Ladies and Gentlemen, At the outset I wish to express my sincere gratitude to Mr Srinivasan for having conceptualised such an opt program to be staged today in Chennai on a much needed subject of “credit appraisal and he related such a wanting subject to the recently amended company laws. The 1956 Act has been crying for an amendment for quite some time in order to make more relevant to the contemporary situations and to be in better understanding and control to corporates, regulators and other stakeholders. Though there were many attempts in the past, it could taste the success only when the amendment was introduced in the Loksabha on 3rd August 2009. This Companies Bill, 2009 was referred to the Parliamentary Standing Committee on Finance, which submitted its report on 31st August 2010 and was withdrawn after the introduction of the Companies Bill, 2011. The Companies Bill, 2011 was also considered by the Parliamentary Standing Committee on Finance which submitted its report on 26th June 2012. Subsequently, the bill was considered and approved by the Lok Sabha on 18th December 2012 as the Companies Bill, 2012. The Bill was then considered and approved by the Rajya Sabha too on 8th August 2013. It received the President’s assent on 29th August 2013 and has now become the Companies Act, 2013. It is genuinely expected that the bill which has been subjected to so many discussions and debates must have come out to match the current corporate needs. The change in the company law is a matter to be inferred in different perception by different sections of the stake holders, While it may provide a relief to the promoters, it offers the regulators to exercise much needed control over the functions of such promoters. While it may open a new job opportunity to the budding and practicing company secretaries it adds more responsibility to the chartered accountants and company secretaries to bring out the 360* view on the companys performance and functions to the knowledge of the interested public and shareholders. But, for the bankers and financiers who take credit decision of extending the financial assistance to the corporate world, it is to be seen whether the amendments open the door to have more insight in to the companys plans and futures which may aid the bankers to arrive a speedy, timely and of course accurate decision. It is very much important because as on date our country has got 13.59 lac companies registered in India and a sizable number is getting registered every day. Almost all the companies registered are one way or other are in the need of banking services which in strict terms need not be in the form of financial assistance alone and it could be even in the form of maintaining their operative account also. Thus it is very much required for a banker to know the structure & style and functions & financials of the company which intends to avail a banking facility with. As on March 2013 the loan outstanding availed by the Indian corporate sector is as follows: Rs. In crores The figure is the sufficient indicator to understand the seriousness of the appraiser’s job. The long term finances extended in the recent years for roads, power and mining sectors was purely availed by the corporate sectors only which are governed under the companies act. The banking system, more particularly the public sector banks which advances whooping sum to the institutions functioning under a structured legal frame i.e., companies act, need to possess strong and robust appraisal mechanism which includes deep and wide knowledge on the various tenets of the companies law. The appraising banker is expected to study the following aspects while processing the corporate credit proposals. CHECK LIST USED BY THE CREDIT APPRAISER It could be observed from the above that strong, robust and reliable provisions in the companies act should be in place to offer a clear picture to the appraiser to understand the financial health and credibility of the company. Not to mention that it requires a thorough knowledge to the appraiser on the various provisions of the companies act. The updation in the approach towards the appraisal, though it is an ongoing, it enjoys more relevance today in view of the various factors like, Indian banking system has switched over to total automation from 2005 onwards which includes the calculation of various financial ratios also which are considered as indicators of the financial health of a company and at times an apprehension appears that the appraisal became mechanical. In the presence of external credit rating agencies to assess the credit absorbing capacity of the corporates in a periodical interval and the agency like CIBIL which indicates the character of an individual or a promoter, the appraiser may develop a tendency not to look beyond these parameters while studying the companys profile. Indian PSBs command more than 70 percent of the business have lost its experienced manpower in view of the faulty decision of introducing SPL.VRS in 2001 and non-infusion of fresh blood up to 2009. Though the recruitment in the banks commenced from 2009 onwards, the sector could retain the recruited workforce from 2012 onwards only. This has resulted in a peculiar scenario that 50 percentage of the supervisory cadres in the banking system are with lesser than three years exposure in banking and the majority of them are technical graduates like engineering. It is likely that the remaining 50 percent also will be displaced by the new recruits over a period of five years