Letter of Credit Vs Bank Guarantee

Letter of Credit vs Bank Gaurantee

A letter of Credit differs from a Bank Guarantee. An issuing or confirming Banks’ obligation is independent of, and unqualified by, the contract of sale under the transaction. A commercial credit is neither a performance bond, nor it is a guarantee or quality of the goods shipped.

Letters of Credit are Separate Transactions

A contract for sale of goods between the seller and the buyer incorporates mode of settlement. Letters of credit by their nature are separate from the sale contract, and banks are not concerned or bound by such sale contracts even if the credits bear reference to them.

The credits stipulate documents which have to be tendered for payment and it, therefore, follows that in credits parties deal with documents and not with goods, services or performances to which the documents relate.

It is, therefore, in the interest of all the parties concerned that the conditions and terms of credit are complete and precise and barefit of excessive details.

Payment under a letter of credit does not depend on the performance obligation on the part of the exporter except those which the credit imposes. Banks accept documents under letters of credit for what those document purport to be on their face. Contract between the buyer and the seller is obligatory between themselves. The seller(beneficiary) cannot take advantage of any contractual terms in between the buyer and the opening bank and between the opening bank and the advising/confirming bank.

Uniform Customs and Practice for Documentary Credit

In the course of time, a number of practices, expressions and terms have evolved between banks dealing with documentary credits. To ensure uniformity of interpretation in international trade, the International Chambers of Commerce in Paris has worked out the “Uniform Customs and Practice for Documentary Credit”. These have been revised and brought up to date several times in the past. The latest in the line of revisions is the UCP 600 (UCP 500 w.e.f. January 1, 1994) which updates and consolidates the previous UCP 400. They are now applied by the banks in nearly all countries including India.

Parties to a Letter of Credit:

Following persons are generally parties, to a letter of Credit:

Beneficiary : The exporter of goods in whose favour the L/C has been established.

Customer/importer : The person we intends to import the goods and instructs bank to established Letter of Credit.

Issuing Bank: The Banker in the importers Country who opened the L/C.

Correspondent Bank or Advising Bank: The banker in the exporters country, who is authorised by the issuing bank to advise the beneficiary of the Credit and to effect such payment or to accept and pay such bills of exchange or to negotiate against Stipulated documents and on Compliance of Stipulated terms and condition specified by the importer on the exporter.

Confirming Bank: The banker in the exporters(beneficiary) country, who at the desire of the beneficiary adds confirmation to the letter of Credit so that beneficiary can get payment without recourse from the Confirming bank. The Confirming bank may be correspondent bank itself or some other bank.

Generally following types of Letter of Credit are in operation.

Revocable or Irrevocable Letters of Credit
Confirmed Credit
Transferable Credit
With or without Recourse Credit
Revolving Letter of Credit
Transit Credit
Back to Back Credit
The Sight Credit
The Credit available against Time Draft (Usance Credit)
The Deferred payment Credit.

Precautions to be taken at the time of establishing Letter of Credit

Letter of credit offers almost complete protection to the seller but the buyer is put to many disadvantages and has to make payments against documents only. Before agreeing to open a letter of credit in favour of the seller, the opener must be satisfied with the creditworthiness and general reputation of the seller. Entire success of an L/C transaction depends on proper conduct of the seller.

Confidential report on the seller must be obtained at the time of first transaction with him.

Letter of credit also does not offer any protection for the quality/quantity of goods supplied under the L/C. It would, therefore be necessary to know the nature of goods and specify submission of quality reports/inspection reports from an independent agency to ensure receipt of goods of proper quality. This is particularly important in case of import of chemicals and such other goods. The opener has to submit an L/C application to the opening bank. The instructions contained in the L/C application is the mandate for the issuing bank and letter of credit will be issued in accordance with this application. It is, therefore, necessary that complete and precise information must be given in the L/C application form specifying therein the description, unit rate and quantity of the goods covered under L/C and details of documents required in absolute clear and unambiguous terms. The reference to underlying sale contract must be avoided as far as possible. The L/C application must nevertheless contain all the required/information based on which L/C could be opened by the bank.

