Volume #15 | IssueNo. 292/2023 | September 2023
Compliance as a Way of Life!
As my alma mater #ICSI celebrates its 55th Foundation Day on 4th October, 2023 at Vigyan Bhavan, New Delhi in the august presence of three eminent women – the Hon’ble President Smt. Droupadi Murmu, Hon’ble Finance Minister Smt. Nirmala Sitharaman and Revered Sister B K Shivani, I dedicate this piece to both – the Corporates (who say “Compliance in our business”) and Compliance Professionals (who say “Compliance is our business”)!
Credit for this catchy phrase goes to one of my earliest clients, Mr. Naveen Kashyap, erstwhile MD of Yokogawa Technology Solutions India, now elevated to an international role as VP-Digital Innovation & Services, Yokogawa Electric, Japan. With a technology-cum-management-cum-sanatana dharma background, he is a rare leader who values compliance equally and advocates its complete adherence in letter and spirit. Here is a gist of his brilliant address to business leaders and professionals, gathered over high-tea at my office recently, as we moved into a newly renovated, vibrant space :
- What does compliance mean to you? ….Discipline? Ethics? Rules? Peace of mind? How about ‘Societal Dharma’ ? Comply with the law of land. Respect the law of land. To me “Compliance is an indicator of a company’s righteousness. A Company’s integrity. A Company’s discipline”. Ultimately when we talk about leaders, we talk about their humility, their discipline, courage to stand tall. So when we apply the same parameters to what makes leaders in a corporate, we come back to Discipline, Integrity and Righteousness.
- Compliance is like a torch or a guideline that ensures we don’t tread onto the wrong path. Shri Krishna says in the Bhagavad Gita, Sankhya Yoga “Swalpamapyasya karmasya, traayate mahato bhayaat”. “Compliance is that element, doing a little bit of which you are actually going to be saved from a larger disaster or a larger concern”.
- Then he also says in the Karma Yoga, “Niyatam kuru karma twam karmajyaayo hya karmanaha” “Keep doing the work honestly and sincerely, irrespective of the outcomes”. It is not always someone telling you what is right or wrong….you should be knowing what is right or wrong. So Compliance defines our conduct as corporates. Compliance defines our identity as corporates.
- Where does this evolve from? The earliest and simplest form of definition around compliance what I actually draw from the Taittareeya Upanishad from Yajur veda shaka, particularly the Shiksha valli is “Satyam vada, Dharmam chara”. “Speak the truth, follow your dharma”. (Incidentally the motto of ICSI is this !) It could be your societal dharma, it could be your personal dharma. Don’t swerve away from this route of satya and dharma.
- Ultimately when we look for the context, Upanishad is nothing but a convocation speech that is given to the students on completing their course at the Gurukula, to let them go and start contributing to the society. I would like to take the last three points of Shiksha valli which are a set of guidelines on how we are expected to lead our lives. Finally they say “Eshaha aadeshaha (this is a rule), e tat upadeshaha (I advise you), e tat anushaasanam (follow the advice)”. It says there is a rule…your MCA says there is a regulation which will come up as a notice. Next thing is a gentle reminder which tells you…follow this updadesham. This has to be a non-comprisable rule when you move ahead. So when we try to go back to the roots of compliance, that would have definitely originated in the context of dharma we have inherited and need to practice. Somehow the very integrated portion of that has got disintegrated and we see compliance as a separate element ! But otherwise it is nothing but righteousness i.e. righteous life which contributes to the overall propserity.
- If we all know these basics, why don’t we comply? What is the general tendency? #1 Ignorance. about changing rules. Ignorance is bliss sometimes. #2 Arrogance. How would I be affected at all? How would I be caught? Who are they to catch hold of me? I can outsmart them. #3 Wrong logic in interpretation. Wrong use of the right logic. Our ability to outsmart somebody and try to be creative in compliance, while compliance is just to follow and not try to innovate. #4 Abuse of the smart logic. Many times we try to interpret and justify our wrong deeds and actions while applying logic without looking into the context.
