member of IFAC, SAFA and CAPA) - icmai.in

The Management Accountant |March 2012 251

Official Organ of the Institute of Cost Accountants of India established in year 1944 (Foundermember of IFAC, SAFA and CAPA)

Volume 47 No. 3 March 2012

C O N T E N T S

TheManagement Accountant

EDITORIAL

PRESIDENT’S COMMUNIQUE

CHAIRMAN’S COMMUNIQUE(Direct Taxation Committee)

CHAIRMAN’S COMMUNIQUE(Regional Council & Chapter CoordinationCommittee)

Cover ThemeClean Development Machanism—a pathway tofuture sustainable developmentby Sujit Dutta

Sustainable Growth—The Accountant’s roleby Sreenivas Garimella

Sustainable Growth, Technological Optimismand the Malthusian Ghostby Dr. Sujit Kumar Roy

Sustainable Development : Should GreenInvestment be the Guiding Light?by Dr. Sumita Chakraborty & Dr. Gautam Mitra

Sustainable Growth—Concept, Indices andIndia’s Growthby Gopala Krishna Ayitam

Food Security and biofuel : A paradox of sustainabilityby Mausumi BhattacharyyaSustainable Development—Issues and Criticsfrom Indian Perspectiveby Arindam Banerjee

Financial Model for sustainable Growth Rate :Managerial Perspectivesby Prof. Prafulla Kumar Swain & Ansuman Samal

TaxationTax Titbits—Fallout From Vodafone’s Case by S. Rajaratnam

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When Penalty is not Exigible Under Section271(1) © of Income Tax Act, 1961?by M. Govindarajan

Building on Revenue : New Service tax Circularon Construction Services by P. Ravindran

Case StudyHindustan Unilever’s Cost Aggressionby Kaberi Bhattacharyya

General ManagementManaging Organisational Creativityby Om Prakash Dani & M. S. Srinivasan

Human Resource ManagementDemistifying Khandelwal Committe Recommendactions on HR in PSBs by J D Sharma

Random ThoughtsSurvival Kit in the Current Globalised Economyby Pramod Jain

Takeover & AcquisitionNew Takeover Regime 2011 : An overviewby Gopal Chandra Mondal

Mergers and Acqusitions in the New Economic Orderby Dr. Ashish Varma & Ujjwal Tiwari

Banking FinanceEvaluation of Credit Risk Management in UrbanCo-Operative Banks—A Study in Hooghly Districtby Anupam Mitra

Efficient Cash Management : The Pulse of Today’sBusiness by Dr. Sandeep Goel

53rd National Cost Convention–2012

Economic Review

Institute News

Letters to Editor

Book Review

IDEALS THE INSTITUTE STANDS FOR

❏ to develop the Cost and Management Accountancy profession ❏ to develop the body of members and properly

equip them for functions ❏ to ensure sound professional ethics ❏ to keep abreast of new developments.

The contents of this journal are the copyright of The Institute of Cost Accountants of India, whose permission is necessary

for reproduction in whole or in part.

InsideThis Issue

252 The Management Accountant |March 2012

INSTITUTE UPDATES

MISSION STATEMENT

“The Institute of Cost Accountants of IndiaProfessionals would ethically drive enterprises globallyby creating value to stakeholders in the socio-economiccontext through competencies drawn from the inte-gration of strategy, management and accounting.”

VISION STATEMENT

“The Institute of Cost Accountants of India wouldbe the preferred source of resources and professionalsfor the financial leadership of enterprises globally.’’

PRESIDENTM. Gopalakrishnan

email : [email protected] PRESIDENT

Rakesh Singhemail : [email protected]

COUNCIL MEMBERSAmit Anand Apte, A. Om Prakash,

Aruna Vilas Soman, A.S. Durga Prasad,Dr. Sanjiban Bandyopadhyaya, Hari Krishan Goel, Manas Kumar Thakur, P.V.S. Jagan Mohan Rao,Pramodkumar Vithaldasji Bhattad, Sanjay Gupta,

S.R. Bhargave, Suresh Chandra Mohanty,T.C.A. Srinivasa Prasad

GOVERNMENT NOMINEESA. K. Srivastava, Nandna Munshi

Ashish Kumar, G. Sreekumar, K. GovindarajSenior Director (Examinations)

Chandana [email protected]

Senior Director (Studies)R N Pal

[email protected] (Technical)

J. P. [email protected]

Director (Internal Control & Systems)Arnab Chakraborty

[email protected] (CAT), (Training & Placement)

L. [email protected]

Director (Professional Development)J. K. Budhiraja

[email protected] (Continuing Education Programme)

D. [email protected]

Director (Discipline, Administration, Membership & Legal)& Joint SecretaryKaushik Banerjee

[email protected] (Advanced Studies)

Dr. Alok [email protected]

Director (Finance)S. R. Saha

[email protected] Director (Administration–Delhi Office & Public

Relations)S. C. Gupta

[email protected]

Rajendra [email protected]

Editorial Office & Headquarters12, Sudder Street, Kolkata-700 016

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DISCLAIMER

The views expressed by the authors are personaland do not necessarily represent the viewsand should not attributed to The Institute.


From the Editor’s Desk

Sustainability is the buzzword of our time which is used by the experts and the non-experts almost on every occasion and to describe almost everything. But, that’s what abuzzword is defined in most dictionaries: a catchword, a slogan, a pretentious word oflittle exact meaning. The question is whether sustainability is such a buzzword devoidof any essence and real meaning; or it is a way of survival in a world already teemingwith huge population and strapped for resources. In fact the word ‘sustainability’, inmy opinion is a way of doing more with less and less resources.

‘Sustainability’ is essentially a term taken from the ecological science, but it came togreater prominence ever since the Brundtland Commission in its famous report, OurCommon Future, combined it with the word “development”. Since the early 1960s thedeteriorating environmental conditions around the world had become a cause for greatconcern. Unsustainable technologies and industrial production started to wreck havocall around the world. But the Brundtland Commission noted that degradations ofenvironment are also caused by poverty and differing states of social development. Allthese probably prompted the Late Prime Minister Mrs. Indira Gandhi to say “Isn’tpoverty the greatest polluter?” The Stockholm Conference on Human Environment in1972 and, in its aftermath, the environmental movement generated a plethora ofliterature, and heated debates too, on the role of economic growth vis-à-vis thesustainability of our ecological system. There were both anti-growth and pro-growtharguments. But in 1987 the World Commission on Environment and Development underthe aegis of Ms. Gro Harlem Brundtland, formerly the premier of Norway, mandatedfor sustainable development that would take care of both the environment and theneeds of the business and society for economic growth. Twenty years since the firstsummit on environment at Stockholm, when the international community gatheredtogether at Rio, a practical articulation of the idea of sustainable development wasmade by the business community. In a way, it is both recognition and an acceptanceby business, not only of environmental responsibility, but also putting people atthe centre of development. Some called it ‘triple bottom line approach’ while somepreferred to call it ‘People-Planet-Profit approach’. In the triple bottom line rhetoric,“the three lines represent society, the economy and the environment. Society dependson the economy and the economy depends on the global ecosystem, whose healthrepresents the ultimate bottom line” and, because it takes into consideration all thethree interrelated aspects of sustainable development, it is also called a Profit, Peopleand Planet approach to environmental stewardship.

In this Profit, People and Planet approach, profit relates to the creation of value throughthe production of goods and services and through the creation of jobs and income.Profit, in the ultimate sense, is an expression of the society’s appreciation for the productof the company and the effectiveness with which factors are deployed. A focus forprofit is therefore the traditional conclusion of the corporate Annual Reports. A socialbottom line, on the other hand, shows how the company has benefited the society—anentity that includes customers, vendors, communities, governments and stake holders.The intriguing issue before us is not only to sustain but also to remain competitive bykeeping the cost price below the market price

I am happy to inform our readers that the theme of this issue not only coincides withthe twenty-five years of the concept of sustainable development, but it also acts as aprecursor to the 53rd National Cost Convention – 2012 that is focused on a most importanttheme entitled, ‘Sustainability Framework – Integrated Reporting, Imperatives forCMAs. Our esteemed readers may also kindly note that the present issue will appearquite fresh and colourful as about 80% of the magazine is being brought out in colour.

Wish you a very happy reading!

In a way, it is bothrecognition and an

acceptance by business, notonly of environmentalresponsibility, but also

putting people at the centreof development. Some called

it ‘triple bottom lineapproach’ while some

preferred to call it ‘People-Planet-Profit approach’. In

the triple bottom linerhetoric, “the three lines

represent society, theeconomy and the

environment. Societydepends on the economy

and the economy dependson the global ecosystem,

whose health represents theultimate bottom line” and,

because it takes intoconsideration all the three

interrelated aspects ofsustainable development, itis also called a Profit, People

and Planet approach toenvironmental stewardship.


M. Gopalakrishnan, President

President’s Communique

“The more you dig more water flows from the spring;The more you learn and disseminate the knowledge grows.”

Thirukurral by Thiruvalluvar (550 AD)

Dear professional colleagues,

Greetings!1st February 2012, will be written in letters of gold in the annals of the Institutehistory, as it is the effective date from which the notification passed by theparliament for the change of name of the Institute to The Institute of CostAccountants of India and to use the designated letters ACMA and FCMAcame into effect. Immediately following that the Institute was also ableoperationalise the decisions taken by the Council to use the title CMA beforethe name to denote the profession. Since it is not possible to write ACMAand FCMA which has been allowed by the Act, on each and everycommunication the Council decided to use the common letters in both of thedesignated letters viz., CMA as the title. The Council also decided to promotethe Brand CMA for all the education, training & placement, membership,examination, CEP and other activities of the Institute. The Institute buildingsincluding the Regional Councils and Chapters will be known as ‘CMABhawan’ and the name of the Regional Councils will be designated as “TheInstitute of Cost Accountants of India ............ Regional Council / Chapter”.The detailed guidelines are being worked out by the office and will be issuedshortly. The Council decided to retain the existing logo with the new nameincorporated into it, as it has been well recognized throughout India andabroad since the inception.In addition to the name change, the amendment also enabled formation ofLLPs amongst professionals. With this, the practicing members of our Institutecan now enter into a Limited Liability Partnership, which has no companyas its partner in accordance with the Limited Liability Partnership Act, 2008.The detailed guidelines in this regard are uploaded on the Institute’s websitewww.icwai.org.

EventsThe month of February was a busy month in terms of series of events takingplace across India, where there was active participation from the Institute.The key events started with the India Corporate and Investor Meet (ICIM)programmes by the Ministry of Corporate Affairs across India starting withKolkata and followed by Bangalore, Chennai, Delhi and Mumbai. TheHonourable Union Minister of Corporate Affairs, while addressing themeetings, informed the new policies that are being framed by his Ministryfor the corporate sector and highlighted the role of professionals in properimplementation of the policies of the Government. I represented the Institutein the CII programme on Integrated Reporting at Delhi, on 1st February 2012,where Dr.Bhasker Chatterjee, Director General & CEO of Indian Institute ofCorporate Affairs was the Chief Guest. The role played by our Institute inthe area was well acknowledged during the event.Indian Institute of Corporate Affairs organized a “Seminar on Study of Stateof Corporate Governance in India: Stakeholders Consultation” at New Delhion 21st February, 2012 at New Delhi. I along with various senior officers ofthe Institute attended this important programme. An empirical studypresented by Indian Institute of Management, Kolkata, revealed theinadequacies of the present form of Corporate Governance, with littledeviation of the quarterly results on a quarter on quarter basis, in spite of




the widely publicized business risks that they faced.It points out to the need for a new form of businessreporting, which delineates the results from the nonbusiness or one off transactions, to be disclosedseparately, so as to differentiate normal results fromabnormal flows during the period of reporting. I amsure that the emerging Corporate Governance policyof Ministry of Corporate Affairs addresses theseconcerns. I am sure that the new Cost Accountingreporting mechanism can possibly address theseconcerns.Region and Chapters ConnectThe Navi-Mumbai Chapter of Cost Accountants helda Seminar on Cost Accounting Records and CostAudit Report Rules on 11th February 2012. I could seethe effect of “Train the Trainers programme” launchedby the Institute as the entire seminar was handled bylocal experts from Navi Mumbai. I also took theopportunity to visit the land we have acquired forNavi Mumbai Centre of Excellence and had discussionon the modalities of starting the centre soon. I havealready informed about the good progress made ingetting Govt. approval in my previous communiqué.I visited the Coimbatore Chapter on 15th February2012, and used the occasion to address the CFOs fromthe region on the Institute-Industry connect on manyof the key areas of cost and management accounting.The industry representatives agreed that theperformance reporting under the new notifications onCARR & CAR will be a major value addition whichcan be made use of by the industry. During themembers meet, the members complimented theCouncil for achieving the name change with the useof designated letters for denoting membership of theInstitute and thanked the Ministry of CorporateAffairs for the same. The event also showcased thePR capabilities of our chapter as the press conferencewas widely covered by the press in Business Line,The Hindu and Indian Express, which are popular inthe southern part of the country.I also addressed the members in the National Seminarheld at Dhanbad-Sindri Chapter on 19th February2012, which was addressed by Shri T.K.Lahiry,Chairman and Managing Director of Bharat CokingCoal Ltd. On the sidelines of the Seminar the CMDoffered to promote a programme of financialliteracy amongst the displaced families in the Region,who have young persons passing the HigherSecondary Examination. He also suggested that BCCLcan also impart practical training to the selectedcandidates for skill development in financialaccounting. I readily accepted the offer and haveasked the CAT Directorate to implement the scheme.This can be a pilot scheme which can trigger similar

Industry-Institute partnership across the country evenin remote regions. This will also give a majoropportunity to the youth in that region to achieve ahigher level of earning. I thank the CMD of BCCL forkick starting a major initiative, which can prove to bea game changer in the region. I was also pleasantlysurprised by the good infrastructure the chapter ishaving in a centre locality in the city. I requested theChapter Managing Committee to make theinfrastructure as part of Knowledge Centre for Miningindustry instead of concentrating only on studentcoaching, which they readily agreed.Students’ matters, Examination Results and FirstConvocationThe results of the Examination held in Dec 2011, havebeen published on dot on 20th February 2012, with amajor difference this year that they were publishedin the morning itself. I compliment the ExaminationDirectorate for this achievement, keeping in view ofthe record number of candidates who appeared forthe examination. I also congratulate the successfulcandidates who have passed the examination. Asmentioned in my previous communication, theconvocation is being held on 1st March 2012, at ScienceCity Auditorium at Kolkata, for students who passedthe examinations in June 2011.It was decided that from December 2011 termexamination, the suggested answers will be availablefor download from our website to all the registeredstudents of the Institute. The details will be notifiedshortly. I am certain that this step will go a long wayin helping the student community as a whole toprepare themselves in a better way for futureexaminations.The Institute has also entered into an MOU with FoodCorporation of India, for engaging 500 inter passedcost trainees throughout their offices across thecountry, under the Training scheme of the Institute. Ithank the Chairman and Managing Director Mr. SirajHussain, CMA. A. K. Kapoor, Adviser Cost –Ministryof Food and the Company Senior management forenabling this key initiative. The Campus Placementdrive has been started by the Training and Placementunder the Committee for Members in Industry (CMI),with a joint meet of the Chairmen of all the fourRegions participating in a pre- placement meeting atKolkata. I am also encouraged with request to the CMIfrom some major corporate to organize exclusivecampus placement for their organization.Government of India Ministry and other MeetingsIn order to provide an update on the Institute mattersto the Ministry of Corporate Affairs, myself along withVice President met the Honourable Minister ofCorporate Affairs, Secretary, Joint Secretary and other


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officlals. In the meeting with the Honourable Minister,he highlighted the need for incorporating the costcompetitiveness in the new corporate governancepolicy that is being updated by the Ministry. We alsohighlighted the important role our profession can playin the policy framework of the Ministry during themeeting with the Secretary. He also highlighted thekey role that can be played by the profession, and weagreed to help the Ministry in providing intellectualsupport in cost and pricing of the health care sectorincluding drugs and pharmaceuticals. We also sharedthe decisions taken by the Council after the namechange notifications with the MCA officials.The Honourable Minister of Corporate Affairs, askedthe Institute to present the scenario on costcompetitiveness to the Exporters Convention whichwas held on 13th February 2012 at Mangalore. Amongthe various initiatives launched by the Ministry, I wasable to establish a connect between the newnotifications on Cost Accounting Records and CostAudit Report and the aim of the Ministry of CorporateAffairs to promote cost competitiveness across theindustry. The Honourable Minister while addressingthe convention, brought out the need for an Study onCost Competitiveness of the Indian Ports, which arethe life line of exports. I agreed to the Minister’ssuggestion to bring out the study on exports jointlywith Federation of Indian Exporters Organisation.Another study which was deliberated during theConvention was Costing in Agriculture with specialreference to commercial crops for export. I am happyto inform you that the Institute has formed a studygroup of experts from Ports and agriculturerespectively for both these topics and will come outwith a detailed report within the next three months.National Cost ConventionFriends, the National Convention Committee underthe leadership of Shri. Rakesh Singh, Vice Presidentis leaving no stones unturned to make the NationalConvention, a grand success. Since the IFAC-PAIBCommittee meetings will also be held just beforethe convention, we will have the benefit ofinternational speakers addressing the convention.Since this will the first national convention that willbe held after the change of name of the Institute, Iextol all the members to come and benefit from thedeliberations.Myself, alongwith Shri.A.S.Durgaprasad, metShri.A.K.Awasthi, Deputy Comptroller and AuditorGeneral of India, and thanked him for accepting tochair the Technical Committee of the NationalConvention. Under his intellectual leadership, theTechnical Session and speakers have been finalizedand I am sure that the convention will be providing

technical deliberations of a high caliber which willbenefit the profession.CARR & CAR InitiativesAs we are moving towards the first year end whichwill start seeing the implementation of the CARR &CAR notifications, it is very important that themembers both from industry and practice get fullytrained in the new framework. Towards this the CEP2 directorate as well as the Regional Councils andchapters are conducting a series of programmes aimedat expanding the limited no. of experts who are ableto train the practitioners and members in the new costaudit framework. From the Institute we are alsoholding frequent meetings of the key working groupswhich have been formed to release the guidance tomembers in the form of FAQs, guidance notes andclarifications. The feedback control loop, which is anessential part of management decisions are equallyapplicable to this also, as the clarifications can beissued in consultation with the Ministry only if weget the feedback on the operational issues. Therefore,I request the members to continue to give thefeedback.The Technical Cell of the National task Force alsoaccelerated its efforts in finalizing the next series ofFAQs, while also retuning the ones already issued.The Working Group on construction industry alsoconducted its first meeting on 24th February 2012, inwhich I was also present.Cost Accounting Standards and Cost Audit andAssurance StandardsCost Accounting Standards Board, has startedretuning the earlier CAS to fit in with the newframework and has released the Exposure Draft ofRevised Cost Accounting Standard - 2 on CapacityDetermination (CAS - 2). I am also happy to informyou that the work on guidance notes are alsoprogressing well, with the release of Exposure Draftof Guidance Note on Cost Accounting Standard - 7on Employee Cost (CAS - 7).The new series of Cost Audit and AssuranceStandards were also by the CAASB of the Institute inits meeting held on 1st February 2012 and theExposure Drafts of Cost Audit and AssuranceStandards on Planning an Audit of Cost Statements(CAAS – 320) and on Audit Documentation (CAAS -340) have been released for public comments.All the Exposure Drafts have been uploaded on theinstitute website and I request the members to sendcomments / suggestions on the same to the respectiveSecretariats.

International EventsI am happy to inform the members that our Institute

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co-hosted the International Federation of Accountants– Donor Community meeting which was held atJaipur, India on 22nd February 2012. This was the firstmeeting of the MOSAIC Steering Committee of IFAC-Donor Community, aimed at establishing ProfessionalAccounting Organisations in developing countries.During the meeting the efforts of both the AccountingBodies from India, the costing institute and thechartered institute shared the various initiatives,which have been taken by us, in developing countries.The Institute was well represented during the meetingwith the presence of Shri. Sanjay Gupta, CouncilMember; Shri B L Jain, Chairman, NIRC; Dr. AshokJain and Shri Sanjay Jain, Chairman and Secretaryrespectively of Jaipur Chapter of the Institute. TheIFAC- Donor Community complimented theorganization of the meeting, and was of the opinionthat it facilitated very key decisions taken during themeet. The meeting was preceded by a meeting withMr.Anthony M.Hegarty, Chief Financial ManagementOfficer ,World Bank, at Delhi, who heads the MOSAICSteering Committee.As all members are aware, we have always beenharping on the view that Internal Audit is not thepreserve of chartered accountants alone. The functionhas metamorphosed beyond mere complianceorientation, with cross functional teams working onthe area within enterprises, to have a futuristicassessment of not only managing risks and mitigatingthem. In order to institutionalise this concept, we hada meeting with the officials of Institute of InternalAuditors (USA) On 7th February, 2012 at our NewDelhi office. Mr. Richard F. Chambers, President &CEO, Mr. Dennis K.Beran, Chairman of the Board,Mr Hal A.Garyn, Vice President IIA, Mr.AnilBhandari, President, IIA-India and Mr. Ravi HariharaIyer, Secretary-IIA-India were part of the IIAdelegation. Shri Rakesh Singh, Vice President andSenior Officers of the Institute were present in themeeting. We also explored the possibility to areas of

mutual co-operation in membership recognition andjoint programmes with IIA.

CEP EventsI am happy that the professional developmentcontinues to be on a robust path with intensivespecialized inhouse as well as common programmeslaunched by the CEP Directorate. The ExclusiveTraining programmes on ‘IFRS and Converged IndianAccounting Standards’ by Dr. TP Ghosh, forMahanadi Coalfields Ltd; Direct and Indirect Taxationand Costing for GAIL India Limited at Jaipur; RecentTrends in Financial Management including IFRSand New Schedule VI of the Companies Act andManagement of Taxation during 14-17 February,2012; and ‘Corporate Tax-Planning, Compliance;Management and Strategic Cost Management’ during21-24 February, 2012; ‘Project Appraisal and InternalAudit’ at Guwahati on 27th and 28th February 2012;are some of the programmes.I also wish to inform that the CEP 2 Directorate is indialogue with CII for conducting a Training Courseon ‘Accountability Accredited Certified SustainabilityAssurance Practitioner’ for the members at Chennaiin the first week of April 2012. The venue and thedetails will be available in the website as soon as theyare finalized.On behalf of the Institute, I wish members on theoccasion of Holi, Navaratri and other festivals duringthe month.

With warm regards,

CMA M.GopalakrishnanPresident,The Institute of Cost Accountants of India1st March 2012

258 The Management Accountant |March 2012258 The Management Accountant |March 2012

Respectable Professional Friends,

It is indeed a privilege to represent my alma mater and serve as

Chairman, Direct Taxation Committee. This is my third consecutive year

of assuming this esteemed office as its Chairman, which was erstwhile

functioning as " Taxation Committee" in 2010-11 and "Taxation and

Perspective Planning Committee" in 2009-10. I take this opportunity

to express my gratitude to the Hon'ble Council for bestowing confidence

on me in this long march towards attaining our objectives. The activities

of the Committee are:

PREPARATION of Technical Papers on areas of Direct Taxation

including International Taxation;

RESPONSE in lieu of Government Notifications/requirements like

exercise on Pre-Budget Memorandum and prescribe tools for

ensuring strict compliance ;

ADVISE MoF, Government of India through CBDT - on tools/

measures , based on Generally Accepted Cost Accounting Principles,

which may be gainfully incorporated to plug revenue leakage and

increase revenue collection for the exchequer

LIAISON with concerned Ministries to discuss, advise and prescribe

methodology for effective application of Cost Accounting principles,

as is relevant for assessment income, to plug revenue leakage and

strengthen the governance mechanism.

In our efforts during 2011-12, till date, we have been working on

various issues of National importance, which also include the

following :

Preparation and submission of Pre-Budget Memorandum to the

Ministry of Finance, Government of India [ submitted on 15th

November,2011 for Union Budget 2012-13]

Response to Tax Accounting Standards issued by the Central Board

of Direct Taxes (CBDT), Department of Revenue, Ministry of Finance,

Government of India [submitted on 8th November,2011]

Pre-budget Meeting and presentation before the Ministry of Finance

[ 25th November,2011]

Presentation on effective application of Cost Accounting Principles

for in assessment of Income;

Prescribing formats which would enable Revenue Authorities to

collect more relevant information for assessment, with special

reference to international transactions and matters relating to

transfer pricing and determination of arm's length price;

Prescribing suggestions/recommendations on Income Tax Act, 1961

and also on Direct Tax Code Bill, 2010 to strengthen provisions

enshrined therein, which would be in favour of the Revenue.

With the changing paradigm in socio-economic-dynamic corporate

environment and increasing diversified and complex business

transactions, the utilization of the services of Cost and Management

Accountants is much felt and strongly upheld by both for the business

houses as well the Revenue. While, the corporates are reaching far

and beyond to expand their business horizon, through effective

implementation of cost-reduction techniques Government, on the other

hand, requires a proper mechanism to ensure governance through soft

laws but strict compliance. One of the major activity of ours' is thus to

uphold Generally Accepted Cost Accounting Principles (GACAP) and its

effective application for assessment of income, through a bottom-up

approach. Cost classification, cost accumulation and cost determination

is our absolute domain. However, a top-down approach of deducting

profit from sales, does not justify the actual cost. This bottom up

approach of cost-built up mechanism, being wishfully avoided by

statutory auditors, therefore, creates a path to evade tax, through

wishful cost-setting. This leads to reduce reporting profits. With the

increasing propensity of corporate financial frauds, surfaced and

reported in public, it is quite apparent that mere conformance of legal

and statutory compliance does not ensure a proper disclosure. I

wonder, the magnitude of this parallel economy and spiraling

inflationary pressure, could have been curbed and controlled. Huge

amount of undisclosed funds could have been recovered from therein,

which could, in turn, be gainfully utilized in funding various programmes

on poverty eradication, infrastructure development, funding education

and other economic development projects of this country, had,

expertise and specialized services of Cost Accountants, been recognized

and utilized by the Revenue Authorities. Further, with the reported

statistics of fiscal deficit, steep fall in collection of targeted revenue, it

is high time for the Government to seek the specialized services of

Cost Accountants through a much deserved recognition by

incorporating "Cost Accountants" in the definition of "Accountant" u/

s 288(2) of the Income Tax Act, 1961 vis-à-vis in Clause 314(2) of the

proposed Direct Tax Code Bill, 2010. Till the recent past, the

Government of the country was kept in abeyance by vested interested

group, who had opposed inclusion therein, with a fear to be exposed of

their professional irregularities. It is a high time for the Government to

offer due recognition to this esteemed profession and incorporation in

the definition of Accountant.

As Cost Accountants, we measure performance and facilitate in

compliance too. Expertise of "Cost Accountants" could be sought for,

which apparently promises a major increase in revenue collection for

the exchequer. Hence, the Ministry of Finance, should initiate

involvement of our professionals, especially in conducting "Special

Audits" all across manufacturing, trading or service sectors. I look

forward for a healthy proposition and due recognition of our

professionals in the ensuing Union Budget, 2012.

I shall fail in my duty, if I do not offer my gratitude to my colleagues

in the Central Councils, members from the Regional Councils, fellow

professional friends and well wishers, for their continuous support in

our efforts.

I seek your sincere co-operation and valuable contribution/

suggestion.

Wish you all a very happy Fiscal year 2012-13.

Best Wishes

(Dr.Sanjiban Bandyopadhyaya)

1st March, 2012

Dr.Sanjiban BandyopadhyayaChairman,Direct Taxation Committee

Chairman’s Communique

The Management Accountant |March 2012 259The Management Accountant |March 2012 259

Dear Professional colleagues,

I would like to thank all the members for providing me

with an opportunity to serve the profession, I am especially

thankful to the President & my council colleagues for bestowing

upon me the responsibility of Chairman of the Regional Council

& Chapter Coordination Committee. The members and Chapters

are the backbone of our Institute; they are the mouthpiece

and ambassadors of the CMA Profession. Institutes can

only frame guidelines, provide opportunities but implemen-

tation of these are done by the respective chapters. Chapters

& Regions are inducting new members to the profession

and also updating the knowledge of existing members

through coaching activities and Continuous Education Programme.

The quality of new members and updating the knowledge

of existing members are entirely dependant on the Chapter

& Regions. Therefore the roles played by them are very

crucial and important for the profession to achieve greater

heights.

The CWA (Amendment) Act 2011 effective from 01.02.2012

has changed the name of Institute of Cost and Works Accountants

of India as Institute of Cost Accountants of India and now

we are ACMA/FCMA. With this, we have got appropriate

recognition and entrusted with added responsibility for

maintaining and enhancing our performance.

For the benefit of students, members, Chapters & Regions,

the council has taken up the task for formulating guidelines

with the help of various Directorates of the Institute. The

guidelines include compilation of rules, procedure, facilities

and opportunities that are available to students, members,

Chapters & Regions, which will also lead to good governance.

In the Regional Council & Chapter Coordination Committee

the following decision were taken:

(a) The Chapters of the Institute to be constituted henceforth

should spell out their area of operation and also giving

the districts and/or pin codes.

(b) It was also decided that meeting of RCs & Chapters

coordination committee shall be held at least once in

a year, in each region. The Chairman of the Region,

Chairman of Chapters Coordination Committee of the

concerned Region and Chairman of all chapters of that

region will be invited to attend the meeting.

This initiative will facilitate two ways direct interaction

for speedy decision-making

(c) We have to revive the inactive chapters of the Institute.

(d) A new Chapter was formed in Western Region named

Vapi Daman Silvasa Chapter of Cost Accountants having

jurisdiction over Vapi, Daman, Silvasa & Atul.