After the L/C has been issued by the bank, a copy thereof must be obtained immediately. The L/C must be scrutinized to ensure that it has been properly issued and is in conformity with L/C application. Discrepancy, if any, must be brought to the notice of opening bank immediately.

Import contact may be concluded either in terms of INR or in foreign currency. Where the contracts are in INR, the related documents are also prepared in INR and no conversion is involved. However, where the bill is drawn in foreign currency, the payment is made in Indian rupees equivalent to the foreign currency. The equivalent rupee value is arrived at by applying suitable exchange rate. These rates are applied by banks to standardise the foreign exchange-rupee conversion process.

When the price of foreign currency is quoted in terms of home or local currency it is called direct quotation basis. This has been in application since 02.08.1993. However, there is a difference between inter-bank exchange rates and merchant rates.

Merchant rates are the exchange rates applied by the bankers for transaction with their customers for various purposes, including imports and exports. These rates are calculated by the banks as per the guidelines issued by the Foreign Exchange Dealers Association of India (FEDAI). Inter-bank rates are the rate for transactions amongst the authorised dealers in foreign exchange and depend on the market conditions.

Since exchange rates are volatile, documents delivered by the bank at the time of a favourable exchange rate will enable the Indian purchaser to pay less of Indian rupees. Forex rates are always quoted as two way price i.e. at a rate at which the bank is willing to sell foreign currency(buying rate) and at a rate at which the bank is willing to buy foreign currency(selling rate). There is always some difference in buying and selling rates. However, the maximum spread available to bank is restricted in terms of celling imposed by RBI. All exchange rates by authorised dealers are quoted in terms of their capacity as buyer or seller.

Procedure for Registration of an Indian Private Limited Company

1. Select, in order of preference, at least one suitable name upto a maximum of six names, indicative of the main objects of the company. Ensure that the name does not resemble the name of any other already registered company and also does not violate the provisions of emblems and names (Prevention of Improper Use Act, 1950) by availing the services of checking name availability on the portal.

2. Apply to the concerned RoC to ascertain the availability of name in eForm1A by logging in to the portal. A fee of Rs. 500/- has to be paid alongside and the digital signature of the applicant proposing the company has to be attached in the form.

3. If proposed name is not available, the user has apply for a fresh name on the same application. After the name approval the applicant can apply for registration of the new company by filing the required forms (that is Form 1, 18 and 32) within 60 days of name approval.

4. Draft Memorandum & Articles of Association (MOA and AOA) and get it stamped as per the provisions of the Stamp Act prevailing in the respective State of the country.

5. Get the Memorandum and the Articles signed by at least two subscribers in his/her own hand, his/her father’s name, occupation, address and the number of shares subscribed for and witnessed by at least one person. Ensure that the Memorandum and Article is dated on a date after the date of stamping;

6. Scan the stamped pages of MOA;

7. Take the MOA (Memorandum of Association) in word file and insert the scanned pages properly and remove the corresponding pages from word file. (For instance, insert page 1 & 2 from scanned file and remove page 1 and 2 from word file)

8. Once you remove pages from word file, the paragraph numbers will get changed and you have to alter the paragraph numbers suitably in the said file.

9. Repeat the same for AOA (Articles of Association) as well;

10. Convert MOA file and AOA file in word to PDF file. You may use cutepdf writer (a freeware) for such conversion;

11. Once this file is saved in pdf format, you should be ready with another PDF file marked as Others. It should contain Authorisation letter on appropriate stamp paper for correcting MOA and AOA. Normally such authorisation is given to either Company Secretary or a Chartered Accountant;

12. Name approval letter, Form 1, Address proof of the subscribers must also be scanned and kept ready;

13. Download all relevant fresh forms (1, 18 & 32) from http://www.mca.gov.in/. This has to be dilgitally signed by a person named in the articles as a director or manager or secretary or by a CA or ACS or Advocate or Secretary.

14. Get yourself registered free on http://www.mca.gov.in/ for uploading all files. Once the files are uploaded the challan shall be generated, which can be paid either online with the help of credit card or netbanking or by way of conservative mode of payment through Bank;

15. Deliver the originals at ROC which shall be informed by mail within 24 to 48 hours for the purpose of any corrections.