leaving average age of the supervisory strength of the PSBs at below 35 years. Though the Indian youths joining in the banking sector are academically strong and inclined towards learning, it is very much required to infuse such knowledge immediately, which is normally expected to be acquired from out of experience. It is also unfortunate that some of the corporates deviated from the accepted corporate discipline and went to the extent of deliberately cooked up their balance sheets with an ulterior motive to mislead the stake holders. It is another unfortunate that it could not be brought out even by the globally reputed accountants. This factor also necessitates strong provisions in the laws and thorough knowledge of such laws to the appraisers. A big and notable public limited corporate never mentioned the bankers name in the published balance sheet and it is not sure whether it is mandatory to do so, but it is very much required for the appraiser to ascertain the dealing of the company with other financial institutions. It was observed that few corporates availed short term credit facilities from the financial institutions to bridge the temporary mismatch, invested in their subsidiaries and availed further credit facilities on the financial strength of such investments. Recently, a big corporate availed financial assistance from various leading banks and FIs without getting reflected in the balance sheet and quite unfortunately it went unnoticed by the FIs and by the various regulators like ROC, SEBI and stock exchanges. Even the impact of amalgamation of their subsidiaries did not get properly reflected in their Audited balance sheet audited by leading auditors. As per the recent press report that a survey conducted by Deloitte indicated about 62% of the respondents opined that the corporate frauds will be on a rise in the years to come which is a concern. Nevertheless, it is also felt by the respondents that the new companies act 2013 will bring strong regulations which will extend its arms to prevent or to early deduction of such frauds. Thus it may be inferred from the above that in order to evolve a flaw free credit dispensation system to ensure free flow of credit to the needy corporates it is very much required to have a strong companies law and a thorough knowledge on such law to all the stake holders, more particularly the appraisers who are directly involving in arriving credit decision. A casual browse through certain provisions of the companies act instilled in me a great amount of confidence that the relevant documents required to infer the health of the company from the appraiser’s angle will be more transparent and will contain reliable data thanks to the companies act 2013. Change of auditors after a specified number of years may bring out some of the unattended and undisclosed information of the company escaped the attention of the previous auditors. The role of the auditors is also restricted to specific services curbing non professional collusion which may have influence in the reporting of the financials. It is indeed a profound change that the act stipulates the Secretarial Audit which may help the banks to get authenticated information on the important inputs for the bankers like the compliance of regulations related to board functions, passing of important resolution like borrowing power, charge creation with the ROC etc. Now with the stipulation of obtaining Secretarial Audit certificate, incidences of availing multi financing without reporting may come to a halt. Another feature that appointment of internal auditor will help the banks to access the authenticated data to be relied upon for the meaningful of appraisal. Now since the act has bestowed legal stature to the serious fraud investigation office, the regulations will have more control and also may get early warning signals of any possible corporate frauds. The new law has provisions against insider trading and passing on any price sensitive information which are the prime causative factor for the artificial inflation of share prices which may at times influence the bankers either way in taking credit decisions. The tenure of the independent director for a limited period of 2 terms of 5 yrs. each with a cooling period of 3 yrs. in between may effectively control the independent directors from gaining personal interest on the company which may at times influence the credit decisions. The Loksabha has passed further 14 amendments last week including the punishment for illegal money pooling activities which perhaps a stern warning to all fly by night companies and also will augment pooling in the structured savings schemes- a boon to the banks. As our corporate affairs Minister Mr Arun Jaitley stated while introducing the bill in Loksabha that all the “oppressive provisions” have been removed from the companies act 2013 as it was felt “nobody will come to India if such an environment persists”. This fine tuning will also be boon to Indian banks as more foreign investments will flow in and the resultant of which will be the credit off take, more proposals and more appraisals. To conclude, the amended companies act 2013 with further envisaged sharpening has come into existence when the economy of the country also is opening up and I am sure that it would have desired control on the functions of the corporates which would ensure more transparency – A MANTRA OF GOOD GOVERNANCE. Thanks
Posted on: Thu, 25 Dec 2014 10:57:14 +0000
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