Regulations
MCA’s latest order improves transparency

The new Order is more or less like a master circular which has brought all its earlier circulars at one place. The Order is another welcome step of the MCA towards making data and information of companies more transparent to investors

 
The ministry of corporate affairs (MCA) issued a new order vide F No. 52/26/CAB-2010 on 6 November 2012 relating to the issue of appointment of cost auditors in supersession of all its earlier orders on the same issue. This, however, should come as no surprise as the MCA, in a way, has continued with its tradition of bringing consistent changes to the field of cost audit. 
 
The following earlier Orders dated 2 May 2011; 3 May 2011; 30 June 2011; and 24 January 2012, shall no longer be in force and have been replaced with the new Order:
 
Applicability of the new Order:
The order has laid down two sets of eligibility criteria for companies which will compulsorily require auditing of their cost accounting records. The first set of companies includes those as mentioned in Point A below. The other set of companies are those to which Companies (Cost Accounting Records) Rules, 2011  applies and which further fulfils the conditions specified in Point B below. 
 
Point A:
1. Companies to whom Rules as given in Order1  apply AND engaged in production, processing, manufacturing, or mining activities of the products/ services included in the Rules as given in the Order OR
 
2. Covered in the product or activity groups as specified in Table I in the Order AND aggregate value of net-worth as on the last date of the immediately preceding financial year exceeds Rs5 crore OR
 
3. The aggregate value of the turnover from the sale or supply of all the products or activities during the immediately preceding financial year exceeds Rs20 crore OR
 
4. The company’s equity or debt securities are either listed or in the process of being listed, in or outside India.
 
Point B:
1. Companies to whom Cost Accounting Records, 2011 apply AND engaged in production, processing, manufacturing, or mining activities of the products/ services in such product or activity groups as specified in Table II to the Order; AND
 
2. Wherein the aggregate value of the turnover made by the company from sale or supply of all the products or activities during the immediately preceding financial year exceeds Rs100 crore. OR
 
3. The company’s equity or debt securities of the company are listed or are in the process of listing, whether in India or outside.
 
The companies to which the Order applies shall be required to get their cost accounts audited in respect of each financial year on or after 1 January 2013 by a cost auditor, being either a cost accountant or a firm of cost accountants, holding valid certificate of practice under the provisions of Cost and Works Accountant Act, 1959.
 
A few clarifications incorporated in the Order, inter alia:
As the tables, in which the MCA has listed the nature of industries to which the Order apply, have been linked with the industry codes of the Central Excise Tariff Act, 1985 (CETA), it has been clarified that: 
 
a. Products or activity groups shall be covered by this Order irrespective of whether central excise duty is levied or not;
 
b. In case of any product or activity group where multiple units of measurement are in use for the products or activities covered therein, then the relevant product or activity group shall be repeated against each unit of measurement separately.
 
c. Wherever same CETA chapter headings have been shown against two or more product or activity groups, the actual details shall be shown against the most appropriate product or activity group.
 
d. Where any of the activity/group not included in CETA but are covered by specific rules issued by MCA, cost auditing for them will be mandatory.
 
Effect of the Order:

Appointment of cost auditor: Yet another revised procedure
The MCA vide its General Circular No. 36/2012  (Circular 1) dated 6 November 2012 has set out new points to be kept in mind while appointing a cost auditor by companies. This is in continuation of the General Circular 15/2011 dated 11 April 2011 (Circular 2). Circular 1 is effective from the financial years commencing on or after 1 January 2013.
 
The procedure for appointment of the cost auditor as prescribed by both the circulars is:
 
1. Eligible companies to e-file its application for appointing a cost auditor with the Central Government in the prescribed Form 23C within 90 days from the date of commencement of each financial year.
 
2. MCA to approve the application within 30 days of filing Form 23C, if no approval is received, then deemed approval for the appointment of cost auditor can be assumed by the company according to Circular 1.
 
3. Company to issue a formal letter of appointment (approved by the board) within 30 days from the date of approval of MCA. 
 
4. Cost auditor to file Form 23D within 30 days of date of formal letter of appointment issued by the company.
 
5. In case of change of cost auditor because of some exigency:
 
a. Caused by death of existing cost auditor
 
Companies to file Form 23C within 90 days of the date of death without any additional fee2
 
b. Caused by some other reason
 
Companies to file fresh Form 23C with applicable fee and additional fee, specifying the reason of change. In case of change due to resignation by the existing cost auditor, the application to be accompanied with such resignation letter. Circular 1 also lists out a few other cases of exigencies, which basically require that supporting documents should be attached to Form 23C to validate the same. 
 
6. Circular 2 had made the Audit Committee responsible for ensuring proper diligence in the appointment of cost auditor. The provisions of Section 224 (1B) of the Companies Act, 1956 being also applicable to cost auditors, the Audit Committee was responsible for ensuring compliance with the same. In case of default, the company, its every officer in default and the cost auditor (if he is guilty of offence) shall be punishable as per the provisions of the Companies Act, 1956.
 