16. Scan and convert the corrected pages into pdf once again.

17. Upload all the forms on http://www.mca.gov.in/ and submit the same to ROC office.

18. If all the corrections are carried out properly, you shall receive the Certificate of Incorporation (COI) through email. Please note the CIN mentioned on such COI. Please note that this COI shall not carry the signature of Assistant Registrar of Companies;

19. The originals shall be despatched to the addresss mentined on Form 18 so filed online by the Subscriber or through their authorised representative.

Limited Liability Partnership (From India’s perspectives)

In the past few years, we have seen number of laws which has come into play, which includes provisions relating to Service Tax, Fringe Benefit Tax, Banking Cash Transaction Tax (BCTT) and finally the much-awaited LLP (Limited Liability Partnership) ….. to name a few. The introduction of new taxes were very controversial and it is believed that LLP shall come out very successful in the litmus test of maintaining the said LLP and its compliances related thereto.

Parliament passed the Limited Liability Partnership (LLP) Bill 2008 on 12.12.2008. The Lok Sabha today gave its assent to the Bill which was earlier passed by the Rajya Sabha.
Replying to the debate on the Bill in the Lok Sabha, Minister for Corporate Affairs Prem Chand Gupta expressed the hope that the first ever LLP in the country would be registered by the first day of the new Financial Year i.e. 1.4.2009.ccording to an official statement, Gupta informed the House that concept LLP Rules have already been placed on his ministry’’s website.

Gupta also assured the House that registration of LLPs would be a paperless affair, as it will also be covered under MCA-21 e-governance program of the Ministry.

Regarding taxation, he said that as the matter relates to the Finance Ministry, this concern would be taken care of by that Ministry. But, he assured the House that Indian LLPs will in no way be put to any disadvantage and “our LLPs will have a level playing field with other similar bodies outside the country.”

The LLP is a new corporate form that enables professional expertise and entrepreneurial initiative to combine, organize and operate in an innovative and efficient manner.
For a long time, a need has been felt to provide for a business format that would combine the flexibility of a partnership and the advantages of limited liability of a company at a low compliance cost.

An extract of … The Probation of Offenders Act, 1958 (for release of convicts or offenders) as it relates to India

THE PROBATION OF OFFENDERS ACT, 1958
Year : 1958
ACT NO. 20 OF 1958

AN ACT TO PROVIDE FOR THE RELEASE OF OFFENDERS ON PROBATIONOR AFTERDUE ADMONIT [16th May, 1958.]

1. Short title extent and commencement.
(1) This Act may be called the Probation of Offenders Act, 1958.
(2) It extends to the whole of India except the State of Jammu and Kashmir.(3) It shall come into force in a State on such date as theState Government may, by notification in the Official Gazette, appoint, and different dates may be appointed for different parts of the State.

2. Definitions.
In this Act, unless the context otherwise requires,-
(a) “Code” means the Code of Criminal Procedure,1898 ( 5 of 1898 )
(b) “probation officer” means an officer appointed to be a probation officer or recognised as such under section 13;
(c) “prescribed” means prescribed by rules made under this Act;
(d) words and expressions used but not defined in this Act and defined in the Code of Criminal Procedure, 1898 (5 of1898). shall have the meanings respectively assigned to them in that Code.

3. Power of court to release certain offenders after admonition.
When any person is found guilty of having committed an offence punishable under section 379 or section 380 or section 381 or section 404 or section 420 of the Indian Penal Code (45 of 1860.) or any offence punishable with imprisonment for not more than two years, or with fine, or with both, under the Indian Penal Code or any other law, and no previous conviction is proved against him and the court by which the person is found guilty is of opinion that, having regard to the circumstances of the case including the nature of the offence and the character of the offender, it is expedient so to do, then.notwithstanding anything contained in any other law for the time being in force, the court may, instead of sentencing him to any punishment or releasing him on probation of good conduct under section 4, release him after due admonition

