As SEBI reforms startup listing, SMEs must ensure funds are not misused

SME ExchangeAmid SEBI banning as many as 239 entities for alleged money laundering, taxation consultancy PwC has called for a three-year locking-in for the entire pre-listing capital held by promoters to curb tax evasion and other illegal activities through market platforms.

The agency has called for imposing a similar lock-in even for preferential allotments, as prescribed under the capital and disclosure requirement (ICDR) norms so that only serious investors access the market. The PwC report is part of a BSE-mandated review of SME listing process.

The premier bourse last week said that 100 entities were trading on its SME platform. The regulator Securities and Exchange Board (SEBI) on June 29 banned four publicly traded SMEs and 235 other related entities for alledgely misusing the exchange’s platform for money laundering and tax evasion.

The SEBI, in an interim order alleged that these entities made Rs 614 crore in illegal gains through suspected money laundering and tax evasion activities. The four companies banned are EcoFriendly Food Processing Park, Esteem Bio Organic Food Processing, Channel Nine Entertainment and HPC Biosciences. These are traded on the BSE SME Platform.

“The institutional trading platform (ITP) could be utilised as a tool for tax planning by staying invested in an SME for a period more than 12 months and exiting at a very high stock price thereby making huge gains with no tax liability,” PwC said in the report.

Accordingly, the report has suggested that the entire pre-listing capital held by promoters should be locked in for three years as “such restrictive conditions would discourage people from accessing the platform only for tax planning”. The BSE had launched ITP for its SME platform to facilitate start-ups and other SMEs to list without the mandatory IPO process which is time-consuming and capital intensive that small companies can hardly afford.

According to PTI, in addition to allowing SMEs and start-up companies to raise capital, the BSE SME platrfom also provides easier entry and exit options for informed investors like angel investors, venture capitalists and private equity players, apart from offering better visibility and wider investor base and tax benefits to long-term investors.

Meanwhile, the report also called for a reduction in trading lot size and shorter interval for review of lot size after many SMEs, merchant bankers and market-makers cited this as a disincentive for entering the market. The report said market participants want the timeframe to review the lot size to be reduced from the current six months and lower the trading lot requirement of Rs 1 lakh to attract retail investors to the segment.

As SEBI continues to make business easier, it is important SMEs do not eye illegal gains through suspected money laundering and tax evasion activities.

 

SEBI calls for stringent laws against erring auditors, valuers

SEBI has proposed giving the board of directors of the company the authority to take appropriate action after conducting an investigation against the individual or firm that violates any regulations or submits a false certificate or report.

India’s capital market regulator has proposed amendments to tighten laws governing auditors and other third-party individuals hired by listed companies for auditing financial results, among other things.

The Kotak Committee, formed to come up with proposals for improving corporate governance, last year recommended that the Securities and Exchange Board of India (SEBI) should have clear powers to act against auditors and other third-party individuals or firms with statutory duties under the securities law.

Auditing lapses have caused several frauds to go unnoticed for years and the capital market regulator has had no direct control on the auditing firms.

SEBI has proposed giving the board of directors of the company the authority to take appropriate action after conducting an investigation against the individual or firm that violates any regulations or submits a false certificate or report.

The proposed changes come months after Punjab National Bank, India’s second largest state-run lender, stunned markets after uncovering a $2 billion loan fraud that had gone undetected for years.

Merchant bankers, credit rating agencies, custodians, among others, are registered and regulated by SEBI but chartered accountants, company secretaries, valuers and monitoring agencies do not come under any direct regulators.

The amendments would mean auditors must ensure certificates or reports issued by them are true in all material respects and they must exercise all due care, skill and diligence with respect to all processes involved in issuance of the report or certificate.

The auditors would be responsible to report in writing to the audit committee of the listed company or the compliance officer on any violation of the securities law they noticed.

In January, SEBI barred Price Waterhouse from auditing listed companies in India for two years after an investigation into a nearly decade-old accounting fraud case in a software services company that became India’s biggest corporate scandal.

SEBI has sought feedback and comments on the draft regulations over the next 30 days.

 

Link: Business Today

ICAI UDIN aims to address concerns of CAs with respect to forgery and fake use of name by Non CAs.

ICAI have launched Unique Document Identification Number (UDIN) facility which is a unique number, which will be generated by the system for every document certified/ attested by a Chartered Accountant and registered with the UDIN portal available at https://udin.icai.org/ with effect from 1st July 2018.

It has been noticed that financial statements and documents were being certified/attested by third persons, in lieu of Chartered Accountants. As these statements are being relied upon by the authorities as true statements and certificates, UDIN can be generated by a practicing CA by registering his/her documents/ certificates on UDIN Portal for verification.

A practicing Chartered Accountant can generate a UDIN for certificate/ document attested by him either in individual capacity or as a partner.

At present, this facility is recommendatory. But ICAI is mulling to make the same compulsory in near future, so as to curb the menace of fake or forged documents.

No change is possible in the data already registered by a Chartered Accountant in the online system. Therefore, members are requested to thoroughly check the details in preview option before submission of their application.

Information filled in can be edited/ modified any number of times before the submission. But once it is submitted, it cannot be edited.