7. Proper checks in the MCA21 system are going to be introduced to check the same while filing relevant Forms. 
 
Our analysis
The Order is more or less like a master circular which has brought all its earlier circulars at one place. However, this Order has specified some 155 group or activities to which the Order applies. The vast list of activities not only includes the industries covered by previous orders but has also brought a few more products or activity groups within the ambit of cost audit, which will prove as a major boost to the profession as well as to the issue of transparency and corporate governance. The Order is another welcome step of the MCA towards investor awareness and making the data and information of companies more transparent to investors.
 
(The authors can be contacted at [email protected] and [email protected].)

[1] These industries are: a) Telecommunication; b) Petroleum; c) Electricity; d) Sugar; e) Fertilizer; f) Pharmaceutical

[2] Additional fee applicable as per Companies (Fees on Applications) Rules, 1999 and amendments made thereafter

 

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Indonesian Shadow Puppets: Bumi Plc

Nathaniel Rothschild, scion of the English branch of the famous banking family, teamed up with the Bakries and the Roeslanis of Indonesia to exploit its mineral wealth. But it dawned on him too late that the Bakries and the Roeslanis “were acting in concert from the beginning”
 

In my prior column, I discussed the hidden wealth of the family of China’s outgoing prime minister, Wen Jiabao. (Read here: Chinese princelings: Wen Jiabao’s family fortune). The enormous wealth and power of elite families is not just limited to China. It extends to all emerging markets. The reason is simple. The rules are different. Investors in any given market are aware of the local rules and adapt their business practices and models to them. The problem comes when outside investors want to play too.

 

Once such example is Indonesia. Emerging markets have been the darlings of investors for the past few years. Recently they have fallen on hard times as their economic growth has slowed and their markets have stalled. The exception has been Indonesia. Over the past several years Indonesia’s vast mineral wealth has been exploited to feed the seemingly ever growing demand from China. Even with China slowing, Indonesia has grown at an enviable 6.2%. Its market has increased at twice the rate of the S&P 500 since 2009 and is up 13% since June.

 

The idea of exploiting this market and especially Indonesia’s mineral wealth seemed to be a “no-lose” situation especially if investors could be protected by listings on markets with better safeguards. This was the brain child of Nathaniel Rothschild.

 

Nathaniel Rothschild is the scion of the English branch of the famous banking family and the future fifth Baron Rothschild. He believed that with the world’s growing demand for energy resources, an investment in Indonesian coal, would net investors returns of “two to three times their money”. To exploit this idea he created a company, Vallar. With the magic of his name and the promise of unlimited growth in emerging markets, he was easily able to raise $1.07 billion from Vallar’s IPO on the London Stock Exchange in July of 2010.

 

With all that money, Mr Rothschild went looking for local companies and local partners who he could help with foreign capital. He found them in the Bakrie family of Indonesia -- an aristocratic lineage in their own country equal to his. The Bakries dynasty was started in 1942 and thrived like many families in emerging markets through lucrative connections with the government, which was at that time under Suharto. They also made the successful transition to democracy. Aburizal Bakrie is the chairman of the largest party, Golkar, and a potential presidential candidate in 2012.

 

There was one problem with the Bakries. Their business practices were adapted to Indonesia. They survived, not through the legal protections, but because they developed strong relationships with the government and other powerful families. The Bakries’ empire was created through leverage made possible by a corporate shell game. It had nearly collapsed twice in the past 12 years, after the 1997-98 Asian financial crisis and again in 2008. When this was pointed out to Mr Rothschild by a local journalist in December of 2010, he brushed it off. He told the Jakarta Post that there was nothing wrong with them.

 

So Rothschild teamed up with not only the Bakries, but with another powerful Indonesian family, the Roeslanis. They contributed their interests in two large coal mining concerns, Bumi Resources and Berau, in exchange for shares in Vallar which was renamed Bumi plc. The deal seemed quite a success. After it came out, Bumi’s shares increased by 30% by April 2011, but then things began to go horribly wrong.

 

The Bakries, true to form, had leveraged up their interests. By fall, the stock had fallen 40% from April and was 20% below its IPO price. The Bakries had a margin call for a $1.3 billion dollar loan. But the Bakries had been here before and knew how to handle these problems. They called in one of their friends—another Indonesian business tycoon—Sami Tan. Like the Roeslanis, Mr Tan had a long term relationship with the Bakries and arranged to bail them out. They didn’t even bother to contact Mr Rothschild. He wasn’t part of the family. When he called, they didn’t bother to pick up the phone.

 

In November Rothschild vented his anger in the press, but it didn’t help. By February Tan and the Bakries almost removed him from the board. But that wasn’t the only problem. By September of 2012 Bumi investors learned of $400 million interparty loans to the Roeslanis that, despite promises, were never repaid. Not to mention an interesting $363 million investment in a Yemeni oil field with no listed reserves.

 

By October Rothschild resigned from the board when it finally dawned on him that the Bakries and the Roeslanis “were acting in concert from the beginning”. He never understood until it was too late that the relationship systems in emerging markets are transparent only to the locals. He was playing in a game where he never understood the rules.

 

To read more articles by the same writer, click here.

 

(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages. Mr Gamble can be contacted at [email protected] or [email protected].)

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