Published on Fri, Dec 26,2014 | 22:46, Updated at Fri, Dec 26 at 23:05Source : CNBC-TV18 | Watch Video : 
Hello & Welcome to this special year end edition of The Firm in which we look back and we look ahead. Not just to the next year but the next 15- because CNBC-TV18 celebrates 15 years of leadership this December. So on this show, we asked some of the country's top lawyers, regulatory experts, accountants and auditors to identify the top 15 changes that India will and should witness in the next 15 years. Let the crystal ball gazing begin!
In 2009, India witnessed its biggest ever corporate fraud. 5 years hence the Satyam saga has yet to reach conclusion in court but it's left it's mark on the most important law for business. When the 58 year old Companies Act was re-written, it included several anti-Satyam safeguards. The Companies Act, 2013 rotates auditors and independent directors and gives minority shareholders a powerful veto on related party transactions. But eminent lawyer Cyril Shroff says the law falls short in many other areas – for instance, financial instruments!
Cyril Shroff
Managing Partner, Amarchand Mangaldas
"I think we currently suffer from woefully inadequate options for financial instruments; it's just very binary. There is so much variety that is possible in different types of capital as well as debt; we currently don't have that and in a high growth economy where you're to see different pools of capital coming in- you need those instruments and you need markets for those instruments. It's too plain vanilla- yes, there are risks involved but that's all solvable. And lastly, I think the market for corporate control needs to be significantly deepened. There is practically no market. In the next 10-15 years, if we don't see more public M&A – potentially hostile M&A- you will not really force the governance debate nor will you provide for value creation through having better governance takeovers."
The last 15 years marked the birth of Indian multinationals. The Tata Group has been one of India's most aggressive deal makers over the last 15 years. From Tetley to Jaguar Landrover - the Tatas have bought it all. Group General Counsel Bharat Vasani had a ringside view of all the action, and now he hopes India brings the M&A pie home!
Bharat Vasani
Group General Counsel, Tata Group
"I would also like to see leverage buyouts permissible under Indian regulations, why one needs to go to London to do a leverage buyout, why not we do it in India. I would also like to see decriminalization of lot of things that are made criminal under the Companies Act. There was progress made in the 2013 Act but not adequate enough. So I would like more and more corporate technical offences are decriminalized, substantial fines are levied but people are not put to jail, I would also like to see much better corporate insolvency laws which deals with smoother and easier exit of companies which have failed in business. Currently there are companies which are languishing for years without getting wound up, that's not good for the economy & our competiveness either."
In the last 15 years, India saw the introduction of a codified takeover regulation (1997) and its re-writing (2011). Thresholds went up and promoter premiums went down …to zero. The buyback regulations were amended twice (1998, 2012, 2013) and de-listing norms are awaiting their 3rd iteration (2003, 2009, 2014!). But top investment banker Sourav Malik says we still have a long way to go.
Sourav Malik
Senior Executive Director & Head - M&A, Kotak Investment Banking
"I think one of the key things that acquirers have been looking for in the Indian market which is different from other markets is when there is a change in control of a company, the ability to directly go ahead - pursuant to that change of control- delist the company if they so desire & thereafter have a process that allows them subject to appropriate safeguards and thresholds, squeeze out minority shareholders- that's something that's very important and having a streamlined process that allows the acquirers to do this while keeping the interest of minority shareholders interests is something that's important. And I think in the next 10 odd years regulators should jointly think of."
Speaking of retail shareholders- India Inc's relationship with the minority has undergone a transformation. No more the bhajan and poetry filled shareholder meetings of the past. Today minority shareholders are voting down related party transactions, deciding executive remuneration and blocking devious schemes. Why – even mutual funds have found a voice! Adding to the chorus are India's new proxy advisory firms; giving corporate governance a new fillip! Founder Anil Singhvi of IiAS is leading the charge.