4. Power of court to release certain officers on probation of good conduct.
(1) When any person is found guilty of having committed an offence not punishable with death or imprisonment for life and the court by which the person is found guilty is of opinion that, having regard to the circumstances of the case including the nature of the offence and the character of the offender, it is expedient to release him on probation of good conduct, then, notwithstanding anything contained in any other law for the time being in force, the court may, instead of sentencing him at once to any punishment direct that he be released on his entering into a bond, with or without sureties, to appear and receive sentence when called upon during such period, not exceeding three years, as the court may direct and in the meantime to keep the peace and be of good behaviour: Provided that the court shall not direct such release of an offender unless it is satisfied that the offender or his surety, if any, has a fixed place of abode or regular occupation in the place over which the court exercises jurisdiction or in which the offender is likely to live during the period for which he enters into the bond.
(2) Before making any order under sub-section (1), the court shall take into consideration the report, if any, of the probation officer concerned in relation to the case.
(3) When an order under sub-section (1) is made, the court may, if it is of opinion that in the interests of the offender and of the public it is expedient so to do, in addition pass a supervision order directing that the offender shall remain under the supervision of a probation officer named in the order during such period, not being less than one year, as may be specified therein, and may in such supervision order impose such conditions as it deems necessary for the due supervision of the offender.
(4) The court making a supervision order under sub-section (3)shall require the offender, before he is released, to enter into a bond, with or without sureties, to observe the conditions specified in such order and such additional conditions with respect to residence, abstention from intoxicants or any other matter as the court may, having regard to the particular circumstances, consider fit to impose for preventing a repetition of the same offence or a commission of other offences by the offender.
(5) The court making a supervision order under sub-section (3)shall explain to the offender the terms and conditions of the order and shall forthwith furnish one copy of the supervision order to each of the offenders, the sureties, if any, and the probation officer concerned.

5. Power of court to require released offenders to pay compensation and costs.
(1) The Court directing the release of an offender under section 3 or section 4, may, if it thinks fit, make at the same time a further order directing him to pay-(a) such compensation as the court thinks reasonable for loss or injury caused to any person by the commission of the offence ; and(b) such costs of the proceedings as the court thinks reasonable.
(2) The amount ordered to be paid under sub-section (1) may be recovered as a fine in accordance with the provisions of sections 386.and 387 of the Code.
(3) A civil court trying any suit, arising out of the same matter for which the offender is prosecuted, shall take into account any amount paid or recovered as compensation under sub-section (1) in awarding damages.

Indian Budget for Financial Year 2008-2009 and our Comments …

Budget Highlights Following are the (relevant points) highlights of the Budget 2008-09 presented by the Finance Minister, Mr P Chidambaram in Parliament on Friday.

1. Banking cash transaction tax withdrawn from April one, 2009.

2. Commodities Transaction Tax to be introduced on the lines of Securities Transaction Tax.

3. Short-term capital gains increases to 15 per cent.

4. ONLY Fresh facilities, encouragement to sports and guest houses exempted from Fringe Benefit Tax.

5. For women, the income tax limit goes up from Rs 1.45 lakh to Rs 1.80 lakh. In case of senior women citizens, it increases from Rs 1.95 lakh to Rs 2.25 lakh. No change in corporate income tax or FBT rates.

6. New Income tax slabs will be: 10 per cent for 1,50,000 to 3,00,000, 20 per cent for 3,00,000 to 5,00,000 and 30 per cent above 5,00,000.

7. No change in rate of surcharge and Education Cess.

8. Changes in IT slab. Threshold of exemption for all Income Tax assesses raised from from 1,10,000 to 1,50,000.

9. Threshold for small service providers raised from Rs. eight lakh to Rs 10 lakh.

10. Asset management service under mutual funds, services by stock exchanges to be brought under Services Tax net.

Our Comments on matters not restricted only for Budget:

1. Overall an electoral budget.

2. Tax administration should also have been taken care of. Preserving books of accounts for 8 years is the most difficult job which increases the cost of preserving and storing records unnecessarily. Its high time, the Ministry considers maintaining only last 4 years record, except for those assessees, where a dispute has arisen and the matter is pending before Tribunal, Courts of any judicature, etc.