- The last part of it is Window Dressing. I project myself to be compliant while I am not. A small story here…….A teacher gives 2 chaklis (south indian savoury) to all the children in a class and says, “Don’t eat them. If both the chaklis are in your hand till the end, I will give you two more”. He wanted to measure their honesty and sincerity. Some kids saw this as a long term incentive and not worth it. They ate both immediately, while another set of kids ate one and retained the other. There was only one boy who had eaten the chaklis and yet had them both in his hand. The teacher was happy with his behaviour and rewarded him with two more, as promised. Surprised that he didn’t succumb to temptation, all the kids wanted to know what the secret was. The boy spilled the beans “What did the teacher ask us to do? To maintain the chaklis….I took out the first circle and second one another circle and ate. As far as I am concerned there are two chaklis. I have complied with both the spirit and letter of the rule’. This is another kind of tendency that we at corporate world have.
- Then there is always this disincentive. Many a times why we don’t follow compliance is because something else is more compelling – immediate return that we can see. You know you are not supposed to drive on the other side of the road ..take a U turn and cut across. It is not only risking ourselves but also risking others on the line. This is exactly what compliance is telling you. It is not only about risking your own future …things which are not in your control. You also become an impediment to the society at large knowingly or unknowingly.
- This is basically driven by two basic characteristics of human kind. #1 Labhdha rakshanam. Protect and keep whatever you have. #2 Alabhya labham...to acquire something which is not available with you. These are incentives which probe our individual behaviour beyond a defined line because they are easy.
- Because all these principles are given to a ruler we go back to the Rama Charitha Manas, where Rama when he meets Bharatha at the Nandigrama forest asks him “There were actually 13 commandments…Are you consulting? Are you complying? How are you following the Raja Dharma?” So our history is rich in examples where we have put compliance first.
- Again going back to Bhagavad Gita, Shri Krishna says “Sambhaavitasya cha akeertim maranaadatirichyate which means for noble people, disgrace is greater than death” If this is followed, you will never resort to fraud or cheating. As leaders we are under continuous scrutiny but we also have this tendency called ‘minimalism’. It is okay this time..a small breach is fine. But these small things create cracks in the system.
- Compliance is something like our conscience which should not be handed over to someone else. Conscience has to be programmed here (in the head) and that has to keep prodding you to check if we are on the right path or not. Non-compliance necessarily means you are trying to dig a hole in the same structure on which you are standing.
- Shri Krishna says in Sankhya yoga “Aapuryamanam api achalam prathishtam, samudram aapaha pravishanti yadvat”. “As the ocean is filled with water flowing into it from all sides and remains immovable, so the man into whom all desires flow, but is not a bit affected attains peace and not the man who craves the desire”. Irrespective of new waters entering into the sea, the sea has only temporary ripples but soon regains state of equilibrium and stand tall. “You have built a Temple of Compliance (addressing me). Know that in volatile times, there are small variations, small ripples, waves, tides which will gradually ebb away. Please keep to who you are and be non-compromising in terms of your integrity. That is the true essence of what Compliance means”.
- Let alone the corporate world, we need to ingrain compliance into our own lifestyle also. Then we stand tall in the corporate world because as Shri Krishna says in the Karma Yoga “Yadyadaacharati shreshtaha, tat devetaro janaha, sa yat pramaanam kurute lokaha tad anuvartate”. “Whatever action is performed by a great man, common men follow in his footsteps. And whatever standards he sets by exemplary acts, all the world pursues”. So please don’t set wrong examples. The best and smartest people in business are under constant scrutiny and the signals they send are watched by the world. We must ensure that we are meeting the basic expectations of the society and that gives us the license to be an integral part of the society.
- Moving away from the Bhagwad Gita, let’s talk about Herzberg two factor theory – Hygiene factors and Motivators. Compliance is more like a hygiene factor …It’s presence does not add value but its absence hits you hard. As a motivation factor it multiples the impact. If it is absent it is only a degree of performance. So, let us ensure it becomes a part of the corporate hygiene, personal hygiene and character hygiene.
- Today being a day when you have expanded your office, I will end with this quote :
“Dhruvante raaja, varuno dhruvam Devo bruhaspatih,
Dhruvanta indrascha agnishcha raastram dhaarayataam dhruvam !
Oh king! May Varuna give stability; May the divine Bruhaspati give stability; May Indra and Agni give stability; May the kingdom be held in stability”!