Anil Singhvi
Founder, IiAS
"On the one side we say we shouldn't have dynasty in governments but when it comes to the corporate boardrooms, we are still favoring dynastic situations wherein the amendments which just came in the Companies Act – it's not a step in the right direction, it should again be re-looked at. RPTs to a very large extent should be done away with & second important factor is the role of Independent Directors. Unless and until we have a very robust class action suit which empowers the common shareholder that he/she can sue the Independent Directors. For that we need a very high regulatory framework which is supportive from SEBI's perspective and Companies Act perspective. Class action suits should become like how they are in America - before committing such an act of cruelty against minority shareholders, they would think 10 times. These are 2 very important factors - one is how to take wilful defaulters out and really empower shareholders to sue Independent Directors for any misconduct in the boardroom."
Not everybody is enthused by that idea. Leading corporate lawyer Zia Mody says India has already gone too far in its expectations from independent directors. She hopes the next 15 years will bring a balance to the boardroom.
Zia Mody
Managing Partner AZB
"In a situation where many companies are facing issued of commercial kickbacks and other kinds of frauds, I think the directors are and I am saying it's wrongly, directors are getting extremely skittish about their level of responsibilities; especially the independent directors. So exactly how to run this process and how to allay the fears of independent directors that they will not get caught in the crossfire is one issue. The next issue is of course the continuing anxiety of the high level of obligations of directors across the Board. You have to make the Independent Directors feel that will not be looked at with a 20:20 hindsight."
One of the biggest regulatory changes in the last 15 years was the shift from MRTPC to CCI. The 2002 Competition Act replaced the 30 year old Monopolies and Restrictive Trade Practices Commission. Barely had companies come to grips with the creation of the Competition Commission of India, CCI introduced merger control (2011). Big penalties, taking on public sector monopolies, dawn raids and this year – its first structural remedy – CCI is growing up fast. But competition lawyer Pallavi Shroff hopes for more clarity as the regulator comes of age.
Pallavi Shroff
Managing Partner- Amarchand Mangaldas
"Lots of guidance as the European Union and others have evolved- I think that's what the next step of the CCI should be so that businesses know it very clearly. Then if they transgress, by all means go and penalize them. But let's now have a situation where there is complete lack of clarity on what the CCI wants and yet the CCI comes after businesses and penalizes them some huge amounts. I don't think that should be the approach going forward. That's on the enforcement and equally on the merger control side; particularly when they are looking at global mergers. There are certain areas where alignments may be necessary with the SEBI Takeover Code – its timelines vs what the CCI requires. I think that sort of fine tuning is required so that all these things can work in harmony. Look at the trades in the stock market- the Sensex is at an all time high- there are lot of block and bulk deals happening- do we need to file before every block and bulk deal, can there be price manipulations- this is where I urge the Commission to understand more closely from the business."
There's a new watchdog in the making for the audit profession as well. That's because India produces the maximum number of accountants in the world. But leaves them to self regulate! The ICAI's failures are partly why auditors today are grappling with rotation and restrictions on non-audit services. Well known auditor PR Ramesh says more changes are on the anvil.
PR Ramesh
Chairman, Deloitte India
"When I look ahead, the entire concept of an annual audit, where an annual report comes few months after the year end and an AGM becomes irrelevant because if you are able to get financial information onto your device on a real time basis, just like you get cricket match scores today, I believe that the annual requirements will become irrelevant. Therefore the audit will have to be on a real time basis and audit has to be systems based or technology driven because what then an auditor needs to focus on is the underlying technology that produces the result. It will also mean that a lot of auditor's judgment will be replaced by technology; just as financial reporting will significantly be technology driven. So there will be very little judgment involved and everything will be so automated that as transactions happen those will be accounted for in accordance to the Standards which are programmed in the technology space and the results will come out. Secondly, the regulators are increasingly believing that a profession cannot oversee itself & there needs to be an oversight, there is this body called IFIAR - International Forum of Independent Audit Regulators- one of its principles require that the oversight of the audit profession has to be by a body independent of the audit profession. So bodies are being created which will have oversight on the profession. Third, one is finding that the regulatory activism is happening at a completely new level, where regulators are less tolerant towards audit failures and regulatory oversight is extremely intense. PCAOB in US is a classic example of regulatory oversight of the profession which has significantly impacted the way the profession delivers its services. The fourth area is that reporting is going to move away from financial reporting to integrated reporting which would include a lot of non financial reporting & that would mean areas like environment, carbon credits, etc which are not financial and that would mean that the composition of an audit team - the auditor skill set will be different from what it is today which today is totally a financial skill set."