3. Tax audit limit should be raised to Rs. 200.00 lacs as against Rs. 40.00 lacs, which is prevailing since late 1980s.

4. Fringe Benefit Tax should not be made applicable to assessees not covered under Tax Audit provisions.

5. With the rising inflation and strengthening of rupee, we are of the opinion that Service Tax exemption limit should have been made applicable to assessees having gross taxable billing of not less than Rs. 40.00 lacs.

6. Development of Roads, Education System, Mid-day meals, etc. are good proposition, however, an effective audit to control the flow of funds and to ensure its pre-directed utilisation is essential to bring in the balanced growth of the citizen of the country. Transparency of funds utilisation should be the motto.

7. Unless and until, the infrastructure such as roads, railways and airways are developed at international level, our country may not be able to continue with the sustained growth. For example, lowering of railway fare was not at all a fair idea. The alternative should have been to deploy the excess money so collected by way of differential money so proposed to be reduced through the medium of expenditure on tracks, its maintenance, security system of the railways, standard of the platform and the area occupied by the Railways nationwide.

8. Other comments have been intentionally avoided so as to ensure that this email should not resemble an essay on economics.

Are members of the prestigious Institute of Chartered Accountants of India in trouble of losing their own prestige?

In continuation with my comments on Satyam earlier, this article is being published to highlight the dis-comfort that is being allegedly faced by the members of the prestigious “Institute of Chartered Accountants of India”. The members of this community have already flooded the professional group of Yahoo with lot of anguish and sarcasm. My opinions have been expressed to ensure that there is a balanced opinion and not the one which may be termed as Prejudice!

 

My opinions are expressed here in the form of answers. The queries raised by the members on various email groups has been tried to be accommodated in this publication.

 

1. Some of the members questioned the PwC’s decision to withdraw their comments on financial statement after the disclosure of ex-Chairman, Satyam, Shri B. Ramalinga Raju. They also questioned about the fees that PwC charged for the said audit under consideration or was it a Charity Audit at the end of Satyam? However, in my opinion, I wanted a balanced question relating to the following:

 

(a) What about the Salaries taken by those Accountants, Finance Managers, Finance Directors (who did not complete their job as was expected by them – on a right legal framework)?
(b) What about the fees taken by the Directors in Audit Committee for the purpose of Corporate Governance?
(c) What about the fees taken by the Internal Auditors?
(d) What about the fees taken by the Company Secretary?
(e) What about the fees taken by the entire board who approved the accounts? Or would have met several times to discuss about accounts and finance?
(f) Why the fees taken by PwC is ONLY being questioned? Has emotion taken over the professional etiquette of a person?

 

2. As regards audit reliability statement of PwC

 

There is a Guidance Note to that effect and I am sure the statements made by PwC stands valid.

3. Post Satyam Fiasco – Auditors Duty?

 

Assume that the Annual report is published and later the Directors say that the financial statements are wrong in one way or the other and that they have inflated purchase bills by forging or bank statements or Fixed Deposit Receipts, what are the auditors expected to do then? In this scenario, the PwC would not have been allowed to re-check the validity of those papers (in the office of Satyam) after the statement of B. R. Raju to the Board. Hence, they have stated that because the said signatories (directors) to the annual report have informed that the financial statements are not true, it is right on their part to dis-own their own statements / comments on the Audited financial statements.

 

4. There were some members who were in favour of publishing CAs photo (for their alleged failure in performing their duty) in Journals and barring them from carrying out professional activities ANYTIME in the future!

 

Are we telling ourselves that there should be dual system in India, viz., a stringent acts ONLY for CAs and the normal ones for all the others!!!
 

5. Members targeting Price Waterhouse Coopers – Are PwC the only concern responsible for Satyam?

 

Please note that I am not supporting ICAI (& their Council Members) or Price Waterhouse Coopers with such publications. My only concern is why are we ONLY targeting Chartered Accountants (just because we feel that PwC is our competitor!). Are we CAs not comfortable with the competitors of our own stream? Why are we not talking about Shri Ramdas Athavales’ letter to SEBI in 2002 for Satyam irregularities? Why are we not talking about the alleged support of Chandrababu Naidu and A. B. Vajpayee who did not took the letter seriously? What was the SEBI doing against such complaint lodged way back in 2002? SEBI has alleged in the recent past that since the chairman has been lodged in Jail, they cannot investigate the matter thoroughly! Why was there a need to arrest him and put him in Jail when there were so many authorities who would have unearthed the reality if B. R. Raju was made to co-operate with them in investigation? He could have been arrested after few days after the investigation would have made some progress. Is it not right that CB-CID was very quick to put him in Jail without an investigation at the initial days of arrest?
 