I had the opportunity to attend the International Valuation

Standard Council meeting at Hong Kong during the 1st week

of November 2011 as representative of the Institute. In the

said meeting we were of the view that our course conducted

by Advance Study Department on "Business Valuation

Management" should be given international recognition. This

was well received and acknowledged.

The Institute is holding a National Cost convention at Delhi

between 15th and 17th March 2012 and Chapters & Regions

meet are scheduled on 14th March. The Representatives of

Regions & Chapter are requested to participate and exchange

their ideas and views. I sincerely hope that this shall lead to

fruitful discussions for betterment of the profession.

I once again thank all my colleagues in the council, Directors

and all the staff for their whole hearted support. I would be

failing in my communiqué if I do not thank the President and

Vice President for their guidance in enabling me to discharge

my responsibilities towards the profession.

I wish all ACMAs/FCMAs success in the Cost & Management

Accountancy profession.

With regards,

Yours sincerely,

(P. V. Bhattad)

1st March, 2012

P. V. BhattadChairmanRegional Council & ChapterCoordination Committee

Chairman’s Communique


Clean Development Machanism—a pathway to future

sustainable development

Sujit DuttaHead of the Department—MBAInstitute of Engineering & ManagementKolkata

Introduction

The first commitment period of Kyoto—Protocol,the global legally binding agreement forreducing emissions on which the current carbon

market is based—will come to an end in December2012.The existing Kyoto Protocol, the only pact thatimposes legally binding cuts though only ondeveloped countries, extended till the end of 2017.The Durban Conference agreed to extend KyotoProtocol for a second period from January 2013 toDecember 2017. After Durban conference, due toextension of the Kyoto Protocol Mechanism, moreand more companies will be looking towardsenvironmentally sustainable projects through cleandevelopment mechanism. This will bring certainty tothe UN-backed carbon trade. Market will be positiveand more Indian companies will invest in the CDMprojects. This will bring enormous growth in carboncredit trading and India—being the second largestsupplier of carbon credit—it will bring tremendousopportunity for Indian Inc. to earn revenue fromcarbon credit through CDM project.

ObjectiveThe objective of this study is to focus on key

underlying issues of the CDM and to bring attention ofthe policymakers to take the mechanism forward andunleash the huge potential lying ahead of the industry.

What is CDM?The CDM is a full-fledged offset standard. It is an

economic instrument for inducing initiatives to meet thechallenges faced by the impending threat of climatechanges. The CDM mechanism creates a platform inwhich developing countries can voluntarily participatein the long term global climate actions. The aim of theCDM out of the three flexible mechanism of KyotoProtocol is to assist sustainable development ofdeveloping countries. According to Article 12 of theKyoto Protocol, the CDM allows Annex I countries toinvest emission reduction projects in developingcountries and receive credit in the form of CertifiedEmission Reductions (CER), which they may countagainst their obligatory reduction targets. Through this,industrialized countries can finance mitigation projects

in developing countries contributing to their sustainabledevelopment.

Clean Development Mechanism

CDM Project Flow Chart

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Technology Transfer &Project Financing

Carbon Credits

CDMDevelopedCountries

DevelopingCountries

▲

▲

▲ ▲

Activity OutputAccredition/Designation

ProjectIdentification

And FormulationPDD PP

Letter ofApproval

DNA

▲ ▲

▲ ▲▲

NationalApproval

Validation

Registration

Project Financing

Monitoring

ValidationReport

DNA

▲

It is the Responsibility of theDNA to determine Environ-mental Sustainability

The PDD is approved by DOE-A after available publicsuggestions

CDM-EB

▲

The PDD and validity report issubmitted to EB i.e. project isbig

Investor

▲Bi-lateral mode, Uni-lateralmode, Multi-lateral mode

PP

▲The monitoring report issubmitted by DOE-A toDOE-B

▲


Note : DNA : Designated National Authority; DOE:Designated Operational Entity; PP: Project Participants/Proponents; EB: Executive Board; PDD: Project DesignDocument; CER: Certified Emission Reductions

Ensuring Sustainability DevelopmentCDM is an eventual result of a long evolution from

a proposal by Brazil, a leading developing country.Most developing countries are struggling to get outof poverty. Many developing countries expect CDMto facilitate a substantial transfer of technology andother resources to support economic growth. Animportant question about CDM is whether it cansupport to initiate projects that serve both climatechange mitigation and sustainable developmentobjective. If CDM does not make its expectedcontribution to sustainable development, then supportfor it is likely to erode.

Sustainable DevelopmentSocial : Generation of employment directly and

indirectly during operational and construction phase ofthe project is to be ensured. Whenever a project is startedit provides many opportunities to the small-scaleentrepreneurs around the project that enables the localpeople to have steady source of income for theirlivelihood. The project is also expected to create businessopportunities for local stakeholders such as bankers,manufacturers, contractors, suppliers and so on.

Economical : The project facilitates earningadditional revenue to the government. There will beinflows of fund through the sale of CERs and this willbring direct and indirect positive economic growthin the region as well as country.

Environmental : Use of modern technology willresult in GHG emissions and thus reduce theenvironmental impact in the region. CDM projectensures real, measurable and long term emissionreductions.

Technological : Transfer of new technology and otherresources is a key element of CDM project. Modern andnew technology will help in enhancing the skill andknowledge base of the employees. This can help otherprojects in the country to acquire technology andencourage capacity building across the country.

Eligible Sectors for CDM ProjectsThe important sectors which have potential for

CDM projects in developing countries include thefollowing :

● Agriculture● Buildings (residential, commercial, and govern-

ment buildings)● Energy generation, distribution and use● Forestry● Industry and Manufacturing activities● Mining● Transport● Waste ManagementCDM from India’s Perspective

CDM projects in few developing countries and, and theglobal scenario (as on 16th May 2011). Source: UNFCCC

CDM projects in few developing countries and, and theglobal scenario (as on 16th May 2011). Source: UNFCCC

Some emerging issuesTo ensure the potential of CDM as a market based

instrument for encouraging investments from thedeveloped countries and to stimulate the projectproponents in developing countries, there are certainissues which need to be addressed and these relatesto whether

● It will help in enhancing the knowledge

Issuance of CERs

VerificationCertification

Report

DOE-B

▲

Verification report isproduced and

certification reportis issued to EB

CDM-EBCERs are issued

by EB

Varification/Certification

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(contd. to page 266)

“The art of communication is the language of leadership.” — James Humes


Sustainable Growth—The Accountant’s role

Sreenivas GarimellaB.Com., PG Dip PPM, ACMATeam Manager, SBSC, Chennai

The recognition governments and manyorganizations have given to the importance ofsustainability and sustainable development is

beginning to change business culture and society. Theglobal challenge is to ensure that organizationsdevelop sustainably to reverse the previous erosionof natural resources, and to improve theirenvironmental, social, and financial performance. Thisrequires radical changes in the way they do businessand the way we live our lives.

From an environmental and social perspective,sustainability issues are transforming the competitivelandscape, forcing organizations to change the waythey think about products, technologies, processes,and business models. From a financial perspective,the primacy of shareholders as owners is giving wayto an enlightened view of maximizing wealth creationthat incorporates wider stakeholder perspectives andissues into decision making. Long-term sustainablevalue creation requires responsible organizations todirect their strategies and operations to achievingsustainable economic, social, and environmentalperformance.

Achieving a sustainable future is only possible iforganizations recognize the role that they can andneed to play. Effective action by the accountancyprofession and professional accountants to betterintegrate and account for sustainability is an essentialpart of that role. Every organization today stronglybelieves that these professional accountantscan influence the way organizations integratesustainability into their mission, goals and objectives,strategies, management and operations, definitions ofsuccess, and stakeholder communications.

Professional accountants in all types of organi-zation have a significant role in :

● challenging conventional assumptions of doingbusiness, identifying risks, and seizingopportunities;

● integrating sustainability issues into strategy,operations, and reporting;

● redefining success in the context of achievingsustainable value creation;

● establishing appropriate performance goals andtargets;

● encouraging and rewarding the right behaviors;and

● ensuring that the necessary information,analysis, and insights are available to supportdecision making.

Considerable progress has been made on defining,spreading awareness and gaining recognition thatlong-term sustainable organizational success andvalue creation is only achievable when organizationsdirect their strategies and operations toward achievingsustainable economic, social, and environmentalperformance.

Many of the corporate governance reform effortsare using the language of sustainability, stakeholdergovernance, and encouraging governing boards totake a longer-term view of performance, as thephilosophy revolves around leadership, sustainability,and corporate citizenship.

Corporate do believe and understand that thesustainable success of an entity over the longer termas a key component of effective board practice. Vastmajority of CEOs see sustainability as important totheir company’s future success in spite of economicdifficulties. However, significant challenges remain fororganizations, including integrating social andenvironmental (along with financial) factors into anorganization’s way of doing business in all the coreelements of the organization, and across the supply chain.

Another challenge is engaging small-and medium-sized entities (SMEs). In most countries, SMEs accountfor a sizeable portion of private sector employmentand gross domestic product. With regard toenvironmental and social issues, SME impacts areconsiderable, and therefore have vast potential tocontribute to sustainable economies. The integrationof social and environmental factors is critical iforganizations are to gain the trust of stakeholders andthe wider public. It is felt to reinforce the importanceof information reporting and to expand from abusiness strategy and operational perspective to thatof an integrated reporting perspective. Integrated

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reporting is emerging as a new theme and is well-supported.

Integrating sustainability issues into businessstrategy and operations is now covered in more depththat reflects new thinking. The reporting perspectivehas been updated to provide guidance on how toimprove stakeholder communications, based onsustainability reporting and providing an integratedview of environmental, social, and financialperformance. The integration of sustainabilityinformation with mainstream financial reporting willincreasingly be critical to maintaining the trust ofcustomers and investors.

Connecting Professional Accountants toSustainability

Professional accountants are categorized and seen ascreators, enablers, preservers, and reporters ofsustainable value for their organizations. Expectationsare set in business as derived from the activities that theyperform to support the development of sustainableorganizational success. The professional expertiseacquired and orientation equips them with the necessaryqualities to support their contribution, and particularlyto act as integrators by incorporating sustainabilityfactors into their organizational strategy, operations,and reporting. This will allow organizations tosimultaneously deliver improved business performanceand to contribute to a better world.

Every organization clearly highlights the role ofprofessional accountants to be more than simply thatof preparers or assurers of financial and sustainabilityreports. More than one-half of all professionalaccountants globally work in organizations and areadapting to a world in which sustainability is the keyto long-term organizational performance.

The organizational objectives and goal statementsframed helps professional accountants to understandhow, in their diverse roles, can influence change.Defining clearly the different facets of sustainabilityand corporate responsibility in organizationalframework, can help professional accountants graspall the important aspects of sustainability that theymay encounter, directly or indirectly, and that wouldbe important to their organizations.

Role of Professional Accountants and the FinanceFunction

The organizational framework will provideprofessional accountants with an opportunity toconsider themselves as knowledgeable change agents.Professional accountants are well-positioned to helporganizations interpret sustainability issues in arelevant way for their organizations, and to integratethose issues into the way they do business. Althoughdeveloping a sustainable organization is a multi-

disciplinary responsibility, the finance function needsto be clear on its role in providing and supportingsustainability leadership for several reasons:

● The finance function is well placed to influencebehavior and outcomes through incorporatingsustainability considerations into strategies and plans,business cases, capital expenditure decisions, and intoperformance management and costing systems.

● Integrated sustainability management involvesmanaging opportunity and risk, measuring andmanaging performance, and providing insight andanalysis to support decision making. This plays to thestrengths of professional accountants working infinance functions and offers opportunities to providehigher value business partnering.

● Improving the quality of stakeholdercommunications and the reporting of sustainabilityinformation and how it connects to an organization’sstrategy and operations requires the same rigor as theprocess of financial reporting. Materiality, relevance,comparability, accuracy, and completeness continue tobe essential qualitative characteristics of information.

Professional accountants understand the need for,and how to implement quality data and robustsystems to capture, maintain, and report performance.They also have the project management skills neededto put such systems in place, applying appropriateprocesses and controls.

To rise to the challenge, professional accountants,on an individual level, will need to understand howsustainability does or might affect their role, and toidentify and utilize the continuing professionaldevelopment resources available. Continuingeducation will help accountants learn more about theapplied aspects of sustainability and determineapproaches to organizational improvement andtransformation.

Accountants working in audit and advisory roles,particularly in SMEs, can consider how they couldembrace sustainability issues to add value to their clientservice/ advisory role. Importantly, when acting in apublic interest-related reporting or advisory capacity, itmight be necessary to consider whether sustainabilityissues have been properly addressed and disclosed.

Organizational Perspectives and Key Considera-tions

Many accountants find it very difficult to get acoherent view of all the various perspectives of thistopic due to overloaded information available fromvarious sources. Fundamentally, it has been observedthat organizations that have successfully embracedsustainable development have usually taken actionsto cover (1) business strategy perspective,(2) operational perspective, (3) reporting perspective.

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From the business strategy perspective, theemphasis is adopting a strategic approach, so thatsustainability is integrated into vision and leadership,strategic planning, objectives, goals, and targets, aswell as incorporated into governance, accountabilityarrangements, and risk management.

The operational perspective focuses on how anorganization can deliver on its strategy and specificsustainable development objectives and targets. Itpresents a full spectrum of management andmanagement accounting activities to support higherquality information, which leads to more-informeddecision making and can help support the choices anorganization needs to make to chart a moresustainable path. This perspective covers howorganizations can achieve relatively simple quick winsto improve energy efficiency and reduce waste,calculate a carbon footprint, and implementsustainability and environmental accounting,integrated management control systems, andperformance measurement and KPIs.

The reporting perspective covers on how accountantscan help improve the usefulness and relevance of theirorganization’s external communications, includingdeveloping a reporting strategy to help achieveintegrated business reporting. Professional accountantscan lead the way in developing a reporting anddisclosure strategy to help yield high-quality reportsand accounts that provide a more complete picture ofan organization’s performance. This will involvereflecting sustainability impacts in financial statements,improving narrative reporting, determiningmateriality in relation to the needs of variousstakeholders, and establishing an approach to externalassurance that adds credibility to an organization’sdisclosure and can also help to improve anorganization’s reporting processes.

Let us review the key considerations for each ofthe above dimensions :

Business Strategy Attributes Key Considerations

Defining Sustainability ● Create awareness of how the financeand Sustainable function can get involved in establishingDevelopment a business case

● Ensure clarity on uses of the business case● Focus the business case on linking

sustainability to strategy and the impactsof organizational activity on society andthe environment

● Identifying significant, material, andrelevant environmental and social issues.

● Understanding sustainability issues andtheir relationship to a particular organi-zation is an important precursor to esta-blishing an approach to dealing with them.

Vision and Leadership ● A strategic approach to sustainability helpsto identify a range of competitive strategies.

● Values guide behaviors and decisions.

● Integration of sustainability into the keybusiness drivers requires leadership andownership within the governing bodyand at all management levels.

● Managerial and operational structuresdeliver the vision and strategy and ensureaccountability and ownership.

Stakeholder Engagement ● Reinforce the importance of stakeholderengagement.

● Establish a systematic and carefullyplanned approach to entering a dialoguewith stakeholders.

● Stakeholder dialogue can help managersconsider how best to deal with the trade-offs between economic, social, andenvironmental performance.

● Ensure that ongoing stakeholderengagement initiatives are continuous,dynamic, and periodically reviewed.

● Build the knowledge and professionalskills needed to deal with the challengesof understanding and balancingstakeholder expectations.

Goals and Target Setting ● Establish goals, targets, and performancemeasures.

● Identify outcomes where possible.● Engage employees involved in executing

strategy .● Link to rewards.● Establish a baseline against which

progress can be monitored.Integration with Risk ● Integrate sustainability issues into riskManagement management and other management

systems.● Gather information and assess cost benefit.● Assess potential impact.● Interpreting risk and causation.● Dealing with opportunity and risk

Engagement of Suppliers ● The overriding importance of values and arisk-based perspective to guide decisions.

● Identify the opportunities associated withsustainable procurement.

● Supplier monitoring and support isongoing via periodic meetings andtraining, and with the consideration ofcollaborative opportunities.

● Consider a systematic process forsupplier selection that is clear to allpotential and current suppliers.

● Communicate how an organizationbuilds relationships and does businesswith business partners and suppliers.

Operational Attributes Key Considerations

Cutting Cost by minimizing ● Identifying large environmental costs thatwaste could be reduced

● Monetizing procedures for costs, savings, andrevenues related to any business activities witha potential environmental impact.

(contd.)


(contd.)

(contd.)

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● Using measurement and targets andensuring accountability.

● Small (and no cost) changes can lower energycosts and reduce carbon emissions.

● Spreading awareness.● Spreading awareness.● Tracking physical accounting information.● Reviewing and understanding the

impact of legislation regarding waste.● Changing processes.

Carbon Foot printing ● Moving beyond a GHG inventory.● Determine how to manage carbon

emissions data.● Distinguish between boundaries, in terms of

organizational and product footprints, andbetween entities in the supply chain.

● Establish principles of a carbon auditreport and the key issues to be disclosedin external reports for stakeholders.

● Greenhouse gas inventory audit.Improving information to ● Moving from a conformance- to an integratedsupport decisions and performance-based view of accountingreporting for sustainability impacts

● Identifying, defining, and classifying costs tomotivate desired activities and behaviors

● Working across organizationalfunctions, particularly integratingaccounting, procurement and operations

● Accounting for social costs and valuingsocial impacts

● Using environmental and social cost andother non-financial information forproject appraisal and capital budgeting

Integrated Management ● MCSs should incorporate specific activitiescontrol Systems that support sustainability goals and

objectives into the organization’s overallmanagement and control cycle.

● MCSs should ideally help to integratesocial and environmental factorsalongside financial and quality factors

● (Internal) control effectiveness depends oneffective governance and risk management.

Performance ● Integrate sustainability measures where theyMeasurement and KPIs have been identified as an important

driver of strategy.● Judge how scientific cause-and-effect

relationships between measures need tobe to inform decisions.

● Develop and use eco-efficiencyindicators to link monetary and physicalinformation for decision making

● Develop and use socio-efficiency indicatorsto better understand social impacts.

Reporting Attributes Key Considerations

Develop reporting strategy ● Determine the range of users and their needsfor various types of reports and disclosures.

● Break down functional silos to facilitateeffective integrated reporting.


● Use reporting frameworks and guidelinesto help develop reporting processes andto ensure that all relevant sustainabilityinformation is disclosed.

● Meeting stakeholder needs in all markets.

Reflecting impacts in ● Establishing how to reflect environmentalfinancial statements (and, where applicable, other sustaina-

bilityrelated) liabilities and costs infinancial statements prepared under IFRSs.

● Determining specific sustainabilitydisclosure requirements under nationalsecurities regulations and GenerallyAccepted Accounting Principles (GAAP).

Transparency to Investors ● Avoiding over-disclosure and clutter. Asis the case for other aspects of businessreporting, the challenge for sustainabilityrelated disclosures in the MC (and inseparate sustainability reports) is to avoiddisclosing too much information,particularly immaterial clutter. Forexample, disclosing all risks that anorganization faces could reduce thevisibility, and therefore the relevance andunderstandability, of key risks.

● Ensuring a forward-looking orientation.An annual report will incorporate bothpast performance and prospective events.

● Viewing narrative reporting as a fairreflection of the management informationused internally.

Determining Materiality ● In defining report content, materiality shouldbe considered along with the need for otherimportant information characteristics.

● Accountability for materiality thresholdsand judgments.

● Materiality testing can also apply to thesustainability issues that potentiallyapply to the sector in which anorganization operates

● Determining a process for resolving differentexpectations regarding materiality.

● Where information is reported can help (a) toreinforce materiality criteria, and (b) to keepthe length of disclosures manageable(particularly where the application ofmateriality might vary between reporting forwider stakeholders from investors).

External Review ● The quality of external assurance is directlyand Assurance of linked to stakeholder inclusiveness.Sustainability Disclosures ● Clarifying the purpose and scope of the

assurance.● Establishing the type of engagement.● Enhancing the assurance statement.

(contd.)

Reporting Attributes Key Considerations

(contd.) (contd.)

References■ IFAC website www.ifac.org.■ BT Group, Changing World : Sustained Values, Our 2010

Sustainability Review (London, 2010).■ CorporateRegister.com, Assure View, The CSR

Assurance Statement Report (London, 2008).

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■ American Institute of CPAs, Canadian Instituteof Chartered Accountants, and Chartered Instituteof Management Accountants, Evolution of Cor-porate Sustainability Practices: Perspectives fromthe UK, US and Canada (London: CIMA, 2010).

■ Association of Chartered Certified Accountants andKPMG, Environmental Liabilities: Paying for the Past,Providing for the Future (London, 2002).

■ Integrated Reporting Committee, Framework forIntegrated Reporting and the Integrated Report,Discussion Paper (Johannesburg, 2011).

■ “Become Energy Efficient,” US Small BusinessAdministration

■ Various other references from British Library and frominternet.

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and skill of the employees with the newtechnology.

● It will help in increasing the direct and indirectemployment opportunity.

● It will reduce pollution at the facility.● It will contribute to a better local environment

for the employees and the surroundingcommunity.

● It will help in improving the social status of thepeople in and around the project.

● It will demonstrate the use of any new financialmechanism.

● It will generate additional revenue for thecompany.

ConclusionThe CDM—an innovative flexible mechanism

under the Kyoto Protocol—has the objective ofassisting developing countries in achievingsustainable development. It has been successful ingiving momentum for clean energy projects. CDMactivities witnessed steady progress over the years.It has helped in raising awareness of global warmingand climate change. Hence, it is important toensure that CDM continues to grow and promoteenvironment-friendly projects.

CDM implementation brings opportunities as wellas threats. Hence, role of the government is all themore important. The government will play asignificant role in making policies and the objectiveof the policy making is to take advantage of theopportunities while be more effective in neutralizingthe threats. Often it’s the journey, which is moreworthwhile than the destination itself. A new path …but it’s important that the path being followed is thevirtuous one. ❐

References■ Augus P. Sari and Stephen Meyers , page 19, May1999,

“ Clean Development Mechanism : Perspectives fromDeveloping Countries”.

■ Bas Associates Consulting Ltd, Page 1,” Background toClean Development Mechanism”.

■ Page 15, Clean Development Mechanism in Asia andthe Pacific—Issue, challenges and opportunities ST/ESCAP/2292

■ CDM Basics, Pages 1, 3 and 4 “Indian Institute ofSustainable Development”.

■ IGES CDM Project data analysis & forecasting.■ Jennifer Brook, September 17-19, 2007, “ International

Volunteering and Co-operation Climate Change”.■ Liguang Liu, Page 1,9, 21, May 2006, “Clean

Development Mechanism in China : Seeking Synergiesto Achieve Sustainable Development.

■ N B Rao, Pages 1,13,14, “ The New Greenback”.■ NSWAI ENVIS, Seventh Issues 2007.■ Pavan Sukhdev, March 2008,” Global Warming and

India—Creating a New Consciousness”■ Sarah Jeveed, November 2010 “ Clean Development

Mechanism : Kyoto Protocol Hangs In Balance”.■ Soumitra Ghosh and Subrat Kumar Sahu, pages 3,

5,November 2011, “ The Indian Clean DevelopmentMechanism : Subsidizing and Legitimating CarbonPollution”.

■ World Bank, State and Trends of the Carbon Market,June 2011.

■ World Bank, Thompson Reuters Point Carbon,Bloomberg New Energy Finance and EcosystemMarketplace

■ www.wikipedia.org.■ www.rediff.com › India › Business › Business Headline■ “Emission Trading”,2007. http://en.wikipedia.org/

wiki/Emissions Trading.

(contd. from page 261)

“Vision is not enough. It must be combined with venture. It is not enough to stare up the steps, we must step up thestairs.” — Vaclav Havel


Sustainable Growth, Technological Optimism and the

Malthusian Ghost

Dr. Sujit Kumar RoyAssociate Professor and Head of the Department of AccountancyGoenka College of Commerce and Business Administration,Kolkata

Introduction

When in October 2011 Homo sapiens on theplanet touched the seven billion mark, theworld seemed to have responded to it with

a kind of insouciant calmness. The red alert—like theone we saw in the blockbuster of the seventies, ThePopulation Bomb (Ehrlich, 1972), or the worriesexpressed in the eighties in the famous document of theWorld Commission on Environment and Developmententitled, Our Common Future (1987), was not there. Theworld seemed to have accepted it with a sense of blaséthat either we have enough space and resources on thisplanet to support a rising tide of humanity; or there’snothing much we can do about it – something GarretHarding (1968) observed in his seminal article, TheTragedy of the Commons, that population problem hadno technical solution.

However, the population trajectory on our planetlends itself to an interesting observation: since the worldpopulation reached the one billion mark in 1804, it took123 years for the population number to double in 1927.The third billion mark was reached in 1959, just takinga quick 32 years; the fourth billion came more quickly,in 15 years. The fifth, sixth and the current seventhbillion were added in 13 years, 12 years and 12 years,respectively. It is probably the reduced pace with whichthe last three billions were added to the worldpopulation that gave the demographers some comfortas well as some reasons to believe that the trajectoryof growth might be tapering off towards a nearstabilization point somewhere near the 9.3 billion markby the middle of the century, and over 10 billion by theend of this century — only subject to hugely difficulttarget of reduction in the fertility rates in 39 Africancountries, nine Asian countries, six countries in Oceaniaand four countries in Latin America.

On the upper side of the estimate, a recent estimate ofthe United Nations (UNFPA, 2011) suggested that with asmall variation in fertility, particularly in the morepopulous countries, the total could be even higher: 10.6billion people could be living on Earth by 2050 and morethan 15 billion in 2100. (UN, 2010). As is the case with mostforecasting, the interesting thing about populationstatistics is that it is not amenable to forecast with

clairvoyant precision; evidently, the current projectionson population growth hugely contrasted with those madeearlier (e.g. World Bank, 1992), predicting the globalpopulation somewhere near 12.5 billion in the middle ofthe twenty-second century only.

The intention of this paper is not throwing lighton the demographic prospect of our planet. Instead,it explores briefly the implications of, and theprofound environmental and resource challengesarising from, ever growing population. Such resourcechallenges are not entirely new to us; the publicationof Rachel Carson’s (1962) magnum opus, Silent Spring,was the harbinger of a whole movement for theenvironment in the 1970s.

The outgrowth of the literature that followedCarson’s work delved on wide-ranging issues affectingthe relationship of man with the environment andheralded the advent of the age of environmentalism,which, in effect, maintained the view that the bio-physicallimits of our planet posed a definite limit to the humanaspirations for resources for unlimited growth.

Throughout 1970s and 1980s, the raging debatebetween the pro-growth and the anti-growthprotagonists provided a tapestry of literature with widechasms between them. The idea of sustainabledevelopment, a catch-all phrase, (so much so that aGoogle search for the word was returned with 21 millionentries) which was brought to greater prominence by theReport of the World Commission on Environment andDevelopment (WCED, 1987), had, by providing a bridgebetween these two conflicting ideas—economic growthand environmental sustainability— spearheaded the casefor technological optimism: “The Concept of sustainabledevelopment does imply limits—not absolute limits butlimitations imposed by the present state of technologyand social organizations on environmental resources andby the ability of the biosphere to absorb the effects ofhuman activities. But technology and social organizationcan be both managed and improved to make for a newera of economic growth” (WCED, 1987: p. 8).

Twenty-five years later, a report by the McKinseyGlobal Institute, which is evocative of the apprehen-sionsof the 1970s to a large extent, maintains that, “Duringmost of the 20th century, the prices of natural resources

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such as energy, food, water, and materials such as steelall fell, supporting economic growth in the process. Butthat benign era appears to have come to an end. The pastten years have wiped out all of the price declines thatoccurred in the previous century. As the resourcelandscape shifts, many are asking whether an era ofsustained high resource prices and increased economic,social, and environmental risk is likely to emerge”(Dobbs et al, 2011 : p. 1). The Report, in the backdrop of 3billion more middle-class consumers expected to be inthe global economy by 2030, 80% rise in steel demandprojected from 2010 to 2030, 147% increase in realcommodity prices since the turn of the century, 100%increase in the average cost to bring a new oil well online over the past decade and, moreover, 44 millionpeople driven into poverty by rising food prices in thesecond half of 2010, attempts to revive a case fortechnological optimism we have already seen in theReport of the WCED.

Incidentally, 2012 happens to mark 25 years sincethe concept of sustainable development was espousedby the WCED and embraced forthwith by the globalcommunity — the rich and the poor, the communistsand the capitalists alike. Unfortunately, the stage forthe celebration of the silver jubilee of such an all-embracing idea is visibly missing. Has the much-trumpeted sustainable development lost its relevance?Has the Malthusian limits returned with vengeance?To know the answer, we shall revisit the debates ofthe 1970s with its current relevance in the wake of theMcKinsey Report.

Limits to Growth : Resurrection of theMalthusian Ghost?

Throughout the history of human society,population growth has always had its impact on theavailability of food. As the world population hits itsnew height, a billion mouths, i.e., – 1 in 7 – go hungryaround the world today. But hunger and scarcity offood is not unprecedented in the history of mankind.The spectre of hunger had always hovered around usfrom the dawn of civilisation, and there seems to be apermanent cycle in the history when human numberand food supply went off balance. About 10000 B.C.,when agriculture, the path breaking technology inhuman history, was adopted, the world’s populationwas not more than 4 million. The spread of agricultureenabled more people to be fed so that human numbersgrew steadily—doubling every thousand years until1000 B.C. when population reached 50 million. Thefigure doubled relatively quickly in 500 years to reach100 million around 500 B.C., and thereafter, it grewto reach 200 million at the peak of the Roman Empireabout 200 A.D. The decline of the Roman Empire(which is attributed to barbarian overrun of theRoman Empire due to population pressure andscarcity of food:), and resultant warfare and instabilityhad its impact on agriculture and in consequence there

was no substantial growth in population until 1000A.D. By the end of 1200 A.D. there was substantialincrease in population when it reached its peak atabout 360 million. It is at this juncture of the historyof mankind that food crisis became conspicuous forthe next one century when population did not growmore than 400 million. The next one hundred yearswere a demographic watershed in the history ofEurope, when starvation, plague and black feverbrought down population to a paltry 360 million.Between 1400 and 1700 A.D., population growth andfood production suffered intermittently so that by theend of 1700 there were no more than 600 millionpeople on the earth. From the beginning of 1800, therewas a turning point in the demographic history of theearth with a steadily upward trajectory noted at thebeginning of this essay. It is about this time (1798)that Rev. Thomas Malthus published his famousmonograph, An Essay on the Principles of Population,examining the long-term relationship betweenpopulation growth and food supply. His thesis wasthat with the diminishing supply of arable land, war,pestilence, famines or convulsions of war would puta quietus on the rapidly growing population.

