The GST regime continues to promote the scheme of self-assessment like erstwhile indirect tax laws and Audit of records of tax payers is the basis for the proper functioning of self-assessment based tax system. The GST regime continues to promote the scheme of self-assessment like erstwhile indirect tax laws and Audit of records of tax payers is the basis for the proper functioning of self-assessment based tax system.
As per section 2(13) of CGST Act, 2017. GST Audit means examination of records, returns and documents maintained and furnished by registered person to check the following:-
Verify the correctness of turnover declared.
Input tax credit availed and utilized.
Exemptions and deductions claimed.
Rate of tax applied in respect of supply of goods or services etc.
The following three types of GST audit are envisaged under the GST Law:-
GST Audit u/s 35(5) of Act, if turnover exceeds prescribed limit (i.e Rs. 2 Crore)
GST Audit by tax authorities u/s 65.
Special GST audit direction from department u/s 66.
Types of Audit in GST Law
1) GST Audit u/s 35(5)
As per section 35(5) with rule 80, in case registered person whose aggregate turnover during the financial year exceeds Rs. 2 crore, he shall get his accounts audited by Chartered Accountant or Cost Accountant.
Here the term used is aggregate turnover and not turnover in state. Aggregate turnover is computed on all India basis having same PAN. Therefore, if a registered person is liable to gets his accounts audited under section 35, then all the registration obtained under same PAN will also be liable to GST audit.
For example, if a company XYZ Ltd has operations in two states Haryana and Rajasthan, and turnover in Haryana is 3.75 crore and in Rajasthan is 25 lakh, then GST audit to be conducted for both the states. GST Audit under this section to be conducted GSTIN wise.The registered person whose accounts are to be audited, he shall submit audited accounts along with his annual return in Form GSTR-9C and a reconciliation statement reconciling turnover in audited financial statement and return furnished for financial year.
2) GST Audit by u/s 65
It is important tool in tax administration to ensure compliance of law and prevent revenue leakage. This section authorizes conduct of GST audit by commissioner or any officer authorized by him of transactions of registered person only. It means GST audit of unregistered person cannot be carried out under this section even if he is liable to register. The commissioner may issue general or specific order to authorize officers to conduct GST audit.
Before commencement of audit, proper officer will issue a notice in form ADT-01 at least 15 days prior to commencement of audit. The audit may be conducted at place of business of registered person or in the office of proper officer. During audit, officer will ensure correctness of turnover declared, input tax credit availed and utilized, deductions and exemptions claimed etc. The GST audit under this section be completed within 3 months (subject to extension by commissioner) from commencement of audit. On completion of audit, officer will inform the discrepancy noticed with registered person and after considering reply of registered person, his findings to be finalize.
The proper officer will inform the final findings of his audit to the registered person in form ADT-02.The finding under GST audit may be used by proper officer to initiate action u/s 73 or 74.
3) Special GST audit direction by department u/s 66
Special GST audit direction under this section is issued to registered person only when any proceeding (being scrutiny, enquiry, investigation or any other proceeding) is pending before him and having regard to nature and complexity of case and interest of revenue , he is of opinion that
Value has not been correctly declared OR
Credit availed is not within normal limits
In such a case, proper officer with prior approval of commissioner, issue direction to registered person in form ADT-03 to get his records including accounts audited by Chartered Accountant or cost Accountant as nominated by commissioner (Auditor is not choosed by registered person).
The audit direction under this section may be issued even if accounts/records of such person is already audited under this act or any other act.
On completion of audit, Auditors will submit his report to proper officer within 90 days (subject to extension) and registered person will be informed of finding in form ADT-04. Opportunity of being heard is given to person, if officer intends to use material gathered during GST audit in any proceeding.
The proper officer may initiate proceeding u/s 73 or 74 on the basis of finding of special GST audit.
In the recent past, more so in the previous decade, accounting and auditing community witnessed and in fact, confronted and gone through scandals emanating from fraudulent and manipulative devious and dubious accounts. These shames outraged not only the auditing community but the public at large.
What is noticed in all these cases is the methods deployed are tailored to suit the deceitful purpose of manipulations in financial statements. Enron episodes and other companies’ incidences made the accounting and audit community to sit erect and ponder over a stratagem to come out of that rut—the result is the birth of forensic accounting.
Part played by CARO
Companies (Auditors’ Report) Order, 2003 was also an attempt to target specific areas to plug the loopholes so as to arrest the untoward in the horizon. CARO clauses call for straight answers to the queries depicting the correct positions prevailing in the setup for the period under audit.
One of the clauses requires auditors to report, amongst other things, “whether any fraud on or by the company has been noticed or reported during the year; If yes, the nature and the amount involved are to be indicated”.
The CARO 2016 in clause 3 (x) has further enlarged the scope of the clause to spell out and extract as to “whether any fraud by the company or officers or employees has been noticed the nature and the amount involved is any fraud on the Company by its or reported during the year; If yes, to be indicated”.
Nonetheless, even in the present avatar of CARO, auditors’ responsibility is limited to report under this clause when these frauds are noticed during audit, either in internal reporting of the management or otherwise.
Auditors added Responsibility under the provisions of the Companies Act 2013:
The responsibility of the auditors has been well enlarged as clearly spelt out in Section 143, especially with reference to Internal Financial Controls– “Whether the company has adequate internal financial controls in place and operating effectiveness of such controls?”(143(3)(i) of the Act).
Thanks to this heightened responsibility in the main audit report, CARO, 2016 has dispensed with the clause on Financial controls in three vital areas, that is, for the purchase of inventory and fixed assets and for the sale of goods? Whether there is a continuing failure to correct major weaknesses in internal control”.
The responsibility of an auditor(s) is to express an opinion on the financial statements based on his or their audit after taking into account the provisions of the Companies Act, 2013 (the Act) and the Rules made there under and also the provisions of other applicable Acts, the accounting and auditing standards (Refer Section 143(10) of the Act) and matters which are necessary .
Those Standards require that the auditors comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. SA 240 on THE AUDITOR’S RESPONSIBILITIES RELATING TO FRAUD IN AN AUDIT OF FINANCIAL STATEMENTS.
