceiling on managerial remuneration based on net profits.
However, AK Singhal, director (finance) NTPC, feels that this wouldn’t be applicable to state-owned companies as the government would continue to fix their remuneration.

How to Incorporate a Company ?

Steps to be taken to get a new company incorporated:
Select, in order of preference, at least one suitable name upto a maximum of six names, indicative of the main objects of the company.
Ensure that the name does not resemble the name of any other already registered company and also does not violate the provisions of emblems and names (Prevention of Improper Use Act, 1950) by availing the services of checking name availability on the portal.
Apply to the concerned RoC to ascertain the availability of name in eForm1 A by logging in to the portal. A fee of Rs. 500/- has to be paid alongside and the digital signature of the applicant proposing the company has to be attached in the form. If proposed name is not available, the user has apply for a fresh name on the same application.
After the name approval the applicant can apply for registration of the new company by filing the required forms (that is Form 1, 18 and 32) within six months of name approval
Arrange for the drafting of the memorandum and articles of association by the solicitors, vetting of the same by RoC and printing of the same.
Arrange for stamping of the memorandum and aticles with the appropriate stamp duty.
Get the Memorandum and the Articles signed by at least two subscribers in his/her own hand, his/her father's name, occupation, address and the number of shares subscribed for and witnessed by at least one person.
Ensure that the Memorandum and Article is dated on a date after the date of stamping.
Login to the portal and fill the following forms and attach the mandatory documents listed in the eForm Declaration of compliance - Form-1Notice of situation of registered office of the company - Form-18. Particulars of the Director's, Manager or Secretary - Form-32.Submit the following eForms after attaching the digital signature, pay the requisite filing and registration fees and send the physical copy of Memorandum and Article of Association to the RoC
After processing of the Form is complete and Corporate Identity is generated obtain Certificate of Incorporation from RoC.
Additional steps to be taken for formation of a Public Limited Company:
To obtain Commencement of Business Certificate after incorporation of the company the public company has to make following compliance
File a declaration in eForm 20 and attach the statement in lieu of the prospectus(schedule III) OR
File a declaration in eForm 19 and attach the prospectus (Schedule II) to it.
Obtain the Certificate of Commencement of Business.
Additional steps to be taken for registration of a Part IX Company:
The Part IX Company is required to file eForm 37 and eForm 39 apart from filing eForm 1, 18 and 32.
The company is required to file eForm 1 first and then the company can file all the other eForms (18, 32, 37 and 39) simultaneously or separately

VIKAS KAPAHI

TREASURER

JAB WE MET CA

REDEFINING PROFESSIONALISM....

WINDFALL TAX

The controversial proposal to introduce windfall tax has left private oil companies in the country a worried lot. Heres all you need to know about that issue - how viable is it and whether companies are actually making windfall profits.
Windfall tax is a tax imposed on profits made by virtue of market conditions rather than companies' own efficiency, operational style or technology.
But the key question is - whether companies are actually making windfall profits?
Analysts say that if private oil companies were well integrated, then there were chances of them profiting. But refineries in India are using crude which is imported at market price.
But upstream companies which explore and produce oil do reap gains. But the quantum of oil produced by private companies is around 10 million tonnes which is insignificant, keeping in mind total consumption.
Besides, oil producing companies, as part of the production sharing contract, do pay the government a royalty which is ad valorem. So then is the government justified in contemplating windfall taxes?
It's argued that the government does not cushion the private oil companies when they make losses, then on what ground really, is it demanding a pie of the profit, if at all!
Also the high risk in the business of oil exploration and production means that without incentives like tax concessions, private players or global investment will keep a safe distance.
Analysts say it is unjustified to compare India with China, Malaysia or Venezuela, who've imposed windfall taxes in the recent past.
The question is whether the government will indulge in bad economics for the sake of political survival as it seeks a windfall in the vote of confidence next week.

How To analyse a Comapny ?

The Company Analysis

The different issues regarding a company that should be examined are:
The Management

The Company

The Annual Report

Ratios

Cash flow

Management is the single most important factor to consider in a company. Upon its quality rests the future of the company. A good, competent management can make a company grow while a weak, inefficient management can destroy a thriving company. Investors must check on integrity of managers, proven competence, how high is it rated by its peers, how did it perform at times of adversity, the management's depth of knowledge, its innovativeness and professionalism.

A company may have made losses consecutively for two years or more and one may not wish to touch its shares - yet it may be a good company and worth purchasing into. There are several factors one should look at.Another aspect that should be ascertained is whether the company is the market leader in its products or in its segment. When you invest in market leaders, the risk is less. The shares of market leaders do not fall as quickly as those of other companies.The policy a company follows is also of imperative importance. What are its plans for growth? What is its vision? Every company has a life. If it is allowed to live a normal life it will grow upto a point and then begin to level out and eventually die. It is at the point of leveling out that it must be given new life.Labour relations are extremely important. A company that has motivated, industrious work force has high productivity and practically no disruption of work. On the other hand, a company that has bad industrial relations will lose several hundred mandays as a consequence of strikes and go slows.

The Annual report is the primary and most important source of information about a company is its Annual Report. By law, this is prepared every year and distributed to the shareholders. Annual Reports are usually very well presented. A tremendous amount of data is given about the performance of a company over a period of time. The Annual Report is broken down into the following specific parts:

A.The Director's Report,

B.The Auditor's Report,

C.The Financial Statements, and

D.The Schedules and Notes to the Accounts.

E. Management Discussion and Financial Analysis

A Director’s Report is valuable and if read intelligently can give the investor a good grasp of the workings of a company,The problems it faces, the direction it intends taking, dividends proposed and the future prospects of the company. The Director’s Report gives investors insights into the company. and enunciates the opinion of the directors on the economy, the industry and political situation.