Malthus and his ideas enjoyed brief support butwas put to rest for over a century when no suchoutcome was faced, owing manly to the agro-industrial revolution that swept throughout the world.But by 1970 population growth rate spiralled to 2.1%p.a., which is the most rapid and frightening growthrate in the whole history of the planet. Amidstheightened environmentalism (for a review article onthis see Roy, 2009; 2010) that followed, two significantpublications, namely, Population Bomb by Dr. PaulEhrlich (1972) and the Club of Rome’s Report, TheLimits to Growth, by Meadows et al—(1972) caughtattention of all. These two celebrated works examinedthe possibility of unlimited growth in population andconsumption in a finite, and non-growing, planet.

The Meadows’ team at the Massachusetts Instituteof Technology constructed a simulated world model(world 3) and fed it data that assumed that population,industrial production and pollution would continueto grow exponentially in the future (as they havegrown in the past). Since the world is physically finite,exponential growth of these three key phenomenamust eventually hit a limit. Following this, they cameto a rather apocalyptic conclusion : ‘’if the presentgrowth trends in world population, industrialization,pollution, food production and resource depletioncontinue unchanged, the limits to growth on thisplanet will be reached sometime within the next onehundred years. The most probable result will be a rathersudden and uncontrollable decline in both populationand industrial capacity’’ (Ibid. p. 24; emphasissupplied).

The model allowed for improvements in resource

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supply, but still their conclusions remainedunchanged. For example :

● If natural resource reserves are doubled, thecrisis brought on by their estimates of pollution levelis merely delayed.

● If ‘’unlimited resources’’ are assumed due tobreakthroughs in renewable energy and recyclingtechniques for raw materials, again pollution bringsthe system down.

● If successful pollution control is added to‘’unlimited resources’’, limits on arable land and theincreased diversion of investments to higher costagriculture set the limits to growth and yield a down-turn—a result postponed but not avoided bypopulation limitations brought about by an increasein the effectiveness of birth control.

● If radical improvements are simultaneouslyassumed in resource availability, pollution control, landyields and birth controls, a period of opulence results,which gives way to decline when the scale of industria-lization again depletes resources, generates excessivepollution and forces a reduction in food productions.

Meadows and their work had important followersin the 1970s (D’Arge, 1972; Schumacher, 1973;Kenneth Boulding, 1972; for example) as it hadthroughout 1980s and 1990s, when the captivatingidea of sustainable development and its forcefulfollowing in the Rio Summit in 1992 was at itscommanding height. The essence of the arguments ofthose followers of the ‘limits to growth theory’ hasbeen encapsulated by Goodland and Dally (1992) inthe following diagram :

Goodland and Dally through their model (emptyworld v. full world) show the global ecosystem as aclosed system. Here nothing enters it, and nothingexits from it, except solar energy and heat loss.Economies and societies grow by utilizing theresources available to them, transferring theseresources into commodities and services and gettingrid of the waste products. Waste is dispatched intothe sinks which are themselves part of the globalecosystem: oceans, rivers, land-fills and theatmosphere. But as the economic subsystem keeps ongrowing, it entails using up more and more of itsresources and sink functions until to a point whereno more space is left in the ecosystem to provide forresources and sinks.

The central idea expressed in Goodland and Dally(1992) does not appear to be a mere theory. Indeed, asRoy (2000) reported, many of the limits contem-platedby Goodland and Dally had started to show up in theearly 1990s; for example, out of 1.3 billion peopleworldwide who did not meet WHO standards ofparticulate emission, 300,000 – 700,000 had died ofserious exposures to particulate emissions each yearthroughout the decade; population explosion in Chinaforced over-cultivation, leading to detritions of farmland by some 50 million acre (equivalent to all the firmlands in France, Germany, Denmark and theNetherlands); in the formerly Soviet Union, the AralSea had been reduced by two-thirds because of hugediversion of waters that had taken place in the pastfew decades for irrigation purposes; in Sweden, mostof its lakes had turned acidic and somewhereacidification had increased 100 times more than theywere in the 1930s; by the late 1980s in the Scandinavia,20,000 lakes had been badly acidified and about one-third of all the lakes did not contain any life. Amongstmany such examples, Roy (2000) also mentioned thatin Vistula (Poland), a third of the rivers are devoid ofall life. The area was unfit even for industrial use overtwo-thirds of its length because it is so corrosive that,1,000 square kilometre of the Baltic Sea was biologicallydead from the poisons brought down by the rivers.

The curious case of technological optimismSince its publication in 1972, The Limits to Growth

has been carefully examined and subjected to severecriticism appropriate to so fundamental a theme. Themajor attack to this work mounted by the optimists(known as ‘technological optimists’) is that a growingnumber of technological improvements in such areasas food production, environmental quality and energywill sustain life and the growing economic subsystemas the population grows. Commonplace examples ofthis doctrine show the starling breadth with which itis applied: If the world is running short of food,technological innovations can be relied upon to

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increase the productivity of agricultural land andacreage of arable land itself. Improved seeds, fertilizesherbicides, pesticides and irrigation methods can bedeveloped to prevent famine. If environmental qualityis threatened by pollution, more effective pollution-control devices can be invented. If fossil fuels aredwindling, engineers can find ways to reduce the costof discovery and extraction and scientists can comeup with natural and synthetic substitutes. Scientistsmay even find out ways to recycle resources adinfinitum. In short, technological optimism relies notjust on the breakthrough in technology to provide lifesupport for humanity, but assumes a growingaccumulation of breakthroughs that can meet thedemands of economic growth necessitated bypopulation growth (Krier and Gillette, 1985).

The technological optimism, at its extreme, alsoholds the notion of fungibility so that production andgrowth can completely do away with exhaustiblenatural resources; therefore, resource exhaustion isnot a problem. Robert Solo, the 1978 Nobel Laureatein Economics thus wrote : “If it is very easy tosubstitute other factors for natural resources, thenthere is in principle, no problem. The world can, ineffect, get along without natural resources, soexhaustion is just an event, not a catastrophe” (Solocited in Roy, 2000, p. 83).

American population biologist Ehrlich and hisco-author (1971) contradicted and faulted the basicpremise of the technological optimists. Expressingeconomic growth—reflected in GDP and industrialoutput—as a concomitant to population growth, theseauthors expressed global environmental problem andthe resource challenge in terms of a simple equation:

Global environmental burden/resource needs =Global population ¥ GDP per capita ¥ environmentalimpact/resource consumption per unit of GDP.

Within this relationship, if by 2050 globalpopulation becomes 10 billion or more and the worldGDP rises by 4–5% p.a. for the next 40 years, theconclusion for commentators like Stikker (1991),therefore, is that the same environmental burden orresource crises would prevail even though environ-mental impact and resource efficiency per unit of GDPimproves by 90%. This is indeed a tall order. Currentglobal data on air, water and solid wastes, on thecontrary, leave no doubt that environmental problemsand resource shortage have already assumed seriousstate and, as it appears, the ineluctable march towardsmany of the limits admonished in the catastrophistliterature of The Limits to Growth and its ilk cannot beavoided by mere tweaking of existing technologies.Indeed, the McKinsey report is replete with examplesof such productivity enhancing technologies, but

notwithstanding its best effort to pen a rosy pictureof the future, admittedly they cannot meet more than20 percent of the 2030 forecast demand for energy,steel, water and land. The roller-coaster growth of theIndian, Chinese and other economies in the emergingmarkets have placed far more serious demands onnatural resources of the planet. But yet, as acommentator in the McKinsey website suggested, ifthe rest of humanity consumed natural resources athalf the lifetime rate of the average American, a reallysignificant number of commodities would run outwithin a matter of 30 years; in some cases, rare earthmetals, for example, it would vanish within 10 years.Even copper, which is considered to be a prettyplentiful base metal, would be gone within about 38years (Niall Ferguson, 2012). With water scarcitylooming large, according to some research, by 2030the gap between availability and need will be about40 percent (ibid).

The limitations of some other technologies/substitutions are also eminently visible. For example,world is enamoured with biofuels as a substitute forfossil fuels. But French author Jean Ziegler in his recentwork Massive Destruction (2011) shows, not only dobiofuels each year consume hundreds of millions oftons of corn, wheat and other foods, and not only doestheir production release into the atmosphere millionsof tons of carbon dioxide, but, in addition to this, theycause social disasters in the countries where thetranscontinental companies that manufacture thebiofuel become dominant. The world has already usedup 40 percent of the primary productivity in 1980. Adoubling in population would entail appropriationsof 80-100 percent of the primary productivity(something which is impossible), leaving practicallyno room for biofuel cultivation—except pushing morepeople to the already large hunger league. Global foodproduction has been steadily rising – from about 600million metric tons in 1950 to 1800 million metric tonsin 1985 and thereafter, it is projected to grow at 2.1billion metric tons in 2030. However, this much foodwould be just sufficient for 2.5 billion people at anAmerican dietary level of 800 kg/year per person. Ifevenly distributed, this much food can at best providesubsistence living to 10 billion people only. Theupshot of the argument is that simultaneous rise inthe population and draw down of resources from theenvironment must run into bottleneck because of thefinite limits of the earth. Finitude per se would not bea problem if it could be possible to recycle everythingin keeping with the first law of thermodynamics,which states that matter and energy are constant; theycan neither be created nor destroyed. But second lawof thermodynamics states that the quality of energydoes change. The implication of the second law of

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thermodynamics for our industrial system is that mancannot convert waste back into raw materials exceptby spending energy which itself degrades into wasteheat, making it impossible to recycle.

The Stone Age Did Not Come to End for Want ofStones

The world at 7 billion is a sobering reminder ofthe predicament of the earth. But, as most of us haveobserved with bewilderment, since the beginning of1980s, there were very few discussions on populationissue as though it was no more a problem. However,an article in the Time has recently broached thisuncomfortable issue “Until the 7 billion threshold wasapproached recently, population growth had largelydisappeared as a major international issue — a farcry from the 1970s, when Malthusian thought wasback in fashion and countries like India and Chinawere taking brutally coercive steps to curb populationgrowth. That’s partially a reaction to those dark days— right-thinking environmentalists didn’t want to beassociated with unjust policies, and so populationbecame the green issue that dare not speak its name”(Walsh, 2011). And in the process, humanity has lostits chance to tweak its way out of the crisis broughton by the ever increasing population by meretechnological change.

The problem we have now requires nothing lessthan a revolution. However, the glimmer of hope thatwe foresee is that throughout history humanity hassurvived not by living within its limits, but bytranscending it through evolving technology. TheStone Age did not come to an end just because therewere not enough stones on earth, but because of theadvent of the Metal Age, where stones are not thething around which life revolved. Indeed, a sustai-nable society is one that continually evolves in theuse of science and technology. As historian MarkKurlansky (2002) in his fascinating book, Salt, tells us,three hundred years ago salt was the most sought-after commodity. In those days, supply of salt was asimportant a subject for national security as oil is now.But salt is no longer an issue one would like to talkabout; our society has fixed the problem throughinnovation which has made its supply abundant.Imagine, food problem in our society is solved justlike that! People like Sir Winston Churchill imaginedearly in the last century about it in its own inimitablestyle : “Fifty years hence we shall escape the absurdityof growing a whole chicken in order to eat the breastor wing by growing these parts separately under asuitable medium” (cited in Sample, 2005). Nowscientists are close to producing, at least, theoretically,the world’s annual meat supply with a single cellinstead of rearing millions of livestock in the farm(ibid). Similar innovation in energy technology is

taking place rapidly [See box for cutting-edgetechnologies]. Scientists in Australia have developeda prototype of car that would run on solar-poweredhydrogen to be obtained from rooftop solar panels.Indeed, as we have seen in the past, scarcity andcompetition can lead to innovation and that seems tobe an article of faith in the philosophy underpinnedby technological optimism.

Cutting-edge technologiesHigh-speed digital switches made of silicon

carbide and gallium nitride have been developed forhigh-frequency power management for everythingfrom military jets to high-speed rail. They use 90percent less energy, take up only about 1 percent asmuch space, and are more reliable and flexible thanexisting transformers.

Compressorless air conditioning and electrochro-mic windows : New compressorless air conditionersand electrochromic window technologies offer thepotential to cut home-cooling bills by half.

Clean coal : Today, carbon capture and seques-tration (CCS) costs $8,000 to $10,000 per kilowatt (kw).Innovative processes now under development couldhelp coal-fired generators to capture more than 90percent of their carbon dioxide, at a cost of less than$2,000 per kw.

Biofuels : Although second generation cellulosicbiofuels have proved harder to make than many hadhoped five years ago, innovative start-ups focused oncellulosic and algae-based biofuels are starting tocreate high-margin specialty chemicals and blendstocks, generating cash now and suggesting a pathwayto deliver biofuels at $2 a gallon or less by 2020.

Solar fuels : It is possible to use photosyntheticmicroorganisms (e.g., algae) to convert waste carbondioxide and sunlight as primary inputs in theproduction of ethanol, “drop-in fuels,” such as dieseland jet fuel, or specialty chemicals. Solar fuels would,like biofuels, be a natural alternative to oil. However,solar fuels could be up to 200 times more land-efficientthan current first-generation biofuels and could begrown on non-cropland, where the sun radiation isthe highest. In addition, solar fuels could use brackishwater, which would limit their impact on global waterwithdrawals. Carbon emissions could be 70 to 90percent lower than with the use of conventionalgasoline.

Advanced desalination technology : suchtechnologies may be 70–80 percent cheaper andefficient than traditional reverse osmosis desalinationtechniques.

Soil-nutrient management : Microbial-basedecosystems can help support the management of soil

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nutrients by transforming organic nitrogen andphosphorous in soil into a usable form of nutrientsfor plants, increasing the uptake of nutrients by crops,and providing plants with amino acids that aidphotosynthesis and resistance to stress. Early resultsfrom start-ups show such ecosystems increase plantyields by 10 to 40 percent and reduce fertilizer use by30 to 50 percent.

Fuel cells : The low-temperature conversion ofhydrogen to electricity happens at high efficiencies ofup to 60 percent. Applications in the residential sectorallow the use of both the produced heat and power,increasing efficiency to over 80 percent. Theseapplications run on natural gas and use a localreformer to produce hydrogen for the fuel cell. Fuelcells in vehicles run on hydrogen, typically producedcentrally through steam methane reforming orelectrolysis. From a well-to-wheel perspective, fuelcell vehicles are more energy-efficient thancombustion engine cars and have a longer range thanbattery electric cars. Fuel cells are commerciallyavailable, and significant cost reductions (up to 80percent) could be achieved when sales volumesincrease to the order of hundred thousands. The mainchallenge to scaling up fuel cell applications, especiallyfor cars, is likely to be hydrogen distribution.

[Source: Dobb et al (2011)].ConclusionIt is true that throughout its history human race

has faced, and overcome, the limits imposed bynature. But the kind of challenge our society wouldbe facing with unlimited population stands tall evenif we assume continuous technological breakthrough.Some 10,000 years ago humanity had inventedagriculture as an answer to our forebears’ nomadicquest for food. But now, 35% of the earth’s land isalready degraded, and since this figure is increasingand largely irreversible, such degradation is a signthat we have exceeded the regenerative capacity ofthe earth’s soil source. With a fairly large proportionof the primary productivity of land being alreadyappropriated, we must invent new means ofprocurement of food or face widespread hungersometime in the middle of the century.

Even if we solve this problem, unknowninterconnections on a worldwide level may lead to anumber of issues beyond our comprehension. Thethreat of global, warming looms large and there is noradical technology in sight to combat it. The FourthAssessment Report of the Intergovernmental Panelon Climate Change (IPCC) has already issued red alertthat an average global temperature increase of only1 – 2 degree centigrade above the pre-industrial levelwould commit 15 – 40% the species of the planet to

extinction. With a 3 degree increase in thetemperature, as the report said, it would entailextinction of 20–50 % of species (including 25–60%mammals, 30–40% birds and 15–70% butterflies inSouth Africa). Any further rise in the globaltemperature would lead to a catastrophe far beyondhuman experience. Examples of environmental limitsgalore, the fact that population is growing by 10,000an hour is scary enough. With the state of technologyat hand, we are not too sure whether humanity willwin the race against nature’s limit. Even if we are ableto transcend the limit of nature in the long-run, fornow, as the McKinsey Report recognised, the resourcelandscape is likely to evolve unevenly in the comingdecade, creating a wide variety of opportunities andthreats for different companies, sectors, countries andregions. ❐

References■ Boulding, K.E. (1972) ‘The Economics of the Coming

Spaceship Earth’ in Environmental Quality in a GrowingEconomy’, H. Jarrett (ed), Washington, DC: The JohnHopkins Press, pp.34–58.

■ Carson Rachel (1962), Silent Spring, Houghton Mifflin,Boston.

■ D’Arge, R.C. (1972), ‘Economic growth and Naturalenvironment’, in A. K. Kneese and P. T. Bower (eds),Environmental Quality Analysis: Theory and Methodsin Social Science, Baltimore, Hopkins UniversityPress.

■ Dobbs, Richard et al. (2011): Resource Revolution:Meeting the world’s energy, materials, food, and waterneeds, McKinsey Global Institute [www.mckinsey.com/mgi].

■ Ehrlich P R (19672), The Population Bomb, Sierra Cluband Ballantine Books, New York.

■ Ferguson, Niall (2012), ‘Voice on the ResourceRevolution’, The McKinsey Quarterly (January).

■ Hardin, Garrett (1968), “The Tragedy of the Commons”,Science, 162 (1243-1248).

■ Goodland R. and Dally H. (1992), Population,Technology and Lifestyle, New York, Island Press.

■ Krier J.E. (1990) ‘The political economy of Barry Commoner’,Environmental Law Journal, 11(13), pp. 22-32.

■ Kurlansky, Mark (2002): Salt : A World History,Penguin, New York.

■ Malthus Thomas (1970), An Essay on the Principle ofPopulation (New York : Penguin, originally published in 1798).

■ Meadows, D. H. et al (1972), The Limits to Growth: AReport for the Club of Rome’s Project for the Predicamentof Mankind, Universe Books, New York.

■ Roy, Sujit Kumar (2000), Corporate EnvironmentalAccounting: The Emerging Agenda for CorporateAccounting and Reporting, unpublished dissertation,Department of Commerce, Burdwan University.

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“A leader has the vision and conviction that a dream can be achieved. He inspires the power and energy toget it done.” — Ralph Lauren


Introduction

We do not inherit the earth from our parents;we borrow it from our children”. This oldaphorism gives rationality a mandate that

caring our planet is not just an act of prudence but anact to demonstrate the present human stewardshiptowards our progeny. It inspires us to make the rightuse of money for preserving life and elevating humanconsciousness as an act of sagacity.

In recent years, an increasing number of firmsproactively address corporate social responsibility(CSR) factors such as environment, social, andgovernance (ESG) issues. Recent cases suggest that itis possible to enhance corporate value by resolvingthe ESG issues through corporate efforts, such as riskmanagement, stakeholder management, etc. As aconsequence of the aforementioned trends, variousstudies have been conducted on the relationshipbetween the different aspects of ESG and corporatevalue. Most of the studies focus on the differences inmarket values and performance of socially responsiblefirms and conventional ones. If socially responsiblefirms and companies that take action to deal withcorporate social responsibility issues record relativelybetter market returns compared to other firms, itcould be concluded that corporate efforts to resolveESG matters improve corporate values.

However, several questions remain. It is not clearwhether excess returns could be brought about byother factors such as fund manager’s skills. To dealwith these points, Schroder [2007] analyses theperformances of SRI indices instead of SRI funds andclarifies that the difference in risk-adjusted returns ismuch smaller than that of conventional indices.Statman [2000] shows supportive results bycomparing the Domini Social Index 3 and the S&P500Index. While these studies examine the performanceof SRI indices. Derwall et al [2005] examine theperformance of equity portfolios based on corporatescores for ESG issues.

There has been a growing interest, both in theacademic as well as the business world, around the

issue of Sustainable Development (SD) and the SociallyResponsible Investment (SRI). Socially responsiblefirms receive more favorable responses as they createvalue for the firms in the long-run. If organizations canprove themselves socially responsible, investors willfeel comfortable in dealing with them and as a matterof fact a sense of confidence will gradually build in theminds of people at large. Although financialperformance remains at the heart of corporatedisclosure, investors today place value on informationabout environmental and social aspect of companiesand companies will react to investor responses to suchnon-financial disclosure and external assessments.Companies should consider the paramount importanceof the environment and society in its daily operationsand try to promote continuous improvement in thisarea. The company should framework a sustainablefuture programme which designs to help them inachieving savings through improvement in operationalefficiency.

Better social performance may also function insimilar ways as advertising does, by increasing overalldemand for products and services and/or by reducingconsumer price sensitivity (Dorfman and Steiner,1954; Navarro, 1988; Sen and Bhattacharya, 2001;Milgrom and Roberts, 1986). Moreover, it has beensuggested that positive social performance couldreduce the level of waste within productive processes(Konar and Cohen, 2001; Porter and Van Der Linde,1995). A major purpose of sustainability developmentis to encourage company management to control non-financial business risks, increase productivity andimprove business opportunities in areas such asgovernance, environmental and social impact, andworkplace practices (RepuTex 2005).

Awareness and proactive management of thesenon-financial risks provide opportunities for theorganization to build a positive social responsibilityreputation, reduce costs and future liabilities, andincrease revenues (see RepuTex 2006).

Against this backdrop, our endeavour has beenclassified in seven sections. Section I introduces the

Sustainable Development : Should Green Investment be

the Guiding Light?

Dr. Sumita ChakrabortyDy. Director, Research & JournalThe Institute of Cost Accountants of India

Dr. Gautam MitraAssociate Professor

Dept. of Business Administration Burdwan University

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paper. It highlights the motivation and the sectionplan. Section II highlights concepts of sociallyresponsible investment, its origin and development.Section III highlights intertemporal model and itstheoretical framework towards sustainability. SectionIV and Section V offer plausible and dubious reasonsof SRI. Section VI investigates global performances ofSRI funds. Section VII concludes the article and offerspolicy implications.

Origin & Development

The origins of socially responsible investing dateback to ancient times. In Biblical times, Jewish lawlaid down many directives about how to investethically. The origins of socially responsible investingare ancient, but it has only taken full stride in the last20 years.

The modern roots of SRI can be traced to theimpassioned political climate of the 1960s. In the 1960s,concerns about the environment, civil rights andmilitarism were all brought to the national forefront.During that decade, a series of movements changedthe nation’s consciousness about the issues of socialresponsibility and accountability. Events including theVietnam War, the Bhopal Chemical disaster in 1984and the Exxon Valdez oil spill in 1989, helped tostimulate public resentment and concern withcorporate practices. With the adoption of a code ofconduct first set forth by Pastor Leon Sullivan in 1977to combat apartheid and human rights violations,there was a clear divide between multinationalcorporations that were perceived as responsible andthose that were not. The Global Sullivan Principles,created twenty years later, called for equal pay for allpeople, fair employment practices and affirmativetraining and promotion of all people irrespective ofcolor and creed.

The ranks of socially concerned investors grewdramatically throughout the 1980s as millions ofpeople, churches, universities, cities, and statesfocused investment strategies on pressuring the whiteminority government of South Africa to dismantle itsracist system of apartheid. Gradually the crisis ofglobal warming, the environment moved to theforefront of the minds of socially concerned investors.The origin of socially responsible investing are ancientbut it has come full stride in the last 20 years. Millionsof people began embracing the concept of SRI. Mutualfunds and money managers arise to help investorschannel their capital toward enterprises thatcontribute to a sustainable environment and a unifiedworld. Even before the Sullivan Principles werearticulated, people were creating SRI funds. The firstSRI mutual fund was Pax World Fund, a $1 billion

fund created in 1971 by Luther Tyson and JackCorbett, who worked for the United MethodistChurch.

Today there are a plethora of environmental andsocial concerns for socially responsible investors tomove around. Pressing social issues such as diversityin the workplace, employee issues, human rights inoverseas factories, and socially destructive productssuch as tobacco, now provide abundant ground forinvestors to base their choices on. However, there existplausible and dubious reasons for SRI. We discussthem in Section IV.1 and Section V.1. Before that westudy the theoretical foundation of SRI, theintertemporal model in Section III.1.

The Intertemporal ModelA classical approach towards SRI is to construct

the problem in an intertemporal context which iswhat we have described earlier as the focal areasfor corporate strategy, i.e., corporate mission ofsolving social problems, gaining a competitive edgeby offering a qualitatively new solution, deliver-ing results by making the employees identifywith the company and coping with change byfocusing on emerging problems. In this approach,corporate profits is seen to be a function of revenueand cost, the latter including the costs in a givenperception of social responsibility in an intertemporalcontext. Table I offers a brief sketch of intertemporalmodel.

Table I : Intertemporal Model

p (t) = f [P * Q t & C Qt ]where : p ( t) = Corporate profit in time t or

corporate appropriation in time t P * (Qt) = Revenuefrom selling quantity Q in time t

C (Qt )] = Cost of producing quantity Q in time tC(Qt) implies social responsibility cost includingmaterial, capital, organizational and social respon-sibility cost given a certain perception of socialresponsibility at time period ‘t’ [SRC(t)]. However,SRC(t) fi Change in Perception of social respon-sibility in period t fi perception of socialresponsibility in period (t+1) = Perception of socialresponsibility + Change in perception of socialresponsibility in period (t+1)This increase will further augment corporate profitin time (t+1) and so on and so forth, thereby settingthe pace for corporate growth.

The international corporate achievement can be setnot just in terms of profits, but in other measures ofdesired corporate performance. Put in other terms,discharging corporate social responsibility andallocating definite corporate budgetary provisions acts

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as a catalyst for corporate movements over time, i.e.,corporate growth.

Plausible Reasons in favour of SRIHavermann & Webster (1999) have attempted to

trace the relationship between a company’s strategyand its stakeholders (viz., shareholder, employees,customers and government) and to demonstratethereby how socially responsible investing can impacta company’s cash flow in terms of costs, sales and thecost of capital—ultimately to impact its share price.Hutton (1977) has assessed the relationship of abusiness with its stakeholders, called the RelationshipHierarchy, that reflects that depth of the keystakeholder relationships of a business by means of avertically layered hierarchy. We explain the essenceof both the studies.

Havermann & Webster have emphasized on costof capital. A company that is out of favour withinvestors because of its products or processes will besubject to negative ethical screening accordingly, and,hence, will have to pay more for acquiring capital fromthe market, either by using more shares or by payinghigher rate of interest. The second route is themechanism of shareholder advocacy, a popular SRIstrategy where shareholders apply themselves in thecapacity of corporate owners through dialoguepressure, voting at annual general meetings (AGMs)and lending support for responsible governance toaddress issues of corporate ethical social, and forenvironmental behavior. The effectiveness ofshareholder advocacy increases when it isaccompanied by a credible threat of ethical consumeractivism. Responsible consumer and equallyresponsible and ethical investor can work as aformidable team to produce synergic effect. Corporatelaw in many countries allows shareholders with aminority stake in a company also to place item on theagenda of shareholder meetings and requires that avote be taken on these matters at meetings. This is apowerful mechanism for embarrassing managementabout alleged ethical failures.

Nowadays annual meetings of large companiesreceive wide media coverage that can produceconsiderable negative publicity sometimes leading toconsumer boycotts and diminished retrial sales. Allsuch events can be predicted to have an adverseimpact on market perceptions reflected in lowperceived utility value (PUV) about the company andits products in the eyes of customers leading to adecline in market capitalization and hence shareprices.

Hutton has assessed the key relationship of abusiness with its stakeholders, called the RelationshipHierarchy that reflects the depth of the key

stakeholder relationships of a business by means of avertically layered hierarchy. Hutton’s model of TheRelationship Hierarchy is shown in Table : II

Table II : The Relationship HierarchyAwarenesss fi Trusts fi Transactions fiSatisfactions fi Loyalty or Commitments fiAdvocacy

At a high level of strong stakeholder relationships,the level of loyalty or commitment implies not only awillingness to repurchase (in the case of a consumer)but also to recommend the business to others if asked.At the highest level of advocacy the individual is soimpressed by the company that he or she willrecommend it to others without being asked. Thecompany’s own customers and other stakeholders aredoing its marketing for mutual benefit.

Apart from plausible reasons, there exist somedubious claims against SRI. As mentioned earlier, weexamine them in Section V.1.

SRI : Some Dubious ClaimsSome people might think an SRI should under-

perform because it places additional constraints onportfolio managers. It rules out companies that selladdictive or harmful products such as tobacco,alcohol, pornography, gambling games or weaponry.And it directs investors to buy stakes in companiesthat : (i) preserve the environment, (ii) practice goodemployee relations, (iii) do not violate human rights,(iv) adhere to good governance, (v) are sensitive toindigenous peoples, and enjoy good relations withtheir community.

Extra ESG requirements leave a smaller populationfrom which to choose and earn good investmentreturns. In particular, the absence of stocks from thenoncyclical sectors of tobacco, alcohol and gamblingcan punish relative performance during bear markets.Moreover, ESG-compliant companies may forgoprofit opportunities (e.g. not mining in an area whereenvironmental concerns exist) or incur extra costs (e.g.operating advanced pollution-remediation techno-logies), whereas non-ESG companies might createmore profit by doing the opposite.

