L8 P1 Corporate Governance

•MF, Hedge Fund, P-Notes, ETF•Corporate governance•Companies Act 2013•SEBI norms

•RPT: Suzuki Mehsana

•Vodafone•Transfer pricing•Netherland BIPA•GAAR, DTC

•Nokia Royalty tax, Finland DTAA

Today’s topics: 8th May 2014

All PowerPoint Slides available at Mrunal.org/ECONOMY

Mutual fund

Portfolio (AMC)

UnitUnitUnit

NAV

EXIT LOAD

Portfolio Nature: equity, debt, gilt edged fund, real estate

Income vs riskGrowth Fund: 80 (Equity): 20 (Debt)Balance: 50: 50Income = 20 : 80

Mutual funds types:

ETF: Exchange Traded Fund

Portfolio Goldman Sach

Rs.10Rs.10Rs.10

ONGC, CIL, GAIL10 CPSE

Rs.3000 crore NFO

Rs.20

BSE-NSE

15 ETF: 1 freeRedeem

MF Unit: CASHETF: Shares=> secondary market sell=>CASH

EXIT load…no; commission lessETF: USA 1993; India 2002

ETF different from MF?

Hedge Fund = pvt MF for HNI

Portfolio (Hedge Fund)

UnitUnitUnit

HNI=> private MFKarvy Capital, Motilal Oswald etc.SEBI regulation…not strict like MFAlternative investment fund Cat.IIIHigh risk, high reward100 Cr. Pooled=> bet upto Rs.200 crore (T+2)

Hedge Fund

P-Notes: Participatory Notes

Hedge Fund manager

P-Note: Offshore Derivative Instrument

Hedge Fund manager

FII(India)

AnonymousCGT evade terrorist moneyhot moneyMarch 2014: 2 lakh Crore (13% of FII)

P-notes : SEBI

FPI new classificationRisk profile + KYC complianceCAT I: Foreign government, government's fin. Institutions (UTI, EPFO, LIC)

CAT II: Mutual Fund, Pension Fund, Univ.Fund, CAT III: not in CAT I and CAT II

Who can't issue P-notes?CAT IIICAT II: certain high risk

SEBI on P-Notes

Corporate Governance

1.Definition2.Companies Act 20133.SEBI norms 2014

Way of directing the companyTo protect stakeholders’ interestTo comply with legal-regulatory req.

Corporate governance: Meaning?

Not mere technical complianceMoral-ethical complianceAbsence: fraud, mismanagement

Corporate governance: Meaning?

SEBI Norms:•Sep 2012: Adi Godrej•April 2014: Published•Effective 1st Oct. 2014

Companies Act•Original 1956•Aug 2013 (470 section)•…•Feb 2014: rules notified

Corporate governance in India

Companies Act2013One person

Private ltd.2-200

Public Ltd.7-unlimitedListed

Vodafone India.Unlisted

Nokia India

16

Types of companies

Total ~9 lakh companies>90% private ltd.

Capital: 50 LTurnover 2 cr.

SHARE-HOLDERS

Board of DirectorsChairman-MD

CEOExecutives

Staff

IPO

BoD

Chairman

Executive Director/Full-time

Nominated (Bank/CG)

Independent Director

18

Minimum: OPC-1; Private-2; Public-3Maximum: 15Even more by AGM resolutionOne person: maximum 20 companies.One director Indian resident (182 days)

One director Woman12 months absent = vacate.

Companies Act 2013: Directors

Not a PromoterPecuniary interest…X (except salary)MD nominated…XEmployee…XPublic (listed) company: minimum 1/3rd ID

Term: 5 years x 2 (performance review AGM)

Re-appointment: cooling 3 years

Companies Act 2013: Independent director

ID: Separate meetingsOne person max. 7 companies IDFull-time director in 1 company => 3 companies' ID

Term: 2 x 5 years (Retrospective)Performance report on IDAtleast 1 woman director in the board

SEBI norms: ID

SHARE-HOLDERS

Board of DirectorsChairman-MD

CEOExecutives

Staff

IPO

Independ DirectorsBoard Meetings

Minimum 4 meetings per yearNot > 120 days gapVideo conferencing…yesQuorum: 1/3rd strength OR 2 directors whichever max. (one person company..X)

7 days prior notice

Companies Act 2013 : Board meetings

1. Audit committee2. Stakeholder relationship committee

(SRC)3. CSR committee (CSRC)4. Nomination and Remuneration

committee (NRC): 1. MD/Director: 11% of profit2. CEO vs Median salary3. Pay rise vs Company performance

Companies Act -BoD: Committee

Last 3 years' avg. profit=> 2% CSR spend

Applies to?1. net profit of 50 million (excluding tax)2. net worth of 5 billion (Asset-liability)3. turnover of 10 billion (sales excluding

costs)Foreign branch…X

Corporate Social responsibility (CSR)

SHARE-HOLDERS

Board of DirectorsChairman-MD

CEOExecutives

Staff

IPO

Independ DirectorsBoard Meetings

AGM

One person company: no needPublic & pvt LTD. companies…yesGeneral notice by letter / emailQuorum (physically present): depending on # shareholders: 5 to 30

Proxy voting….YesElectronic Voting…Yes (SEBI C.G. Norms also)

Annual General Meeting (AGM)

Auditing related

1.Independent directors2.Board meetings3.AGM

BoD => Audit Committee (ID)External AuditorsFraud report to Central government + shareholders' meeting

One auditor=> maximum of 20 companies

Companies Act 2013

Individual auditor: 5 yearsAudit firm: 5 year x 2Cooling off: 5 yearsInternal audit: CA/Accountant/othersWhistleblower mechanismFull time Company Secretary: capital >Rs.10 cr (7500)

Companies Act 2013: Auditor’s term

Company cannot give loan to director / related persons

Min. loan interest rate >G-SecCredit rating before accepting public deposit (CIS)

Chief Finance Officer=> audit account

Companies Act 2013: misc.

