AT A GLANCE Monthly Newsletter
The Institute of Company Secretaries of India

March 2002

There has been a progressive intensification of financial sector reforms, and the financial sector as a whole is more sensitized than before to the need for internal strength and effective management as well as to the overall concerns for financial stability. At the same time, in view of greater disclosure and tougher prudential norms, the weaknesses in our financial system are more apparent than before. The NPA levels remain too large by international standards and concerns relating to management and supervision within the ambit of corporate governance are being tested during the period of downturn of economic activity. There is also a sense that we have a lot to acquire and adapt in terms of the technical expertise necessary to measure and manage risks better. The structure of the financial system is changing and supervisory and regulatory regimes are experiencing the strains of accommodating these changes. Certain weak links in the decentralised banking and non-bank financial sectors have also come to notice. In a fundamental sense, regulators and supervisors are under the greatest pressures of change and bear the larger responsibility for the future. For both the regulations and the regulated, eternal vigilance is the price of growth with financial stability.

The development of international standards and codes in the current context has five important features, viz. it is part of the reform of the international financial architecture; it represents a consolidated view of several interrelated standards and codes; it is a collaborative effort involving different groups of countries, markets and international financial institutions and standard setting agencies and bodies; it has elements of both external and internal assessments of degree of compliance and finally there is an assumption of linkage between the implementation of standards and codes and financial stability. The complexities relating to the global financial system in the context of strong national interests continuing to dominate public policy viewed in the light of Indian experience warrant, more than a legal basis, emphasis on three aspects, namely-(i) the standards may be set domestically with a recognition that they have some international dimension also, (ii) the processes of setting, prioritizing, incentivising, monitoring and reorienting should be consultative and participative in both domestic and international dimensions, and (iii) effective implementation is a complex and varied process with domestic legal framework being one enabling factor at this juncture.

In banking industry if money is the raw material and customer service the end product, manpower can be called “plant and machinery”. It is people who are behind the success of any organization. Management, ancient or modern, depends on how one understands people and how the leader stands with them in times of trouble and challenges. The trust of staff alone will get you their best. We have to nurture and look after individual aspirations. This sector has become more significant in the face of competition, recessionary trends and pressures on profitability. We have to provide a congenial work atmosphere. Besides good work has to be rewarded with promotions and appropriate placements.

On perusal of the provisions of section 27 of the State Financial Corporations Act, 1951 and Section 274 of the Companies Act, it is evident that there is apparent conflict between the two sections concerning the qualification of the appointee. This conflict is accentuated by the introduction of additional grounds of disqualification of directors under clause (g) of section 274(1). In order to dispel any uncertainty arising from incorrect interpretation, the Department should rise to the occasion and put an end to the controversy by clarifying the position of directors appointed by banks and financial institutions having provisions in their statute similar to sub-sections (5) and (6) of section 16 of the Sick Industrial Companies (Special Provisions) Act, 1985.

Dishonour of cheque is now a vast conspiracy which must make the defaulter only unhappy because the trends of verdicts of Supreme Court unequivocally demonstrate that there is sub-conscious judicial pressure in the minds of Judges which leans heavily in favour of the holder of the cheque. So the defaulters must be beware of the penal consequences.

The Committee on Banking Regulations and Supervisory Practices (Basle Committee) had in July, 1988 released the agreed framework on international convergence of capital measure and capital standards. The Committee has adopted risk weighted assets approach which assigns weights to both on and off balance sheet exposures of a bank according to their perceived risk, as the method of measuring capital adequacy and set the minimum standard at 8 percent to be achieved by the end of 1992. The Committee was keen that this accord on capital adequacy measurement should become the basis for a worldwide standard.

The development of active and liquid fixed income markets along with the further expansion of equity markets, integration of the capital market with the real sector of the economy and ensuring liquid and transparent foreign exchange markets are some possible steps in the path to global integration of financial markets. The key lies perhaps in viewing the integration of global financial markets as an opportunity rather than a threat. Many developing countries have so far unfortunately viewed the liberalization of capital contracts and the integration with global financial markets as a threat. It should also ultimately serve to lower the cost of capital-provided the necessary sound economic and financial policies are implemented.

When an economy is in trouble, there is a flight to safety and quality, and the focus is on currency values, cross-border exposure, risky lending, and back liquidity. Government, industry, commerce and consumption-all large users of credit-are affected. Each needs a viable banking system. While the soundness of banks is often taken for granted, it draws special scrutiny when stability must be resorted to markets. If a large bank goes bust, markets fear a ripple effect. Bank’s liquidity is important because a bank is counted upon to meet its commitments, the risks it assumes must be reasonable and within its resources and the credit competence of its staff. Credit fundamentals are central to soundness. The importance and significance of sound credit decisions are emphasized in this article.

   PART II: OTHERS ARTICLES

Schedule XIII to the Companies Act, 1956 lays down the conditions to be fulfilled for the appointment of a managing or a whole time director or a manager without the approval of the Central Government. Part II of the Schedule, which contains the provisions regarding remuneration has been amended by substituting the provisions of Section II, which relates to remuneration payable by companies, having no profits or inadequate profits. Three Explanations IV, V & VI have also been added to this Section II of Part II of Schedule XIII. Instead of having one ceiling limit for companies with different amounts of effective capital, as hitherto, the new Section II envisages three different situations and provides for different ceilings under each situation.

Since the units of MF’s conform to the description “such other” instruments under the SCRA and can be declared as ‘securities’ under the delegated powers, the Central Government should declare units of MFs as ‘securities’ under Section 2(h) of the SCRA. Such declaration would help-(i) the market regulator and stock exchanges to regulate trading of units more effectively with a view to protecting interest of investors therein, (ii) market for units to deepen, (iii) provide a level playing field to other MF’s with UTI, and (iv) removes confusion about the status of units of MFs. More importantly this would remove the regulatory gap.

The provisions enabling the appointment of a small shareholder director is not made mandatory and the choice to elect such director very well lies with the company even on receipt of a valid nomination. Hence it can be gain said that though the said provisions appear to have created an oasis in the drought hit shareholders democracy, in reality it, in reality, is only a mirage . Instead of depending on the law to provide for sops in the matter of shareholders democracy, if the professionals and the regulatory authorities do their part sincerely, then the interests of the stakeholders will certainly be protected and the their expectations and that of other interested parties will certainly be met to a large extent.

The escalation of non performing asset and sickness of a company is an area of concern for the auditor to certify the validity of going concern concept. The intention should be to make financial statements more transparent and meaningful in changing circumstances for the benefit of the user. The time gap between generation of fund and surpluses by use of assets and liquidation of liabilities need attention because it may affect the going concern concept. The Auditor should assume continuity of operation over indefinite period of time and must look for time mismatch between asset and liabilities. He should apply his/her mind as to revenue potentiality of assets and ability to meet debt and liabilities. The doubt about the going concern concept can be assessed from the management in order to form the opinion as to truthfulness and fairness of sate of affairs of annual accounts.

Convening and holding of annual general meetings by companies which is a very important statutory requirement, is quite a complicated exercise involving numerous pre and post meeting procedural compliances. Besides at the meeting itself several complexities crop up. Several such possible issues arising with regard to AGMs are listed out in this case study with suitable solutions.

• Highlights of Economic Survey 2001-02 

• Highlights of Economic Survay 

• Limits on Credit Exposure 

• Bank Financing for Margin Trading o Investments by Banks/FIs 

• Guidelines on Investment Fluctuation Reserves 

• Money Changing Facilities Liberalised 

• No PIS for OCBs o Acquisition of Shares under ESOP