The UDIN once generated can be withdrawn or cancelled with narration. Hence if any user search for this UDIN, appropriate narration indicated by Member with the date of revoke will be displayed for reference.

 

 

Link: UDIN for Practicing CAs

I-T department bars CAs from valuing shares of closely held firms

The income tax (I-T) has barred all Chartered Accountants (CAs) from valuing shares of closely-held companies.

Earlier, the fair market value of unlisted equity shares was calculated at the option of the company on either the book value on the valuation date or by the discounted cash flow method. Calculated by a merchant banker or a CA.

However, the Central Board of Direct Taxes has removed the CAs from the list of authorised professionals in this regard. From Thursday, only a merchant banker may do this. This change brings this provision at par with Rule 3 of the I-T Act, which says only a merchant banker may calculate the value of unlisted shares issued under Employee Stock Ownership schemes.

Interestingly valuation of shares may still be done by CAs under the Companies Act.

So, unlisted shares or unlisted companies may be sold or valued by a CA’s valuation but, for I-T purposes, it will require a merchant banker’s valuation report.

It is expected that the government is considering a qualifying course for valuation; only those who clear it may do valuation.

Source: Business Standard

How blockchain will fundamentally change our lives in future

 

Blockchain has the potential and can be implemented across diverse sectors such as banking, education, and health.

The use of the internet has undergone rapid evolution in a matter of a few decades.

In the 1990s, the internet was described as “a wide-area hypermedia information retrieval initiative aiming to give universal access to a large universe of documents” or simply put, ‘The Internet of Information’ which was primarily used to access data resources and services administered on the web browsers.

Back then, no one would have thought how it would fundamentally change our daily lives in the future. It has rapidly evolved from a platform to gather information to a space where we can shop, bank and communicate. The digital revolution has made the world realise the value of the internet and its implementations.

So, today we are gradually moving towards what Canadian strategist Don Tapscott calls ‘The Internet of Value’; that is the fountainhead of digital assets. Blockchain, which allows us to enable the exchange of any asset across the globe in real-time, ranging from stocks and bonds to music and art, is the next inevitable step in the global progress towards ‘The Internet of Value’.

Various applications of the internet have been made possible which are efficient like peer-to-peer money transfer, because internet reduces the transactional and communication cost to a bare minimum. This is the same force driving the new platforms that have emerged to deliver goods and services at levels of efficiency previously unimaginable, and blockchain is leading the revolution in redefining the new-age internet.

Like a traditional ledger, blockchain is essentially a record of transactions. These transactions can be any movement of money, goods or secure data — for example, a purchase at a supermarket, or the assignment of an Aadhar number. It works in three basic steps. First, it gathers data that the user has provided in forms of smart contracts, transactions IDs. Second, it orders the received data into blocks and finally chains them together securely using cryptography making it decentralised and accessible via any computer/mobile device across the network.

Now the question here is why do we need it? What is it that will change the way groceries are bought, stocks are purchased, money is transferred, bills are paid, and land deeds are made? The answer possibly can be the demand for trust and security emerging from both people and enterprises alike. Blockchain best serves these purposes as the trust factor is native to the medium. For example, if you are transferring money online to your friend, then your medium becomes the internet and to secure your transfer, a clever programming code is written. The same concept is applied by blockchain, but the security is made more secure by cryptography.

Blockchain has the potential and can be implemented across diverse sectors such as banking, education, and health. For instance, we keep our savings, assets and cash with banks because they are trustworthy and secure. However, their data is centralised, making them quite prone to cybercriminals that can bring the entire banking system to a halt. Now consider a person working abroad who wants to send a remittance to his family back home but has to encounter multiple clearances before his family receives it. With blockchain technology, the concept of crypto currency comes into picture, thus resulting in an open-access registry of monetary flows which makes the intermediation of financial institutions unnecessary and even costs less.

Second, in the field of healthcare, while big data analytics and artificial intelligence are simplifying healthcare delivery by smartly diagnosing the diseases from the patterns of numerous plugged-in electrocardiograms, blockchain is turning out to be a perfect platform for recording the medical attention of a patient and identifying a trend from the data recorded. Consider health card: A database which can be perceived as your health identity as it carries your entire medical history. Such technologies can find effective application in reducing information asymmetries within the healthcare and insurance markets by providing the most accurate data on patients.

Finally, blockchain can reorient the education system by delivering academic transparency. It can build an e-portfolio of academic credentials which has your test scores since the day you entered school. Paying for school fee in crypto currency — which is decentralised — from anywhere around the world on a secured network is commendable. Hence, this multi-trillion-dollar industry of education is indeed revolutionising.

Also, if implemented in government operations, blockchain will help break down barriers built from bureaucracy and corruption by providing a means to bypass existing power structures. It could be used to transform the way charities are created and regulated. By implementing a transparent system of transactions that include deposits of cash, transfers of donation and expenses spending will bring about a paradigm shift on how rules are enforced for these organisations.

Moreover, this technology has the competence to revamp the present system by automating manual processes, eradicating frauds and controlling the issues for authorisation. Its implementation across diverse sectors can be a solution to the most foundational problems of mankind. Hence, blockchain could be the perfect platform to transform a knowledge-driven economy into a digital-inclusive society.