Implicit in the very existence of SRI is the claimthat it is possible to identify which firms are more orless responsible. Not only is this claim questionable,but the selection criteria employed by SRI fundmanagers and researchers can be criticized on severalgrounds :

First, questions have been raised about both theinformation that fund managers rely on to makeinvestment decisions and the consistency of thecriteria they employ. According to a study of eight of

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the most prominent funds : “Sources of socialinformation used varied widely from fund to fundwith date provided by firms they being the mostfrequently used.”

While all investors depend heavily on corporateself-reporting, the shortcoming of corporate financialreporting pale when compared with those of corporatevoluntary disclosures of non-financial performances,in part because with one rare exception, there havebeen no legal penalties for providing incomplete ormisleading information. Another common source ofdata articles in the business and popular press mayreflect the effectiveness of firm’s public relations, orthat of its critics, rather than its actual behavior.

Moreover, many SRI fund managers use screeningmethodologies that are proprietary and, thus, theycannot reveal why a particular firm is excluded orincluded.

A second criticism focuses on the criteria employedby SRI funds to determine “corporate irresponsi-bility”. Tobacco and alcohol are the two negativescreens American funds use most often. The reasonsfor the former is relatively straightforward, but thelatter is more problematic: why should a firmautomatically be considered irresponsible because itproduces or distributes wine, a product thatshareholders in ethical mutual funds are as likely toenjoy as any other group of investors? Moresubstantively, many funds restrict or prohibitinvestments in firms that produce military equipmentor nuclear power. But should such firms be considered“irresponsible” in light of the fact that the former maycontribute to legitimate national security needs and,later, may contribute to reducing carbon emissions?Despite all their claims to be on the cutting edge ofchanging public expectation of business, no fund hasrelaxed its exclusion of military contractors sinceSeptember 11.

SRI has also been criticized for being too inclusive.According to a survey of more than 600 SRI funds, byPaul Hawken, more than 90 percent of Fortune 500companies are included in at least one SRI portfolio.Howken argues that the selection criteria employed bymany social funds allows virtually any publicly heldfirm to be considered responsible. The most widely heldfirm by socially responsible investment funds isMicrosoft, a firm that Hawken criticizes for “itsruthless, take-no-prisoners management tactics’’ aswell as for antitrust violations in both the United Statesand Europe. Hawken is also critical of the social andethical practices of other firms that feature prominentlyin SRI portfolios, including Walmart (held by thirtythree SRI funds), Halliburton (held by twenty-threefunds) and Exxon Mobile (held by forty funds).

Finally, the emphasis many funds place oncompetitive rates of return renders problematic acritical raison d’etre of social investment, namely,social responsibility pays. These funds typically applytheir social attributes or yardsticks only after firmshave been screened by normal financial criteria. Theresult may be exclusion of investment in firms whosesocial performance is outstanding or highlyinnovative, but whose financial prospects areuncertain or modest. An innovative or pioneering firmthat has chosen to sacrifice short-term profits in thepursuit of social goals thus might not be owned bymany socially responsible funds. This may becounterproductive from the perspective of promotingmore responsible corporate behavior, and it also callsinto question the popular claim that being moreresponsible can and should make a firm betterinvestment.

The criticisms suggest that even if SRI funds wereto consistently outperform no socially screenedportfolios (which there are little evidence that theydo), it is unclear what this would prove about therelationship between corporate responsibility andprofitability. Empirical results that we offer in sectionVI.1 offers a better explanation to this controversy.

SRI : The Global PerformanceThe validity of the business case for virtue can also

be explored through the financial performance ofsocially responsible mutual funds. The results of thisanalysis reveal that socially responsible funds andindexes perform no better or worse than those of anyother kind of fund or stock index. The three mostwidely used ethical indexes are the Domini 400 SocialIndex, the Dow Jones Sustainability World Index(DJSWI), and the FTSE4Good Index. In addition tousing positive screens, the Domino uses negativescreens based on military contracting, themanufacture of alcohol or tobacco products, andrevenues from gaming products or services and theownership of nuclear power plants. DJSWI, which wasestablished in 1999 by the Sustainability AssetManagement Group, Swiss company in cooperationwith Dow Jones Indexes, tracks the performances ofthe top 10 percent of leading sustainability firms ineach industry group. The FTSE4Good Index includesfirms that meet its criteria on social, environmentaland human rights issues and excludes tobacco, armsmanufacture and firms that produce nuclear poweror uranium.

Reinforcing this conclusion are the track recordsof stock market indexes made up of companiesscreened by environmental, social and governance(ESG) criteria. The Domini 400 Social Index averaged8.4% annually from 1990 to 2008, compared to 7.8%

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for the Standard & Poor’s 500 Index over the sameperiod. In Canada, the Jantzi Social Index averaged2.4% annually from 2000 to 2008, compared to 2.8%for the S&P/TSX Composite Index.

Between May 1 1990 and June 30 2004, DominoSocial Index which is used as the basis for selectingthe Domino Social equity Fund (the fourth largest fundwith $1.2 billion under management), returned $5.40for each dollar invested, while S&P returned $ 4.60.But this difference is largely attributable to theindustries in which the fund invested; there was noevidence of a social factor. For its part, the FTSE4Good has closely tracked the performance of the FTSEAll share Index since 2000.

The DJSWI has performed more poorly than thebenchmark Dow Jones Global Index since its inceptionin 1999, but much of this difference can be traced tothe relative size of the two indexes. The DJSWI consistsof only 250 companies, while the DJ Global comprises5,029 making the former less diversified and thereforemore susceptible to changes in the market valuationof any one form. It is also overweighed in the largecapitalization stocks and growth companies and itadds and deletes companies more frequently than domost indexes in 2002, it replaced more than seventycompanies nearly one- quarter of its portfolio.Although the performance of the DJWSI Index is oftenas evidence for or against the financial case for SRI,the lack of comparability between it and DJ GlobalIndex renders any such assessment problematic. AloisFlatz, its former researcher director, cautions “..it ispremature to draw definitive conclusions regardingthe business case for sustainability… A much longertime frame is needed to attribute index or fundperformance to particular sustainability criteria orstrategies.’’

As in the case of Domino Social 400 and DJSWI,much of the relative performance of SRI mutual fundsand indexes is affected by the performances ofthe industries in which their investments areconcentrated. For this reason, in some years they haveoutperformed their mainstream counterparts and inother years have lagged behind them. For example,during the latter part of the 1990s, many social fundsshowed relatively strong returns due to their heavyexposure in financials, “clean” technology, health care,media and communications. But their performancewas then negatively affected when the value of manyof these firms declined.

In addition, social investors are not free from thefads that affect all other investors. In Britain duringthe late 1980s, there was considerable excitementabout the financial prospects of green companies anda green index of thirty companies involved inenvironmental services increased in value from 100

to 147 in just 5 months. This Green Euphoria, however,could not be sustained and over the next five yearsthe index steadily underperformed the FTSE All ShareIndex. A similar development occurred in the UnitedStates, where fifty worst mutual funds listed by theWall Street Journal in 1993 contained a number ofenvironmental funds, most of them involved inenvironmental remediation.

While there continues to be debate over whetherthe use of negative screens by virtually all SRI fundsincreases risk or lower returns (or both), oralternatively whether socially screened investmentsare less volatile and result in higher returns, theconsensus of the more than 100 studies of socialinvestment funds and their strategies is that the risk-adjusted returns of a carefully constructed sociallyscreened portfolio is zero. In other words, sharereturns are neither harmed nor helped by includingsocial criteria in stock selection. This explains whySRI investments vehicles have recently grown inpopularity in both United States and Europe; thereappears to be little cost associated with making suchinvestments. But it also undermines the frequent claimthat more responsible firms, at least as assessed bySRI fund managers and researchers, perform better.It also explains why the funds that manage 98% ofinvestments in mutual funds in the United Statescontinue to pursue other investment strategies, noneof which is necessarily any better or worse.

Ironically, if more socially responsible firms didsystematically perform better, we would expect allfund managers to heavily weigh their portfolios withthose firms’ securities. This would both erase alldifferences in financial performance between sociallyresponsible and “normal” funds and raise the priceof the shares of more responsible firms so as to reducethe return from future purchase of them. Still, if thefinancial market undervalues corporate socialperformance, then more responsible investors mightin principle be able to earn higher returns when thefinancial consequences of responsible or irresponsiblebehavior eventually affected earnings. But there is nopersuasive evidence that the market does so.

Some advocates of SRI continue to claim thatinformed investment funds will perform betterbecause their managers are more aware of thesignificance of corporate social and environmentalpolicies on long run financial performances. As oneenvironmental foundation writes : “We believe thatwe are once again on the cusp of redefining theresponsibilities of a prudent fiduciary this time torecognize that improving environmental performanceis a primary pathway to increasing shareholdervalue”. Its claim is that as an environmentallyconscious investor, it possesses insights into the long-

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term financial benefits of corporate environmentalefforts which more conventional investors haveoverlooked.

Have such claims have not yet been validated doesnot mean that they never will be. But there is reasonto be skeptical. For this claim cannot rest on aninvestor’s ability to accurately measure currentcorporate environmental practices or, more precisely,the relationships between current and futurecorporate environmental practices and between thosepractices and current and future environmentalpressures and opportunities. But how can anyoneknow which environmental issues will becomepolitically salient or whether a firm that hassuccessfully addressed environmental issues in thepast will also manage them well in future? Suchuncertainties about future financial performance areno different from those that confront any investmentstrategy.

In this context it is worth recalling that the socialinvestment community was no more able than anyinvestors to identify the failures of corporategovernance that created massive shareholder lossesat the beginning of twenty first century. Enron, WorldCom, Adelphia and Health care were all widely heldby SRI funds. Enron was widely respected for its CSR;it was ranked one of the 100 best companies to workfor; received several environmental awards; issued atriple bottom line report; established a socialresponsibility task force; developed codes of conductcovering security corruption and human rights;supported progressive climate change policiesand was known for its generous philanthropiccontributions. These practices which led a number ofSRI funds to include Enron in their portfolios did notmake Enron a sound investment. And, Shell, whoseenvironmental and human rights initiatives led it tobe included in many SRI portfolios also, did not turnout to be a prudent investment when in 2004 it wasrevealed to have finished the amount of its oilreserves.

Jantzi Social Index February 2011 ReturnsOn March 3, 2011 — Jantzi-Sustainalytics reported

that the Jantzi Social Index® (JSI) increased in valueby 4.16 per cent during the month of February. Duringthe same period, the S&P/TSX Composite Indexincreased by 4.44 per cent and the S&P/TSX 60 Indexincreased by 4.56 per cent. Since inception on January1, 2000 through February 28, 2011, the JSI has achievedan annualized return of 6.79 per cent, while the S&P/TSX Composite and the S&P/TSX 60 had annualizedreturns of 7.05 per cent and 6.75 percent, respectively,over the same period. Table III highlights the returnfrom the fund as reported in February 2011.

Table III : Jantzi Social Index February 2011 ReturnsReturns Feb 3 1 3 5 10 Incep- Incep-

mos yr yr yr yr tion tionAnnu- Cumu-alized lative

JSI 4.16% 10.54% 20.97% 3.83% 5.62% 7.38% 6.79% 108.32%

S&P/TSXComposite 4.44% 9.78% 24.84% 4.42% 6.82% 8.20% 7.05% 114.01%

S&P/TSX 60 4.56% 10.33% 22.61% 3.59% 6.90% 7.93% 6.75% 107.39%

From Table III it appears that almost all the timereturns are comparable or in tuned between JSI & S&P but in 3rd year’s return JSI has outperformed S&P.

Apart from it, there are other evidences too :1. The Dow Jones Sustainability Index (DJSI)

outperformed the Standard & Poor’s 500 during the1990s by about 15 %

2. The Dow Jones Sustainability group Index(international focus) yielded a total return of 139percent versus 95% for the benchmark Dow JonesGlobal Index, between 2000 and 2010.

3. Storebrand Scudder Environment value Fund(European Focus) outperformed the Morgan StanleyCapital International World Index (MCCIWI) by 8%between 2005 and 2009 (due to change in portfolioconstruction, the MSCIWI was not recognized as anappropriate benchmark after 2009).

4. Innovest’s review of performance data showsthat, depending upon the sector, the Ecovalue 21 (USfocus) performance-rating model demonstrated thatcompanies with above-average environmentalperformance score shave consistently outperformedbelow average companies by 300 to 2,500 basis pointsper annum.

5. The trend of Good money Industrial Averageand the Dow Jones Industrial Average, since 1997,also show that SRI funds on average have earnedhigher returns than others. Goodmoney is an indexof 30 shares chosen to cover the same industries asthe shares in the DJIA but screened according toethical criteria. Both of these numbers refers toaverages. They suggest there is no cost to SRI. Onaverage, there may even be a gain.

ConclusionsIn conclusion, it is essential to explore whether

ethically oriented investors can rely upon sociallyresponsible investment (SRI) as a reliable guiding lightfor manifesting their investing their investmentpriorities, given the mixed responses from availableevidence, relating to the questions raised earlier. Thisissue needs to be highlighted, considering that therecould be disparity in CSR rating published by variousrating agencies that provide a measure of a company’scomposite performance in terms of environmental,

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social and economic parameters. To cite an instanceof rating conflicts and possibly confusing signals forpotential investors, we take the case of two CSR ratingagencies—Innovest Strategic Value Advisors, andOekom—that completed environmental evaluationsof the Japanese auto major Toyota in the year 2003. Inits Ecovalue ’21 environmental rating, InnovestStrategic Value Advisors granted Toyota an AAAratring, the highest possible score on a scale thatmimics bond rating, ranging from AAA to CCC.However, in the environmental section of itsCorporate Responsibility Rating (CRR), Mumbai-based Oekom Research gave Toyota a C on a scalethat mimics school grades, ranging from (A+) to (D-).Furthermore, Toyota was placed 2nd of 16 autocompanies that Innovest rated, while it came 16th ofthe 20 auto companies that Oekom rated.

To be sure, both Innovest and Oekom are highlyrespected rating firms. In a bid to reinforce thebusiness base for sustainable investment, Innovest hasbeen trying to identify in almost all industry sectors—that environmentally proactive companies fare betterin the financial markets. Oekom has traditionallyfocused exclusively on the evaluation of corporatesocial/environmental performance, and has fairlyrecently begun to correlate these to corporate financialperformance. The eco-efficiency subsection of the tworatings represent a significant deviation: Oekomassigns Toyota a D; while Innovest says that Toyotahas “superior eco-efficiency overall”.

The difference may be accounted for in terms ofeach firm scoring factors when the company does notdisclose the information necessary to make a properassessment. So in the absernce of explicit information,Oekom rates the company as if it has worstperformance, even if the actual performance may beaverage or even superior. On the other hand,Innovest’s opinion is that “lack of information doesnot lead to an automatic penalty in terms of the scoreassigned” it should be a case by case assessment.

So what do we conclude about Toyota’s corporatesustainability profile? Is one screen “right” or other“wrong”? If so, which is more reliable? In thisconnection it may be apt to allude to whatpsychologists refer to as “the Roshomon effect” fordescribing multiple different interpretations of thesame phenomenon, after Akira Kurosawa’s 1950Japanese film Rashomon. Viewers of Rashomon areobviously tempted to legitimize one story overanother, but Kuroswa skillfully presents each narratoras potentially reliable while also showing reasons whyall the narrators may skew the facts to present theirown selves in a sympathetic light. Roshoman leaves

viewers with the impression that the impulse toauthorize one interpretation over an other is futile.

Hearing the multiple different interpretations givesus greater insight both into the event itself and intothe motives of the narrators.

Similiarly, ethically aware investors may find itconfusing to hear seemingly contradictory reportsabout the social/environmental dimensions ofcorporate performance, but they would certainly bewiser to consider the breadth and diversity ofavailable information upon which to base theirinvestment decisions. ❐

Reference■ Aurobindo, Sri, (1970), Letters on Yoga Volumes 1&2,

Pondicherry: Sri Aurobindo Ashram ( First publishedin 1958)

■ Chatterjee Kanika (2008),The Wisdom of Investing witha Conscience: Is a Socially Responsible Investing aGuiding Light, in Corporate Social Responsibility,Banerjee, B.et al; pp36-72

■ Crane Andrew (2009), CSR in Marketplace, in CraneAndrew ed.,Corporate Social Responsibility: Readingsand cases in a global context, pp 97-205

■ Havemann, R. and Webster P. (1999) Does EthicalInvestment Pay? EIRIS Research and other Studies ofEthical Investment and Financial Performance. EthicalInvestment Research Service (EIRIS).

■ Hutton,P.,Director,Mori (197) Using Research toImprove Quality and Service—provision paper at SMIConference, January 197.

■ Ullman A.E. (1985), Data in Search of a Theory: ACritical Examination of the Relationship among SocialPerformance, Social Disclosure and EconomicPerformance of US Firms, academy of managementReview 10(3) pp 540-547

■ Ray Tanima & Sarkar Amitava (2008), Corporate SocialResponsibility and Sustainable Development inCorporate Social Responsibility, ed.,Banerjee, B.et al;pp24-35

■ SRI Reports and planning and policy links■ www.socialinvest.org ; Social Investment Forum,■ www.globalcompetitivenessindex.com; Global Com-

petitiveness Report, World Economic Forum www.firstaffirmative.com; First Affirmative FinancialNetwork, LLC Registered with Securities and ExchangeCommission

■ www.worldbank.org; World Bank and the InternationalFinance Corporation www.doinbusiness.orglreportsl;Access to Doing Business reports as well as sub-nationaland regional reports, reform case studies andcustomized country and regional profiles

■ www.accountabilitv.org.uk and www.fdc.org.br ;Responsible Competitiveness Index. www. accoun-tability.org; Climate Competitiveness Index.

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“Management is efficiency in climbing the ladder of success; leadership determines whether the ladder isleaning against the right wall.” —Stephen R. Covey


Sustainable Growth—Concept, Indices and

India’s Growth

Gopala Krishna AyitamB.Sc., FCMACost & Management Consultant, Hyderabad

Concept

The United Nations (UN) defines sustainabledevelopment as “development that meets theneeds of the present without compromising the

ability of future generations to meet their own needs.”Some important factors that must be taken intoaccount when discussing sustainable development arethe rational use of natural resources and energy,pollution, and climate change. In development terms,sustaina-bility means responsible growth—whensocial and environmental concerns are aligned withpeople’s economic needs.

‘Sustainable Growth’ generally refers to thesustainable growth at the macro level which, in turn,is aggregation of such growth by the population of acountry through various sectors and forms. The reportof the Growth Commission aptly puts it as “Thegrowth of GDP may be measured up in themacroeconomic treetops, but all the action is in themicroeconomic undergrowth, where new limbssprout, and dead wood is cleared away.”

Growth is commonly referred to the economygrowth. However, the essential stipulation for thegrowth to be sustainable is that such growth shall bewith ensuring such growth for the future generationsas well. Hence two major challenges for growth to besustainable are :

● Growth has to be through maintaining theenvironment without harming the same in anymanner. Growth that is achieved with ever depletingnatural resources and adding to the concerns arisingout of ‘climate change’ cannot be termed as sustainablegrowth.

● Growth has to be equitable so that it is inclusive.To quote from UNDP “for growth to be inclusive, itmust be sustained and sustainable and that, for it tobe sustained and sustainable, it must also beequitable”

Growth and GlobalizationThe disparities within the incomes among the

population of a country, whether developed or

developing, have been a challenge to the policyplanners. Ensuring the spread of the gains out ofgrowing economy throughout the population of allclasses, categories and geographies are essential tomaintain the integrity and coherence within a nation.Historically and even in present day world, severalnations have experienced demonstrations, revolts,revolutions and such other protests arising out ofsocio-economic imbalances and cultural disparities.

About sixty five per cent of world’s seven billionpopulation is reported to be living in high-income orhigh growth economies. This is mostly because twomost populous countries—China and India—havebeen consistently reporting high GDP growth overthe past decade or more. The remaining thirty fiveper cent population continues to live in countries withstagnating—or even declining—incomes.

The world population is expected to grow by fiftyper cent by the year 2050 and out of which nearlytwo-thirds is expected to live in countries that arecurrently experiencing little or no growth. Thispresents a larger challenge not only to the countriesthat are not experiencing growth but also to countrieswhich have been growing. This is because mosteconomies have been growing not just because of theirdomestic markets but because of their trade andcommerce with other countries.

To be more specific, the growth of China and Indiais significantly attributed to their policies of openingtheir economies. Opening of the economies not onlyhelped in attracting investments into the country butalso resulted in increased export of goods and servicesfrom these two countries. During the year 2010-11about 58 per cent of the Tata group’s total revenuesare reported to be from international operations. Onthis strength the group states that ‘anchored inIndia…the Tata group is spreading its footprintglobally through excellence and innovation’.

The slow growth of USA economy and, thereafterthe emerging economic crisis of Europe, pushed thesecountries to explore other markets in several otherparts of the globe including the least developed

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countries. Hence, for these two growing economiesto sustain their growth, it is important that the no-growth or slow-growth countries with which they areengaged in trade or commerce record growth, orincreased growth respectively.

Such growing countries also have the advantageof access to latest technologies and resources includingcross-border flow of capital. The Growth CommissionReport contains thirteen success stories stating thatthese cases demonstrated that fast, sustained growthis possible as 13 economies have achieved it. Thesehigh growth countries are reported to have benefittedfrom imported ideas, technologies and know-howfrom the rest of the world as well as they exploitedglobal demand.

A Nation’s Growth MeasureEconomic growth is a recent phenomenon in

human history. It began with the industrial revolutionin Britain at the middle (1760) of the 18th century. “Itis impossible to contemplate the progress ofmanufactures in Great Britain within the last thirtyyears without wonder and astonishment,” wrotePatrick Colquhoun, a Scottish merchant, in 1814. Thisprogress spread to Europe and North America in the19th century, accelerating as it traveled. In the 20th

century, particularly in the second half, it spread andaccelerated again.

The economy’s growth is measured in terms ofgrowth in ‘Gross Domestic Product (GDP)’. It is astatistical method of compression, reducing therestless endeavor and complex data on a nation’seconomy into a single number which can reflectpositive or negative growth over a period. A nation’ssustainable growth is usually a result of the following:

● Investment in infrastructure, health, education,skills and knowledge of people.

● Development and/or transfer of technology.● Dynamic policies including those dealing with

internal/external trade; industry, investmentetc. with consistency over a longer period.

● Necessary structural changes to economy/governance.

● Fair labour markets that balance the interestsof investors, management and work force.

● Stable currency and exchange rate.● Flow of capital and efficient financial markets.● Stable macroeconomic conditions.● Consistent and growing domestic savings to

part finance investments.● Efficient and expanding financial services sector● Balanced development throughout regions and

sections of population.● Concern for and being cautious about

environment.

Growth in economy may not be the ultimate but itmakes a nation march ahead with confidence andwork on achieving various objectives. It may help ineradication of poverty, increasing income levels of thepeople, reducing unemployment etc. It may bring inresources to invest in social development likeeducation, health and other Millennium DevelopmentGoals (MDG) to which the world economies arecommitted. Further, a growing economy will also beable to invest in strengthening or developinginfrastructure and other core/priority sectors. To sumup : “a growing GDP is evidence of a society gettingits collective act together.”

Indices of growthHuman Development Index (HDI) is a popular

measure that indicates the human development in acountry which is direct result of nation’s growth. TheHDI is a single statistic that serves as a reference forboth social and economic development. HDI is a wayof measuring development by combining indicatorsof life expectancy, educational attainment, and incomeinto a composite index. The importance of HDI withreference to sustainable growth can be betterunderstood with the following extract from HumanDevelopment Report 2011 :

“Development progress in the world’s poorestcountries could be halted or even reversed by mid-century unless bold steps are taken now to slowclimate change, prevent further environmentaldamage, and reduce deep inequalities within andamong nations, according to projections in the 2011Human Development Report. Sustainability and Equity:A Better Future for All argues that environmentalsustainability can be most fairly and effectivelyachieved by addressing health, education, income,and gender disparities together with the need forglobal action on energy production and ecosystemprotection.”

Purchasing Managers’ Indices (PMIs) is one of theearly indicators used to assess the growth in economy.PMIs are long-established monthly data-drivensnapshots of individual countries’ economies. Theyare compiled using proprietary and highly effectivemarket research techniques (based on interviews withsenior purchasing executives) which accuratelymeasure economic activity and report well beforeother comparative official and government statistics.Typically the individual reports cover one key sectorper country for example manufacturing or services.PMIs are among the most closely watched surveys inthe world and are essential must-have data foreconomic analysts, financial market players and otherdecision makers such as central banks that requireearly indicators of changing market conditions whensetting interest rates.

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Unlike the Index of Industrial Production (IIP)which reflects the on-the-ground production levels,the PMI is designed to indicate industrial activity inadvance. With 50 points being the line thatdifferentiates expansion (>50) from contraction (<50),a reading of 57.5 points clocked by the manufacturingPMI for January 2012, has brought cheer to the Indianeconomy.

Logistics Performance Index (LPI) is one of themeasures developed to study the enabling servicesto promote trade and commerce across nationswhich drive growth in economies. World Bankacknowledging the importance of efficient logisticsfor increased trade and growth developed LogisticsPerformance Index (LPI). Launched in November2007, the Logistics Performance Index (LPI) is aninteractive benchmarking tool created to helpcountries identify the challenges and opportunitiesthey face in improving trade logistics. The LPI and itsindicators provide the first in-depth assessment of thelogistics gap among countries across several areas ofperformance.

The LPI is a multidimensional assessment oflogistics performance, rated on a scale from one(worst) to five (best) : ‘It uses more than 5,000individual country assessments made by nearly 1,000international freight forwarders to compare the tradelogistics profiles of 155 countries. The 2010 LPI alsoprovides a snapshot of selected performanceindicators in nearly 130 countries, including expandedinformation on the time, cost, and reliability of importand export supply chains, infrastructure quality,performance of core services, and the friendliness oftrade clearance procedures’.

Based on a worldwide survey of global freightforwarders and express carriers, the LPI developsmeasures of the logistics friendliness of the countriessurveyed. Feedback from the survey is supplementedwith objective data on the performance of keycomponents of the logistics chain. The LPI provides acomprehensive picture of countries’ supply chainperformance. It is built on the following seven areasof performance :

● Efficiency of the clearance process by customsand other border agencies

● Quality of transport and information techno-logy infrastructure for logistics

● Ease and affordability of arranging interna-tional shipments

● Competence of the local logistics industry● Ability to track and trace international

shipments● Domestic logistics costs● Timeliness of shipments in reaching destination.

India’s sustained growthSustaining growth becomes much more important

before discussing about sustainable growth even whenit is essential that growth has to be sustainable. Thegrowth story of India began with the initiatives oneconomic reforms during 1991-1995. Subsequentemphasis on development of infrastructure anddisinvestment of Government shareholding in PublicSector Undertakings (PSU) in addition to takingforward the economic reforms, helped sustaining thegrowth during 1999-2004.

The growth of India’s economy continued till theyear 2007-08 but started declining thereafter. Inaddition to recessionary conditions in severaleconomies across the globe, the economic crisis inEurope, certain domestic aspects are also often citedas reasons for such slowing down in growth.

The above highlights the challenges in sustaininggrowth and need for thrust on policy initiatives thathelp maintain the growth momentum. However, in ademocracy like India, it is always a challenge to ensureproactive and growth oriented policies as socialinitiatives and programmes may require resourcesthat are to be diverted from otherwise productivedeployment.

While HDI, PMI, LPI etc. offer themselves asindices at the macro level, several organizations beguninitiatives under Social Performance Management(SPM). As Peter Drucker said : “It is not enough forbusiness to do well, it must also do good.” Theinitiatives include implementing and reporting under‘Triple Bottom Line” which encompasses three Ps orthree pillars as under :

● Financial (Profit)● Social (People)● Environment (Planet)

Corporate India has been increasingly becomingproactive in adapting green and sustainable growthmodels. This may either because of their concern forthe future or out of business opportunities that arise

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Food security and biofuel : A paradox of sustainability

Mausumi BhattacharyyaSr. Lecturer in Commerce, Serampore College,Hooghly, W.B.

Food security

The World Food Summit of 1996 defined foodsecurity as existing “when all people at all timeshave access to sufficient, safe, nutritious food to

maintain a healthy and active life”. Commonly, theconcept of food security includes both physical andeconomic access to food that meets people’s dietaryneeds as well as their food preferences. Food security isnot just a complex sustainable development issue linkedto health and nutrition, it is closely associated withsustainable economic development, environment, andtrade. According to the World Health Organization(WHO), food security is built on three pillars:

● Food availability : sufficient quantities of foodavailable on a consistent basis.

● Food access: having sufficient resources toobtain appropriate foods for a nutritious diet.

● Food use: appropriate use based on knowledgeof basic nutrition and care, as well as adequatewater and sanitation.

United Nations’ high-level panel on globalsustainability warned that “the world is running outof time to make sure that there is enough food, waterand energy to meet the needs of a rapidly growingpopulation and to avoid sending up to 3 billion peopleinto poverty”. The Panel’s report further stated thatas the world’s population is set to grow to nearly 9billion by 2040 from 7 billion now, and the number ofmiddle-class consumers to grow by 3 billion over thenext 20 years, the demand for resources will riseexponentially. According to U.N. estimates, by 2030,the world will need at least 50% more food, 45% moreenergy and 30% more water, at a time when thechanging environment will be creating new limits tosupply. And if the world fails to tackle these problems,it risks condemning up to 3 billion people into poverty(Chestney, 2012).