Let the owner of the land, leader of the land – in this case the organisation, be permanent. Let her ideals be permanent, let her guidance be permanent. Let she be blessed along with a team to reach greater heights and serve as conscience keepers to more and more of us who are actually active in social life….!!
After such an insightful and impactful talk on the need for compliance, do scroll down to catch what notifications some of the ministries have announced during September, 2023. Key one being on the Angel Tax under the IT update section.
For any previous issues of Samhita and the readers’ feedback, please visit http://www.sharadasc.com/resource-center/.
In May 2023, the Ministry of Finance had released two notifications that brought practising professionals (CA, CS, CMA) under the scope of Prevention of Money Laundering Act as Reporting Entities for certain prescribed financial transactions. Updates on the same were carried out in our 288th and 289th Issue of newsletter. In continuation to the same, we have few thoughts to share on the specific aspect of maintaining records and reporting requirements.
While the Act does not define financial transactions which is widely used in the May 2023 notifications, it certainly defines the term transaction. Rule 2(1)(h) of the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (“PMLA Rules”) defines transactions as follows:
“transaction” means a purchase, sale, loan, pledge, gift, transfer, delivery or the arrangement thereof and includes –
- opening of an account;
- deposits, withdrawal, exchange or transfer of funds in whatever currency, whether in cash or by cheque, payment order or other instruments or by electronic or other non-physical means;
- the use of a safety deposit box or any other form of safe deposit;
- entering into any fiduciary relationship;
- any payment made or received in whole or in part of any contractual or other legal obligation;
- any payment made in respect of playing games of chance for cash or kind including such activities associated with casino; and
- establishing or creating a legal person or legal arrangement.”
Further, Rule 3 of the PMLA Rules w.r.t Maintenance of records reads as follows:
“Every reporting entity shall maintain the record of all transactions including, the record of-
(A) all cash transactions of the value of more than ten lakh rupees or its equivalent in foreign currency; (B) all series of cash transactions integrally connected…….;(BA) all transactions involving receipts by non-profit organizations exceeding the value of ten lakhs rupees, or its equivalent in foreign currency; (C) all cash transactions where forged…..; (D) all suspicious transactions, whether or not made in cash and by way of-…….; (E) all cross border wire transfers…….; (F) all purchase and sale by any person of immovable property valued at fifty lakh rupees or more that is registered by the reporting entity, as the case may be.”
Though it is evident from the above rule that record of all transactions is required to be maintained, we may draw an inference that since the words ‘whether or not in cash’ has been specifically used for suspicious transactions in sub clause D of Rule 3, the term cash transactions referred to in Clause A, B, C refers to transactions in hard cash only.
Further Rule 8 requires reporting of only those transactions specified in sub rule A to E of Rule 3 and not all transactions. Considering professionals (CS,CA, CMA) do not deal in hard cash transactions of such high value, the reporting requirements under PMLA may not be applicable and relief can be availed to this extent. The information to be maintained in the records for all transactions and the reporting requirements is enclosed for the reference of readers.
We await more clarity on the above from ICSI which has been assigned with the responsibility of releasing manuals on aforesaid aspects under PMLA as per guidelines of the Financial Intelligence Unit-India.
Vide notification dated September 18, 2023 the Insolvency and Bankruptcy Board of India (“the Board/IBBI”) has amended the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“the Regulations”), effective from said date. Highlights of the amendments are as follows:
- Regulation 2D inserted for mandating the financial creditor or operational creditor to submit evidence and include chronology of debt and default including date when the debt became due, date of default, dates of part payments, if any, date of last acknowledgment of debt and the limitation application, in the application being made by them under Regulation 7 or 9.
- Regulation 3A inserted to provide for a detailed procedure on taking custody and control of assets and records of the Corporate Debtor (“CD”) by the resolution professional (RP) including assistance and cooperation by the personnel of CD, its promoters or any other person associated with the management of the CD.
- Regulation 12(1) relating to submission of proof of claims has been substituted to permit the creditors to submit proof beyond the time specified in public announcement. The creditor shall be allowed to submit his claim with proof, up to the date of issue of request for resolution plans under regulation 36B or 90 days from the insolvency commencement date, whichever is later. However, the creditor shall provide reasons for such delay.
