The Hindu Business Line : There are local variations to fraud

THE process of notification of accounting standards incorporating international best practices, it is told, would be completed shortly by the National Advisory Committee in Accounting Standards with the assistance of the Institute of Chartered Accountants of India. But the goal is yet to be reached. This leaves one with the vague feeling that there is still a long way to go.

It would have been more reassuring if the goals were set out in full detail — what the best international practices are and which of these are yet to be followed in India, why those practices have remained unattainable till now, and what difference it will make to the investors or the securities market if India falls in line with the countries in which the better practices in question have already been adopted.

It will accelerate the pace of improvement, if the prerequisites for achieving it and the cost of effecting the improvement are specified.

What would need clarification is not merely the action called for immediately for bringing about the improvement and the time it may take to do so but also who the beneficiaries of such new technology are likely to be.

It will need a good deal of explanation to appreciate why the best practices have not served to avert the spectacular, large-scale declines and falls that have been occurring in big business in the US despite the `best practices' prevailing there. Could India have prevented the `scams' that have been disturbing its securities market if it had adopted the lauded American practices to stem the periodical rot in its own market? It is very doubtful.

The reason is that while all success stories read remarkably alike, there seem to be local variations in the frauds which topple big companies in India and elsewhere. There is very little comparable to the adventures of some of those who have made their mark in India — Mundhra of yesteryear or the Big Bull Mehta or Ketan Parekh in recent times. It is difficult to fathom that the mighty could have fallen by such foolish miscalculations or infractions of the law as those by which Enron, WorldCom, and so on, came into disrepute. But, by and large, malpractices are alike in all climes and the vaunted best practices have not so far been found to minimise, much less eliminate, unfair trade or professional practices anywhere in the world.

Consolidation of accounts

The recommendation of the Irani Committee on the right of subsidiaries to proliferate, despite the recommendation of a Parliamentary Committee to the contrary not long ago, is worrisome. Bluntly put, what has been pressed for is the right to create confusion through a chain of lineal and dispersed subsidiaries, and thwart the revenue authorities' efforts to keep track of the disposition of the funds of a company or a group of companies.

A company is a special legal entity created by law to facilitate pooling of financial and personnel resources. Some of the abuses to which incorporation has lent itself have had to be countered by `piercing the corporate veil'.

Allowing the unchecked growth of subsidiaries will be conducive to the destruction of the little transparency that exists in corporate deals at present.

It will be a Herculean task for the officers of the Ministry of Company Affairs or the Revenue Department to establish that a new undertaking is essentially a subsidiary if its shares are owned equally by four different companies of a single group.

Is it necessary for the law to generate a mess and then wallow in it? No creature of the law should be permitted to frustrate its regulation through ingenious permutations and combinations.

There is nothing to prevent formation of as many companies as may be necessary to mobilise resources from the public at large and undertake new activities. How does resort to the establishment of numerous subsidiaries help the economy or even the promoters of a group of companies? On the contrary, it affects the Revenue and impedes the regulatory functions of the company law administration. Where does the holding company draw the line? Will the accounts of all the subsidiary companies, however remotely connected they may be, be consolidated or will the requirement of consolidation be restricted to one or two generations alone?

How can the Irani Committee reasonably expect the Government to waive the existing stipulation that the accounts of the subsidiary companies should be circulated to the shareholders, if they have not been consolidated with those of the holding company or such consolidation is not feasible? In fact, the definition of a `subsidiary company' should be expanded to cover companies in which controlling interest is held by other companies of the group. The Irani Committee has ignored the fact that the law is toughened to deal not with those who abide by it, but those who exploit it and reduce it to a farce.

(By arrangement with Corporate Law Adviser, New Delhi.)

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
The nuclear doctrine — For ensuring global strategic stability

NBFCs on the move

Halt to a lawyer's lucre

The impairment pair

Over-regulation can drive companies out of the public markets

There are local variations to fraud

ROI has many a shortcoming

Forebodings on board

A bitter-sweet season ahead

Sensex highs

Cooperating for a cause