Sustainability The World Commission on Environment and

Development defines sustainable development asthe “development that meets the needs of thepresent without compromising the ability of future

generations to meet their own needs.” Controversymay arise as to what may be defined as the presentneed and what implies the future one. It is debatablewhether the present needs can be met withoutencroaching upon the future generations’ needs. Theconcept of sustainability itself may appear to be faultywhen the compromise becomes inevitable. In thecontext of food security the issue of sustainability hasbecame more crucial in so far as renewable bio-energyis concerned. The issue of sustainability in respect offood is gradually coming into conflict with thesustainable energy production from biomass. Lesspollutant energy or a square meal for the mass— theissue of sustainability hinges between the two.

Global food crisisThe year 2008 experienced the worst food crisis

throughout the globe. The global food crisis duringthe last decade emerged from an unprecedentedincrease in the price of food, especially of staples,coupled with depleting food stock. Quite naturally,the majority of the developing countries had toenhance cereal import. The consequences of the crisisare most pressing in low-income countries, where, onan average, 50-80 percent of per capita income is spenton food. The World Bank points out that global foodprices have risen by 75% since 2000, while wheatprices have increased by 200%. The costs of otherstaples such as rice and soya bean have also hit recordhighs, while corn is at its most expensive in 12 years.The increasing cost of grains is also pushing up theprice of meat, poultry, eggs and dairy products. Andthere is every likelihood that prices will continue theirrelentless rise, according to expert predictions by theUN and developed countries. The rise in food priceshave, as chain reaction, pushed up inflation furtherworsening the purchasing power of the poor. FAOidentified 37 developing countries as the ones withmost urgent hunger needs (UNCTAD, 2008).

The global food crisis undermines the fundamentalhuman rights of the people and crucially hampers theachievement of millennium development goal sincereduced availability and affordability of foodcompromises health, nutrition, education and many

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such social indicators. A food shortage impacts thegender disparity in the developing countriessignificantly. Food crisis should not be viewed as ashort-term phenomenon. It has its causes rooted inthe complex socio-political patterns of the globaleconomy. Among the major contributors to the crisiswere changing climatic conditions, rising energyprices, changing demographic pattern and faultydevelopment policies at various national levels.Production of biofuels, although not very significantas of now, may, in course of time, replace all the majoragents to the food crisis. An invention to save the earthfrom burning fossil fuels may cause the humankindstarve one day.

Biofuels

Biofuels, namely the fuels from plants, are arenewable source of energy and, therefore, havedrawn a growing interest worldwide in recentdecades, mainly as a substitute of fossil fuels. Incontrast to other renewable energy resources,biomass, an organic material, can be converteddirectly into burnable fuels to assist in meetingtransportation fuel demands. The two most widelyused types of biofuels are ethanol and biodiesel.Ethanol is an alcohol modified to be utilized as a fuel.Ethanol is produced by fermentation through thebrewing of any biomass containing carbohydrates.Presently, ethanol is derived from starches and sugarsand is produced from corn, potatoes, sugarcane, orpotato, millet and so on. However there has beenconstant research to allow it to be produced fromfibrous substance which consists of the bulk of mostplant matter—the cellulose and hemicellulose. Ethanolis widely used as a blending agent with gasoline toboost octane and, at the same time reducing carbonmonoxide and other toxic smog-causing emissions.Biodiesel is made from vegetable oil or animal fat(triglycerides) reacted with methanol or ethanol. Inorder to lessen harmful vehicle emissions, it can beutilized in its pure form or as an additive (normally20%) as a renewable substitute fuel for diesel engines.It is produced mainly from the oils extracted fromethanol or methanol-induced rapeseed, sunflower,soybean or palm oil (IEA, 2007).

Several factors may explain the increased demandand consumption, global goals for reducinggreenhouse gas emissions, and the desire forindependence to import fuel from politically unstableregions (Ajanovic 2010, Timilsina and Shrestha, 2010).In recent years, many countries have different politicalobjectives and are up to replace fossil fuels with

biofuels. Europe meets 5.75% of its energy demandfor transportation by biofuel. The target percentagefor the USA is 10% by 2020 (Ajanovic, 2010). Biodieseland ethanol are both clean and environment-friendlywhich can be produced on-site in local villages orcommunities from locally available, renewableresources. Most of the equipments that are needed atdifferent stages of production may be made andmaintained at the local workshop. This can makebiofuels an economical option to fossil fuels and canaid in strengthening local communities—both sociallyand economically.

Present estimates predict that the world oilproduction will reach its peak sometime in the next10 to 15 years. It thus makes sense to search for newalternatives before that day arrives. Biofuels—beingcleaner burning energy sources—lessen the toxicpollutant emissions produced by burning gasoline,and it cuts down on the dumping of used oil. Anothergain is that many alternative fuels can be generated,while oil is a non-renewable resource. Demand varies,and there is always the possibility of discovering newreserves. More importantly, biofuel is capable ofimproving the performance of the engine. Biofuel is a“quality” fuel help to lengthen the life of vehicles. Asan alternative to the “traditional” diesel fuel, biofuelis expected to yield significant energy security andenvironmental advantage to its consumers. Thusbiofuel appears to be a sustainable solution to ourgrowing energy demands.

Conflict between fuel and food

Production of biofuels gave rise to an alternativeuse of land earlier meant for agriculture. Acres oflands are being booked by the biofuel producers forcultivating grains that serve as the inputs of biofuelindustry. Farmers are being lured with high pricesfor producing corns and other grains—of course notfor food but for biofuels. This, on the one hand, isleading to food shortage and, on the other hand,playing havoc on biodiversity. Biofuels are now incompetition with the production of food consumption(Brown, 2008). The market for biofuels has also beenassociated, at least in part, to rising prices of edibleproducts. Nellemann (2009) states that the origin ofthis crisis is complex and it appears to be related toseveral factors.

Biofuels have forced global food prices up by75%—far more than previously estimated—accordingto a confidential World Bank report obtained by TheGuardian (2008). The figure emphatically contradictsthe US government’s claims that plant-derived fuels

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contribute less than 3% to food-price rises. It will addto pressure on governments in Washington and acrossEurope, which have turned to plant-derived fuels toreduce emissions of greenhouse gases and reduce theirdependence on imported oil. Rising food prices havepushed 100 million people worldwide below thepoverty line, estimates the World Bank, and havesparked riots from Bangladesh to Egypt. Developedcountries described higher food and fuel prices as thefirst real economic crisis of globalisation. “Withoutthe increase in biofuels, global wheat and maize stockswould not have declined appreciably and priceincreases due to other factors would have beenmoderate,” says the report. The basket of food pricesexamined in the study rose by 140% between 2002and February 2008. The report estimates that higherenergy and fertiliser prices accounted for an increaseof only 15%, while biofuels have been responsible fora 75% jump over that period. It argues that productionof biofuels has distorted food markets in three mainways. First, it has diverted grain away from food forfuel, with over a third of US corn now used to produceethanol and about half of vegetable oils in theEuropean Union going towards the production ofbiodiesel. Second, farmers have been encouraged toset land aside for biofuel production. Third, it hassparked financial speculation in grains, driving pricesup higher (Chakraborty, 2008).

The U.S. concluded 2010 as the top renewableethanol producing country, according to the GlobalBiofuels Outlook to 2020, recently released from HartEnergy Consulting’s Global Biofuels Center (GBC).With more than 51 billion liters (13.47 billion gallons)of ethanol production capacity in operation, the U.S.is by far the leader, with South America’s largestnation, Brazil, following with nearly 27 billion liters(7.1 billion gallons). When combined, these twocountries represent 82% of ethanol productioncapacity in operation worldwide. China ranks adistant third at more than 2.7 billion liters (713 milliongallons). The ranking continues with France in fourthplace. Canada rounds out the top five. In 2009, theU.S. ethanol industry had a total of 170 operatingplants (Hart Energy, 2011). Corn for ethanol remainsa central plank of US agricultural and energy policy.The 2007 Energy Bill quintuples the country’s biofuelstarget to 35 billion gallons by 2022 (Holmes, 2008).

Concluding remarksA section of social thinkers claim that the heavily

subsidised biofuel industry is fundamentally immoral,diverting land which should be producing food to fillhuman stomachs to produce fuel for car engines.According to International Food Policy Research

Institute the most direct effect is the diversion of landfrom corn, sugarcane and other crops to biofuels.Emphasis on those few crops leads to the destructionof other varieties of crops resulting in the loss ofbiodiversity to the detriment of global life. Once theprice of corn starts going up, there was some shiftfrom poor consumers in Africa to alternatives like rice.Thus, our concern for green earth starts forcing peopleto change their natural food habits. The growth ofbiofuels has a distorting ripple effect on other foodcrop markets. The major developing countries havestarted setting lofty targets of biofuel production.There is no apparent reason to deny that biofuels cangift us a greener earth for our posterity. But achievingthat goal might force millions to starve now.

The question appears very straight—shouldhunger be compromised for the greener energy?

We need a new growth model where sustainabledevelopment moves from the margins to the heart ofthe key economic decisions.

The choice between food and energy is notmutually exclusive. We need both for our survival.Striking the balance between the two is, therefore, thebiggest challenge of sustainability. ❐

References■ Ajanovic Amela(2010) : Biofuels versus food production:

Does biofuels production increase food prices? EnergyXXX, Elsevier.

■ Brown, R.C (2008). Why are we producing biofuels?Presidential Lecture, Iowa State University, October, 27.

■ Chakraborty Aditya (2008): Secret Report: Bio fuelcaused food crisis. The Guardian, July, 3.

■ Chestney Neena (2012): As population soars, worldlacks food, Financial Post, January, 31.

■ Hart Energy( 2011): US leads ranking of top 25 countriesfor global biofuel production capacities. Press Release,15 February.

■ Holmes Stephanie (2008). Bioenergy: fuelling the foodcrisis? BBC News, Rome, June, 4.

■ International Energy Agency (2007): World EnergyOutlook.

■ Nellamann, C. (2009) : The environmental food crisis:The environment’s role in averting future food crises,A UNEP Rapid Response Assessment.

■ Timilsina Govinda R. and Shrestha Ashish (2010):Biofuels: Markets, targets and impacts. World BankResearch Working Paper No.5364. July 1.

■ UNCTAD (2008) : Addressing the global food crisis: Keytrade investment and commodity policies in ensuringsustainable food security and alleviating poverty. Italy,3-8 June.

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“Make your top managers rich and they will make you rich.” — Robert H. Johnson


Sustainable Development—Issues and Critics from Indian

Perspective

—“You have to decide whether development means affluence or whether development means peace,prosperity and happiness”—Sunderlal Bahuguna

Arindam BanerjeeFCMA, CFP, Asst. ProfessorAsia Pacific Institute of ManagementNew Delhi

What is Sustainable Development?

The definition of sustainable development is verybroadly defined by various research groups.One of the important studies is done by Board

on Sustainable Development of the U.S. NationalAcademy of Sciences. Under its report titled OurCommon Journey : A Transition toward Sustaina-bility, the board emphasized on what is to bedeveloped and what is to be sustained in the future(refer Exhibit 1). For defining ‘What is to be sustained’the board classified three major categories :

● Nature : Nature is sub-categorized into Earth,Bio-diversity, and Ecosystems.

● Life Support : Life Support is further classified underEcosystem Services, Resources, and Environment.

● Community : Community is sub-classifiedunder Culture, Groups, and Places. Similarly,‘What is to be Developed’ is also classifiedunder three categories :

● People : This is further sub-classified into ChildSurvival, Life Expectancy, Education, Equity,and Equal Opportunity.

● Economy : Under this category, the sub-classifications are Wealth, Productive Sectors,and Consumption.

● Society : The sub-classifications are Institutions,Social Capital, States, and Regions.

Exhibit 1 : Sustainable Development : A Definition

The degree upto which these factors are sustainedand developed is an important decision. Initiatives tosustain and develop these factors may be combinedat different degrees, and thus may be linked through‘only’, ‘Mostly’, ‘But’, And’, and ‘Or’. There arevarious opinions about the time period for actions tobe taken. According to the board the time horizonmay be ‘25 years’ or ‘Now and in the Future’, or‘Forever’. Though, what is meant by ‘Forever’, and‘in the future’ is not defined. As we observe,environment, poverty, culture, and education playsa major role in sustainable development. Now, wewill take on these issues from the Indian perspective.

Management accounting can play a very importantrole in sustainable development. Bennet and James(1997) interpreted management accounting forsustainable development as a tool for supportingdecision-making which incorporates environmental,institutional, economic and social components. Theyalso concluded that “there is an increasing potentialfor environmental-related management accounting tomake a substantial contribution to both businesssuccess and sustainable development”.

Sustainability Development from IndianPerspective

The significance of sustainable development wasfirst mentioned by Indira Gandhi, the then primeminister of India at UN Conference on HumanEnvironment at Stockholm in 1972. She emphasizedthat the elimination of poverty is essential for adoptingsustainable development. Over the years, unplannedindustrialization, uncontrolled exploitation of naturalresources led to severe environmental damage andadverse impact on sustainable future.

The pertinent question is what should be ourapproach towards a maintainable future:

Eradication of Poverty : Abject poverty usuallyleads to destruction of environment. Poor peopleusually depend heavily on immediate environmentfor sustenance. This dependence often leads todestruction of natural resources. Improvement of

Source: U.S. National Research Council, Policy Division, Board onSustainable Development, Our Common Journey : A Transition TowardSustainability (Washington, DC : National Academy Press, 1999)

WHAT IS TO BESUSTAINED

FOR HOW LONG?25 years

‘‘Now and In the future’’Forever

WHAT IS TO BEDEVELOPED

NATUREEarth BiodiversityEcosystems

LIFE SUPPORTEcosystem ServicesResources Environment

PEOPELEChild Survival LifeExpectancy EquityEquial Opportunity

LINKED BYOnly Mostly But And Or

COMMUNITYCultures Groups Places

LIFE SUPPORTEcosystem ServicesResources Environment

SOCIETYInstitutions SocialCapital States Regions

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natural resources management systems often resultsinto elimination of poverty and sustainabledevelopment. For ages, especially rural poor remaindependent upon their small land-holdings for basicdiet. If, under market forces, the poor somehow losescontrol over the land, it aggravates the poverty andthe impact on environment.

Altering the Unsustainable Pattern of Produc-tion and Consumption : Increased urbanization,unplanned consumption and production leads toerosion of natural resources. This should beencountered through proper public awareness andeducation. Establishment of desirable limits ofconsumption and related production is necessary byapplying appropriate mechanisms, which may includeincentives, education, and legislation. Developmentdecisions that lead to more sustainable society isdesirable. Improved technologies that lead tooptimum consumption of resources should beencouraged. Management accountants can play avery positive role in this regard.

Economic and Social Development throughManaging and Protecting Natural Resource Base :The protection and sustenance of natural resourceswhile developing the society and economy should beof paramount interest. Evaluation of all develop-mental projects should be guided from environmentalperspective. Marginal and poor people should haveequitable rights, and access to natural resources likewater, land etc. Traditional modes for sustenance ofnatural resources like water harvesting, creation ofponds, groves, and bushes should be encouraged.

Globalization and Sustainable Development :The issue of sustainable development becomes morerelevant in the era of globalization. The socialcommitment of business and development should bein synchronization with commercial interests. Issueslinked to local culture and diversity should be takeninto consideration while creating developmentalissues. Impact of global issues over local livelihoodshould be taken into consideration for sustainabledevelopment. Civil unrest, war, and conflict are majorthreat to sustainable development. Effectivemechanism to deal with adverse situations andcontinued sustainable development is essential.

Sustainable Development and Health Issues :Physical, mental, and spiritual wellbeing is essentialfor sustainable development. Physical and economicaccess to healthy and balanced diet, clean air, drinkingwater, education, primary health care etc by commonpeople should be ensured. In a developing countrylike India, people often suffer from some traditionaldiseases like cholera, malaria etc. due to lack ofhygiene and basic amenities. Modern widespread

diseases like AIDS, cancer etc are also taking toll onhuman life. For sustainable development, the basichealth facilities should be strengthened. India is alsoenriched of traditional medical systems likeAyurveda. These traditional systems should bestrengthened and made accessible to all.

Governance of Sustainable Development at Local,National, and International Level :

Sustainable Development at Local Level :Involvement at the local level of the society is importantfor sustainable development. Formation andstrengthening of democratic institutions at grass-rootlevel usually leads to better sustained manage-ment ofnatural resources. In a away, participation of localpeople in governance is essential for sustainabledevelopment. This may happen through elected localbodies, or community groups. Appropriaterepresentation and capacity building of women andevery community is necessary for successfulsustainable development. The cultural, occupational,and economic heterogeneity of population is anessential asset for successful sustainable development.

Sustainable Development at National Level :Optimization of resources from various sources isrequired for effective implementation of sustainabledevelopment. This emphasizes the requirement of co-ordination among various government departments,NGOs, corporate bodies, and research institutions toachieve the goal of sustainable development.Modification, simplification, or even elimination ofcertain acts and laws may be considered for effectivesustainable development. Areas lacking policiesshould be identified and proper steps should be takento fill the gap.

Sustainable Development at International Level :Some areas like across-the-border environmentalimpacts, marine issues, management of biologicalresources etc., international co-operation is desirable.Experience sharing with international bodies iseffective for sustainable development. A bettergovernance regime is to be formed for bettercompliance and cooperation.

ConclusionWith modern development comes the erosion of

environment and natural resources. While adoptingthe path of development, we must consider theimplications on future generations. It should beensured that this development can be sustained overthe years to come. The good news is—thinking hasalready been started towards this direction, and thebad news is—a lot is to be done. ❐

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“A desk is a dangerous place from which to view the world.” — John Le Caré


Financial Model for sustainable Growth Rate :

Managerial Perspectives

Prof. Prafulla Kumar SwainM.com, M.Phil, FCMAProfessor (Finance), Institute of Business &Computer Studies, (Faculty of ManagementStudies), Siksha O Anusandhan University,Kalinga Nager, Bhubaneswar, Odisha, India

Ansuman SamalBSc.IT, D.E.M, MBA (Marketing & Systems),

Lecturer (General Management), School ofHotel Management, (Faculty of Hotel Management),

Siksha O Anusandhan University, Jagamara, Bhubaneswar, Odisha, India,

Introduction

Financial Management endeavors to makeoptimal investment; financing and dividenddecision with an objective to maximize owner’s

wealth via-a-vis maintain sustainable growth of anenterprise. Sustainable growth, with reference tobusiness, is the realistically sustainable growth that abusiness enterprise could maintain without facingfinancial crisis in future. A business that grows quicklymay find difficult to sustain the growth. Similarly, abusiness that grows too slowly or not at all maystagnate. Thus the objective of any business enterpriseis to determine optimum growth rate.

Basically, there are three principles of sustainablebusiness i.e., dedicated long term customerrelationship, environmental responsibility, and profitand power sharing (Holden A).

Sustainable Growth Rate (SGR) is defined as “theannual percentage of increase in sales that is consistentwith a defined financial policy i.e. target debt to equityratio, target dividend payment ratio, target profit marginand target ratio of total asset to net sales (Robert CHiggins). Indeed, a sustainable growth rate that thecompany can sustain without having increased financialleverage. Thus, the sustainable growth rate model(formula) is directly predicted on RETURN ON EQUITY(ROE). The SGR Model provides a comprehensiveframework and helps in calculating company’s specificsustainable growth rate. However, the Optimal GrowthRate (OGR) assesses sustainable growth from the totalshareholders’ value creation and profitabilityprospective. This OGR is independent of a given strategyand business model.

Sustainable Business Model—A conceptualFramework

A successful business model innovation is set tobecome the most prominent source of competitiveadvantage and of sustained, profitable growth andsuccess and, consequently of shareholders andstockholders value (Daum J.H. etal). A SustainableValue Creation Model is furnished as follows :

Models for Sustainable Growth RateModel I

Sustainable Growth Rate (SGR ) = ROE ¥¥¥¥¥(1 – Dividend Payment Ratio)

To calculate the sustainable growth rate for acompany one most know how profitable the companyis based on a measure of its return on equity (ROE).

Net Income (After Tax)ROE = Average Shareholder’s Equity

One must also know what percentage of acompany’s earnings per share it pays out in dividends,which is called the dividend payment ratio.

Yearly dividend per shareDividend Payment Ratio = Earning per share

Assumptions : The above model is based on thefollowing assumptions :

● Maintain a target capital structure withoutissuing new equity.

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● Maintain a target dividend payment ratio.● Increase sales as rapidly as market conditions

allow.Model IIAccording to Robert C. Higgins, the Sustainable

Growth Rate is the maximum growth rate a companycan achieve consistent with the firm’s establishedfinancial policy.

FormulaPm ¥ (I –d) ¥ (I+L)

SGR = T – {PM ¥ (I- d) ¥ (I+L) }

where Pm = Profit Margin (Existing & Target)d = Dividend payout ratio (Target)L = Debt equity ratio (Target)T = Ratio of Total Asset to Sales

Assumptions● Depreciation is sufficient to maintain the value

of existing assets.● The profit margin remains stable.● The proportion of assets and sales remain stable

i.e. constant asset to sales ratio.● Current Capital Structure and dividend policy

should be maintained i.e. constant debt toequity ratio.

Strategy for Sustainable GrowthCEOs of both small and big business houses

visualize to maintain sustainable rate of growth onlong term basis. Obviously, achieving this objectiveis not an easy task when there is a rapid change in thepolitical, economic, competitive and technologicalenvironment. The change in each of the environmentalfactor presents unique challenges to CEOs searchingfor elusive holy-grail of sustainable growth. SinceReturn on Sales (ROS) and Sales growth are the primeindicators of SGR, the business leaders should focuson the 5 forces of the Porter’s model and developgrowth strategy model as follows :

Economists and Business Researchers contendthat achieving sustainable growth is not possiblewithout paying heed to twin cornerstones : GrowthStrategy and Growth Capabilities. If the CEOs do notgive proper attention to these aspects, then the businesswill be doomed to failure in achieving sustainablegrowth. After all, if the company has an excellentgrowth strategy in place—but has not put the necessaryinfrastructure in place to execute that strategy—longterm growth is impossible. The reverse is true as well.Finally, the company should limit the scope of RedOcean Strategy and venture into Blue Ocean Strategyfor a better sustainable growth.

Managerial Implications of Sustainable GrowthRate

The following are the managerial implications forsustainable growth rate :

1. To Plan Healthy Corporate Sales Growth● If a company’s actual growth rate temporarily

exceeds its sustainable rate, the company may go forborrowing required fund.

● If the actual rate exceeds sustainable growthfor longer periods, management must formulatefinancial strategy from among the following options :

— Sell new equity.— Permanently increase financial leverage.— Reduce dividends.— Increase the profit margin.— Decrease the percentage of total assets to sales.In practice, the companies often undertake these

measures due to other negative impacts.2. To Plan for Expanding Financial LeverageThe sustainable growth model is particularly

helpful in situation in which a borrower requiresadditional financing. The need for additional debtcreates a potentially risky situation of too much debtand too little equity. Either additional equity must beraised or the borrower will have to reduce the rate ofexpansion to a level that can be sustained without anincrease in financial leverage.

3. Use of free cash flows in most productive way.Matured firms like TATA groups, Godrej

Industries limited, Bata India Limited, SBI etc have aactual growth rates that are less than sustainablegrowth rate. In such situation, the management shouldfind the production use of free cash flows. The variousoptions for such use are :

— Increase dividend rate.— Increase possession of lower earning liquid asset.These actions serve to decrease the sustainable

growth rate. Alternatively, these forms can attemptto enhance their actual growth rates through theacquisitions of rapidly growing companies.

PotentialEntrants

Substitutes

Rivalry amongexisting firms

IndustryCompetitors

➤

▲

▲

Suppliers Buyers▲▲

Threat ofNew Entrants

Threat ofSubstitute Products

of Service

Bargaining Powerof Suppliers

Bargaining Powerof Buyers

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4. To Manage inflationary effect for positive growthThese are two sources of growth—increased

volume and inflation. To bring the real growth thecompany should finance for assets having highlybullish value due to inflationary effect. Inflation in-creases the amount of external financing required andincreases debt-equity ratio which is calculated on ahistorical cost basis. In some situations, the creditors/lenders may require that the firm’s historical Debt-to-Equity ratio will remain constant. Indeed, inflationlowers the firm’s sustainable growth rate.

ConclusionFinancial model for “Sustainable Growth Rate”

is a dynamic tool for a business enterprise to surviveand grow. The two models discussed in this articlemay be used by the business leaders to plan for longterm sustainable growth. Defining financial policy,formulating various growth strategies, redesigningthe capital structure, developing financial reengi-neering tools and inviting the favorable blessings ofinflation can be strategically done by using SustainableGrowth Rate (SGR) of a business enterprise. ❐

References■ Daum J.H. and Gruber K.F. “Sustainable Value Creation

—Securing Success and exploiting growth opportunitiesby turning business model innovation into a process”.

■ Galpin and Timothy. “Making Strategy work : BuildingSustainable Capability’’ John Wiley & Sons, 1997.

■ Holden A. (2010), “Growing a Sustainable BusinessModel” www. Renewable energy world.com.”

■ Kazmi A, “Strategic Management and Business Policy”The McGraw Hill Companies, Third Edition 2008.

■ Kim C.W, Land Mouborgne R. “Blue Ocean Strategy :How to create uncontested market space and makecompletition irrelevant”, Harvard Business School Press.

■ Schertz A., “The Business Tree : Growth Strategies andTactics for Surviving and Thriving.”

■ Slywotzky A., Wise R. and Weber K. “Grow whenmarkets don’t.”

■ “Sustainable Growth: Is there Room to Grow?” ADeloittee Research View Point. Available from http://www.deloit te .com/dtt/research/0,1015,s id%3D15582%26cid%3D100764,00.html.2005.

■ Zook C. and Allen J. “Profit from the core : A Return to growthin Turbulent Times”, Harvard Business School Press.

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out of concern for environment. Some organizationshave begun positioning sustainable growth into theirorganization structures. ‘In ITC, a board level Sus-tainability Committee reviews, monitors and providesstrategic direction to the company’s sustainabilitypractices towards fulfilling its triple bottom lineobjectives. A member of the senior management teamof ITC’s Environment, Health and Safety functionis represented on the Corporate ManagementCommittee that is entrusted with the task of strategicmanagement of the company’s business’. Tata Powerwas reported to be the first company to have a ChiefSustainability Officer in 2008, in India.

More can be expected in the future years to comefrom all stakeholders including government andcorporate in the light of the conclusion from DurbanSummit on Climate Change. ‘The United NationsClimate Change Conference, Durban 2011, delivereda breakthrough on the international community’sresponse to climate change. In the second largestmeeting of its kind, the negotiations advanced, in abalanced fashion, the implementation of theConvention and the Kyoto Protocol, the Bali ActionPlan, and the Cancun Agreements. The outcomesincluded a decision by Parties to adopt a universallegal agreement on climate change as soon as possible,and no later than 2015’.

Sustained and inclusive growth of IndiaWith reference to India’s GDP during the year

2010-11, the agriculture sector contributed 16.1 percent; industry contributed 28.6 per cent and servicessector contributed 55.3 per cent. Over the years thecontribution from agriculture as a percentage has beendeclining and that of services sector has beenincreasing. However, during the year 2010-11, with 7per cent growth, the agriculture sector contributedsignificantly for the economic recovery. The 7 per centgrowth in agriculture sector is in comparison to a mere1 per cent growth it recorded in the year 2009-10 andas compared to 9.3 per cent growth reported fromservices sector during the year 2010-11.

Notwithstanding the slow growth rate with nearlytwo thirds population depending on agriculture, thesector continues to be the focus for the country’s sus-tained and inclusive growth. The services and industrysector are important for overall economic growth and increating employment opportunities. Hence, for sustainedand inclusive growth of India, all the three sectors areimportant and need focus in the years to come unlikemost developed economies of the world. ❐

References■ The Growth Report – Strategies for Sustained Growth

and Inclusive Development■ Connecting to Compete, Trade Logistics in the Global

Economy, 2010, World Bank■ Human Development Report 2011, UNDP■ Articles published in business newspapers as referred

to in the text.


“Catch someone doing something right.”— Kenneth Blanchard and Spencer Johnson


Tax Titbits — Fallout From Vodafone’s Case

S. RajaratnamM.A., LLM, FCMAAdvocate & Tax Consultant, Chennai

Anon-resident company—Vodafone Interna-tional Holdings BV of Vodafone group— was treated as a representative assessee of a

non-resident seller in Hutchison group under Section163 through overseas intermediaries and action wastaken for failure to deduct tax at source in respect ofdeemed capital gains. The reasoning was—theshares in an Indian company were involved as“underlying assets”. Liability to deduct tax at sourcewas upheld by the High Court in VodafoneInternational Holdings B. V. v. Union of India [2010]329 ITR 126 (Bom). On such a view, many investmentsin India routed through Mauritius, UAE or Singaporecompanies would be subject to tax even on transferof shares of the holding companies for tax in Indiawithout the benefit of the Double Tax AvoidanceAgreement. The decision, therefore, createduncertainty in settled law. The matter was taken upby the Supreme Court. Revenue has raisedmultiplicity of arguments each of which has beendiscussed elaborately by a Bench of three judges bythe Supreme Court reversing the decision of the HighCourt in this much-awaited decision in VodafoneInternational Holdings B.V. v. Union of India [2012]17 taxmann.com 202 (SC).

Representative assessee

A representative assessee is liable under Sections161 and 163 of the Income-tax Act, 1961, to carry outwhatever tax obligations its principal has. However,Section 195 providing for tax deduction at sourcecovers payments made by a resident to a non-resident, so that Section 195 could have no application,where the payment is from one non-resident tothe another. The non-resident purchaser cannot,therefore, be treated as an agent under Section 163.Consequential disallowance under Section 40(a)(i) ofthe Income-tax Act would also have no application.On this inference, even merits of the liability need nothave been gone into, but, all the same, the SupremeCourt dealt with merits as well.