- Provisions inserted under Regulation 13 w.r.t verification of claims to enable the RP:
a) to explain reasons for not collating the claims after verification,
b) to verify claims received beyond prescribed period but up to 7 days before commencement of COC meeting and to categorise them as acceptable or non-acceptable for collation and
c) to intimate the creditor within 7 days of categorisation as above along with reasons for those claims categorised as non-acceptable, if any
d) place such claims before COC in its next meeting for its recommendation for inclusion in list of creditors and its treatment in resolution plan, if any.
e) submit such claims before the Adjudicating Authority for condonation of delay and adjudication wherever applicable.
- Under Regulation 16A relating to Authorised Representative, provisions have been introduced for role and responsibilities of the authorised representative including assistance to class of creditors that he represents, to make informed decisions, review the content of minutes prepared by resolution professional, assist the creditors in evaluating resolution plan, providing regular updates to the creditors he represents on the progress of corporate insolvency resolution process etc.
- Under regulation 28 w.r.t assignment or transfer of debt, a timeline of 7 days has been prescribed for creditors to inform the RP about such assignment or transfer of debt.
- Regulation 30B inserted to enable the committee members to propose for an audit of the CD along with the scope, objectives, estimated cost, timeframe and name of the proposed auditor. The audit shall be conducted by an insolvency professional having qualifications required for such audit. Further, the expenses of such audit shall be treated as part of insolvency resolution process costs.
The Insolvency and Bankruptcy Board of India (“the Board/IBBI”) vide notification dated September 18, 2023 has amended the Insolvency and Bankruptcy Board of India (Insolvency Professionals), Regulations 2016 (“the Regulations”). Highlights of the amendments are as follows:
- Introduction of a unified enrolment and registration application form to enable submission of common application form for both enrolment and registration processes. Form A and Form AA under Second Schedule to the Regulations have been amended.
- Under Regulation 5 relating to Qualification and Experience of Individual to be eligible for registration as Insolvency Professional, requirement to complete pre-registration educational course within 12 months from payment of application fee has been introduced.
- Timeline for the Board to grant certificate of registration to applicants has been reduced from 60 days to 30 days from receipt of application, excluding the time given by the Board for presenting additional documents, information or clarification, or appearing in person, as the case may be.
- Similarly, if the Board is of the view that certificate of registration ought not be granted, the same shall be communicated to the applicant within 30 days instead of 45 days from the date of receipt of application excluding the time for presenting additional documents, information or clarification, or appearing in person, as the case may be.
- Under Regulation 10 w.r.t temporary surrender of registration, the following circumstances have been added for the Insolvency Professional Agency to inform the Board:
(e) accepts the application for surrender of membership and strikes the name of the professional member from its registers;
(f) expels the professional member; or
(g) receives intimation of demise of an individual or winding up or dissolution of a company, limited liability partnership or registered partnership firm and strikes the name of the professional member from its registers.”
- Regulation 10A has been inserted for surrender of certificate of registration permitting the Insolvency Professional to surrender certificate of registration by making a request to the Board. Further, the Board may accept such request within 30 days of receipt of request.
- Provisions relating to special procedure for action on surrender, expulsion have been inserted under Regulation 10B which allows for issuing notice to concerned professional for cancellation of registration with an opportunity of being heard. Final decision of the Board shall be communicated within 30 days from date of receipt of written submission by member.
In continuation to erstwhile circulars, the MCA vide General Circular dated September 25, 2023 has allowed companies whose AGMs are due in 2023 or 2024 to conduct their AGMs through VC or OAVM on or before September 30, 2024. Further, conducting of EGMs through VC or OAVM has also been permitted till September 30, 2024.
Vide notification dated September 19, 2023 SEBI has introduced new regulation 62A under the Securities And Exchange Board Of India (Listing Obligations And Disclosure Requirements) for provisions relating to listing of subsequent issuances of non-convertible debt securities (“NCDS”). Highlights of the same are as follows:
- All NCDS, proposed to be issued on or after January 01, 2024 shall be listed on a stock exchange if it is being issued by a listed entity which already has listed NCDS.
- Any subsequent issuance of unlisted NCDS made on or before December 31, 2023 by a listed entity, which are outstanding on December 31, 2023 may be listed on the stock exchange.
- A listed entity that proposes to list NCDS on the stock exchange on or after January 01, 2024 shall list all outstanding unlisted NCDS issued on or after January 01, 2024 within 3 months from the date of listing of NCDS that are proposed to be listed.