PNB fraud fallout: RBI tells banks to link SWIFT with CBS by 30 April

The PNB fraud, which happened via SWIFT, went undetected since it was not linked to core banking solutions (CBS) and because checks failed at several levels
RBI has announced the setting up of a panel under the chairmanship of Y.H. Malegam to study rising cases of bank fraud and set out a blueprint to curb them.

The Reserve Bank of India (RBI) has set 30 April as the deadline for banks to integrate SWIFT (Society for Worldwide Interbank Financial Telecommunication) with core banking solutions (CBS) as it looks to strengthen internal controls in banks following the Rs11,400 crore PNB fraud.

“That (30 April) could be a deadline but it is an outer limit. Today, the urgency is such that everyone wants this project to be on fast track,” Usha Ananthasubramanian, managing director and chief executive officer of Allahabad Bank, and chairman of the Indian Banks’ Association (IBA), said on the sidelines of an IBA event on Friday.

“There is already a mandate from RBI that you need to comply with this straight through processing and combining SWIFT with CBS… Everybody has started…” she added.

The PNB fraud revolves around SWIFT. Branch officials of the lender fraudulently issued letters of undertaking, basically guarantees, to jeweller Nirav Modi-linked companies without getting proper approvals and without making entries in CBS, the software used to support a bank’s most common transactions.

The scam that happened via SWIFT went undetected since it was not linked to CBS and because checks failed at several levels, say experts.

RBI announced the setting up of a panel under the chairmanship of Y.H. Malegam, a former member of its central board of directors, to study rising cases of bank fraud and set out a blueprint to curb them.

In a letter to banks, RBI also reiterated that they must strictly comply with the principle of “four eyes”—that each SWIFT message must be processed by four bank officials: a maker, a checker, a verifier and an authorizer—two people who have seen the letter said on condition of anonymity.

“Apart from talking about maker-checker concept, RBI has asked banks to maintain a Chinese wall between officials dealing with SWIFT and CBS,” said a senior official at Mumbai-based bank, one of the two people cited above.

Source:  The Economic Times

Shell companies crackdown: Govt removes exemptions from ITR filing

The Union Budget 2018-19 has rationalised the I-T Act provision relating to prosecution for failure to furnish returns.

Seeking to crackdown on shell companies, the government has proposed to remove exemption available to firms with tax liability of up to Rs 3,000 from filing I-T returns beginning next fiscal.

The Union Budget 2018-19 has rationalised the I-T Act provision relating to prosecution for failure to furnish returns.

Thus, a managing director or a director in charge of the company during a particular financial year could be liable for prosecution in case of any lapse in filing I-T returns for any financial year beginning April 1.

“The income tax departments would now track investments by these companies. Also, the focus will be on those firms that show less profit and also those who file I-T returns for the first time,” a senior finance ministry official said.

There are around 12 lakh active companies in the country, out of which about 7 lakh are filing their returns, including annual audited report, with the ministry of corporate affairs. Of this, about 3 lakh companies show ‘nil’ income.

The Section 276CC of the Income Tax Act provided that if a person wilfully fails to furnish in due time the return of income, he shall be punishable with imprisonment and fine.

However, no prosecution could be initiated if the tax liability of an assessee does not exceed Rs 3,000.

The government has amended the provision with effect from April 1, 2018 and removed the exemption available to companies.

“In order to prevent abuse of the said proviso by shell companies or by companies holding benami properties, it is proposed to amend the provisions… so as to provide that the said sub-clause shall not apply in respect of a company,” it said.

The official said that as many as 5 lakh are companies not filing returns and they could be a potential source of money laundering. “These could be small firms which are engaged in honest business, but there could be some which are a potential threat. We have to look into the data.”

Nangia & Co Managing Partner Rakesh Nangia said though the amendment has been brought about to prevent abuse by shell companies/benami properties, checks similar to those placed in the law for invoking GAAR, should be in place to avoid genuine hardship.

“Though the taxman may be driven by compulsions to ensure proper tax compliance, care must be taken while taking such action. In most developing countries, prosecution for tax matters is applied only in cases of serious tax frauds and not in general compliance matters,” Nangia said.

The Budget announcement follows the recommendation of the task force on shell companies, which was set up in February last year.

In the government’s fight against black money, shell companies have come to the fore as they are seen as potential for money laundering.

Till the end of December 2017, over 2.26 lakh companies were deregistered by the MCA for various non-compliances and being inactive for long.

Shell companies are characterised by nominal paid-up capital, high reserves and surplus on account of receipt of high share premium, investment in unlisted companies, no dividend income and high cash in hand.

Also, private companies as majority shareholders, low turnover and operating income, nominal expenses, nominal statutory payments and stock in trade, minimum fixed asset are some of the other characteristics.

Since last year, the Central Board of Direct Taxes (CBDT) — the apex policy making body of the I-T department — has been sharing with the MCA specific information like PAN data of corporates, Income Tax returns (ITRs), audit reports and statement of financial transactions (SFT) received from banks.

 

Source: Times of India