Spirit of company law has been violated

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Former Chief Justice of India J.S. Verma speaks out against the Supreme Court’s Vodafone verdict.
Former Chief Justice of India J.S. Verma speaks out against the Supreme Court’s Vodafone verdict.

On November 6, the Ministry of Corporate Affairs said that the Registrar of Companies (RoCs) cannot be expected to examine all the filing with a fine toothcomb. The ‘clarification’ was apparently a response to a spate of criticism regarding scrutiny of annual accounts filed with RoCs . The trigger for this criticism was l’affaire Robert Vadra-DLF in which DLF, a listed company, seems to have hobnobbed financially with a clutch of private companies owned directly or indirectly by Robert Vadra.

The Ministry statement goes on to say that in any case, all these documents are available for public scrutiny, available as they are on the Ministry’s Web site and that companies making false statements are punishable.

Of course, the registrars, the clarification says at the end, routinely scrutinise balance-sheets of companies, against whom there are complaints; of companies which have raised money from the public through public issue of shares/ debentures etc; in cases where the auditors have qualified their reports; where there are defaults in payment of matured deposits and debentures; and in cases where references are received from other regulatory authorities pointing out irregularities, calling for action under the Companies Act, 1956.

After the scrutiny, suitable steps are initiated, wherever necessary, to obtain explanation and clarification and to institute inspections, investigations and prosecutions wherever warranted, the clarification says smugly.

One wonders how the registrar concerned kept quiet when DLF, a listed company, gave unsecured loans to Vadra’s companies, unless he found the back-to-back deals, by way of these loans being used to acquire properties from DLF at throwaway prices, kosher. By the same token, how come the RoC kept quiet as men of straw donned the robes of big investors in a clutch of investment companies taking equity stakes in Purti, the company promoted by the BJP President Nitin Gadkari.

The point is, the RoC is not merely supposed to file the documents filed with it and forget about the whole thing. Income-tax authorities can take up returns for scrutiny selectively, applying a sense of proportion, but the RoCs cannot possibly afford to be as selective, especially where public money is involved.

Hard questions must be asked even of closely-held companies when they hobnob with listed companies, in which the public is vitally and substantially interested.

The telecom cases

The government functionaries seem to be saying ‘we-said-so’ in the aftermath of the tepid response to the auction of 2G licences.

While many of them openly criticise the CAG for quoting what they call a brash figure of Rs 1,76,000 crore as the putative loss from allotment of licences on first-come-first-served basis, given the fact that the present auctions have not borne out these figures, there is a muted criticism of the apex court as well for cancelling the licences and ordering auction.

In doing so, they are missing the wood for the trees. Can anyone justify the manner of dishing out licences on FCFS basis clandestinely with many of the allottees post-haste selling them off back-to-back at an astounding multiple of eight to ten times?

That what was sold were shares and not licences cannot fool anyone, given that the underlying assets of these shares invariably were licences. It is unfortunate that the Government has chosen to conceal its disappointment with the auction by adopting a child-like manner — lampooning the CAG whose calculations are more than borne out by the valuations for shares, at the material point of time, of the telecom companies that were harbouring the licences, only to unload them to the unsuspecting foreign telecom companies.

The Vodafone verdict of the Supreme Court in which the telecom companies were absolved of capital gains tax liability inasmuch as the shares that changed hands were those of foreign controlling companies, troubles many a conscience even today.

Now Justice J.S. Verma, a retired Chief Justice of India, has boldly said, while releasing a book, that the Supreme Court erred in not honouring a legal precedent set by itself.

Vodafone precedent

Way back in 1985, in the famous McDowell and Companies Ltd case, the five-member Constitution bench of the Supreme Court had ruled that colourable devices cannot be adopted in the name of tax planning, that the substance is more important than the form of a transaction, and that in a welfare state the so-called smart acts of tax-planners exact a heavy price from the hapless citizens in the form of heightened taxes from them.

Justice Verma has pointed out that in Vodafone case, the apex court could by all means have broken free of what the Supreme Court had said some three decades ago, but by constituting a Constitution bench of cognate jurisdiction, and not by a smaller bench comprising just three members.

The former chief justice is not upset merely with this technicality which, of course, is important given the fact that a smaller bench cannot overrule a larger bench of the same court.

Many have wondered how a complex web of carefully crafted investment can pass off as noble and normal. Hutch, the Hong Kong Company from which Vodafone bought the controlling interest of its telecom operations in India by acquiring controlling interest in a Camay Island company, knew from the beginning that investing directly in India was fraught with the danger of being slapped with capital gains tax liability, and hence chose this convoluted mode of investment away from India.

And this precisely is what was decried by the Supreme Court in McDowell case, which is still the law of the land on tax planning.

(The author is a New Delhi-based chartered accountant.)

(This article was published on November 19, 2012)
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