Companies and shareholders are distinct personsIndustrial revolution in the West heralded by the

concept of limited liability for the investor was

rendered possible by the principle that company andshareholders are different as decided in the classiccase in Salomon v. Salomon [1897] AC 22. On thesame reasoning, a subsidiary is distinct from a foreigncompany as long as it has got a commercial purposeand economic substance, except where it is a merepuppet for the holding company. Neither the conceptof piercing the corporate veil nor the doctrine ofsubstance over form, nor the concept of beneficialownership or alter ego, can be brought in to “lookthrough” a transaction. What the Assessing Officercan do is to “look at” a transaction, unless “lookthrough” is specifically provided in the statute.

Shares and controlling interest cannot bedissected

One of the arguments was that the Vodafonegroup was paying not only for the shares, but alsothe controlling interest which goes with it. Thisargument was not accepted, since share in a companyconsists of “congeries of rights and liabilities” as waspointed out by Macmillan J. in IRC v. Crossman 1 AllE.R. 762, so that there is no scope for dissection ofthe payment between the shares and controllinginterest. When one pays for a bulk of shares, thecontrol element certainly goes into the pricingmechanism.

An unwanted intermediaryAn argument that impressed the High Court was

that the transfer was engineered through anintermediary, CGP Investments, which was asubsidiary of a company registered in CaymanIslands. CGP was, therefore, treated as an interloper,whose presence could be ignored as artificiallyintroduced. The Supreme Court, however, found thatCGP investments was formed as early as in 1998 with42% interest in 2005 for Hutchison through twoMauritius companies engaged in the business ofmobile telephone service. There was no material tosuggest that these transactions over the years are not“genuine business transactions”, but are “fraudulentor dubious”. It was pointed out that these develop-ments were not merely by way of share transactions,but by way of loan agreements, non-compete

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agreements, brand names, oracle licence, mattersrelating to preference shares etc., so that CGP couldnot be dismissed as a mere interloper. Functioningthrough subsidiaries and their subsidiaries is not amere tax device, but necessary for such objectives likehedging, covering political risks, mobility ofinvestments, ability to raise funds etc. Many otherrights—like Right of First Refusal (ROFR), Tag AlongRights (TARs), subscriptions option, call option, putoption, cash and cashless option, agreements likeshareholders’ agreement relating to voting rightsgiving controlling interest and various other ancillaryagreements connected therewith—are independentand legally enforceable as long as they are notinconsistent with the Memorandum and Articles ofthe company.

Tax planning

In IRC v. Duke of Westminster [1935] 19 TC 490, ataxpayer’s right to plan his affairs in a manner that hepays least tax was conceded. But in Ramsay Ltd. v.Inland Revenue Commissioners [1981] 1All E.R. 865,a transaction lacking in commercial purpose imposedas a device, it was held, could be ignored. Indian lawtoo recognised a right to avoid tax, subject only tolegislative injunction in CIT v. A. Raman and Co. [1968]67 ITR 11 (SC), while artificial tax planning was frownedupon in CIT v. B.M. Kharwar [1969] 72 ITR 603 (SC).Both views have found support in English and Indianlaw—more with reference to the facts of each case. InMcDowell and Co. Ltd. v. CTO [1985] 154 ITR 148(SC), the leading judgement purported to exorcise theghost of Westminster by treating tax avoidance asimpermissible, but the other judges concurring withjudgment did so only because artificial device wasadopted for such tax avoidance in the case. In fact, aBench of Five Judges in Mathuram Agrawal v. State ofMadhya Pradesh [1999] 8 SCC 667 restored theWestminster principle in Indian law. The SupremeCourt in Union of India v. Azadi Bachao Andolan [2003]263 ITR 706 (SC) had not noticed Mathuram Agrawal’scase (supra), but had found consistently with thisdecision that McDowell and Co. Ltd.’s case (supra)did not fault legitimate tax planning.

Valuation

Another argument of revenue was that valuationadopted for the shares was not sound and that it had

a hidden purpose, so as to justify inference of liability.It was found that valuation may be a science, but notlaw. It is largely a matter of opinion depending onvarious factors. It should be taken at the price paidfor the enterprise taking into account the compendiumof rights and liabilities. In a matter of capital gains,what is material is only the consideration forenterprise value received for the shares in the light ofsection 45 of the Income-tax Act.

Scope of Section 9

A non-resident is sought to be made liable underSection 9 inter alia in respect of transfer of capital assetlocated in India. Section 9 is a deeming provision.Though indirect transfers are covered by theexpression “directly or indirectly”, shares locatedabroad are not covered. Law cannot be stretched, soas to subvert the rule of law itself as was pointed outin Ransom (Inspector of Tax) v. Higgs [1974] 3 All ER949 (HL). Indian law in Ishikawajima-Harima HeavyIndustries Ltd. v. Director of Income-tax, Mumbai[2007] 3 SCC 481 and CIT v. R.D. Aggarwal [1965] 1SCR 660 would support such an inference.

Anti-avoidance provision

Both the leading and concurring judgement inVodafone’s case (supra) point out to the absence ofGeneral Anti Avoidance Rule (GAAR) in the presentlaw, which is sought to be introduced in the DirectTaxes Code Bill, 2010. Double Tax AvoidanceAgreements also do not contain Limitation of Benefit(LOB) clause in case of abuse of the Agreements. Doesit mean that the conclusion in this case would bedifferent, if these provisions are available? On theclear finding on the facts of the case—that no Indianasset is the subject matter of transfer—anti-avoidanceprovisions could not have changed this inference oflaw. Whether the statute or the Court could lay downa law that “a person has to arrange his affairs so as toattract maximum tax liability” is a question asked bythe Gujarat High Court in Banyan and Berry v. CIT[1996] 222 ITR 831 (Guj). After all, the same incomecannot be taxed in both the countries, which are partiesto a Double Tax Avoidance Agreement. If it isunderstood that adoption of anti-avoidance provisionwould make a difference to law, so as to bring to taxwhat is not taxable according to the provisions of law,a fresh spate of litigation is in the cards. ❐

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“The conventional definition of management is getting work done through people, but real management isdeveloping people through work.” — Agha Hasan Abedi


When Penalty is not Exigible Under Section 271 (1) © of

Income Tax Act, 1961?

M. GovindarajanAccounts Officer, BSNLThanjavur, Tamil Nadu

Introduction

Chapter XXI of the Income Tax Act, 1961 (‘Act’for short) provides for penalty that may beimposed on the assessee for non-compliance

of the provisions of this Act or suppression,concealment of income etc., Section 270 to 273AAprovides various penalties. Section 273B providesthat notwithstanding anything contained in theprovisions of this Act which impose penalty on theassessee, no penalty shall be imposable on the personor the assessee, as the case may be, for any failurereferred to the provisions if he proves that there wasreasonable cause for the said failure.

In ‘Hindustan Steel Limited V. State of Orissa’ –(1972) 83 ITR 26 (SC) the Supreme Court held that anorder imposing penalty for failure to carry out a statutoryobligation is the result of a quasi-criminal proceedings,and penalty will not ordinarily be imposed unless theparty obliged either acted deliberately in defiance of lawor was guilty of conduct contumacious or dishonest, oracted in conscious disregard of its obligation. Penaltywill not also be imposed merely because it is lawful todo so. Whether penalty should be imposed for failureto perform a statutory obligation is a matter of discretionof the authority to be exercised judicially and on aconsideration of all the relevant circumstances. Evenif a minimum penalty is prescribed, the authoritycompetent to impose the penalty will be justified inrefusing to impose penalty when there is a technical orvenial breach of the provisions of the Act, or wherethe breach flows from a bona fide belief that theoffender is not liable to act in the manner prescribed bythe statute.

In this article Section 271(1)© of the Act is takeninto consideration for analysis as to when penalty isnot exigible under this Section.

Section 271(1) ©For the purpose of analysis we have to refer the

provisions of Section 271(1) © of the Act. Section271(1)© reads as follows :

“271(1) If the Assessing Officer or the

Commissioner (Appeals) or the Commissioner in thecourse of any proceedings under this Act, is satisfiedthat any person…

© had concealed the particulars of his income orfurnished inaccurate particulars of such income, or…

(iii) in the cases of referred to in clause © or clause(d), in addition to tax, if any, payable by him, a sumwhich shall not be less than, but which shall not exceedthree times, the amount of tax sought to be evadedby reason of the concealment of particulars of hisincome or fringe benefits or the furnishing ofinaccurate particulars of such income or fringebenefits.

Explanation 1. Where in respect of any factsmaterial to the computation of the total income of anyperson under this Act —

(A) Such person fails to offer an explanation oroffers an explanation which is found by the AssessingOfficer or the Commissioner (Appeals) or theCommissioner to be false; or

(B) Such person offers an explanation which heis not able to substantiate and fails to prove that suchexplanation is bona fide and that all the facts relatingto the same and material to the computation of histotal income have been disclosed by him,

Then the amount added or disallowed incomputing the total income of such person as a resultthereof, shall for the purpose of clause © of this subsection, be deemed to represent the income in respectof which particulars have been concealed.

IngredientsFor imposing penalty on the assessee the assessee

either had concealed his income or furnishedinaccurate particulars of income and the same is tobe proved.

For invoking Explanation to Section 271(1) © thefollowing three ingredients are required to be satisfiedcumulatively —

● The assessee offers an explanation which he isnot able to substantiate;

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● He fails to prove that such explanation is bonafide; and

● That all the facts relating to the same andmaterial to the computation of total incomehave been disclosed by him.

Case LawsIn ‘Commissioner of Income Tax V. Harsh

Vardhan Chemicals and Mineral Limited’ — (2003)259 ITR 212 (Raj) it was held that no penalty wasleviable in view of the finding of the Tribunal thatwhen the assessee had claimed deduction of anamount that was debatable it could not be said thatthe assessee had concealed any income or furnishedinaccurate particulars for evasion of tax, and in viewof the findings of the Tribunal, no case was made outfor interference.

In ‘Southern Gas Fittings P Limited V. DeputyCommissioner of Income Tax’—(2002) 80 ITD 202(Chennai) the Tribunal held that at the cost of repetitionwe may mention here that from all the facts andcircumstances of the case, it seems that it is a case ofdifference of opinion, as the claim for depreciation etc.was made by the assessee on the basis of trialproduction which was supported by record, but thestand of the Department was that since no commercialproduction was there, the assessee was not entitled forsuch claim.All the facts of the case were before theAssessing Officer and as such it cannot be said to be acase of filing inaccurate particulars or making anyconcealment before the Assessing Officer. Even if theassessee would claim this depreciation etc., on themerits and rejected by the Assessing Officer, still lawis clear that even if the explanation of the assessee isrejected, no case for imposition of penalty would bemade out.

In ‘Commissioner of Income Tax V. PremDass’ — (2001) 248 ITR 237 (P&H) the High Courtdismissed the appeal filed by the Department in whichthe Tribunal cancelled the penalty on the ground thatdifference between the returned income and theassessed income was due to difference of opinionabout estimated rates of income and expenditure.

In ‘Durga Kamal Rice Mills V. Commissioner ofIncome Tax’—(2004) 265 ITR 25 (Cal) the High Courtheld that when two views are possible and when noclear and definite inference can be drawn in a penaltyproceeding, penalty cannot be imposed.

The Honorable Supreme Court in ‘Commissioner ofIncome Tax V. Munim’—(2009) 313 ITR (St.) 30 (SC)confirmed the view of the High Court in which it washeld that when the assessee does not include particularitem in the turnover under bona fide belief that he is notliable to do so, it would not be right to treat the return asa false return inviting the imposition of penalty.

In ‘Union of India V. Rajasthan Spinning andWeaving Mills’ – (2010) 1 GSTR 66 (SC) the SupremeCourt held that the facts on record proved that theassessee offered explanation before the AssessingOfficer and also proved on record that the explanationof the assessee was bona fide in making a claim underSection 80-IB of the Income Tax Act, 1961 on issue.Therefore it could not be held that the assessee hasfailed to offer any explanation at the penalty stageand also failed to prove that the claim of the assesseewas bona fide. The Supreme Court was of the viewthat these are not fit cases for levy of penalty underSection 271(1)(c).

In ‘Income Tax Officer V. Shilpa Filaments PLimited’ – (2011) 12 ITR (Trib) 324 (Ahmd) theTribunal upheld the findings of the Commissioner(Appeals). The Commissioner (Appeals) held that thepenalty had been imposed on four aspects. One wason account of interest from debtors and the secondwas on scrap sales. These two issues were decided infavor of the assessee by the Tribunal. Therefore nopenalty can be imposed on these grounds. The thirdground was on account of notional reallocation ofexpenditure between two units for working outallowance under Section 80-IB of the Act. Thisreallocation was a debatable issue and had arisenbecause of difference of opinion and could not form aground for penalty under Section 271(1)© of the Act.The addition on account of interest from fixed depositswhich were taken into account by the assessee for thepurpose of deduction under Section 80-IB of the Actwas upheld on the ground that the amount wasincorrectly claimed by the assessee. The assessee couldnot have anticipated under Section 80-IB of the Actwould go against him and therefore the assessee’sexplanation was bona fide and Explanation 1 toSection 271(1)© was not attracted. The Tribunal heldthat it was not a case of concealment of income orfurnishing of inaccurate particulars of income.

In ‘New Horizon India Limited V. DeputyCommissioner of Income Tax’—(2011) 12 ITR 332(Delhi) the High Court found that Sec. 271(1) © ofthe Act postulates imposition of penalty for furnishingof inaccurate particulars and concealment of income.In this case the High Court found that in the auditreport accompanying with the return it was clearlymentioned that the amount of Rs. 7,15,276/- was notadmissible under Section 40(a) (1a) of the Act. Hencethere was neither any concealment nor furnishing ofany inaccurate particulars. The assessee’s case is thatinadvertently the said amount was not reduced in thecomputation of income. It is also a settled law thatthe said amount is allowable in the year in which theTDS deducted is paid to the Government account.Hence the Assessing Officer disallowed the same in

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the current assessment year and remarked that thesame will be allowable in the next assessment year.The High Court held that the assessee cannot be heldto be guilty of concealment of furnishing of inaccurateparticulars of income. The High Court set aside theorder and deleted the levy of penalty.

In ‘Abhinav Ajmera V. Assistant Commissioner ofIncome Tax’ – (2011) 12 ITR (Trib) 290 (Delhi) penaltyhas been levied for the difference in treatment of thereceipts from the sale of trees and agricultural land. Theassessee has submitted to the Assessing Officer that theassessee has received Rs.10 lakh as the totalreimbursement for all the trees and existing crop ofhorticulture and the same were included in the total salevalue. The copy of khasra gidauri showing the crop wasalso attached. The Assessing Officer did not accept thesame by holding that it was composite sale along withthe land. On this basis the penalty was imposed underSection 271(1) © of the Act. The Tribunal found thatSection 271(1)© postulates imposition of penalty forfurnishing inaccurate particulars and concealment ofincome. In this regard the Tribunal found that theassessee has sold land on which various crops andhorticulture were existing. In the earlier years he hadbeen furnished all the necessary particulars and made aclaim. There was no concealment of particulars. It wasonly the Assessing Officer’s opinion that being compositesale the assessee’s claim cannot be accepted. The claimof the assessee cannot be construed as ex facie bogus.In the consideration of the Tribunal the penalty cannotbe imposed under Section 271(1) © of the Act.

In ‘Dholu construction and projects Limited V.Income Tax Officer’—(2011) 12 ITR (Trib) 438(Ahmedabad) the Tribunal held that unless theAssessing Officer gives a finding on the basis of materialon record that all the conditions under Section 271(1)©read with Explanation 1(B) are cumulatively andsimultaneously satisfied, penalty cannot be levied. Inthis case the assessee had offered an explanation to theeffect that he had paid a sum of Rs.10 lakhs for grabingcontact and has substantiated the claim. Because of thefact that there is no written agreement between theassessee and Tirupati Traders for withdrawing from thebid there is nothing else which was required to befurnished in order to substantiate the claim. To thisextent, the Tribunal held that first ingredient ofExplanation 1(B) is satisfied against the assessee.Regarding the second ingredient there is nothing in therecord to suggest the explanation of the assessee was notbona fide. Surrounding circumstances and consequenceof events did indicate that the assessee might have paidmoney to grab the contract from GMDC. Similarly thereis nothing on record to suggest that any material fact tothe computation of income in fact existed but was notdisclosed by the assessee. Had there been the agreement

between the assessee and Tirupati Traders existing thenthere is apparently no reason for the assessee to hide thatagreement from the Department. Therefore greaterprobability is that such agreement did not actually exist.In view of this, ingredients 2 and 3 are not satisfiedagainst the assessee. Therefore there is no case for levyof penalty under Section 271(1)(c).

In ‘Comet Leasing & Finance Limited V. AssistantCommissioner of Income Tax’—(2011) 12 ITR (Trib)667 (Delhi) the Assessing Officer in the penaltyproceedings held that the assessee deliberately furnishedinaccurate particulars of income to the tune ofRs.10,70,000 being excess depreciation claimed andinterest income to the tune of Rs.1,34,820/- not offered.The assessee concealed the particulars under Section271(1)© of the Act and the Assessing Officer imposedpenalty on the assessee. The Commissioner (Appeals)held that it was clear that the depreciation was wronglyclaimed and the assessee had also not offered interestincome since it was a financing transaction, therefore,the penalty was leviable. On appeal, the Tribunal heldthat the assessee having offered an explanation whichwas also substantiated, which was bona fide and sinceall the facts relating to same and material to thecomputation of total income had been disclosed by him,even in terms of Explanation 1 to Section 271(1)© theamount disallowed byway of depreciation would notresult into income in respect of which particulars hadbeen concealed. The penalty levied under Section271(1)© of the Act was to be cancelled.

In ‘Sabara Impex Limited V. Income Tax Officer’—(2012) 13 ITR (Trib) 68 (Mumbai) the assesseewrote off the net sundry balances for which theassessee could not submit any cogent explanation.The assessing officer held that it was a fit case forlevy of penalty on account of wrongful write off ofsundry balances under Section 271(1)© of the Act. TheCommissioner (Appeals) held that the assesseeclaimed expenditure by the write off, the genuinenessof which could not be proved and that the assesseehad furnished inaccurate particulars of income bywrongfully claiming a deduction which was notadmissible. The Tribunal held that in respect ofthe write off of net sundry balances there was nothingto indicate incorrectness of particulars beyondunacceptability of the claim of deduction. The penaltycould not be sustained and therefore it was to bedeleted.

In ‘Commissioner of Income Tax V. H.P. StateForest Corporation Limited’—(2011) 340 ITR 204(HP) the assessee, a Government company, engagedin the business of extraction of timber and resin fromforests reduced the closing stock on account ofdeterioration of old stock. The Assessing Officer made


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Building on Revenue : New Service tax Circular on

Construction Services

P. RavindranB.Sc., PGDM (Germany), M.L., (Ph.D.)Advocate—Indirect Taxes & IPRS

ROME WAS NOT BUILT IN A DAY. Thisreassuring maxim comes to mind whileanalyzing the levy of service tax on

construction services. Taxation is similar to theconstruction. It requires careful foundation andproper erection of the superstructure. The service taxon construction services has been beset by manymaladies, most of which are the in the making of thetax policy itself. The real estate sector in our countryis largely unregulated and it is a well known fact thatunethical practices are rampant. The exponentialgrowth in the Economy since 2005 has seen the sectorexpand by leaps and bounds. The spread of disposableincomes and the growing number of people who wantto own homes has ensured that the construction sectorderives sizable income year after year. This activityhas rubbed off on banks that extend home loans atvery profitable rates. The cement and steel industryhas been stimulated by the demand for housing. Largemasses of construction labour have foundemployment, thanks to the real estate boom. Nowonder that the Government felt that they shouldmilk this sector and take home tax revenues.Therefore, the Department of Service Tax introduceda levy of service tax on construction service coveringboth residential housing and commercial / industrialbuidings. Service tax on residential housing has beenin place since 16th June 2005 and service tax oncommercial construction of buildings, pipe lines andconduits has been in existence even earlier, from 10th

September 2004. To complicate the levies, there hasbeen a works contract service since 1st June 2007 onconstruction services.

The service tax on construction of residentialhouses does not cover construction of expensivemansions, palatial houses nor extensive Villas. Thetax has added to the woes of the house-purchasingmiddle class by levying the tax on residentialapartments exceeding twelve in number in a gated

project. This is the moral deficit in the currentstructure of service tax on residential housing. Ahouse built by the super rich running into tens andhundreds of crores will pay no tax, whereas a middleclass apartment in a gated community will set backthe purchaser by several lakhs of rupees in servicetax. This moral deficit needs to be addressed bythe Government, either by withdrawing the taxon middle class housing, say upto Rs.50 lakhs ingross value, or by reducing the rate of tax to a tokenamount.

In this Article, it is proposed to take up service taxlevy on residential construction and the trigger forthe discussion is the latest Circular No.151/2/2012-ST dated 10th February 2012 issued by the CentralBoard of Excise and Customs. Before discussing theservice tax on residential housing, it may be better tohave a look at the statutory description of the taxableservice.

“Construction of complex” means —

(a) construction of a new residential complex or apart thereof; or

(b) completion and finishing services in relationto residential complex such as glazing, plastering,painting, floor and wall tiling, wall covering and wallpapering, wood and metal joinery and carpentry,fencing and railing, construction of swimming pools,acoustic applications or fittings and other similarservices; or

(c) repair, alteration, renovation or restorationof, or similar services in relation to, residentialcomplex.

“Residential complex” means any complexcomprising of —

(i) a building or buildings, having more thantwelve residential units;

(ii) a common area; and

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(iii) any one or more of facilities or services suchas park, lift, parking space, community hall,common water supply or effluent system,

located within a premises and the layout of suchpremises is approved by an authority under any lawfor the time being in force, but does not include acomplex which is constructed by a person directlyengaging any other person for designing or planningof the layout, and the construction of such complexis intended for personal use as residence by suchperson.

Explanation.—For the removal of doubts, it ishereby declared that for the purpose of this clause, —

(a) “personal use” includes permitting the complexfor use as residence by another person on rent orwithout consideration;

(b) “residential unit” means a single house or a singleapartment for use as a place of residence.

“Taxable service” means any service provided orto be provided to any person, by any other person, inrelation to construction of complex.

[Explanation.—For the purposes of this sub-clause,construction of a complex which is intended for sale,wholly or partly, by a builder or any personauthorized by the builder before, during or afterconstruction (except in cases for which no sum isreceived from or on behalf of the prospective buyerby the builder or a person authorized by the builderbefore the grant of completion certificate by theauthority competent to issue such certificate underany law for the time being in force) shall be deemedto be service provided by the builder to the buyer;]

In the service tax on residential constructionservices, one of the grey areas has been constructionby parties to a Joint Venture and sharing of theconstructed units between the parties to theAgreement. Typically such Joint Ventures will involvea land owner with or without an existing building tobe demolished and a builder or developer who agreesto develop a desired superstructure on the land. Theland owner and the developer will share both the landand the constructed superstructure in a specifiedproportion, usually in terms of constructed units. Thedeveloper would either rent out or sell outright hisshare of the superstructure inclusive of the land U.D.S.The land owner would get his share of units withouthaving to spend on anything. There has been a lot ofconfusion on whether service tax was applicable to

such Joint Ventures. More pertinently the followingdoubts have emerged regarding the scope of taxation :

● Whether the number of residential units shouldbe counted taking the shares of both the land ownerand the developer?

● Whether the residential units allotted to the landowner would be in the nature of self-use and thusexempt from service tax?

● If the residential units allotted to the land ownerare taxable, whether exemption will apply if thenumber of units in the hands of the land owner is lessthan twelve?

● Whether the residential units have to exceed thenumber twelve, both in the hands of the land ownerand the developer in order to attract service tax?

● Whether the Joint Venture is to be treated as asingle entity even if unincorporated in the Eyes ofLaw?

● If the Joint Venture for development andconstruction is treated as a single entity, will theallotment of residential units to the land owner andthe developer be considered as self-use and thus non-taxable?

● If the residential units allotted to the developeralone are taxable, then what is the legal basis forexempting the land owners’ share of residential unitsand taxing those of the developer?

These are the questions that have so far stumpedboth the Departmental Officers and the private partiesequally. The situation bristled with confusion anduncertainty. The context seemed to invite Governmentintervention at least for Revenue considerations. Nowthe Central Board of Excise and Customs has comeout with a Circular dated 10th February 2012 enteringthe unchartered waters. Before analyzing whetherthe lingering questions as discussed above have beensatisfactorily answered in the Circular, let us examinethe propositions made out by the Department in theCircular. Unfortunately the Department hasapproached the issue in a non-practical manner andhas pulled out so called business models which donot lend themselves to conceptual clarity. Of course,the Circular does not fail to say that tax is payable inalmost all the instances covered.

The Circular claims to unearth and cover thefollowing business types :

● Tripartite Business Model.

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● Re-development and Rehabilitation Projectsincluding Re-construction by a building society.

● Investment Model.● Conversion Model.● Build-Operate-Transfer (BOT) Model.● Joint Development Agreement Model.

Now let us examine what the CBCE has to sayabout each Model.

A. Tripartite Business Model :

The CBEC has asked itself a question as to whetherflats/houses given to the land owner in exchange fordevelopment rights to the builder are taxable. Inanswer, the Board has stunned everyone by statingthat the construction service modeled on the abovepattern is not taxable for the period prior to 1st July2010. The Board says that the basis of its conclusionis in terms of its own Circular No.108/02/2009-STdated 29th January 2009.

In this context it is to be remembered that theCircular dated 29th January 2009 has generated a lotof controversy and it was remarkable for its amazingconfusion. The field formations of the CBEC hadvirtually rebelled against the Circular by refusing toimplement and apply the Circular. There has beenno instance in the country where anybody got theDepartment to apply the above Circular successfullyin their favour. Thus, it is one thing to say that theconstruction service of the above kind was not taxableprior to 1st July 2010, but another matter to suffuse itwith uncertainty by linking it up with the controversialCircular dated 29th January 2009.

B. Re-development and Rehabilitation Projectsincluding Re-construction by a Building Society :

The CBEC has restricted the scope of itsclarification to Housing Societies and its transactionwith its members. In this Model the Board hasclarified as follows.

The CBEC Circular states that under this Model,the builder/developer receives consideration fromtwo classes of his service receivers. The first categoryis the Society/Members of the Society who wouldtransfer development rights over the land (includingpermission for additional number of flats) to thebuilder/developer. The second category consists ofbuyers of flats other than the Society/Members whogenerally would pay by cash.

(i) Re-construction undertaken by a buildingsociety by directly engaging a builder/developer will

not be chargeable to service tax as it is meant for thepersonal use of the society/its members. Constructionof additional flats undertake as part of thereconstruction, for sale to the second category ofservice receivers, will also not be a taxable service,during the period prior to 01/07/2010;

(ii) For the period after 01/07/2010, constructionservice provided by the builder/developer to secondcategory of service receivers is taxable in case anypayment is made to the builder/developer before theissuance of completion certificate.

The Circular answers one of the questions weposed at the beginning, but restricts that to a BuildingSociety, which is rather strange. Exempting servicetax if payment is made after issuance of completioncertificate creates a distorted playing field andappears bad in equity. The basis of tax should notideally consist in the mode of payment of theconsideration.

C. Investment Model :

The Board’s clarification covers booking of flatsby investors either in terms of a specified area ofconstruction or a flat of a specified area. The CBECseems to catch buyers of investor-types who have theoption to exit from the Project by selling out or toretain the flat for own use. The CBEC clarifies that inthis Model, after 1st July 2010 the investment amountpaid in advance to the builder/developer would beliable to service tax. If the investor exits from theProject either before or after the issuance of completioncertificate, the builder or developer would be entitledto take credit under Rule 6(3) of Service Tax Rules,1994 (to the extent he has refunded the originalamount). The Circular cautions that if the builder/developer resells the flat before the issuanceof completion certificate, service tax would bepayable.

The objective of the Circular is clearly to tax allconsiderations that may arise in the course of investorpurchasing and selling.

D. Conversion Model :

The Board’s clarification is as follows :

Conversion Model : Conversion of any hithertountaxed construction/complex or part thereof into abuilding or civil structure to be used for commerceor industry, after lapse of a period of time.

Clarification : Mere change in use of the buildingdoes not involve any taxable service, unless

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conversion falls within the meaning of commercialor industrial construction service.

The clarification does not go far enough. It appearsthat the benefit of non-taxability in ConversionProjects is denied to residential housing Projects andthis makes it discriminatory. When commercial orindustrial conversion is eligible for exemption, whynot residential conversion?

E. BOT Projects :

The Circular concedes that there could be manyvariants of this Model and that tax implicationswould differ. The Government has milked this Projecttype for Revenue. This is clear from the Circular whenit says that the services provided by the Governmentor its Agency to the concessionaire or service providedby the concessionaire to the users of the facility orthe services provided by the contractor to theconcessionaire are all taxable. The Circular has notexplained as to how the services provided by theconcessionaire to the user of the facility would comeunder construction service and similarly when theservice provided by the Government or its Agencydoes not consist in construction, but only in accordingthe right to use or the right to develop, how it wouldattract service under construction service is notexplained in the Circular.

F. Joint Development Agreement Model :The Circular states that these Projects attract

service tax and for this they have referred to the typeof clarification provide under paragraphs 7, 8 and 9of another Circular No.148/17/2011-ST dated 13th

December 2011. This is curious. The circular dealt withservice tax liability of film & movie distributors andinter alia dwelt upon joint venture agreements in thatfield. Today it is well known that the film industry isup in arms against this service tax on virtually, movies.They have gone on a nation-wide strike very recently.It is a moot point whether the circular will stand orget withdrawn or postponed to a politicallyconvenient time or become modified, under thetremendous pressure being exerted by theentertainment industry. If it is modified or postponedor withdrawn, will it not affect the present circularon construction which is partly based on the reasoningin the “film industry” circular? These are thequestions that need answers. The view of the Boardby implication that all the flats developed under a

Joint Venture Model would be taxable under ServiceTax Law is guaranteed to lead to litigation.