In other words, an audit involves performing procedures to obtain audit evidence about the amounts and the disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error.
In making those risk assessments, the auditor considers internal financial control relevant to the Company’s preparation of the financial statements that give a true and fair view in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of the accounting estimates made by the Company’s Directors, as well as evaluating the overall presentation of the financial statements
As per Section 143(12) if the auditors of a company have reason to believe that an offence involving fraud is being or has been committed against the company by officers or employees of the company, he shall immediately report the matter to the Central Government within such time and in such manner as may be prescribed.
In other words, the audit report gives an opinion as to the best of their information and according to the explanations given to them, the financial statements give the information required by the Act in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India, of the state of affairs of the Company as on a date .
From this it is clear, a financial statement audit does not scrutinize or investigate every transaction or look for fraud particularly. While a properly planned financial statement audit may uncover fraud, the focus is not on uncovering likely fraudulent acts.
Forensic Audit, on the other hand, is a different ball game altogether. No doubt, forensic auditors start on the basis of audited accounts and the auditors’ Report. But, their ball game is different based on the specific domain.
In cricket, the ball that is hit over the ground beyond the boundary line is “six’ that is ‘sexy’ for the audience. If it is hit through the ground to periphery, it is four that never bores. But, in tennis it is out, whence it crosses border. But, in football, if it crosses into the goal space, it is a ‘goal’ for any player in the team to esteem.
What does it covey? As different rules are played out in different games for assessing the boundaries, different procedures have to be deployed for different forensic assignments as they warrant. Why?
Each forensic project is unique by itself and calls for different approach to unravel the mystery behind.
Therefore, a standard approach cannot decipher the issue on hand. How to go about is ingenuity – an initiative that tries to unknot the unknown hidden.
Consequently, the forensic/accountants and auditors may have to necessarily develop an audit program for the specific objective of the individual engagement with necessary backup of Legal team including criminal lawyer &police without sticks so as to testify as an expert in a court of law.
“Accountants look at the numbers. Forensic accountants look behind the numbers” Therefore, it will be appreciated it is more of investigative work of talking with involved officials for extracting the correct position that may involve cross examinations with the each other as a valve to decipher the issue on hand.
More extensive corroboration:
Naturally, keeping the above back drop, it may call for working with a legal team, under distinctive and instinctive assumption that he or she will have to testify as an expert in a court proceeding.
The qualifications and expertise of the engagement team is paramount as the documents created during the forensic audit may be needed in civil and criminal proceedings, by law enforcement, government agencies, or confidential investigations. Therefore, besides performing all that are required of financial statement auditors, a forensic accountant will often require more extensive corroboration, since it demands of expertise with practical tinge that focus on a dedicated line of attack designed to spot out financial fraud.
Forensic accountants/fraud auditors are generally accountants or auditors who by virtue of their aptitudes and attitudes, talents and abilities, skills and dexterities, knowledge and practical experience are bona fide authentic experts and specialists in sensing and detecting frauds in accounting and financial transactions so as to document fraud losses for criminal and civil purposes.
They should have developed the art of interviewing third party witnesses so as to testify as an expert witness. “Investigative mentality” and “professional scepticism” is the core and chore of forensic audit. A forensic accountant may have to focus more on seemingly immaterial transactions to look for indications of fraud that are not subject to the scope of a financial statement audit.
Theft and Squandering of money:
It relates to any fraud by the company (management) or officers or employees of the company. Under CARO, it is whence noticed. But, under forensic audit, it is to be examined in detail, in deep and mostly through well-defined investigative process. Auditors may have to give goodbye to ‘sample checks’ in forensic audit but should be in ‘ample ‘as warranted by the situation and projects under investigation.
2. Manipulation of Accounts and Financial Statements:
Fraudulent financial reporting means deliberate misstatements so as to trick others by unfair means to unjust gains. This is normally attempted where management is ostensibly under pressure, to achieve a target that is seemingly unrealistic, where consequences of failure are significant.
More often than not, it is attempted to maintain or increase the earning trends to float well in the share market especially in a year when it is going for public subscription.
Accounts are also at times scripted to take some tax advantage. This can be attempted through various dubious means- by intentional falsification or alteration of records; by applying wrong estimates with intent to window dress; calculated omission in financial stamens and on the top misapplication of the principles of accounts as to recognition, measurement, presentation and disclosure requirements of various mandated standards.
3. Non-compliance of Statutory and other regulatory Requirements:
The world has been reduced to a global village. What is happening right in the morning in Japan affects the rest of the world as time zone advances!
Today, shareholders and other stakeholders are spread across the globe. When there is cold in America, we sneeze it here. As a result, laws and regulatory requirements are periodically updated to suit the dictates of times.
There are various international agreements that warrant compliances from the signatory countries. Accounting and auditing standards are becoming monolithic so as to understand in the same wave length.
Therefore, very often, it is possible, different agencies may call for compliance certificate that may warrant forensic audit in specific circumstances where investigation is sine quo non.
The court, various tax departments and various regulatory authorities may also ask for and rely for substantive evidence.
4. Computer Forensics –
Assisting and helping in electronic data recovery and enforcement of IP rights etc. This may call for specialist service with high computer background.
Besides, forensic may cover and include within its scope conducting due-diligence that is also unique for ease assignment; Business valuation; specific management auditing; and Evaluating loss before settling insurance claims.
These may further include plethora of cases like calculating and quantifying losses and economic damages,
whether suffered through wrongdoing or breach of contract; disagreements relating to company acquisitions, breaches of warranties and what not. These may be engagements relating to civil disputes/settlements.
Though forensic auditors start their assignments on the basis of audited accounts and the auditors’ Report as pointed out earlier, each forensic project is unique by itself and calls for different approach to unravel the unknown behind.
Therefore, a standard approach cannot decipher the issue on hand. How to go about is already dealt with earlier in the article. When the size of business has enlarged by leaps and bounds over the periods and audit is necessarily to be completed within the appointed time, opinion expressed on audit report is basically to give an opinion as to the best of their information and according to the explanations given to them, the financial statements give the information required by the Act in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India, of the state of affairs of the Company as on a date except where it is qualified .
