The Hindu Business Line : What's not so clear about tax clearance

The Finance Minister in his Budget 2003 speech promised to do away with the requirement of obtaining Income-Tax Clearance Certificates (ITCC). The CBDT has now come with Circular 2 dated February 10, 2004, the operative portion of which is as follows:

"It is hereby clarified that contractors are now not required to obtain from the Income-Tax Department, and there is no need to furnish, such certificate (ITCC) while submitting tenders or obtaining commercial contracts. Further it is also clarified that ITCC shall also not be required for any other purpose such as registration or renewal of registration of contracts, renewal of import/export licences, renewal of post licences and renewal of shipping licences. However, all such persons shall quote their permanent account number in their tender or other relevant documents. It is reiterated that the Income-Tax Department will not issue any ITCC for any of the above mentioned or similar purposes."

While the CBDT circular could be reassuring to some, there could be lingering doubts in the minds of others. What if the other departments of the Government insist on ITCC? After all, the practice of issuing ITCC for participating in tenders, and so on, arose not due to the mandate of the income-tax law but due to the insistence of other governmental departments.

Safer bet

WHY is retail lending supposed to be safer for banks? - Srilini Narasimhan, New Delhi

When it comes to industrial loans, huge chunks of amounts are committed to a company or a group which heightens the risk of default. Whereas, in retail lending, all eggs are not put in a single basket. But in the housing loan segment, some of the banks, which were reckless and one-up to woo in the borrower, are already feeling the heat. Some of them have lent as much as 95 per cent of the value of the property, thus putting in jeopardy the prospects of recovery should the borrower fall into difficulty and the real-estate market turn sluggish.

Similarly, credit cards are money-spinners for banks but their widespread misuse the world over has alerted the banking sector as to the existence of their downside.

Moreover, retail lending makes for diversification but concomitantly involves higher operational expenses because one has to deal with thousands of customers whereas industrial loans involve interface with fewer borrowers.

Sizing the size

IN BOOK-BUILDING, how is the issue size determined? - Pramod Kant Srivatsava, Varanasi

The company concerned first zeroes in on its capital requirement. And then it starts the price discovery process. Suppose a company needs to raise Rs 3,000 crore from the market. If it offers the shares at par, it will have to issue 300-crore share given a face value of Rs 10 per share. But if the market is prepared to pay Rs 20 per share, it needs to issue only 150-crore shares, and only 75-crore shares if the market perceives the shares to be worth Rs 40 a piece.

In short, what flows into the coffers of the company is Rs 3,000 crore in any case. But at Rs 40, three-fourths would have gone into share premium account whereas at Rs 10, nothing would have gone into the share premium account. In other words, with progressive increase in the offer price, lesser and lesser number of shares come into being. This would enable a company to maintain a higher earnings per share what with fewer number of shares cutting into the profit pie. But then the reward expectations also run high when high premium is charged.

L'affaire IIM

GOING by newspaper reports in the context of l'affaire IIMs, it seems the Supreme Court is against capital expenditure being met out of revenue streams of an institution. What is your take on it? - Paranjoy Moitra, Cuttack

With due respect, one would beg to differ. There is an old accounting jargon called `ploughing back of profits'. Reduced to simple terms, it means using the profit to further expand or diversify or modernise the company. Therefore, there is nothing wrong if the high fees charged from students are used for beefing up the infrastructure of the institution.

While it is dangerous to use capital receipts for meeting revenue expenses, the happening of the reverse, far from being dangerous, is a happy augury. Capital expenditure need not always be met out of capital receipts, like from equity, debentures, and so on. Many zero-debt companies look to internal accruals to bankroll their expansion plans.

Getting it `right'

WHAT exactly is a `rights' issue? - B. Satish, e-mail

Section 81 of the Companies Act, 1956 requires a company seeking to increase its capital to offer the new shares to the existing shareholders in proportion to their existing holdings. One of the cornerstones of corporate democracy is, members must be allowed to maintain their stake in the company right through.

Thus, while rights issue is the norm, preferential issue is an exception. A rights issue enables a shareholder to maintain his stake in the company. At his option, he can renounce the rights in favour of anyone else for a consideration.

(ASK! Send in your queries on accounting, auditing, corporate law and taxation to ask@thehindu.co.in)

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