G. Other Clarifications In The Circular :

Absence of requirement of Completion Certificate:

The CBEC has clarified that where completioncertificate is waived or not prescribed, its equivalentby any other name should be used as a dividing linebetween service and sale. The Circular states thatauthorities competent to issue completion certificatesinclude an Architect or a Chartered Engineer or aLicensed Surveyor.

H. Valuation :

The Circular states that value of the flats given inexchange for development rights, where the valuewould mostly not be known, would be determinableon the basis of value of flats sold by the builder/developer from his quota for a known consideration.In cases of any differences in the periods of sale, theCircular clarifies that the value of similar flats as aresold nearer to the date on which land is being madeavailable for construction should be taken. Thisclarification is in the context of the Tripartite BusinessModel.

I. Conclusion

It will be seen that the service tax on constructionrelated services has got murkier with the latestCircular of the Board. The Department can be happythat the Circular will fetch it more tax revenues.Equally it is guaranteed to generate uncertainty,confusion and controversy in equal measure and leadto litigation. It appears that the construction sector,especially that of residential housing, deserves a clearrespite and tax holiday from the vagaries of anuncertain and unclear service tax. There is somethingincongruous about a tax that lets off the hook thewealth-filled villas, commodious condominiums andpalatial mansions with terrace gardens sprouting allover the country but squeezes the sweat purchases ofresidential dwellings by the hard-pressed, taxpaying middle class. It is time for a rethink of taxpolicy on residential construction, not just inservice tax but encompassing all areas where taxes ofall kinds converge to the detriment of the citizens.The policy should call for equity and fairness in thetaxes that are collected on residential units where lifedwells in. ❐

TAXATION

If you pick the right people and give them the opportunity to spread their wings—and put compensation asa carrier behind it—you almost don’t have to manage them.” — Jack Welch


Hindustan Unilever’s Cost Aggression

Kaberi BhattacharyyaAssistant Professor, Department ofCommerce, Netaji Nagar College,Kolkata

Introduction

The most prominent star in the galaxy of theIndian Fast Moving Consumer Goods (FMCG)sector is Hindustan Unilever (HUL). Through

years of sustained hard work, right investments, highquality research and astute strategies – this FMCGgiant has built a powerful good name for itself, settinga very superior benchmark for others to pursue.

The acute competition prevalent in the IndianFMCG sector is well-known—its level intensifyingfurther with the entry of foreign players after theeconomic liberalization that took place in1991.Gradually, with every market segment and all productcategories becoming replete with substitutable brands,the only survival route available to these players is toincreasingly appeal to the tastes and preferences ofthe more and more discerning customers of the times.However for any such attempt, the threshold ofcompetitive cost and prices cannot really be crossed.Since plethora of brands exists in every productcategory, any unique price-rise by a brand/firm hasgenerally been observed to be penalized grossly inthis extremely value and price-sensitive Indianmarket. The EMI-riddled customers unhesitatinglyditch trusted brands for newer ones at the slightestinconvenience in their price-value matrix.

Hence controlling costs, curtailing costs and cost-minimisation activities occupy critical position in the‘must-do’ agenda of every company seeking to set upsuccessful business in this highly slippery FMCGmarketplace. Measures to rein in costs are plenty andnaturally differ with the size, nature and capabilitiesof the entities.

Objective

HUL—which operates in varied categories acrossmultiple product lines—faces an overwhelmingchallenge to balance cost, price and quality at the faceof superlative customer expectations.

Here an attempt has been made to enlist the cost-controlling measures of HUL under such testingcircumstances.

Mitigating Higher Raw Material CostIt is known that all costs are not controllable and,

like any other company, rise in the prices of inputsand periodic rapid spirals therein are major de-stabilising factors for the cost and price-structures ofHUL. Here, passing on the increased burden of risinginput costs to the ultimate customers is the last resortand best avoided—for it is inevitably accompaniedby sacrifice in market-shares in the highly competitiveFMCG marketplace. This point may be substantiatedfrom the following discussion :

The period from January to June 2008 saw a sharpupward spiral in the prices of key inputs of HUL’sproducts such as LAB, petroleum derivatives andpalm-oil. This contributed to the sharply escalatingcosts for soaps and detergents. Here, HUL made thestrategic choice of passing on these input costs almostentirely to its customers by taking substantial price-increases spanning its portfolios.

HUL hiked prices of its products by 1-28 percentacross categories such as tea, detergent, soap,shampoo and personal care from October 2008.Among the key price moves, HUL hiked prices of Lux100 gm soap bar by 6 percent, of Surf Excel QuickWash detergent by 5-6 percent, and of Surf Excel Blueby12-13 percent, of Brooke Bond Red Label tea andTaj Mahal tea by 8-14 percent.

Compared to its competitors, HUL took largerprice increases in some of its key segments. In theJanuary- March quarter of 2009 (which was the lastquarter of the financial year 2008-2009), net profit ofHUL grew by 4 percent from Rs 381 crores to Rs 395crores. Net sales for this quarter, however, grew by 6percent, compared to the industry growth rate of over12 percent. Although the sales realizations hadincreased by 12 percent in this quarter, sales volumehad gone down 4.2—percent indicating thatcustomers had to spend more money for buying lessof HUL’s product(s). Consequently, the company’smarket-share in soaps and skincare fell from 49.6percent and 53.1 percent in December 2008,respectively, to 48.2 percent and 52 percent in March

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2009, respectively. HUL’s arch rivals in the consumerproducts space such as Procter&Gamble, GodrejConsumer Products Limited, and Dabur IndiaLimited, among others, managed to dent its marketshares in most categories like detergents, soaps,shampoos and skincare.

The HUL management also admitted to early signsof downtrading towards cheaper brands and smallerpack sizes. And, as the analysts pointed out, HUL’sfocus on high-value products vis-à-vis stable pricingby its rivals made it lose market share from all fronts– established players, regional ones and newerentrants—especially in product categories directedtowards the mass end of the market (“ HUL changesstrategy to regain market share”, 2009).BetweenMarch 2008 and March 2009, HUL lost market sharein key segments in which it operates, viz, personalwash (from 54.3 percent to 48.2 percent), skincare(from 55.4 percent to 52 percent) and toothpaste (from29.5 percent to 28 percent) [“Slowing juggernaut”,2009]

In the April-June quarter of 2009, HUL’s net salesfell by 8 percent to Rs 4,476 crores and, consequently,net profits dipped from Rs 558 crores to Rs 543 croresthat is by 2.7 percent. The reasons attributed for suchfall in net profits were as mentioned above plus ahigher spend on advertisement to the tune of 26percent in the said quarter, as well as a 15 percentrise in Minimum Alternate Tax (MAT) and lowerother incomes. Foreign exchange loss of Rs 31.8 croreon open-forward contracts was also a contributor forthe above-mentioned fall in net profits (“HUL Junequarter net down 2.7% on higher ad spend”, 2009)

Despite the endorsement of some of the biggestBollywood stars viz, Shahrukh Khan, Aiswariya Rai-Bachhan, Priyanka Chopra, HUL’s beauty soap Luxsaw the biggest dip of 2.1 percent in value marketshare in the 12 month period ended June 2009.Similarly, HUL’s germ-protection brand Lifebuoy’svalue market share dropped from 17.9 percent to 16.6percent during the same period.

However the prices of key raw materials such aspalm oil, LAB and packaging materials started to easeduring 2009, dropping by about 25 to 40 percent below2008 levels. (However, the sharp correction in inputprices has another dimension also. It helps to resurrectregional and local competitors in the staple FMCGcategories. Since urban consumer spends continuedto be under pressure during 2009, the threat ofconsumers’ downtrading to cheaper local as well asnational brands continued to loom for HUL.)

From early 2009, HUL cut prices of its key soapsand detergents by 4 percent to 20 percent. The price-cuts have been undertaken through a combination ofincrease in weight of some packs or a reduction inMRP. For instance, HUL increased the weight of its

popular Lifebuoy toilet soap from 115 gm to 120 gm,but kept the price unchanged at Rs. 15. This translatedinto an effective price-cut of 4.2 percent. HUL alsoreduced the MRP of 200 gm Wheel Active Bluedetergent cake by 20 percent from Rs 10 to Rs 8. Forthe quarter ended September 2009, operating profitgrew 16.48 percent to Rs. 605.72 crores from Rs. 520crores while operating margins improved by 140 basispoints, with tight cost management and operatingleverage.

Vegetable oil prices, which had dropped toextremely low levels in 2009, began rising in 2010 andincreased steeply towards the end of 2010. Crude oilprices increased significantly. This adversely impactedthe price of laundry chemicals, packaging cost andfreight cost. The practice of extra-fill in the form ofconsumer promotion and higher grammage packs wasdiscontinued. Moreover, the business was manageddynamically with increased frequency of cost andpricing review, and aggressive cost savingprogrammes, which helped to minimise the impactof escalating input-prices.

However HUL has not always passed on theburden of rise in input costs to final customers –devising ways to circumvent such cresis to maintainstability in its costs and prices in the highlycompetitive market that it operates. So HUL here takesadvantage of cost variations by seamlessly changingproduct formulations without any difference in theend-use experience through value–engineering whichis enabled through its supreme capacity of researchand innovation.

In 2003, there was tremendous rise in oil pricesand firming up of international cargo rates whichimpacted the costs of HUL quite adversely. Use ofalternative materials, tight control of indirect costs andother cost effectiveness programmes helped mitigatethe impact of cost increases. Savings generatedthrough these initiatives were re-invested in superiorquality and competitive pricing. Operating marginswere lower in 2003 compared to 2002. Relentless focuson cost reduction programmes resulted in significantbenefits. Several breakthroughs in factory efficiencieswere achieved, resulting in significant productivitygains and conversion cost optimisation.

In 2005, again there was steep increase inpetroleum (there was major diversion of oils forproduction of bio-fuels) and petrochemical costsleading to substantial rise in raw material, packagingmaterial and distribution costs (freight). HULemployed ‘Best Practises’ and leveraged Unilever’srelevant global and regional strengths to mitigate suchcost pressures to a considerable extent. Significantbuying cost advantages were generated and strategicalliances with many international and local vendorsfor key raw and packing materials, led to development

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of new technologies, new materials and joint costreduction programmes (through reduction of inputcosts, locational synergies, and import substitution) –the benefits of which were shared between HUL andthe concerned vendors. This was part of the ‘Ten PointProgramme’ that HUL initiated in 2003 where thecompany sought to leverage its scale fully in supplychain, logistics and buying to drive lower costs. Globalbuying of some of the ingredients across differentgeographies obtained better economy of scale forHUL. For e.g., in case of display containers—insteadof every country doing its own buying, it is beingsingularly done at the European level under a globalprocurement officer. Moreover, through VendorCertification Programme several vendors werecertified for implementation of quality systems andzero defect track record. The buying function of thecompany focused on reducing lead time andprocurement costs and developing reliability in thesupply of raw materials and PM by fully leveragingbenefits of scale and synergy through Unilever’sglobal buying network.

Several small scale industries and ancillary unitswere developed to support HUL’s operations. HULalso undertook a ‘Partner in progress’ initiative, underwhich more than 500 managers visited about 65suppliers to develop meaningful ways of improvingthe quality of the supply chain through mutuallyrewarding partnerships.

Rationalisation of Advertisement and PromotionExpenses

Operating multiple product-lines in highlycompetitive categories, HUL is India’s largestadvertiser, accounting for about 18 percent of totalspend on advertisement in the country. India’s largestmedia-buying house Group M manages HUL’s mediabuying. HUL works with media agencies like Lowe,O&M and McCann-Erickson. According to roughestimates, HUL’s ad-spends are placed at around Rs.1,300 crores on an annualized basis.

Lord Leverhume—one of the pioneering leaders ofUnilever—had said ‘I know half my advertising iswasted. I just don’t know which half.’ But the presentmanagement is extremely conscious to plug anyinefficiency in its promotional spends. In 2009, HULrevised the terms of its contract with its advertisingagencies with a view to derive more value for its money.

Aligning its policy with the global ‘performance-based’ payment package of Unilever, HUL sought toreimburse its agencies the cost for the advertisement,topping up by a bonus if certain performance targetsare achieved. However, if the campaign falls short ofthe target, the company will only cover the costsincurred by the agency. The advertising agencybusiness margins were also slashed from 10 percentto about 5 percent. This is quite unlike the earlier

system where upfront commissions were guaranteed.Under the earlier system, creative and media agencieswere compensated either on a monthly retainershipfee or on the basis of commissions which could varybetween 8- 12 percent of their media budgets.

Here the concept of ‘Return on MarketingInvestments’ (ROMI) has been used to drivecontinuous improvement. ROMI is about optimizingthe effectiveness of advertising, promotional andtrade investments. HUL has developed advancedmarketing mix modeling techniques that allowsassessment of all the marketing levers to drive growthand superior yields from marketing investment. Forexample, the media elasticity of each of the brandshave been identified which helps HUL to optimizeits advertising spends.

With increase in rural consumption in certainFMCG categories like hair oils, toothpaste, shampoo,skin creams and lotions, HUL seeks to judiciouslybreak down its massive advertisement budget amongprint, electronic and below-the-line activities to raiseits effectiveness pertinent to relevant geographies.

To enhance the effectiveness of advertisement andpromotional expenditures, world class quantitativetools such as Advertising Budget Guidelines,Minimum Invest Levels, Market Activities Costingand Dynamic Resource Allocation were used and fullyleveraged through unlimited access of Unilever’s suchoutstanding Intellectual Properties.

Productivity AugamentationFor example, in some of HUL’s detergent factories

‘twin track’ is deployed on single production lines.This helps in nearly doubling of the production thusimproving operating efficiencies and cutting downcost. Apart from this, today most of HUL’s productionlines have developed the capability of quickchangeovers to meet the market demand mitigatingto a large extent the risk of obsolescence and providingfor long-term cost-efficiency.

Elimination of WastesAt HUL, cross-functional teams identify and put

in place actions to eliminate wastes and hidden costsfrom all facets of the business. TPM (Total ProductiveMaintenance) is employed in factories to continuouslyreduce business waste and eliminate losses in thesupply chain to meet zero error, zero loss. Throughapplication of TPM, appropriate capital expenditureinvestments are executed in creating capacity to enablefuture growth, and to de-bottleneck existing assets torun them efficiently. These result in increase in assetproductivity levels improving ‘throughput’ fromexisting assets generating savings which are ploughedback into the products. It helps in delivering top-quality products with world class service at acompetitive cost.

From 2009, HUL has sought to downsize the

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number of SKUs in its portfolio of over 35 brandsextending to 1,200 SKUs. By eliminating andrationalizing the tail-end SKUs, HUL is in the processof substantial simplification and cost-savings.

Empowered teams led initiatives to reduce specificenergy consumption and also piloted the use ofsustainable alternative biofuels at several sites,resulting in appreciable savings in energy costs.

HUL has sold several residential and commercialproperties across India to cut costs and raise cash. Ithas shifted its headquarters to Mumbai’s Andheriwestern suburb and leased out its formerheadquarters in South Mumbai to either corporatesor banks after refurbishing it.

Citadel strategy is pursued for certain specificbrands (usually premium ones) for concentrating onspecific geographies where most of the demand isgenerated. For example, in the ice-creams business,20 major cities have been focused upon. It helps inprotecting the turf and growing these specifiedmarkets for the company. At the same time, it alsoconserves the resources by not spreading out on equalstrength across varied geographies.

Cutting down on travel of executives and usingvideo-conferencing instead.

The traditional model is essentially about cost +margin=price. In the bottom of the pyramid, the samemodel cannot be applied. So the price is first set. Hereprice minus desired margin equals the desired cost.And the target cost is the end-to-end cost of the totalbusiness system. So, to arrive at better efficiencies inmanaging costs, the factories are closer to the pointof sale that allows reductions in freight costs—bothinwards cost for materials and outward cost fordespatch to the customer. The costs are reduced—both at back-end as well as point-of-sales throughacross-the-board innovation.

In 2009, Polman had frozen executive bonuses(executive directors and senior management) andlinked them to performance, instilling a sense ofaggression and performance culture in Unileverglobally. Such freeze which insiders refer to as thepolicy of deferred bonus, have been lifted—at least inIndia. HUL has witnessed double digit volumegrowth for at least two quarters now after a year ofsingle digit growth (5% in volume terms for the yearended March 2010). Consequently, senior and middle-level managers have earned bonuses up to Rs. 40 lakhand Rs. 20 lakh, respectively. However, Polman hasimplemented targets for executive bonuses based onsales volume instead of earnings.

HUL has either shed or reassigned managers as partof a plan to link revenue and profits to headcount. In2009, some staff including managers with 5-10 years’experience in the company has been redeployed to

functions such as research and development, while therest have been given a severance package and laid off.These jobs were mostly in supply-chain management;where the company undertook a massive restructuringidentify redundancies (“30 HUL managers face layoffor redeployment”, 2009).

In order to optimize resources in an increasinglycompetitive scenario, HUL offered VRS to about 200people. The VRS is being offered to its staff in clericaland field sales offices. The eligibility criteria will befor people over 40 years of age who have spent morethan 15 years with the company (“HUL offers pinkslips to 200 staff, 2009).

HUL had divested a 51 percent stake in the BPObusiness (earlier known as Unilever India SharedServices) in October 2006 in line with its strategy to focuson core businesses such as home and personal care.

Revamping Distribution Network vis-a-visImproving Efficiency and Cost

Distribution efficiency happens to be an area ofcore competence for HUL. Apart from its wide andunmatched distribution network, HUL has strived toaugment the quality of coverage through cutting-edgetechnology and made substantial investments in I-Tfor the purpose.

Since 2001, through RS-Net which is a web enabledstockist management system, HUL has establishedtwo way connectivity with its stockists. Using thisinfrastructure, HLL has implemented a ContinuousReplenishment based ordering and selling system thatsought to eliminate inefficiencies in stockist inventoryholding—both in terms of quantity and quality. AllRedistribution Stockists who are key elements inHUL’s country-wide distribution frameworkare under a Continuous Replenishment System,leveraging the internet. An end-to-end technologysolution has been deployed which helps reduceinventory cycles while enabling optimum servicelevels—ensuring freshness of stock, reduction inwastage and less working capital blockage. BeforeContinuous Replenishment System was implemented,stock levels of as high as10 days to 2 weeks weremaintained with the suppliers, which after itsimplementation has come down to 5 to 7 days.

Backing this up was the ‘Internal NetworkPlanner and Optimiser’ which helped in ascertainingthe daily stock positions at each point in the supplychain, project stock requirements at these points, planfor replenishment — and do so with completetransparency across the supply chain. Instead ofplanning for every month, the company was thusfacilitated to plan for every day, and even for everyshift, in line with an overall optimisation strategy. Theunderlying objective was to move to making todaywhat was sold yesterday.

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The physical distribution set-up has also beencontinuously stream-lined. The hub-and-spoke methodon which the rural distribution framework wasbuilt up (comprising Redistribution Stockists,ReDistributors and Star Sellers) was dismantled byHUL in 2009 across India, as connectivity to rural areashad improved. SSs who were responsible for supplyingHUL’s basket of products to the kiranas in the nook andcorner of the hinterland were eliminated and the RDswere directed to supply the products directly to thekiranas. The SS partners have been absorbed to a largeextent by HUL in its wholesale channel. In the process,its entire distribution process was streamlined; to doaway with unnecessary layers in distribution and thusimprove efficiency and reduce cost

During 2010-11, the Supply Chain team workedon a strong Cost Effectiveness Programme todeliver savings throughout the supply chain, byvarious means including identification of furtheropportunities for waste elimination. This hasfacilitated the business to achieve a significant costreduction (around 6% of supply chain costs), thehighest ever in the recent past.

Continuous improvement to develop consumer-led, agile value chain through leveraging scale andimproving efficiencies by rapid deployment ofappropriate technologies has resulted in reduction ininventories, improved product freshness and time-

to-shelf, which has resulted in significant reductionof working capital.

ConclusionHUL’s strategy on costs has been succinctly

summarized by Harish Manwani, Chairman, HUL, atthe company’s 76th Annual General Meeting (“HUL torationalize costs, prices”, 2009) where he declared thatfor his business ‘It will be business as usual on growthbut business unusual on costs.’ The FMCG behemothseeks to be extremely cautious on its cost front—deploying it to generate and sustain growth and thisstand of the company has been vindicated from the abovediscussion. Each and every aspect of the organizationhas been considered here, which is the very essence ofan effective cost minimization programme. ❐

References■ “HUL changes strategy to regain market share” (2009,

June 23) The Economic Times■ “30 HUL managers face layoff or redeployment” (2009,

June 24) The Economic Times■ “HUL June quarter net down 2.7% on higher ad spend”

(2009, July29) The Economic Times■ “HUL to rationalize costs, prices” (2009, July 4) Business

Line■ “Slowing juggernaut” (2009, July 12) Business Line■ “HUL offers pink slips to 200 staff”( 2009, August 12)

The Economic Times■ Annual Reports of HUL, from 2001 to 2010-11■ www.hul.co.in

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an addition on the ground that the value of stock wasreduced illegally on the basis of the reports from theconcerned Officers. The Commissioner (Appeals) andTribunal confirmed the addition made by theAssessing Officer. Thereafter the Assessing Officerimposed penalty under Section 271(1)© of the Act.The Commissioner (Appeals) reduced the penalty.The Tribunal set aside the order holding that nopenalty could have been imposed on the assessee asit has disclosed all material facts and there was noconcealment of income on its part. On appeal by theDepartment before the High Court, the High Courtdismissed the appeal of the department holding thatthe accounts of the assessee were duly audited andthe Comptroller and Auditor General had approvedthe accounts of the assessee. Merely because theassessee had claimed depreciation which claim wasnot accepted by the Revenue that by itself would notattract penalty under Section 271(1) ©.

ConclusionFrom the provisions of Section 271(1) © of the Act

and the case laws discussed above it can be inferredthat no penalty can be imposable unless it is provedthat the assessee had concealed the income or

furnished the inaccurate particulars of income. Theassessee is to substantiate the same. Burden is alsoon the Assessing Officer to prove that the assesseehad concealed the income or furnished inaccurateparticulars of income. Mere having the opinion willnot serve the purpose. Mere non-accepting the factwould not attract penalty under Section 271(1) © ofthe Act as held in ‘H.P. State Forest CorporationLimited’ case (Supra). Intention of the assessee toconceal or give inaccurate particulars of income is tobe proved. Mens rea is the essential requirement toimpose penalty as held by the Supreme Court in‘Dilip N. Shroff V. Joint Commissioner of IncomeTax’ – (2007) 291 ITR 519 (SC) in which the SupremeCourt held that mens rea was an essential require-ment for imposing penalty under Section 271(1) © ofthe Act. The Supreme Court in the said case alsoobserved that if the contention of the Revenue isaccepted then in case of every return where the claimis not accepted by the Assessing Officer for any reason,the assessee will invite the penalty under Sec. 271(1)© of the Act. ❐


“Vision is the art of seeing the invisible.” — Jonathan Swift


Managing Organisational Creativity

Om Prakash DaniFCA, FCS, Member, Executive CommitteeSri Aurobindo Society. Puducherry

M. S. SrinivasanResearch Associate, Puducherry

Sri Aurobindo Society

The future belongs to the creatives. In theemerging and future world of business,competitive advantage depends not on capital,

not even on technology, information or knowledgebut on creativity and innovation. Those companieswhich are able to harness the creative and innovateenergies of its people will be the leaders of the future.How to do this at a collective or organizational level?This question is one of the current debates inmanagement. This essay examines this question basedon some of the latest studies and research on thesubject and also on the Indian spiritual perspectiveand practices on creativity.

Tap ideas from all ranksInvite ideas from all the levels of the organizational

hierarchy and tap the creative potential of thewhole organization. Don’t depend on a few elite or“superstar” creatives. This requires genuineempowerment of the frontline workers. Recentresearch shows that giving complete autonomy andencouragement to the initiatives of workers at thelower level has enormous advantage. For example,Google’s founders tracked the progress of ideas thatthey had backed versus ideas that had been executedin the ranks without support from above, anddiscovered a higher success rate in the latter category.Similarly, it was noted that Philip Rosedale, thefounder and chairman of Linden Lab, the fast-growingcompany that manages Second Life, says the greatestsuccesses come from workers’ own initiatives.

Encourage and Enable CollaborationCounteract the myth of the lonely innovator;

encourage and reward collaborative effort; incor-porate the ability or willingness to share ideas orcollaborate with others into the performance appraisalsystem; create an environment which enablescollaboration.

Recently Harvard Business Review brought out aspecial issue on “Collaboration.” In an article in thisissue, Paul Adler and his team of scholars, make thefollowing observations based on their long andextensive research on what they call as “CollaborativeEnterprise”:

● Collaborative communities encourage people tocontinually apply their unique talents to groupprojects—and to become motivated by a collectivemission, not just personal gain or the intrinsicpleasures of autonomous creativity. By marrying asense of common purpose to a supportive structure,these organizations are mobilizing knowledgeworkers’ talents and expertise in flexible, highlymanageable group-work efforts. The approach fostersnot only innovation and agility but also efficiency andscalability.

● Collaborative communities share a distinctiveset of values, which we call an ethic of contribution.It accords the highest value to people who lookbeyond their specific roles and advance the commonpurpose.

● The key coordinating mechanism of acollaborative community, which is often made up ofoverlapping teams, is a process for aligning the sharedpurpose within and across the projects. We callthat type of coordination interdependent processmanagement, a family of techniques including kaizen,process mapping, and formal protocols for brains-torming, participatory meeting management, anddecision making with multiple stakeholders.

Open the Organisation to diverse perspectivesInvite opinions, viewpoints and perspectives from

diverse disciplines and social or cultural groups. Forexample, the design firm IDEO includes engineers,psychologist, marketers and behavioural scientists inits innovation team. Gender diversity is an importantpart of this process. The perspectives of woman inthe creative process can be a very precious input in amale dominated corporate environment.

Map the Phases of Creative WorkEach phase of creative work requires different

kinds of management. For example, the first phaseof the discovery or creating the new idea has to betotally unstructured with maximum freedom andautonomy for the members of the creative team. Anyattempt to standaradise this phase or structure it intoa fixed format, would be counter productive. Themain objective of this stage is creative incubation and

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not standardized efficiency. But the later stages ofcreativity when the idea moves form the stage ofdiscovery to implementation can be structured orstandardized for greater efficiency. Similarly, eachphase of the creative process may require differentkind of people with temperament, talent and skill-setwhich correspond to that stage. For example, thediscovery phase requires people who are radicalthinkers or paradigm-breakers. But the subsequentphases require skill in operational management likeresource allocation.

Find the Right Balance between Efficiency AndCreativity

The corporate world in general tends towardsprocess standardization which enhances efficiency,but it stifles creativity because there is not muchfreedom of choice, judgement or innovation in arigidly standardized process. But still efficiency isessential for effective operation management. Howto reconcile the need for standardized efficiency withcreative freedom? Joseph Hall and Eric Johnson, intheir article in Harvard Business Review, presentssome useful suggestions.

We have to distinguish and identify clearly whatare the activities or domains where creative freedomis essential for adding value to the customer or theprocess. In general, creative freedom is moreimportant in those domains where large variety, fastchange and uncertainty are the main driving factorsand a quick response to the changing customer needsor environment is needed for gaining competitiveadvantage. In such domain, standardization has tobe kept to the minimum. But in those domains wherecreative choice, judgement or innovations ofindividuals or teams do not add much value to theprocess or customer, standardization may benecessary.

For example, Ritz-Carlton gives large creativefreedom for the front-line team made of deskmanagers, steward’s waiters and chefs to plan,innovate and decide what is best for serving the needsof individual customers, without any interferencefrom higher management. But at the same time,maintains carefully defined standards for cleaningrooms and other facilities. Initially, Carlton had adetailed well-defined list of instructions on how toserve or behave with the customer in every possiblesituation like for example, “use words like ‘goodmorning’, ‘certainly’ I’ll be happy to.“ But later Carltonmanagement realized that such a standardizedapproach doesn’t give sufficient freedom for thefrontline staff for innovation and flexible judgementto serve the needs of the individual customer. So, thestaffs guidelines are redesigned to keep them broad

and vague like, “I am empowered to create unique,memorable and personal experiences for our guest.”Customer satisfaction improved.

Manage the Commercialization Trade-offVery few creatives have the capabilities to

commercialize their ideas. So, in many largeorganizations these two stages or functions areseparated and kept away from each other. But aproblem with this method is that commercialisersdon’t have the same passion for the idea as its creators.As a result, quite often, projects loose steam as theymove from creative phase to the stage of commer-cialization. The other alternative is to make thecreatives and commercialisers work together in ateam. For example, as we have mentioned earlier,the design firm IDEO includes marketers in the designteam along with idea-creators.

Minimize Dilution through BureaucracyAs the idea passes from the discovery phase and

moves through other departments like finance,engineering or sales, each trying to modify it accordingto their needs, the creative power of the idea getsconsiderably diluted. Leaders and managers mustmake a conscious effort to counteract this dilution ofthe idea through bureaucracy. One way of doing itto involve bureaucracy in the creative process. Wehave to create a system or process by which thecreative team which generates the idea and theoperational management team which implements theidea work together.

Motivate People to Embrace the CreativeChallenge

Management has to encourage people to constantlygrapple with challenging problems and explore newpossibilities and ideas. The creative minds arefired by independence, autonomy and intellectualchallenge and the organization must be able to providesuch an environment where creativity can flower.However, as we have indicated earlier, the attentionof management should not be confined to a fewexceptional creatives. Every individual has a creativespark in her. To bring it forward, we must make aneffort to understand her unique interests, aptitude,skills and capabilities and provide a matchingchallenge.