From this, it is crystal clear, a financial statement audit does not scrutinize or investigate every transaction or look for fraud particularly. While a properly planned financial statement audit may uncover fraud, the focus is not on unearthing fraud that could be a hard nut to crack under statutory audit not only because of the time constrain but also because of the scope of the audit.
Besides, forensic audit demand different skills and wherewithal’s, time and energy to uncover the fraud hidden in the transactions, it is a different ball game altogether as explained earlier copiously.
As on date, there is no articulated Guidance Note nor any dependable check lists for reason that each assignment is unique and distinctive; and as a result, different routes to be used to go to the roots; – as seas can be used for navigation, roads for road traffic, planes by air- again different types of vehicles are used on the same routes depending of the size and level of passengers and quantum, size and quality of the materials.
Therefore, most important in forensic audit is to decide the effective modus- operandi -technique, style procedure, approach, course of action and articulated methodology so as to successfully handle and deliver the correct result of the assignment so as to fix the fraud
The Government amended Insolvency and Bankruptcy Code, 2016 (IBC) by promulgating an ordinance which brought sweeping changes to both substantive as well as procedural aspects relating to the insolvency process.
Changes were introduced by way of ordinance dated 23rd November 2017 and later on ratified through Amendment Act, 2018.
Section 29A emanated from the above-mentioned amendment. Sec 29A is a restrictive provision which impedes any person falling into the negative list from submission of a resolution plan.
The rationale of Sec 29A
Before the inception of section 29A, every individual or body corporate could be involved in a bidding process. Even the promoters who were party to fraudulent motives and contributed to the default of the Corporate Debtor were able to regain the control of their company again by bidding in hefty discounts while banks and other financial institutes taking haircuts.
Section 29A was introduced to disqualify those people who had contributed to the downfall of the corporate debtor.
In short, the plan of lawmakers is to end the practice of phoenixing i.e. where the management of a company puts it into resolution or liquidation solely to buy the same business back and set up a new ‘phoenix’ company in the same or similar business, shorn of the debts of the old company.
A person shall not be eligible to submit a resolution plan, if such person, or any other person acting jointly or in concert with such person –
Is an undischarged insolvent;
Is a wilful defaulter in accordance with the guidelines of the RBI issued under the Banking Regulation Act, 1949;
Has an account, or an account of a corporate debtor under the management or control of such person or of whom such person is a promoter, classified as a non-performing asset in by the RBI and at least a period of 1 year has elapsed from the date of such classification;
Provided that the person shall be eligible to submit a resolution plan if such person makes payment of all overdue amounts with interest thereon and charges relating to non-performing asset accounts before submission of resolution plan;
Has been convicted for any offence punishable with imprisonment for 2 years or more;
Is disqualified to act as a director under the Companies Act, 2013;
Is prohibited by the SEBI from accessing the securities markets;
Has been a promoter or in the management or control of a corporate debtor in which a preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction has taken place and in respect of which an order has been made by the Adjudicating Authority under this Code;
Has executed an enforceable guarantee in favour of a creditor in respect of a corporate debtor against which an application for insolvency resolution made by such creditor has been admitted under this Code;
Has been subject to any disability, corresponding to clauses (a) to (h), under any law in a jurisdiction outside India; or
Has a connected person not eligible under clauses (a) to (i).
Acting in Concert
The term ‘Acting in concert’ has not been defined under Code. However, Code provides that words/expressions not defined under the Code shall have the meaning assigned to them under other acts identified under the Code including the SEBI Act, 1992.
Therefore, the definition of person acting in concert (“PAC”) will have to be borrowed from the SEBI (SAST) Regulations, 2011 that defines PAC as persons who have the common objective/purpose of acquisition of shares/ voting rights in/exercising control over a company pursuant to an agreement or understanding, formal or informal, directly or indirectly co-operate for acquisition of shares/voting rights in/ exercise of control of the company.
“Connected person” means –
Any person who is the promoter or in the management or control of the resolution applicant;
Any person who shall be the promoter or in management or control of the business of the corporate debtor during the implementation of the resolution plan; or
Holding company, Subsidiary company, Associate company or a related party of a person referred to above
Layers of Ineligibility
An assiduous analysis of Section 29A reveals that the section imposes four layers of ineligibility, as mentioned below-
First layer ineligibility, where the person itself is ineligible;
Second layer ineligibility, i.e. where a “connected person” is ineligible;
Third layer ineligibility, i.e. being a “related party” of connected persons; and
Fourth layer ineligibility, where a person acting jointly/in concert with a person suffering from a first layer/second layer/third layer ineligibility.
The order passed by Judicial Member MK Shrawat, in an order dated June 4, 2018, related to the insolvency case of Wig Associates, –
Comes as a relief for the promoters of big defaulting companies such as Essar Steel, Bhushan Steel and Alok Industries as the existing promoters of the companies get an opportunity to join hands with other financial institutions to bid to buy it back.
It has been clearly stated in the Amendment Act, 2018 that it is to apply from 23.11.2017. Hence, pending cases before this date cannot be governed by section 29A. It is a settled legal principle that old rights are to be governed by old law and new rights by new law.
Exemption for ‘MSMEs’
The Amendment Act, 2018 has made dispensation from the Disqualification Criteria under paragraphs (c) to (h) of Section 29A to ‘micro’, ‘small’ and ‘medium’ enterprises (MSMEs). Therefore, the applicability of section 29A is restricted only to disqualify wilful defaulters from bidding for MSMEs.
The Section 29A does not recognise a genuine business failure or an inadvertent corporate action of a limited liability company. Let’s evaluate the following three cases: –
A company takes a loan and then fails to repay it because of genuine financial or economic distress.
Promoters give a personal guarantee to creditors for loans.
An innocuous commercial arrangement without any mala fide intent to defraud creditors could still qualify as a preferential or undervalued transaction under the IBC.
In all three above mentioned arrangements, the promoter can be debarred from the submission of a resolution plan.
Section 29A has excessively enlarged the scope of disqualification to the extent of drastically reducing the prospective resolution applicants on the basis of what could be labelled as generalized criteria for disqualification wherein it does not differentiate between a genuine applicant and one with antecedents.