Soon, India will also have an audit super-regulator- NFRA. That same body will also determine accounting standards. If the ICAI is facing a re-invent or perish dilemma…Indian accounting standards are also at an existential cross-road. Will India finally make it to IFRS country?
Amarjit Chopra
Former Chairman, ICAI
"In the first phase, certain listed and certain unlisted companies will follow the IndAs and then in 2017, some more listed and unlisted entities will be covered therein and may be a year later or in the same year- probably the banks, insurance companies and NBFCs will also be covered under IndAS. I think next few years will be very exciting as far as Indian accounting world is concerned. Once we are going to bring in IFRS equivalent standards in the name of IndAS, certain changes in the Direct taxes and indirect taxes will have to be brought in. In 2010-2011, when we wanted to bring IndAS, we didn't succeed because industry was not ready and there were certain we founded apprehensions- industry felt there could be certain gains based upon the fair valuation which the IT authorities would like to tax but they may not allow fair valuation losses. I think that is the biggest challenge. On the other hand, the Income tax authorities will come up with something called Tax Computational Standards- now to me what would be netter is Income Tax authorities say companies which have been following IndAS – certain changes in certain Sections could have been brought to make sure injustice is not done to them when it comes to fair valuation losses if the fair valuation incomes are to be taxed."
India's equity markets tell the story of India Inc well. In 15 years, the market capitalization of the Indian equity markets has grown from 10 lakh crores to 100 lakh crores. From 2000 in 1999, the BSE Sensex is at 27,000 today. The NSE nifty has moved from 850 to 8,500 in the same time. And the number of investors has grown fourfold!
In the past 15 years, India's equity markets have witnessed the introduction of dematerialization, derivatives and demutualization of Stock Exchanges. Add to that the launch of currency & interest rate futures, ASBA facility for investors and more distribution channels for distribution of financial products.
Commodity exchanges made a debut and now total 3. There are also 3 national stock exchanges. But exchange regulation came under scrutiny as the FTIL owned NSEL collapsed, taking Jignesh Shah's empire down with it. Former SEBI member and now a Securities Law professor JR Verma warns that more complex challenges await regulators in the future.
JR Verma
Professor- Securities Market, IIM- Ahmadabad
"I think one of the areas is with the emergence of new technologies, how markets are changing and a great deal of disintermediation of certain markets is going on. There are several examples that one can look at- there is the emergence of robo advisors where what is happening is that instead of a human portfolio manager, you have a computer algorithm which basically decides what to buy and tells the clients. The question that comes is that if there is a problem with the portfolio, then who would you hold responsible, whom would you regulate for that kind of an eventuality. You can't hold the computer software responsible. You need a human being who needs to be held responsible- is it the person who wrote the software or code, or is it the organization that sold the software & so on. Similar issues come up when you talk about crowd-funding platforms. If crowdfunding evolves to the point that equity is sold through a crowd funding platform, then what you are doing is taking the investment banker out of the loop completely. So in those cases, who do you hold accountable for disclosures, etc. The problem is that many of these portals rely on computer algorithm and you can't take an algorithm to jail."
Meanwhile the corporate debt market story has been promising too with bond market issuances increasing seven fold in the last decade. Moving from FERA to FEMA, current account convertibility, partial capital account convertibility, introduction of credit default swaps and repo transactions in corporate debt securities- M&M CFO VS Parthasarthy says India as a come a long way in addressing corporate finance requirements. Now, policymakers should move towards total capital account convertibility and frame laws that address the needs of hybrid businesses.
VS Parthasarthy
CFO, M&M
"There will be more companies like Alibaba starting with E-commerce but also operating like a mini-bank. Different industries and different business models are growing to emerge. So the new laws and new statues will have to take of this environment. New laws have to in line and not just say that this guy in insurance business will do this but what if banking and insurance is together; what if the rural business is also along with an insurance business."