No one is talking about them or such other people who were also involved in this act apart from PwC? I am fully in support of the lawful action against PwC, however targetting them alone is not fair. There are many things that needs to be unearthed. PwC is only a part of the larger conspiracy and … earlier we understand, better for the entire CA fraternity. 

 

6. Price Waterhouse Coopers have maligned the entire profession. Now the members do not feel like using the CA logo or using it as a prefix before their name!

 

Are the acts of PwC taking a toll on the reputation of the entire CA community? Is PwC, a representative of the CA profession in India? Why are we maligning our own profession by our unjustified emotional over-run?
 
On a lighter note, I wish to summarise this publication by saying that if someone does not wish to carry the logo or not comfortable being called a CA (only because of one of the firm known as PwC), the only way out shall be to seek some other profession / business and dis-own the CA certificate issued by ICAI. I wish all such departing members of the erstwhile CA community, a very successful career in their new professional / business field in the days ahead.

 

7. There was an article published in one of the local hindi daily of South India. The article stated that most of the Chartered Accountants make an earning by signing fictitious financial statements.

 

Do you think CA fraternity needs a certificate from such dailies about their credential and truth-worthiness or honesty of the members of the prestigious ICAI. Let us not recognise them by giving them undue importance. This is one form of media and hence they need some masala to enhance their penetration in the market by way of circulation based on their own mental thoughts. Let them be a director of any corporate or a member of Rajya Sabha who may be the owner of this daily.
 
Incase, even if I am willing to accept the fact that CAs earn more because of signing some of the false financial statements. Is it not true that all politicians and their family members / relatives fed more on the corruption and black money and through one form of extortion (refer Mayawati Case of brutal murder of engineer). Is it not true that some politicians were involved in Telgi scam as well. Are they not responsible for Jehadi entrants in J & K or any other related incident (including Afzal Guru, Masood, etc.) If this is the case, the said politician must look into their own acts before opening their mouth to pin-point at other professional community which has actually developed the economy & related concerns. The politicians have made India weak politically and diplomatically. They should hang their heads in shame and try not to over-power a professional community.
 
I do not think personally that we need to take certificate of honesty from those who do not have their moral, culture, ethics and professionalism. There are black moles in every field. There are good politicians and there are bad as well. Generalisation concept is only their way to increase their circulation by spreading masala news of zero value to the community and to the India, as a whole.

 

8. Controversy of Satyam vis-a-vis PwC (Statutory Auditors) – Are allegations & suspicions fair?

 

Some of the Hon’ble members of some of the yahoo groups were hell bent on maligning our own profession by targeting PwC. Let us not forget that the entire system was at fault and not alone PwC. Only the Auditors cant be held responsible. Let us wait … why are we in a hurry to put forth our judgement before the law has taken its course? I am flabbergasted to notice that no body is blaming the Audit Committee, Corporate Governance Award being bestowed on Satyam recently, Company Secretary, Stock Exchanges, Service Tax Dept., Income Tax Dept which would have scrutinised all the years return so far, Internal Auditors ………..etc. Why are we only trying to paint PwC? Are we not maligning our own profession indirectly. An accusation is a must but let us be balanced in our views and thoughts.

 

Lastly let us try and be more professional in our work culture henceforth. Let us deliver the service that the society needs. There is no point crying on each others shoulder. Its time to get our acts together and clean up the mess, if any.

How safe are your Business Dealings vis-a-vis risk of the financial instruments

In 1960s and 1970s, the tax were collected not on income but on expenditure. There were separate challans for payment of Expenditure Tax. The sources of generation of income were not known as almost all transactions were cash based. Banking was virtually not in existence and the process of cheque issuance was hardly present. Hence, the government was right in taxing the assessee on the basis of the expenditure.