A similar view was expressed by the National Company Law Tribunal (“NCLT”) in the matter of RBL Bank Ltd v. MBL Infrastructure Ltd wherein it was expressed that it cannot be the intention of the legislature to disqualify the promoters as a class but to rather exclude those class of persons who may affect the credibility of the resolution process given their antecedents.
Addressing promoter’s concern
English law provides a useful template wherein connected parties interested in purchasing assets of an insolvent company has an option to approach the Pre-Pack Pool and disclose details of the deal.
The Pool comprises of experienced business people who conduct independent scrutiny of such deals and opinion on their commercial bona fide. A positive statement gives confidence to the creditors to approve a deal whose bona fide has been independently verified.
A similar concept can be introduced in India where a promoter who is interested to buy back his business during insolvency resolution can place his resolution plan before Committee of Independent Experts. If the committee approves such an arrangement, then the deal could still proceed.
The fact that the promoter’s resolution plan is supported by an independent committee would give greater confidence to a creditors’ committee in considering whether to accept the plan.
Moreover, it shall be unfair to outrightly reject the application even though downfall may be on the account of bona fide and innocuous commercial arrangements.
The Union Cabinet on March 1 approved the creation of a National Financial Reporting Authority (NFRA), a big step forward in regulating the financial audit of large companies.
The NFRA is to be an independent regulator overseeing the auditing profession, and its creation was first recommended by the Standing Committee on Finance in its 21st report.
The Cabinet also approved the creation of the posts within the regulator — that of a chairman, three full-time members, and one secretary — though no decision has yet been taken on who will fill these posts.
How did it come about?
While many provisions of the Companies Act, 2013 came into force on April 1, 2014, the setting up of the NFRA, a key recommendation, was delayed.
The decision appears to have been prompted by the latest bank scam to have hit the headlines — the ₹12,636 crore Punjab National Bank fraud that went undetected by auditors.
The Institute of Chartered Accountants of India (ICAI) had initially voiced its discontent with the idea of a regulator for the sector, saying the existing structure was adequate.
The government has clarified that the roles of the new regulator and those of the ICAI will not overlap.
While announcing the decision to create the body, Finance Minister Arun Jaitley said the NFRA would cover all listed companies and large unlisted companies, the benchmark size for which would be set down in the rules.
Smaller unlisted companies would continue to be audited by the ICAI, he said, adding that the Centre could also refer other entities for investigation “where public interest would be involved.”
The government also said the Quality Review Board (QRB) would continue quality audits for private limited companies, and public unlisted companies below the prescribed threshold.
The NFRA would also have the power to refer cases to the QRB as and when it decided to do so.
The government said the ICAI would continue to play its advisory role with respect to accounting and auditing standards and policies by making its recommendations to the NFRA.
India is among the world’s fastest growing emerging markets, aided by liberal foreign investment policies and an expanding consumer base.
This has catapulted the number of market players and led to high levels of competition in each industry, often exposing firms to the threat of fraud and other risks.
A recent industry survey showed that in 2017, 89 percent of the companies based in India were victims of at least one instance of fraud; 33 percent of them suffered revenue losses of more than seven percent due to this.
Foreign investors expanding to the Indian market therefore need to prioritize conducting due diligence when entering into partnerships and contracts with firms and vendors in India.
Aside from the due diligence review, firms should pay key attention to daily compliance associated with financial reporting, security of company assets, floor operations, and inventory assessment, among other business activity records.
Fraud Prevention in India
Broadly speaking, fraud can be perpetrated by an individual or agency from within an organization or external to the organization. It falls under three main categories: asset misappropriation, fraudulent accounting and financial reporting, and corruption.
The three most common factors that determines a company’s exposure to fraud are incentives or pressures, opportunity, and rationalization.
To reduce their risk exposure, companies must put in place clear internal control mechanisms that can prevent, detect, and deter fraudulent behaviour conducted by employees, vendors, consultants, or various levels of management.
The Companies Act, 2013 first introduced the term ‘internal financial controls’ (IFC) in an effort to curb financial frauds in India. The Act directs companies to implement mechanisms that ensure the following:
Adherence to company’s policies;
Safeguard of its assets;
Prevention and detection of frauds and errors;
Accuracy and completeness of the firm’s accounting records; and,
Timely preparation of reliable financial information.
The Institute of Chartered Accountants of India (ICAI) issued an updated ‘Guidance Note on Audit of Internal Financial Controls over Financial Reporting or ICFR’ in September 2015, which mandates the involvement of an external auditor in the compliance process.
Several amendments to the Companies Act, 2013 focus on the prevention of fraudulent activities within a company, with explicit requirements for anti-fraud mechanisms for businesses varying by size and type of businesses.
The Companies (Amendment) Act, 2017 confers greater accountability to the directors and auditing professionals appointed by the business entity. It also makes directors and employees personally liable in case they are found guilty of committing fraudulent activities. The Act imposes financial penalties, and even imprisonment, in case of non-compliance.
Other Indian laws, such as the Prevention of Corruption (Amendment) Act, 2011, the Whistle blowers Protection Act, 2011, the Right to Information Act, 2005 (RTI), the Information Technology Act 2000 (IT Act), and the Prevention of Money Laundering Act, 2002 (PMLA) aim to protect companies from fraud.
Internal controls prevent, detect, and deter fraud
Aside from the financial loss, the experience of fraud devalues a company’s reputation & credibility & its performance in the market.
Preventing fraud thereby necessitates the implementation, monitoring, and periodic adjustment of risk management strategies and internal control systems.
Regulatory and legal recourse in India is still at the developmental stage, which puts the burden of fraud prevention on companies, and makes the implementation of internal controls a top priority.
Foreign companies with subsidiaries in India, often lack direct control over their firm’s day-to-day operations. Such entities must institute internal control and reporting mechanisms, ensure clarity of policy and penalty in the company handbook, and regularly follow up on any red flag issues.