This holistic approach is sorely missing in India's foreign investment policies too. Yes - in the last 15 years India has relaxed limits on foreign direct investment across industry sectors –most notably in single and multi brand retail and more recently in railways & defence. But our suspicion of foreign investors, desiring their money but denying them control, imposing complex sourcing restrictions…and finally slaying them with tax terrorism has meant India attracts only a fifth of the foreign investment china does. Veteran regulatory expert Vivek Mehra worries this approach will keep India in the digital darkage.
Vivek Mehra
Partner, PwC
"E-commerce is the future; it's something that you have to love with and in India, E-commerce is just 1% of the total market- so I believe it needs to be encouraged. If it has FDI in it or doesn't, I don't understand how does it matter. If Indians who have deep pockets can also get into E-commerce, then how doe sit protect your marketplace? I believe E-commerce can help entrepreneurs sell goods- just as multi-brand trading can. If we want to encourage entrepreneurship and manufacturing in this country, the biggest bottleneck is the marketplace- how do they distribute their goods, how do they get it out into the market in our widespread distribution – it is the most difficult thing in India which only the Unilevers of the world or the cigarette companies have been able to tackle- a new entrepreneur cannot."
It's impossible to talk about business and foreign investors and not talk about tax. 2012 marked India's most controversial tax law - a retroactive tax on indirect transfers after the government lost its case to tax the Hutch-Vodafone deal. Soon after, India became the first country to impose transfer pricing norms on the issuance of capital - leaving business shell-shocked. Mukesh Butani says effective dispute resolution should be the government's key agenda.
Mukesh Butani
Managing Partner, BMR Legal
"I think India should re-look at its treaty policy to embrace mandatory arbitration. I know the mandatory arbitration concept is prevalent more among the OECD nations but even the UN now is prescribing that countries like India and other emerging markets should embrace mandatory arbitration which means that if a dispute is not resolved under the MAP process of the treaty, you resort to mandatory arbitration."
Indirect taxation has seen both change and controversy. Peak customs and excise rates have fallen considerably. In 2005 India introduced value added tax and in 2011 Service tax made an entry. And now GST may be in sight…may be!
Satya Poddar,
Partner- Indirect Tax, EY
"Once the Constitutional Bill is enacted for amending the Constitution, the next step will be to develop a detailed model for the implementation of GST which will define what goods & services will be taxable & at what rate will it apply. On both those issues, the government, we hope, will indeed aim for the best, which is to make GST applicable to the most comprehensive list of goods and services. Minimal, if any, exemptions and the rate should be very modest and low because the government of India is only collecting 5% of GDP in indirect taxes and that 5% tax revenue can easily be replaced by GST rate of 10-12 % and if GST is brought in at that level, it can then create opportunities for additional revenues to be raised from indirect taxes by jacking up the rates from 12-13% or 14 or 15%. Alternatively, if they make the mistake of bringing in GST at very high rates like 20-25%, then it will be a still born baby."
And finally - what will India's judicial system look like 15 years from now? Well in the last 15 years there has been a mushrooming of tribunals, but without adequate resources or appropriate structure. Judicial activism grew, PILs multiplied, corruption came under scrutiny and so did government policy. Cancellation of 2g licenses, mining bans, coal block de-allocations, black money probes - the Supreme Court did some major national cleaning up. But the lack of resources and process has left big one problem unresolved - pendency! Senior Advocate Arvind Datar says it should become a national priority!
Arvind Datar
Senior Advocate
"I would like to have a clean roadmap of what the Central and State governments are going to do first, to tackle the problem of arrears. Out of 4 million cases pending in the High Courts, 50% are just in 4 States. Similarly out of the 30 million cases pending in the lower courts, 50% are just in four States. So I would like a situation where State specific solutions are thought of- what is the problem in UP is quite different from that in Tamil Nadu. So you'll have to have State specific solutions as far as arrears in the subordinate judiciary are concerned. At the High Court and Supreme Court level, I'd like greater attention to be paid to a transparent process of judicial appointment. I think the National Judicial Commission will not be a proper answer."
The 15th and final effort at crystal ball gazing comes from 'The Firm' team. It's less forecast and more expectation – that laws, regulations and court orders will be simple, better written and easy to understand and comply with.