The auditor represents the shareholders and it is his duty to report to the shareholders and the general public on the stewardship of the company by its directors. Auditors are required to report whether the financial statements presented do, in fact, present a true and fair view of the state of the company. It is really the only impartial report that a shareholder or investor receives and this alone should spur one to scrutinize the auditor's report minutely. The Auditors in the Auditors report will comment on any changes made in accounting principles and the effect of these changes made in accounting principles and the effect of these changes on the results. They will also comment on any action or method of accounting they do not agree with.Financial statements of a company in an annual report consist of the balance sheet, the profit and loss account and the cash flow statement. These detail the financial health and performance of the company.

The balance sheet details all the assets and liabilities a company has on a particular date. Assets are those that the company owns such as fixed assets (buildings, cars etc.), investments and current assets (stocks, debtors and cash). Liabilities are those that the company owes (trade creditors, loans, etc.) and the shareholders investment in the company (share capital and reserves). Although every bit of information available in the Balance Sheet, one must definitely look into Share capital, Reserves, Loans (both Secured and Unsecured), Working Capital (Current Assets – Current Liabilities) with special emphasis on Inventories and its valuation, and Investments. Cash can be better analysed from the cash Flow Statement. Have we spared anything in the Balance Sheet? Probably not!

The Profit and Loss account summarizes the activities of a company during an accounting period which may be a month, a quarter, six months, a year or longer, and the result achieved by the company. It details the income earned by the company, its cost and the resulting profit or loss. It is, in effect, the performance appraisal not only of the company but also of its management - its competence, foresight and ability to lead. Major items to look for in the profit & Loss Statement are Sales or Primary Income, compared with other income, if any. This helps us compare if the company has earned profit from its core operations that are likely to sustain or from non core operations (like other income, dividend from investments, interest on investments, rent from leased assets or profit from sale of assets) that may not sustain in the future. On the expenses side, operating and other expenses like salaries, selling expenses, administrative expenses and the like are to be analysed including depreciation, Interest and Finance charges. Taxation, Dividends proposed, Interim Dividend, Transfer to Reserves are other important items in the Profit & Loss Statement.The notes to the accounts are even more important than the schedules because it is here that very important information relating to the company is stated. Notes can effectively be divided into:

(a) Accounting Policies All companies follow certain accounting principles and these may differ from those of other entities. As a consequence, the profit earned might differ. Companies have also been known to change (normally increase) their profit by changing the accounting policies. The accounting policies normally detailed in the notes relate to: How sales are accounted? What the research and development costs are? How the gratuity liability is expensed? How fixed assets are valued? How depreciation is calculated? How stock, including finished goods, work in progress, raw materials and consumable goods are valued? How investments are stated in the balance sheet? How has the foreign exchange translated? And so on.

(b) Contingent Liabilities All contingent liabilities are detailed in the notes to the accounts and it would be wise to read these as they give valuable insights. The more common contingent liabilities that one comes across in the financial statements of companies are:Outstanding guarantees. Outstanding letters of credit. Outstanding bills discounted. Claims against the company not acknowledged as debts. Claim for taxes. Cheques discounted. Uncalled liability on partly paid shares and debentures.

(c) Others The more common notes one comes across are: Whether provisions for known or likely losses have been made? Estimated value of contracts outstanding. Interest not provided for. Arrangements agreed by the company with third parties. Agreements with labour.It is to be kept in mind that no investment should be made without analyzing the financial statements of a company and comparing the company's results with that of earlier years.

Ratios express mathematically the relationship between performance figures and/or assets/liabilities in a form that can be easily understood and interpreted. It is in the analysis of financial statements that ratios are most useful because they help an investor to compare the strengths, weaknesses and performance of companies and to also determine whether it is improving or deteriorating in profitability or financial strengthSales of Rs.500 million a year or a profit of Rs.200 million in a year may appear impressive but one cannot be impressed until this is compared with other figures, such as the company's assets or net worth or capital employed. It is also important to focus on ratios that are meaningful and logical . Otherwise, no useful conclusion can be arrived at. A ratio expressing sales as a percentage of trade creditors or investments is meaningless as there is no commonality between the figures. On the other hand, a ratio that expresses the gross profit as a percentage of sales indicates the mark up on cost or the margin earned.Ratios can be broken down into four broad categories:

(A) Profit and Loss Ratios These show the relationship between two items or groups of items in a profit and loss account or income statement. The more common of these ratios are:

1. Sales to cost of goods sold.

2. Selling expenses to sales.

3. Net profit to sales and

4. Gross profit to sales.

(B) Balance Sheet Ratios These deal with the relationship in the balance sheet such as :

1. Shareholders equity to borrowed funds.

2. Current assets to current liabilities.

3. Liabilities to net worth.

4. Debt to assets and

5. Liabilities to assets.

(C) Balance Sheet and Profit and Loss Account Ratios.These relate an item on the balance sheet to another in the profit and loss account such as:

1. Earnings to shareholder's funds.

2. Net income to assets employed.

3. Sales to stock.

4. Sales to debtors and

5. Cost of goods sold to creditors.

(D) Financial Statements and Market Ratios These are normally known as market ratios and are arrived at by relation financial figures to market prices:1. Market value to earnings and2. Book value to market value.Ratios do not provide answers. They suggest possibilities. Investors must examine these possibilities along with general factors that would affect the company such as its management, management policy, government policy, the state of the economy and the industry to arrive at a logical conclusion and he must act on such conclusions. Ratios are a terrific tool for interpreting financial statements but their usefulness depends entirely on their logical and intelligent interpretation.