Some important best practices for firms based in India are as follows:
Active assessment of risk factors and allegations by management and follow up on action taken;
Company behaviour and ethics code, which should be developed, documented, and communicated to employees;
Policy for whistle blowing, whereby management ensures the confidentiality and safety of information providers;
Proper compliance with laws and regulatory guidelines set up by the Indian government – such as the Whistle blowers Protection Act, 2011 or Prevention of Corruption Act, 1988;
Identifying key areas of focus particular to the relevant business model, to ensure efficient dedication of resources;
Focus on operational risks, such as asset misappropriations or bribery for supplier selection;
Transparency in accounting and financial reporting to prevent fraud or insider trading;
An audit committee that is independent of management, which must have knowledge of the company’s fraud risk exposure and steps taken by management to monitor and mitigate those risks;
Conducting company-wide fraud risk assessments to increase the visibility of management’s attitudes towards managing fraud risks and curbing individual rationalizations of fraudulent behavior; and,
Cooperation with police authorities. The Economic Offences Wing is set up under respective state police departments and is responsible for dealing with cheating and fraud cases in India. The EOW consists of a special committee of investigators, including finance professionals, and deals with cases of fraud amounting to US$440,000 (Rs 30 million) and upwards.
Below we discuss the most common instances of fraud, and how to curb them, at the floor management, middle management, and senior management levels.
Monitoring on-the-floor management – Stock, cash, data theft
Theft of physical assets is the most common type of fraud in most companies, especially in the manufacturing, trade, and retail sectors.
Senior management should look out for any discrepancy in inventory numbers, over ordering of products from suppliers, or large petty cash disbursements. Excessive write-offs or obsolete assets may also be an indicator of fraudulent activities.
On the other hand, protecting intangible assets, such as intellectual property rights and company data are of the utmost importance to companies.
Cyber-security officers should be appointed to prevent data breaches, and implement a system that automatically flags peculiar external communications or use of external storage devices on the company network.
If managers are expected to entertain and dine suppliers or vice versa – a common business practice in India – a limited budget or proper reimbursement system should be in place, and policies related to this must be clearly defined in the company handbook.
Manager-supplier relations should be strictly professional, with limited influence over the procurement process by either party. Senior managers should flag discrepancies in quality, quantity, and price of products and audit all bills.
While the Prevention of Corruption Act, 1988, applies mostly to public sector employees in India, it has been used to prosecute corporate entities under certain provisions.
For example, using this Act, the federal agency, the Central Bureau of Investigation (CBI), recently booked the CEO of Air Asia for reportedly trying to manipulate government policy, using corrupt means, for business gain.
Additionally, companies may also adopt international best practices and conventions, such as the ISO standard PC278 or UK standard BS10500 to prevent corruption and bribery related fraud, provided they don’t run counter to India’s laws.
Upper management – Conflict of interest, financial fraud, insider trading
A conflict of interest occurs when a company’s employee is involved in related-party collaborations, rigging the supply system for personal gain.
The alleged ICICI-Videocon financial fraud, where a US$500 million loan was sanctioned by Chanda Kochhar, CEO of the Indian multinational bank ICICI, to manufacturing firm Videocon, which held a large stake in her husband’s firm NuPower Renewables, is a clear case of conflict of interest.
The subsequent writing off of the bank loans and its convoluted accounting trail has led to inquiries by the CBI – who are charged with assessing if this was a genuine loan or simply a case of financial fraud.
Other instances of financial fraud include when a company’s accounting statements are falsified to dupe investors and inflate the company value.
To prevent this from happening, company directors have to enforce the proper accounting and auditing of company books by qualified professionals who have no conflict of interest.
Insider trading is another common corporate offence – likely to happen in the higher rungs of management.
In this situation, individuals artificially inflate or deflate company stock by leaking confidential information into the market to manipulate share pricing.
Auditors and directors should beware of swinging share prices ahead of any major announcements, such as takeovers or bankruptcy; it could indicate a leak of information.
India’s central bank, the Reserve Bank of India (RBI), requires all Indian entities receiving foreign investments of any kind – to report the same by July 12. The deadline was announced last month through the A.P. (DIR Series) Circular No. 30, dated June 7, 2018. To secure this information, the RBI has introduced a new system of compliance.
New reporting compliance for foreign invested entities
Firms in India should note that the new application – the Foreign Investment Reporting and Management System (FIRMS) – subsumes all other forms of reporting compliance, and will be implemented in two phases.
In the first phase, a dedicated online module called the Entity Master was made accessible for public data entry on the RBI’s website from June 28 till July 12. The registration deadline on the FIRMS interface has now been extended to July 20, but firms should ensure reporting compliance ahead of time to avoid regulatory risks.
In the second phase, a second module containing nine reports will be released on August 1, 2018.
Single reporting format
Under the online FIRMS interface, the RBI provides a single reporting format called – the Single Master Form (SMF) – through which details of the total foreign investments made in an entity will be recorded.
The SMF must be filed irrespective of the mode or structure of foreign investment into the entities.
Any entity found to be non-compliant may not be able to receive further foreign investments, including foreign direct investment (FDI), as regulated by the provisions of the Foreign Exchange Management Act of 1999.
Which entities must comply with the new reporting requirements?
The new reporting compliance is meant for the following types of entities:
A company as per section 1(4) of the Companies Act, 2013;
A Limited Liability Partnership (LLP) registered under the Limited Liability Partnership Act, 2008; and,
A startup, which complies with the conditions laid down in Notification No. G.S.R 180(E) dated February 17, 2016 issued by Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India.
Bankruptcy has become the serious and biggest obstacle in the path of India’s marathon run towards the top growing economy of the world. And resolving this issue is becoming a great headache for all government agencies and organizations. When a company is at death’s door, it gets to shuffle off its old debts and often gain new owners, so as to start a new life. The firms are seeking rebirth under a bankruptcy code adopted in December 2016. In a hopeful development, tycoons might be able to hold on to “their” businesses once, as banks got stiffed seem likely to be forced to cede control.
India is in great need for a fresh approach to insolvent businesses. Its banks’ balance-sheets sag under 8.4trn rupees ($130bn) of loans that might not be repaid-over 10% of their outstanding loans. But foreclosure is fiddly: it currently takes over four years to process an insolvency, and recovery rates are a lousy 26%. Partly as a result, bankers have often turned a blind eye to firms which they should have foreclosed on.