 

In todays world, although cash components cant be said to have been completely ruled out, however the cheque transactions & net banking has taken the front seat. The income can be assessed through cheque payments and on the basis of deduction of tax at source (TDS) or tax collected at source (TCS). With the online assessments and filing of AIR (Annual Information Returns), all such expenditures & incomes can be assessed through various other modes like purchase of a car or transactions incurred through the Credit Cards.

 

The business community however continued to bill their personal expenses to the Profit and Loss Account of the Business thereby reducing the receipt of the Government exchequer. To solve this issue, the current Home Minister of India, who was erstwhile Finance Minister decided to bring in Expenditure Tax by the name of Fringe Benefit Tax (FBT). This FBT has been made to levy as a certain percentage on particular items like Staff Welfare, Motor Car expenses, Conveyance, Travelling Expenses, Telephone & Mobile expenses, Gifts and promotions, etc. There had been many controversies in relation to the FBT, however of late, things seems to have settled down. An article on Tax Audit, TDS, FBT and other related areas shall be presented on this blog very soon from now, which shall give us a perspective and the expectations of the business community.

 

In India, a business dealing is as risky as riding a tiger. Imagine that the Debtors Balances in the Balance Sheet of a concern are high due to any one such trusted customer. If this trusted customer issues a cheque and because of the unhealthy condition of the said Debtor of late, the cheque bounces, what is the option with the said Creditor for recovery?

 

The only option prevalent in India is to issue a notice under Section 138 of the Negotiable Instruments Act, 1938. However, if the notice is issued to a corporate entity, the same section is applied apart from the applicability of Section 141 as well.

 

However, mere cheque bounce is not an offence. Consider the following case decided recently:

 

Cheque bounce case only if payment is to discharge liability

A drawer of the cheque would be guilty of issuing it without sufficient funds in the bank only if he had to discharge a financial liability or debt, not otherwise. In this case, Kumar Exports vs Sharma Carpets, the former issued two cheques as advance payment for buying carpets. However, the goods were not produced or delivered. When the cheques bounced, the carpet firm prosecuted the export firm. The magistrate dismissed the complaint. However, the Punjab and Haryana High Court convicted the exporter and asked the magistrate to decide the sentence. On appeal, the Supreme Court stated that when the sale of carpets had not taken place, “there was no existing debt or liability in discharge of which the export firm was expected to issue cheques to the carpet firm.” Therefore, Section 138 of the Negotiable Instruments Act had no application. The Supreme Court also criticised the High Court for adopting an unknown procedure in which it convicted the exporter and directed the magistrate to decide the punishment.

 

The total process of application of Section 138 till the matter is decided by the Court shall be covered in the next article, which shall appear on this blog shortly.

Satyam Computers Fiasco – Is this going to have an impact on Indian economy?

Indian economy is not a fragile economy. It has an inherent capacity to absorb such losses in the longer run. Son of a farmer, Mr. B. Ramalinga Raju, Chairman, Satyam Computer Services Limited had developed an empire in the shortest possible time. A financial wrong-doing of Rs. 5,040 crores apart from a work force of 50,000 is something which needs to be pondered upon at this stage.

It is without any doubt that these inherent over-statement of assets had been developed over the years. It was finally discovered. The losses were already suffered, mere discovery cant mean to indicate that the company has gone down only recently. The company was in a doom since years … only to be discovered now. The loss to the economy has already been done and there wont be any further impact, except on the share markets, which are volatile. People lose confidence easily in scripts, which comes under the scanner of law enforcement agencies. There wont be any adverse impact on the economy except for the work force which may feel high and dry after this fiasco.

 

Professional community has pointed its guns on Auditors, Price Waterhouse Coopers (PwC) for their alleged negligence. The ICAI has promised to punish the guilty as per their own statutes. However, can blaming just a Chairman or an Auditor or a Company Secretary sufficient? There was not an error, but an intentional design to ensure that the company’s financial health looks rosy. The company had received an award in 2007 for excellence in Corporate Governance!!! Is it not the time that we ponder over such Accounting Standards, Guidance Notes, Corporate Governance, Audit Committee, Internal Audits and so many other compliances. Has CPE programme conducted by the ICAI for so many audit & other related compliances really made the impact on those, who really need the most?