However, the listed entity shall not be required to list Bonds, NCDS issued pursuant to agreement between the listed entity and multilateral institutions and NCDS issued pursuant to an order of court or Tribunal or regulatory requirement under SEBI, RBI, IRDAI or PFRDA. However, the listed entity proposing to issue such securities shall disclose to stock exchanges on which its NCDS are listed about all the key terms of issuance including maturity period, interest rate, embedded options etc.
DGFT has consulted RBI on the issue of unavailability of Pre-shipment and Post-shipment export credit for E-Commerce exports. Accordingly, vide Trade Notice dated September 04, 2023 it has been clarified that the “Master Circular-Rupee / Foreign Currency Export Credit and Customer Service to Exporters” allowing for access to Pre-shipment and Post-shipment export credit and Packing Credit in Foreign Currency (PCFC) be extended to E-Commerce exporters.
Vide notification dated September 25, 2023 the CBDT has amended rule 11UA of Income Tax Rules, 1962 w.r.t. valuation of shares. Highlights of the amendments are as follows:
- Shares can be issued based on valuation report of merchant banker with valuation date not more than 90 days prior to date of issue of shares. This brings clarity on the validity of valuation report.
- In case of issue of shares to venture capital fund (VCF), shares can be issued to any other investor at same price within a period of 90 days either before or after receipt of consideration from the VCF.
- In case of issue of equity shares to non-residents, the merchant banker can adopt any of the following 5 methods of valuation:
(i) Comparable Company Multiple Method;
(ii) Probability Weighted Expected Return Method;
(iii) Option Pricing Method;
(iv) Milestone Analysis Method;
(v) Replacement Cost Methods;
- Permits for valuation of compulsorily convertible preference shares based on fair market value arrived in accordance with any of the 5 given methods of valuation.
- Where the consideration amount is not more than 10% of valuation price, the issue price will be deemed to be the fair market value of shares. This is the safe harbour pricing threshold available without attracting angel tax.
Also read the news update of Economic Times where most professionals have welcomed the above changes that usher in clarity and multiple valuation methodologies for CCPS, safe harbour provision and validity period for the valuation report.
Vide circular dated September 18, 2023 the CBDT has extended the due date for furnishing Audit reports in Form 10B/Form 10BB by Trusts and NGOs from September 30, 2023 to October 31, 2023. Accordingly, the due date for filing the Return of Income in Form ITR-7 for the Assessment Year 2023-24 has also been extended from October 31, 2023 to November 31, 2023.
In exercise of powers under clause (da) of Section 43B of Income Tax Act, 1961 the CBDT has notified that interest paid on loans borrowed from NBFCs classified in Top Layer, Upper Layer and Middle Layer as eligible deduction under Section 43B. This classification is aligned with the RBI guidelines.
GSTN has issued an Advisory on September 19, 2023 informing the taxpayers about activation of geocoding functionality for the “”Additional Place of Business”” address across all States and Union Territories. This builds upon the geocoding functionality earlier implemented for the principal place of business, operational since February 2023. This feature is accessible to normal, composition, SEZ units, SEZ developers, ISD and casual taxpayers whether they are active, cancelled or suspended.
GSTN vide Advisory dated September 13, 2023 has imposed a time limit on reporting old invoices on the e-invoice IRP portals for taxpayers with Aggregate Annual Turnover more than 100 crores. Such taxpayers will not be allowed to report invoices older than 30 days on the date of reporting.
The CBIC vide notification dated September 06, 2023 has notified amendments to Central Goods and Services Tax rules with the aim to bring clarity to the valuation of supplies for online gaming and casinos. The value of supply for online gaming / Casinos is determined as the total amount paid or payable to or deposited with the supplier. It is pertinent to note that any amount returned or refunded to the player or any unused amount by the player cannot be deducted from the value of supply.
Quote of the day
"Ethics is knowing the difference between what you have a right to do and what is right to do."
- Potter Stewart
Disclaimer: The contents of this Newsletter are only a summary and has not dealt with any issue in detail. Any action taken or proposed to be taken must be in consultation with professionals and not merely based on the articles / news updates. S. C. Sharada & Associates disclaims all liability on action taken without professional advice.