This is not only bad for the banks but worse for the nation’s economy, which has been slowed markedly, in part as credit to companies has dried up. This problem has festered for years, not least because banks’ reserves of capital were inadequate to cover the losses which would have resulted, if they had acknowledged dud loans. The state-owned banks is where most of the problems lie, feared even sensible agreements to lower an ailing company’s debt burdens could be painted as cozying up to cronies.
The Indian authorities have removed roadblocks to resolving all this, in stages; Like from 2015, banks were forced to acknowledge which loans were “non-performing”, having spent years expertly sweeping problems under the carpet. The infrastructure for the new bankruptcy code, which requires administrators to run firms in limbo and a new courts system, is being created from scratch. Over a dozen deeply distressed firms were shunted into insolvency proceedings by the authorities in June. These account for like under 3% of all loans, but over a quarter of those are in arrears, reckons Ashish Gupta of Credit Suisse. Nearly 400 companies big and small are going through the process, establishing a first batch of precedents. To make sure that no side delays hurdles the proceedings, the new code says that if creditors and borrowers are not able agree on how to revive the company within 270 days, its assets will be sold for scrap.
But there had been assumptions that the companies’ “promoters”,(founding shareholders) might find a way to stay on. Many were planning to bid for their old assets in auctions; but the government has now banned any defaulting promoters from bidding, so it means they will lose “their” companies to new owners. Now this is a startling reversal of fortunes for a clique of businessmen who have held on to companies through multiple past restructurings, and whose number includes some of corporate India’s grandest names. An appeal which seems unavoidable; or might workaround, like getting a friendly third party to bid on behalf of the old owners (though this is specifically banned).
Critics are concerned that excluding promoters might lead to banks getting less money for the foreclosed assets, and so increase the bailout burden that would ultimately fall on the public purse. Some entrepreneurs can be fail for forgivable reasons— as in industries such as steel, commodity-price swings can up-end even in well-managed firms. But often these promoters regard loan repayment as optional and the blanket ban on all of them might seem blunt. But it is a price worth paying to level a pitch that has long been queered in the tycoons’ favor.
Let’s see how things goes on, and hope all the changes made would lead in progressing economy and better future of India. We all hope for a developed nation with better standard of living that can only be achieved with well growing cycle of economy.
In Recent years, Indian media has been full with news coverage of bankrupted businessman, defaulters, frauds and scams. This time government has decided to take forward step to reduces the count of NPA ( Non Performing Assets). The Government and the Reserve Bank of India are working together on number of changes in rules to reduce the proportion of bad loans in the banking sector, so as to kick-starting the investment cycle and pushing growth. The measures are being finalized include tweaking the existing Joint Lenders Forum for faster resolution of NPAs (non-performing assets), a scheme for onetime settlement of bad debts and penal action for defaulters who have siphoned off loans taken for business purposes. There are also news that PSU ( public sector undertaking) banks have been asked to conduct a forensic audit of top 50 loan defaulters to separate genuine cases of business failure from those where funds have been diverted.
The government might not set up a state-owned Bad Bank to take over NPAs from state-owned banks in the near term, but the Department of Financial Services has been asked to review the existing framework of private asset reconstruction companies over the next few months and submit a report. A large scale auction of bad debts is also being looked into by the government, said by certain sources.
The decision making mechanism might also get bit smoother, so as to take faster decision on restructuring of loan under JLF. The government may also encourage banks to go for one-time settlement of loans, and this process might be overseen by an oversight committee. The settlement will be done in a manner that it gives comfort to bankers against any regulatory backlash in future.
The proportion of bad loans has been rising over the years, even though the government have announced the Indradhanush plan of reforms for the state-owned banks. Public sector banks’ NPAs surged by over Rs 1 lakh crore during the April-December period of 2016-17. Gross NPAs in the first nine months of the current fiscal rose to Rs 6.06 lakh crore by December 31, 2016, from Rs 5.02 lakh crore during the entire year of 2015-16. The gross NPAs were Rs 2.67 lakh crore at the end of 2014-15.
The amount of total stressed assets, which comprises NPAs and restructured loans, is much higher. Top officials have acknowledged the need to resolve bad debts, in order to push economic growth and bringing the investment cycle back on track. During a meeting of the Parliamentary Consultative Committee Wednesday, Jaitley had said that dealing with bank NPAs is a challenging task and that the government was considering several oversight committees to help with resolution of bad debts.
Members of the consultative committee suggested several measures to deal with the like initiating criminal action against the big willful defaulters, creating a Special Bank where NPAs of all the state-owned banks are transferred, allowing the concerned state government to take part in the auction of stressed assets, fixing the gross NPA in the range of 9-10 per cent and not counting restructured assets as NPAs. Some members suggested that the government must establish a bad bank or a Public Sector Asset Rehabilitation Agency (PARA), which should only consider those NPAs where sector-specific reforms do not work. The Economic Survey for 2016-17 has also suggested the idea of PARA to resolve the problem of bad loans. On the issue of setting-up a “bad bank”, Jaitley said that several possible alternatives exist, and the issue is being debated on public platforms.
Well most of this are what said and what heard, but let’s see how things goes on, how much of it would come in action to solve things practically and just not on papers by words. We all hope for ever growing India with developed environment and lifestyle and with less of such issues which becomes the obstacles for the wheel of success.
India continues to make progress with policy reforms and initiatives that are making India a place with unprecedented opportunities for global and domestic businesses.
India’s progress on the World Bank’s Ease of Doing Business rankings, to a rank of 100, progressing from 14201 just three years ago (2015), reflects a focus on this topic at the centre and the states. Building on bankruptcy reforms, major nonperforming assets situations were identified for resolution and actions moving forward. Foreign Direct Investment (FDI) was further liberalised. In 2016-17, FDI reached an all-time high of USD60.1 billion.