 

The answer lies not in the media reports or an hype or economy dooms-day hysteria but the answer lies in our strength to ensure that there is no untowards incident of such types in the future. Learning is always better than mere allegations. The action shall certainly be taken against the culprits, however its the time we look backward and design our characters as a professional, to ensure that the financial statements really presents not only true and fair view, but also a correct view to the best extent its possible.

 

Satyam Computers – A story of financial irregularities and its impact on the economy

B. Ramalinga Raju, Chairman, Satyam Computer Services Limited wrote a letter dated 07.01.2009 to the Board of Directors of the Company stating the facts as hereunder:

The Balance Sheet as at 30.09.2008 carries:

(a) Inflated (non-existent) cash and bank balances of Rs. 5,040 crores;

(b) An accrued interest of Rs. 376 crores, which are also non-existent;

(c) An understated liability of Rs. 1,230/– crores on account of funds arranged by him;

(d) An over-stated Debtors position of Rs. 490 crores

He further stated that for the second quarter ending 30.09.2008, the company reported a revenue of Rs. 2,700 crores and an operating margin of Rs. 649 crores (24% revenue margin) as against the actual revenues of Rs. 2,112 crores and an operating margin of Rs. 61 crores (3% revenue margin). This resulted in artificial cash and bank balances going up by Rs. 588.00 crores in the said quarter itself.

The following needs to be considered to ensure that the history does not repeat in the future:

1. Since the developments are baffling, how come one of the top four consulting & auditing firm, M/s. Price Waterhouse Coopers (PwC) certified the companys’ accounts for the last six years without getting a wind of any wrong doing.

2. The Investor confidence is really shaking and it is hard to digest that after two big stock market scams, there was a possibility that a so-called giant could have such inflated figures.

3. The apex body of Chartered Accountants, ICAI is believed to be said that any member of the body found guilty in the Satyam financial wrong-doings would be severely punished and that the auditors could even be barred from practising, for the lifetime.

4. Satyam closed at 77% lower and it has taken the entire IT index down by 9%. The Mumbai Sensex seems to be reeling under the shock of the said financial fraud that was exposed today by the Chairman himself.

5. The Auditors, especially from the top-four cant wash their hands from their responsibility. This seems to be a clear-cut case of negligence. It seems PwC did not even bothered to check if indeed Bank deposits existed as at that date.

6. It is imperative to note that Satyam was banned from offshoring work with World Bank. Further, the recent controversy shall give out an array of controversy in the days to come, especially in view of the fact that couple of partners of PwC are council members of the apex body of accountants in India, ICAI (The Institute of Chartered Accountants of India).

Now coming to the Accounting part of it, it is to be understood that accounting plays a major role in ensuring that the right presentation is done in consonance with the set guidelines. Globally, in todays day, we are talking of Accounting Standards, Guidance Notes, US GAAP, IFRS and so many types of audit like Expenditure Audit, Internal Audit, Systems Audit and finally statutory audit. Despite having the corporate governance in place, how can a fraud of such huge quantum happened and no body could doubt on the integrity of the accounts? We all get to know about the rosy presentation of the accounts and the Board constituted for audit and corporate governance. If such frauds cannot be detected even by these methods, then we need to look into the faults of any of the following:

1. Either all the people were aware but still did not attempt to bring the facts to light;

2. Most of the Board including the Corporate Governance committee and Statutory Auditors were at fault;

3. Will the name of the top Statutory Auditors sufficient to infuse confidence in the Shareholders and Stakeholders?

4. With Lehmann Brothers and now with Satyam, we have seen the confidence level going down, especially at the time of recession faced by the world globally.

5. Satyam had approx. 50,000 employees. Isnt this a fact that any decision to reduce the workforce may have an adverse impact on the economy as a whole?

The entire accounting profession is shaken by such amount of fraud. Its time we work together as an Auditors, as an Accountant, as an Advisor and ensure that such incidents do not repeat itself anytime in the future to come!