New bodiesCompanies Act 2013

1.National Company Law Tribunal (NCLT)2.National Financial Reporting Authority

(NFRA)3.Investor and Education Protection Fund4.SFIO Fraud

Judicial + technical membersFinish case in three monthsAppeal: NCLATPresent case by Self, Lawyer, CA, CSCases:1. arbitration, compromise, M&A2. Converting Public ltd. To private ltd.3. Filing Class action suits (Satyam)

National Company Law Tribunal (NCLT)

1 Chairman + 15 membersAccounting standardsPowers of civil courtProfession misconduct of CA/accountant=> debar

Appeal: NFRAAICAI unhappy (Chartered Accountants Act, 1949)

#2: National Financial Reporting Authority (NFRA)

New bodiesCompanies Act 2013

1.National Company Law Tribunal (NCLT)2.National Financial Reporting Authority

(NFRA)3.Investor and Education Protection Fund4.SFIO Fraud

Since 1956’s company actUnclaimed Dividend, interest, principle

Under Corporate Affairs MinistryAwareness, seminar, financial literacyParticipation from RBI, SEBI, experts

Investor and Education Protection Fund

2013’s Act: Statutory authority@Delhi HQ, Regional officesCorp. Affairs Secretary = ChairmanMembers:

RBI Executive directorsSEBI Executive directorsLegal experts etc.

Investor and Education Protection Fund Authority

New bodiesCompanies Act 2013

1.National Company Law Tribunal (NCLT)2.National Financial Reporting Authority

(NFRA)3.Investor and Education Protection Fund4.SFIO Fraud

Naresh Chandra report on Corp. governance

2003: under Corp. MinistryCases

1. Satyam2. Reebok fraud3. Sesa Goa invoice4. Saradha Chitfund

Serious Fraud Investigation Office (SFIO)

Statutory bodyNot just document examinationSearch seize arrestCrPC power- investigatorOnce SFIO gets case, other agencies can’t proceed.

State police, CBI -cooperate, provide documents, witnesses.

Companies Act 2013: SFIO

3 companies: OPC, pvt, public4 new bodies: tribunal, financial reporting, edu. Fund, SFIO

Directors: ID, womenMeeting: Board, AGMAudit: fixed term, whistleblower, report to central Govt.

Companies Act: Memorize

business-friendly regulationsBetter corporate governanceProtecting small investorsSelf-regulationLess government approval

Conclusion: Companies Act 2013

SEBI NormsMinority

shareholdersIndependent Directors

E-Voting

RPT

TransparencySalary

Audit Committee

Whistleblower mechanism

Committee

under ID

1st October 2014

Maruti SuzukiGujarat plant Controversy

Dividend Dividend

Royalty Payment

HARYANA

•1 Manager dead•2 Japanese Executive injures•Rs. >3000 crore

MANESAR UNREST, 2012

Dividend

Mehsana

Suzuki MotorsGujarat

ProfitDividend

Royalty Payment

Cost priceProfit margin

HDFC, Reliance Cap, ICICI, SBI

Less profit for MS=>less dividend

MS. Will become mere distributor/ marketing company.

Suzuki (56%)Why controversy?

HDFC, Reliance Cap, ICICI, SBI

Maruti-Suzuki has surplus of Rs.7500 cr.

Why not upgrade Haryana?

100% subsidiary in Gujarat

15 years leaseIf not renewed, it’ll be merged with Maruti-Suzuki.

(2017) 25-30k Cr.

Suzuki (56%)Why controversy?

HDFC, Reliance Cap, ICICI, SBI

Why not upgrade Haryana?

Profit re-invested in Gujarat

@Haryana 1.5 million cars / PA

@Gujarat 2.5 million (2017)

No Risk for Maruti

Suzuki (56%)Why controversy?

Mehana ~1200 Acre.640 acres in Becharaji ; 550 acres in Vithalapur

Investment of Rs. 25-30k Cr.Full Capacity in 20172.5 million cars /PAAutohub- replacing Tamilnadu +HaryanaSuzuki Motors Gujarat ltd=>Ahmedabad (HQ)EMPLOYMENT

Positive Points for Gujarat

Companies Act 2013 =>1/4/2014. “Related party Transaction” RPTRequire vote from majority of minority shareholders.

Minority shareholders=> SEBI complaint

Suzuki has two choices1. Get voting done2. Re-work on strategy (MS Gujarat plant,

SPV)

Negative for Suzuki