A stable macroeconomic environment is a precursor to growth. India has demonstrated a resolve to achieve fiscal consolidation, complemented with aggressive and not purely populist measures. Retail inflation averaged at 3.4 per cent for the April – January FY18 period, significantly lower than 4.5 per cent during the same period in FY17, and, while fiscal deficit for FY18 modestly increased to 3.5 per cent of Gross Domestic Product (GDP), attributed mainly to uncertainty over Goods and Services Tax (GST) collections, the government is committed to further lower it to 3.3 per cent in FY19. The government has also addressed the deterrents and roadblocks to the country’s potential to grow, with progressive policy reforms such as GST and the newly formed Insolvency and Bankruptcy Code (IBC).
In spite of some reformative steps that slowed the growth momentum in the first quarter of FY18, the economy is likely to grow at 7.4 percent in 2018, higher than the advanced economies and the world, i.e., 2 per cent and 3 per cent, respectively.
India has been recording the highest growth rate amongst the Brazil, Russia, India, China and South Africa (BRICS) economies. Buttressing India’s stability is its foreign exchange reserve of about USD420 billion.
Ease of doing business (EODB) is an area where concerted actions have led to important results. The government has adopted more than 7,000 initiatives to improve EODB in the country. As a result, India is now placed amongst the top-five countries that improved its ranking in the World Bank’s Doing Business 2018 Report and, for the first time was ranked in the top 100 economies.
India recorded improvements in 9 out of 10 indicators supported by major measures such as time-bound clearance of applications, de-licensing manufacturing of defence equipment, single-window clearance mechanism, reducing documents required for trade and introducing a single form for online return filing.
This should be recognised as just the beginning of India’s continued efforts to become one of the most investor friendly nations, as it continues to focus on progressing in areas such as trade across borders, enforcement of contracts, registration of property and starting a business to create a more enabling, participative and inviting economic ecosystem.
Improving ease of doing business is an important enabling factor for attracting investments.
Other aspects to advance investments are the promotion of new sectors for investments, skill enhancement and employability. These areas are intertwined and are of key importance to investors. These are being addressed through several central government schemes, which have been adopted by most states.
New regulations also play a key role. While the GST unifies the country’s tax regime, the IBC helps address the resolution of high levels of Non Performing Assets (NPAs) – USD128 billion across 38 listed public and private banks, which have been weighing down the banking system.
This report also highlights India’s efforts to be a digitised economy. A consequence of demonetisation, adopted in November 2016, was the significant thrust to digital transactions in the country. The volume of digital transactions has increased significantly, reaching a record level of 1.1 billion in December 201708. In addition, the cash-to-GDP ratio declined to 8.8 per cent as of FY17, registering a drop from 12.2 per cent in FY16, indicating increased formalisation of the economy.
This report also analyses the progress achieved under several national priority programmes. Skill India, a flagship initiative of the government, has been able to strengthen the ecosystem wit qualified individuals by way of increasing the number of Industrial Training Institutes (ITI) in the country and offering the total number of Qualification Packs (QPs) across sectors.
The setting up of State Skill Development Missions by states has advanced the upskilling of the country’s workforce.
Similarly, the Swachh Bharat Mission and Smart Cities Mission have gained momentum and are promoting administrative professionalism and citizen engagement. Other initiatives like Startup India and Make in India have made inroads into different sectors of the economy, helping states foster a culture of entrepreneurship and innovation.
Sound infrastructure is important for business. Many steps have been taken to address port development and connectivity issues to make India a global logistics centre. The coastal shipping sector in India currently contributes to merely 6 per cent of the entire coastal and inland waterway freight movement. Plans are underway to double this share by 2025.
An area of significant progress has been roads, the lifeline of the country, where significant projects are being accomplished through public private partnership (PPP) models.
This sector has been opened up for 100 per cent FDI under the automatic approval route, subject to applicable laws and regulations.
Bharatmala is envisaged as a programme to develop 34,800 km of roads in its first phase, along the lines of Sagarmala which is a connectivity initiative in the ports and shipping sector. The Railway Budget in 2017 was consolidated with the Union Budget and the government earmarked a historic budget outlay to reshape Indian railways and allied sectors. With the growing need and importance of alternate sources of energy, the government has taken a series of initiatives, especially in the renewable energy (RE) sector paving the way for a host of investment opportunities in this growing sector as detailed in this report.
A majority of the industrial activity happens in the Micro, Small and Medium Enterprises (MSMEs) sector. Indian MSMEs, with approximately 63 million units, contribute 8 per cent to national GDP, employ over 111 million people and manufacture over 6,000 products.
The government intends to enhance the manufacturing sector’s contribution to 25 percent of GDP. Hence, several central government schemes are made to benefit this sector directly. Key steps have been taken by the government for this sector including reduction of the income tax rate of 25 per cent for MSME companies having a turnover of upto USD38.65 million and Minimum Alternate Tax credit carry forward extended to 15 years from 10 years.
Looking ahead, the promise of the many government initiatives mentioned must be realised through rigorous monitoring of these programmes.
India still needs to take further steps to restructure its trade and FDI regime. The country needs to be even more responsive and flexible to address global investors’ requirements.
It is now imperative that a fine balance be struck between the need to push public investment on the one hand and keep the fiscal deficit under check on the other.
Consumer spending could get a boost with a wise mix of public spending and other fiscal reforms to spur demand in the nation. The government will need to facilitate increased exports and further streamline the GST ecosystem.
Reforms are vital for sustainable growth. The Indian economy is moving in the right direction with initiatives taken towards stepping up infrastructure investment, land and labour market reforms and measures to boost manufacturing growth.
While all these can still be classified as an ‘unfinished agenda’, a significant volume of work has already been undertaken towards the completion of these tasks, in terms of a conducive policy environment as well as on the ground effort.
A combination of supportive global growth, improving capex, fiscal spending, a buoyant consumer and concerted policy efforts augur well for a stronger growth outlook for the Indian economy over the short to medium term.
India is marching ahead and setting examples for not just the developing economies but also for developed ones. India has many successes to be proud of – ranging from the Aadhaar programme extending unique identification to 1.14 billion individuals in 2017 to policy measures that provide an impetus to entrepreneurship.
Areas of focus and progress are varied and include simplification of taxes, focus on improving ease of doing business, right to information, universal education, food security, sanitation, rural employment
and governance and transparency.
In the Present era, the market is booming up so every Company want to take opportunity to earn more from the same market and want to get maximum benefits out of that, so what are the ways available for Company to avail such benefits.
So for that, Private Company has to change its Mission as well as the Vision and going for getting those benefits by Converting into Limited Company and after that by listing in SME platform.
What is SME ?
SME means Small and medium-sized enterprises or small and medium-sized businesses (SMBs) are businesses whose personnel numbers fall below certain limits.
What is SME Exchange ?
“SME exchange” means a trading platform of a recognised stock exchange having nationwide trading terminals permitted by the Board to list the specified securities issued in accordance with this Chapter and includes a stock exchange granted recognition for this purpose but does not include the Main Board”.
So now question is arise how those benefits can be obtained, the simplest answer is by listing in SME Platform.
What are the Criteria For Listing?
The Company shall be incorporated under the Companies Act, 1956 or 2013.
Post Issue Paid up Capital The post-issue paid up capital of the company shall be at least Rs. 3 crore.
Net-worth Net worth (excluding revaluation reserves) of at least Rs.3 crore as per the latest audited financial results.
Net Tangible Assets At least Rs. 3 crore as per the latest audited financial results.
Distributable profits in terms of Section 123 of the Companies Act 2013 for at least two years out of immediately preceding three financial years (each financial year has to be a period of at least 12 months).
Extraordinary income will not be considered for the purpose of calculating distributable profits.
The net worth shall be at least Rs.5 crores.
It is mandatory for a company to have a website.
It is mandatory for the company to facilitate trading in demat securities and enter into an agreement with both the depositories.
There should not be any change in the promoters of the company in preceding one year from date of filing application to Different Exchange for listing under SME segment.
A certificate from the applicant company / promoting companies stating the following
” The Company has not been referred to the Board for Industrial and Financial Reconstruction (BIFR).” Note: Cases where company is out of BIFR is allowed.
There is no winding up petition against co., which has been admitted by the court or a liquidator has not been appointed.
Migration from Different Exchange SME Platform to the Main Board
The companies seeking migration to Main Board of Different Exchange should satisfy the eligibility criteria. It is mandatory for the company to be listed and traded on the Different Exchange SME Platform for a minimum period of two years and then they can migrate to the Main Board as per the guidelines specified by SEBI vide their circular dated 18th May 2010 and as per the procedures laid down in the ICDR guidelines Chapter X B.
What are the Benefits of Listing in SME ?
Easy access to Capital: Different Exchange SME provides an avenue to raise capital through equity infusion for growth oriented SME’s.
2. Enhanced Visibility and Prestige: The SME’s benefit by greater credibility and enhanced financial status leading to demand in the company’s shares and higher valuation of the company.
3. Encourages Growth of SMEs: Equity financing provides growth opportunities like expansion, mergers and acquisitions thus being a cost effective and tax efficient mode.
4. Ensures Tax Benefits: In case of listed securities Short Term Gains Tax is 15% and there is absolutely no Long Term Capital Gains Tax.
5. Enables Liquidity for Shareholders: Equity financing enables liquidity for shareholders, provides growth opportunities like expansion, mergers and acquisitions, thus being a cost effective and tax efficient mode.
6. Equity financing through Venture Capital: Provides an incentive for Venture Capital Funds by creating an Exit Route and thus reducing their lock in period.
7. Efficient Risk Distribution: Capital Markets ensure that the capital flows to its best uses and that riskier activities with higher payoffs are funded.
This is as simple as we understand Follow the Below Steps….!!!
The Issuer Company consults and appoints the Merchant Banker/s in an advisory capacity.
The Merchant Banker prepares the documentation for filing after:
conducting due diligence regarding the Company i.e checking the documentation including all the financial documents, material contracts, Government Approvals, Promoter details etc.
and planning the IPO structure, share issuances, and financial requirements
Application procedure: Submission of DRHP/Draft Prospectus –
These documents are prepared by the Merchant Banker and filed with the Exchange as well as with SEBI as per requirements.
Verification & Site Visit –
Different Exchange verifies the documents and processes the same. A visit to the company’s site shall be undertaken by the Exchange official .The Promoters are called for an interview with the Listing Advisory Committee.
Different Exchange issues an In Principle approval on the recommendation of the Committee, provided all the requirements are compiled by the Issuer Company.
Filing of RHP/Prospectus –
Merchant Banker files these documents with the ROC indicating the opening and closing date of the issue.
Once approval is received from the ROC, they intimate the Exchange regarding the opening dates of the issue along with the required documents.
The Initial Public Offer opens and closes as per schedule. After the closure of IPO, the Company submits the documents as per the checklist to the Exchange for finalization of the basis of allotment.
Different Exchange finalizes the basis of allotment and issues the Notice regarding Listing and Trading.
Any Guidelines For Listing ?
The Company has to follow the below Guidelines.
The post issue face value capital should not exceed Rs. Twenty-five crores.
Trading lot size
The minimum application and trading lot size shall not be less than Rs. 1,00,000/-
The minimum depth shall be Rs 1,00,000/- and at any point of time it shall not be less than Rs 1,00,000/-.
The investors holding with less than Rs 1,00,000/- shall be allowed to offer their holding to the Market Maker in one lot.
However in functionality the market lot will be subject to revival after a stipulated time.
The existing Members of the Exchange shall be eligible to participate in SME Platform.
The issues shall be 100% underwritten and Merchant Bankers shall underwrite 15% in their own account.
So, if you want to increase the reputation of your Company in the developing Countries like India, then you should have to register your Company in SME Platform because ultimately your Company get reputed because it is traded in Exchange Platform so Goodwill of the Company is also increased and ultimately you achieve your profit as I said in the First para.
This is best platform provided to the Company for those Company who has not much Paid Up Capital and also less reputed but by registering in SME Platform the Company not only get Reputation in all over India at large but also the Company get Profit by availing Tax benefits upto some extent.
So considering the above fact Company should have to opt for this option and after Few years the Company is also transferred from SME Platform to Main Board., so your Company considered as the same as others reputed Company.
So by considering the Current Market Scenario every Private Company as well as Unlisted Public Company has to think on this matter and work accordingly.
Though this Facility is available since long but few of them able to grab this opportunity. Now its time to Rethink about this opportunity.