The other important aspect of motivation, whichis very much recognised, is appreciation. In generalcreatives are self-motivated and love the intellectualchallenge involved in creating something new. Butthis doesn’t mean they are entirely free from thelure of external motivators. They may becomedemotivated if their good works are not appreciated.So a sympathetic and appreciative leader, who can

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understand precisely—through listening, dialogueand discussion—the motivational needs of eachcreative and keep them in high spirits by providingthe right motivational inputs, can considerably boostthe creative potential of a team.

Understand the Value of Failures and the Virtueof Mistakes

The creative journey is a non-linear, unpredictableand uncertain process, which proceed through trialand error and experimentation. Errors, mistakes andfailures are inevitable and integral part of the creativepath. They are part of the learning process and mustbe viewed as opportunities for learning and growth.As long as we are learning something new from ourmistakes and failures, they must be seen andappreciated as positive virtues and not condemnedor punished as signs of incompetence. So leaders incharge of creative teams must tolerate mistakes andfailures. She has to cerate a culture of learning wherepeople are trained to probe deep into the root causesof mistakes and failures and make this learning astepping stone to future growth and success.

Create a Filtering MechanismEvolve a mechanism or process for filtering ideas,

which means, selecting good ideas and weeding outthe unfeasible ones. According to the well-knownmanagement guru Gary Hamel, the best way to dothis is found in the Silicon Valley, where, “If an ideahas merit, it will attract venture capital and talent. Ifit doesn’t, wont.” Gary Hamel believes that SiliconValley model can be replicated within a company bycreating a “dynamic internal market for ideas, capitaland talents” and gives some examples to show howit can be done. One of them is Royal Duth Shell Co.which had set up a panel for screening and fundingcreative ideas. Any employee of Shell who has acreative idea is invited to give a ten-minute pitch tothe panel, followed by a 15 minute Q & A session. Ifthe member agrees that the idea has real potential,the employee is invited to a second round ofdiscussion with a broader group of company expertswhose knowledge or support may be important tothe success of the supposed venture. Ideas that getthe green light are provided with funds within eightor ten days.

Include the Customer in the Creative ProcessIn the corporate world, creativity cannot be an end

in itself but has to serve customer needs. So, whereverpossible it is better to include the customer in thecreative process. Here are two examples wherecustomer makes a significant contribution to thecreative development of a product :

● Lego, Danish toy-maker, invites the customerss’children, parents and adults to suggest ideas for

product development. Customers design their ownproducts which are then sold to them.

● Sony has set up a web-site to support customerswho are interested in developing new type of gamesthat could be played in the Sony Play Station. It attractsnearly 10,000 participants, a number that vastlyexceeds the number of in-house and contractdevelopers creating games for the play station.

Train People in Intuitive ThinkingThe truly creative idea comes not from the logical

and analytical intellect at the surface levels of ourbeing but from the deeper levels of consciousness,which contains the intuitive faculties. Sri Aurobindodescribes intuition as “rays from an intenser andgreater Light than the tempered clarity of ourintellectual understanding.” (7) To awaken or activatethese faculties in employees they have to be trainedin the following practices :

1. How to receive intuition by keeping the surfacemind silent.

2. How to arrive at the holistic insight or decisionbased on an understanding of the consequencesfor the larger whole of life.

3. Integrative thinking, which means how tointegrate two opposite ideas in a highersynthesis.

The main discipline for receiving intuition is tosilence the surface intellectual mind. As The Motherof Sri Aurobindo Ashram explains the process :

“To learn to be quiet and silent—when you have aproblem to solve, instead of turning over in your headall the possibilities, all the consequences, all thepossible things one should or should not be doing, ifyou remain quiet with an aspiration for goodwill, ifpossible a need for goodwill, then solution comesquickly. As you are silent you are able to hear it.”

However, this intuitive approach through mentalsilence requires a certain minimum level of mentaldevelopment. We must keep in mind that a lazyunderdeveloped mind full of inertia cannot remainsilent, and if it tries to do so, it will slip into a blackhole in the subconscious, where there is neither thelight of reason nor intuition. So a culture of deep andcreative thinking provides a good mental foundationfor the development of intuition in the individual orthe group.

Here comes the importance of another method fordeveloping intuition, which is to stretch the rationaland logical mind to its utmost limits. For example,modern systems theory and ecological thinking whichviews each thing as part of a larger whole and tries toperceive the interconnected unity of all thing, can be

GENERAL MANAGEMENT



Demistifying Khandelwal Committee

Recommend actions on HR in PSBs

J D SharmaM.Com, CAIIB, DIM, MBA, LLB, MIMAPresident—Indian Overseas Bank Officers’Association & Jt. General Secretary, AIBOC

General

The committee has conducted an in-depth studywith following broad assumptions :

1. Forces of competition, consolidation andconvergence are exerting continual pressure onorganizations and individuals alike to deliver best value.

2. The confluence of market forces and technologyhas made business highly competitive.

3. Due to integration of global markets the profitmargins have thinned

In this background, the Committee has sought toaddress various HR related issues by suggestingmeasures for comprehensive HR reforms sothat Public Sector Banks can emerge as globallycompetitive financial entities, leveraging their humancapital. The entire philosophy of the Committee issuspect since the agenda of consolidation of Public SectorBanks was discussed in Parliament and the then FinanceMinister assured the House that consolidation of PublicSector Banks is not on the agenda of the Government.

As regards internationalization of our bankingoperations, it is emphasized that the PublicSector Banks are adequately equipped to handleinternational Trade Finance of domestic customersand also the visible and invisible foreign remittances.In a country where 45 to 50 crores of the people donot have access to banking facilities, the laudableinitiative of RBI and Government for financialinclusion must take priority over blindly imitating theculture and practices of Global Banks. It is more sowhen 2008 financial crisis witnessed collapse of giantglobal banks. We must remember that big is notalways strong in the business of banking.

It is the efficient and transparent banking systemwith proper corporate governance which should bethe focus of Government initiatives. In any serviceindustry including the banks, Human Resources playa vital role and must be regarded and respected assuch. The need of the hour is to create a feeling ofNationalism and orientation to serve the domesticclientele with the commitment towards making ourcountry a better place. The turmoil witnessed in

sectors like Civil Aviation in spite of consolidationand so-called competition and convergence must betaken as a lesson.

If we rely on the following table taken from thereport of Khandelwal Committee on HR issues inPublic Sector Banks, we get startling revelations :

Table-1Indian Banking System—1991 Through 2009

1991 2009 Change

Branches (No.) 46,051 65,412 19,361

Deposits 2,43,701 40,53,638 38,09,937(Rs. crore)

Advances 1,51,341 29,94,334 28,42,993(Rs. crore)

Customer (No.) 8,64,18,430 58,16,58,012 49,52,39,582

Staff (No.) 9,47,544 9,41,375 6,169

It can be noticed that in the year 1991 there were9,47,544 employees to manage 46,051 branches,whereas in the year 2009 there were only 9,41,375employees to manage a larger number of 65,412branches. Similarly the business mix has gone up fromRs. 3,95,042/- crores in 1991 to Rs. 7,47,972/- croresin 2009. The increase in client base has beenphenomenal from 8,64,18,430 to 58,16,58,012.

If we take the tentative figures for December 2011,the number of branches has crossed 75,000, businessmix has crossed Rs.109,24,848 crores and the clientbase has increased to 72,67,50,000.

These figures reveal that a reduced number ofemployees are being forced to manage huge growthof business, customers and network. It has resultedin the bank officers working extended hours rangingfrom 10 to 14 hours. It implies that the compensationpaid to them for an official 6 ½ hours work (net oflunch hours) is being used to make them work almostdouble the prescribed hours. The phenomenalincrease in business and client base and asimultaneous reduction in staff strength defy logic.Such a situation has made not only the working hoursof officers unduly large, but has also led to worsening

HUMAN RESOURCE MANAGEMENT


health, social discontentment, strained family life andoverall stress—both mental and physical.

Khandelwal Committee is conspicuously obliviousto such major issues while recommending various HRinitiatives. If employer ignores such vital issuespertaining to HR, no force on earth can motivate theemployees. It is violative of human rights andexploitation of officers’ community in Public SectorBanks, where the so-called strong trade unions are inplace. It is a serious cause of concern not only for theofficers’ associations but also for the bank manage-ments, Government, Indian Banks’ Association andHuman Rights Organisations.

Manpower and recruitment planningThe government has accepted the recommen-

dations of the committee with regard to manpowerplanning factoring the impact of technology, staff cost,net work expansions, officer–clerk ratio, benchmarking, outsourcing, standard of recruitment,qualification lateral recruitment on contract largelyfor specialized positions etc.

Manpower planning can be better done by thebankers having vast domain knowledge of the businessof banking. The suggested help of outside experts isundesirable. The suggestion to set up a steeringcommittee of the Board to monitor HR activities withtwo HR specialist directors in the Committee isuntenable because there is no specific provision andpractice to appoint two HR specialists on the Board ofPublic Sector Banks. Recommended ratio of officers andclerks at 1 : 0.5 for urban and metro branches and 1 :0.75 for rural and semi-rural branches has huge costimplications. In CBS, several non-core tasks oftransactional nature have been migrated from clericalmenu to supervisory menu, thereby compelling a highcost resource (officer) to do a job which can be betterdone by a low cost resource (clerk).

An economic sense must dictate that in anycomprehensive manpower planning the objectiveshould be to identify more and more jobs of routineand transactional nature which could be added toexisting clerical duties and only security related jobsincluding the decision making must be entrusted toofficers. It will help officers to attend to quality joband clerks to attend to routine and mundane jobs.

Table IIS. Name of the Bank Officer- Staff Cost

No. Clerk Cost IncomeRatio Ratio Ratio

1 Punjab & Sind Bank 0.24 75 0.492 Andhra Bank 0.35 57 0.463 Oriental Bank of Commerce 0.63 55 0.454 Union Bank of India 0.70 52 0.425 Vijaya Bank 0.84 65 0.51

6 Allahabad Bank 0.93 62 0.427 Canara Bank 0.94 61 0.44

Average for these 7 banks 0.66 61 0.461 Punjab National Bank 1.36 70 0.422 Bank of India 1.23 63 0.363 Indian Bank 1.18 69 0.394 Bank of Baroda 1.14 66 0.455 Syndicate Bank 1.13 61 0.506 Indian Overseas Bank 1.11 66 0.437 Corporation Bank 0.98 47 0.36

Average for these 7 banks 1.16 63 0.41Average for all Nationalised 1.02 63 0.44Banks

A perusal of the above figures would reveal thatthe Punjab and Sind Bank with the lowest officer-clerkratio of 1: 0.24 has the highest staff cost at 75% asagainst an average of 65% for off the nationalisedbanks as compared to Corporation Bank with officer-clerk ratio of 1: 0.98 having the least staff cost ratio of47%. Interestingly, Punjab National Bank, with anofficer-clerk ratio of 1:1.36 has the second highest staffcost ratio of 70%. If we analyse the cost to incomeratio of these banks, we find that the first seven bankswith the combined lower officer-clerk ratio of 1:0.66have a higher cost to income ratio of 0.46 as againstthe average of 0.44 for all the Nationalised Bankswhereas the other seven banks with a higher officer-clerk ratio of 1:1.16 have a lower cost to income ratioof 0.41—which is much below the average of 0.44 forall the Nationalised Banks. This analysis renders therecommendation of Khandelwal Committee irrele-vant and economically meaningless.

A healthy ratio of officers to clerks providingadequate number of clerical staff to perform routineclerical jobs will lead to huge cost savings.

Benchmarking studies are suggested in a vaguemanner. The current global benchmarking is BASELnorms and Indian Public Sector Banks are much aheadof such benchmarks. There is need to factor the costof implementing Government’s agenda of socialbanking, financial inclusion etc and such factorsshould influence the benchmarking for Public SectorBanks. Outsourcing is not desirable for business ofbanking where each employee is expected to possessunquestionable integrity and fidelity to maintainsecrecy of customer data. The issues like businessprocess reengineering, change management etc., mustbe undertaken with the involvement of permanentstaff and must percolate top-down.

Ban on recruitment for about 20 years from 1985was an unwise initiative as it has created a generationgap posing problems in succession planning. A proper(contd.)

S. Name of the Bank Officer Staff CostNo. Clerk Cost Income

Ratio Ratio Ratio

(contd.)



succession planning calls for regular intake of peopleacross cadres. The banks had forgotten the art oftesting methodology and process of recruitment. IBPSmust be streng-thened to help the banks recruit qualitypeople and revival of BSRB may also be given athought. Increasing the ratio of direct recruits to 50%of vacancies is illogical and will kill the spirit andaspiration of clerical staff joining the banks with thehope of better career prospects. Prescribing highereducational qualification for clerks and subordinatestaff will accelerate attrition rate in view of the givenlow levels of salary. We need to recruit clerks to manall the locations and, hence, recruitment cannot berestricted to only rural branches. Urban and Metrobranches do have clerical job and need to be providedwith clerical staff as a cost effective measure.

Lateral recruitment of Specialists on contract runscontrary to the Committee’s own recommendation ofcreating succession planning at higher levels inspecialized verticals. A plan to groom three personsas reserve for each critical position is more thanadequate and leaves no scope for lateral recruitmentat higher levels of hierarchy. In Indian conditions,where there is no unemployment dole, five yearcontract employment would lead a specialist withuncertain future and without a settled job. Even socialissues like marriage and bringing up a family willbecome a casualty of an uncertain and unsettledjob.

TABLE III (Rs. In Crores)

S. Name of the Bank Officer- Business/ Profit/ Business Profit/No. Clerk employee emplo- Branch Branch

Ratio yee

1 Punjab & Sind Bank 0.24 6.82 0.05 65.0 0.482 Andhra Bank 0.35 7.26 0.05 72.3 0.463 Oriental Bank of Commerce 0.63 11.39 0.06 119.1 0.654 Union Bank of India 0.70 8.11 0.06 92.0 0.675 Vijaya Bank 0.84 7.52 0.02 81.6 0.246 Allahabad Bank 0.93 7.03 0.04 63.6 0.347 Canara Bank 0.94 7.37 0.05 119.0 0.76

Average for these 7 0.66 7.92 0.047 87.51 0.51banks

1 Punjab National Bank 1.36 6.65 0.06 82.3 0.702 Bank of India 1.23 8.28 0.07 109.1 0.993 Indian Bank 1.18 6.20 0.06 75.5 0.764 Bank of Baroda 1.14 9.13 0.06 113.1 0.755 Syndicate Bank 1.13 7.88 0.04 88.6 0.416 Indian Overseas Bank 1.11 6.86 0.05 91.2 0.617 Corporation Bank 0.98 9.83 0.07 116.2 0.85

Average for these 7 1.16 7.83 0.059 96.54 0.72banksAverage for all Nationa- 1.02 7.48 0.050 95.80 0.61lised Banks

It can be seen that the business per branch andemployee at 119.1 and 11.39 is the highest in case ofOriental Bank of Commerce which is essentially onaccount of merger of Global Trust Bank with OBC.Barring Oriental Bank of Commerce the business perbranch and per employee is highest in the case of CanaraBank with 119.0 and Corporation Bank with 9.83,respectively. The next bank having higher number at113.1 and 9.13 with higher officer-clerk ratio (1 : 1 : 14)is Bank of Baroda. These numbers are against anaverage per branch business of 95.80 and average peremployee business of 7.48 for all the NationalisedBanks. A group comparison of banks with lower officer-clerk ratio shows that the average business per branchat 87.51 is much lower than the business per branch of96.54 in respect of the banks with higher officer-clerkratio. It clearly establishes the fact that the banks witha higher officer-clerk ratio have been posting betternumbers in terms of business per branch.

As regards the profit per employee it can be seenthat individually and collectively the banks havingaverage higher officer-clerk ratio have posted anaverage per employee profit of 0.059 as against 0.047posted by those banks which have got average lowerofficer employee ratio. While per employee profit ofthe banks having average higher officer-clerk ratio ishigher than the average ratio of 0.050 for all thenationalised banks. In respect of those banks havingaverage lower officer-clerk ratio, it is much lower(0.047) than the average per employee profit 0.050 forall the nationalised banks.

This leads us to conclude that in terms of businessand profitability the banks with higher officer-clerkratio have been performing better than those bankswith lower officer clerk ratio. A look at the last columnof the table reveals that the per branch profit in respectof those banks which have lower officer ratio is 0.51whereas it is 0.72 in respect of those which have higherofficer clerk ratio as against an average of 0.61 in respectof all the nationalised banks. This analysis again rendersthe conclusions about reducing the officer-clerk ratiorecommended by Khandelwal Committee as irrelevantand meaningless. It is, therefore, reiterated that theGovernment should withdraw its guidelines to PublicSector Banks about bringing down the officer-clerkratio to 1 : 0.5 in metro and urban centres and 1 : 0.75in rural and semi-urban centres.

Training and Skill developmentCommittee’s recommendations accepted by the

Government are good theoretical concepts which needto be supported by training infrastructure which ishardly enhanced by any Public Sector bank in the last20 years to keep pace with technological and marketchanges where the business dimensions of banks have



undergone phenomenal change. In today’s contexteach bank officer needs at least 15 training days a year.Apart from this there should be a provision ofmandatory leave by every officer for 10 to 15 days ayear. These two initiatives, if put to practiceeffectively, need to be supported by a buffer of 10%of assessed manpower. The committee is completelysilent about it. Budget for training the trainers andthe employees need to be enhanced substantially withaccountability for its effective utilization.

Career PlanningThe Public Sector banks are already practicing fast

track promotions for officers. Committee’s recommen-dation of 3 years’ compulsory rural/semi urbanservice to be eligible for promotion is impracticablebecause there is a probation of two years which isused to give exposure to any recruit in all the aspectsof banking—particularly general banking, creditmanagement, foreign exchange business, agriculturalbanking etc. which are all not available in ruralbranches. It will, therefore, imply that two year ruralservice can be completed only after two years’probation period is over. It makes the eligibility forScale I to II at a minimum length of service of 3 yearsinstead of 4 years an impracticable proposition. It willalso not leave much scope for providing roundedexposure in various functional areas through jobrotation. Three years branch managerial assignmentat the early stages of the career will further constrainit. A span of 18 years to facilitate promotion up to therank of General Manager is unrealistically low as itwill make an Officer, General Manager at the age of40, leaving 20 more years for him to rise up to thelevel of CMD. Lesser number of Board level vacancieswould lead to large scale frustration at the level ofGeneral Managers.

Banking business involves more of decisionmaking which can be enabled by technology and skills.Visualizing a situation to make a person ED orChairman at 40-45 years of age is fraught with therisk of immature handling of huge public money. Theexperience of Barings Bank, Singapore, where 24 yearold Nick Leeson brought the bank down to collapsewithin two months may be taken as a lesson. Viewedin the background of committee’s focus onconsolidation, the vacancies for ED and CMD willfurther shrink and the feeder cadre will be too huge.It will be a perfect recipe for frustration anddiscontentment at higher executive level.

Committee has laid huge emphasis on groomingand nurturing the industry leaders by giving themexposure and training, losing complete focus on theimportant aspect that as to when such potentialindustry leaders will deliver their best before

becoming General Manager/ED/CMD. Grooming offunctional specia-lists in each vertical will renderlateral recruitment irrelevant and hence the reco-mmendations of the committee are conflicting.Retention strategies should focus on emotional factors,superiors valuing employees’ contribution, environ-ment of trust and transparency apart from monetarycompensation to be more attractive which theCommittee has not looked into.

Performance managementThe recommendations are generic in nature except

introduction of 360o feedback. Performance manage-ment can be made easier by ensuring qualityrecruitment, for which a competitive compensationpackage having regard to external parity would beneeded. There should be due compensation forresponsibility, transferability and accountability.

Succession Planning and Leadership Develop-ment

Committee has recommended back up by havingthree potential successors in reserve also for each criticaland leadership position. The idea of engaging theattention of steering committee of Board on HR isimpractical in as much as the Government does notappoint two HR specialists as Directors on the Board. Aneffective succession planning does not leave any scopeof lateral recruitment. To have three potential successorsin reserve is untenable and unrealistic especially in viewof the recent guidelines of the Government prescribinga GM, DGM and AGM ratio of 1:3:9 for the bankincluding the field functionaries. It may not be feasibleto create reserve of three DGMs capable of replacing aGeneral Manager for IT or Risk Management. Theprescribed ratio will act as a constraint on maintainingthe suggested reserve of executives. The commercialnature of banking business will make such theoreticaland bureaucratic recommendations a non-feasiblenon-starter proposition.

Type of measures suggested by the Committee forHR development would entail huge cost and willescalate the staff cost substantially. The Committeehas not visualized the impact assessment onefficiency, productivity and profitability as a sequelto implementation of its recommendations. It showsthat the cost-benefit analysis is not carried out tosubstantiate the desirability of the recommendations.Pure HR specialists without domain knowledge ofbusiness of banking cannot help achieve the goals.

There is need for developing HR qualities in eachfloor level managerial cadre employee in the bank.Surprisingly, the Committee has not thought ofinstitutionalizing the concepts like role modeling,sharing success stories etc. Appointing retired senior



executives as mentor is aimed at creating re-employment opportunities when there is hugeunemployment in the country. Mentoring should bedone internally. The posts of ED & CMD should beinternalized to prevent cultural invasion clientmigration and conflict. The suggestion of thecommittee that ED and CMD too need mentors isinsulting to their position. ED (HR) should beprovided to all the banks irrespective of their size.

Employee Engagement and Motivation

Committee recommends online resolution ofgrievances, free flow of ideas and suggestions,encouraging learning initiatives through appropriaterecognition and reward schemes. Resolution ofHuman Grievances needs human touch which cannotbe generated online.

Professionalization of HR

Every CMD and ED may not have specialized HRbackground. Their areas of specialization could relateto CORE banking activity. It, therefore, calls forimparting HR trainings with a focus on developingspecial HR capabilities in every managerial cadreemployee. To do so in a sustained manner will leadto good HR culture and climate. Lateral recruitmentcannot be a sustainable solution to address HRcapability deficit. People from within will have to begroomed and trained in the field of HR to facilitate abroader understanding of business strategies and theirintegration with HR quality and quantity.

The role of vigilance mechanism in the banks needto be reviewed whereby the genuine bad debts / losseseven at lower levels are viewed in right perspectivewithout using hindsight to arbitrarily fix accoun-tability. It will go a long way to create a climate oftrust and encourage good business decisions.

Creating Risk Culture

The recommendation of premature retirement fornon-performers after the age of 55 is obnoxious, tosay the least. The nature of banking business is suchthat it involves a coordinated team effort to be aperformer. The targets for the branches and regionsare fixed by the superiors arbitrarily as dictated bytheir wisdom and perceived interests. Allocation ofstiff targets and lack of support through creditsanctions and deposit mobilization at competitiveprice are all in the hands of superiors. This nature ofour business can make anybody performer or non-performer at the mercy of superiors. Hence suchconcepts of premature retirement cannot beinstitutionalized in a Public Sector organization. Theaccountability policy for non performing credits doesexist in all the Public Sector Banks. What is paradoxical

in such a policy is that when profit and loss accountis charged to make provisions for Non PerformingAssets, simultaneous efforts to fix accountability andinitiate disciplinary action also commence. On theother hand, when profit, and loss account is chargedto make provisions towards other investments, thevalue of which has been impaired, rightly noaccountability is fixed. Why similar treatment is notextended to non-performing credits which are normalbusiness failures? Committee’s suggestion to fixaccountability for delay in concluding disciplinarycases is a welcome suggestion but similaraccountability should be fixed in respect of delay atCVC and CBI’s end which more severely impact themorale of the officers’ community. The limitation forinitiating disciplinary action having been fixed byCVC at four years from the date of event, is notadhered to in any bank. Committee has shown anabsolute oblivion in this respect. There is need to fixaccountability for its non-adherence. Sanction forprosecution are granted by the Competent Authoritieson dotted lines without application of mind. It isantithesis to good HR practices.

Any initiative on HR in Public Sector Banks wouldbe incomplete without a thorough reorganization ofvigilance administration. It is imperative to understandthat the Public Sector Banks are faced with RiskAverse tendency in decision-making. A vague andambiguous definition of frauds having enlarged scopehas acted as additional deterrent in the genuinedecision-making as the people see the darker side oftheir promotional avenues getting shut. Committeehas failed to deliberate on such vital issues impactingHR.

Reward Management

The existing system of performance linkedincentive to staff has resulted in allurement withoutloyalty or commitment. Consequently, the level ofwindow-dressing has increased and performanceparameters are manipulated in an unfair and unethicalmanner to qualify for performance incentive. It hasled to several avoidable disciplinary cases in PublicSector Banks.

ESOP have been creating discontentment in thosePrivate Sector banks where it is in vogue. It hascaused IR conflicts, agitation, unrest and strikes.Implementing the concept of ESOP in Public SectorBanks is fraught with similar risks and henceundesirable.

It is suggested that the banks which achieve thetargets fixed under Statement of Intent (SoI) areallowed to pay bonus to entire staff since the



achievement of targets is a team effort in which everyemployee—irrespective of his level in hierarchy—makes his humble contribution.

It is imperative for banks to attract better talentsfrom employment market, for which one of theimportant aspects is external parity in wages havingrelation to responsibility, mobility, accountabilityetc. If we succeed in attracting better talent at entrylevel, good HR practices to nurture such talents on asustainable basis shall prove to be quite effectiveto build result-oriented human resource andleadership.

Wages, Service Condition and Employee Welfare

Industry level settlements have ensured equalwages for equal work which is enshrined in ourConstitution and it guards against discriminatorycompensation packages in different Public SectorBanks. The observation of the Committee that eachbank’s ‘capacity to pay’ is undermined, is unfair. Theamount of money charged to bank’s profit and lossaccount to write-off the loans of willful defaultersincluding big industrialists, has not caught the eyeof the Committee. Banks are made to pay heftydividend to the shareholders. It is possible onlybecause the banks have been earning adequate profitsand have the capacity to pay. If human resources aretaken due care they will take good care of otherstakeholders.

The observation about capacity to pay is thereforemisplaced and untenable

We need to set up a wage commission for PublicSector Banks having General Mangers of differentbanks and representatives of officers and employeesto consider periodical revision of pay scales.Committee has been critical of standardization for itsunfounded fears. Standardisation, per se, cannot becondemned, otherwise government’s role to issuebroad guidelines to Public sector Banks on manyissues will become irrelevant. Recent standardizationof number of vacancies of General Manager andpromotion policy norms are immediate cases in point.When the Government and IBA issued guidelines todisentitle the officers from getting stagnationincrement, Professional Qualification Pay (PQP) forpassing JAIIB/CAIIB and automatic movement to theBasic Pay of next higher scale, it was challenged inthe court. IBA and the Government are on record

having filed their counters that they would like PublicSector Banks to follow uniform practice in HRmatters.

Staff Welfare Fund should be 3% of declared netprofit without any cap. It is beyond comprehensionthat the Committee which talks of ‘capacity to pay’,has fixed a cap to restrict the actual 3% of declarednet profit to be used towards staff welfare.Committees suggestion to allocate 25% of welfarefund to retirees is a welcome move. The restrictionsof business mix and number of employees to classifythe banks in different groups is irrational whenamount of welfare fund is linked to net profit. If abank is able to earn higher profit for a lesser businessmix with lesser number of employees, it is only fairto share higher amount in the form of staff welfare.Incentives are both a reward and motivation forexcellent performance. This type of conditionalitieswould be anti-thesis to smaller and medium sizeefficient and high performing banks.

Other conditionalities therefore should be left tothe collec-tive wisdom of staff welfare committeehaving representatives of management, employees’union and officers’ associations without outsideinterference. Elected representatives of retirees’associations should join the management represen-tatives to manage the retirees welfare fund instead ofbeing on staff welfare fund.

Industrial Relations

Committee has recommended re-visiting ofvarious segments for different reasons, which are notHR friendly. We suggest that all the past settlementsshould be consolidated for better understanding.There should be provision for housing at everyplace of posting for all the employees who aresubjected to mobility. There should be preference inKendriya Vidayalas for admission of bank staff’schildren. Indian Banks’ Association should investin creating Educational Infrastructure in differentparts of the country to facilitate the staff mobilityeventually.

Navartna Status to some Public Sector Banks

All Public Sector Banks are listed on stockexchanges and the share price Index takes care of suchaspects. Decorative status would lead to unhealthyand unethical practices of manipulation to earn suchtitle. Hence it is not desirable. ❐


“Hire people who are better than you are, then leave them to get on with it . . . ; Look for people who will aimfor the remarkable, who will not settle for the routine.” — David Ogilvy


Survival Kit in the Current Globalised Economy

Pramod JainFCMA, ACA, ACSHead of Training, Finance AcademyArcelor Mittal

Today, all industries across the economy arefacing toughest time ever. Decreasing margins,ever-demanding customers and global

competition is hallmark of the current scenario. Thesituation is undoubtedly difficult but not beyondrecovery. In this context, it would be advantageousto have a historic view as to how the Indian businessscenario has changed over the years and how havewe landed in the current scenario.

Our country India has had a golden history. Duringthe pre-British period, the country was known as thegolden bird. It was one of the biggest trading centersof the world and had a major share in the world trade.Traders and businessmen from the world over cameto India for enhancing their wealth. However,unfortunately, this golden bird was plundered by thepredators time and again. Britishers were the last tohave come to India in this row. They came to Indiathrough the East India Company and took advantageof the fragmented polity prevalent at that time byadopting the policy of “divide and rule”. Britishersindulged in massive exploitation as much as it finallyresulted in awakening of the nation and throwing ofthem from the country.

Outlook at the time of independence

15th August 1947—the country got its hard earnedindependence. But unfortunately at a massive pricein the form of division of the country between twoindependent nations. At that stage, two people at thehelms were the father of the nation Mahatma Gandhiand Pandit Jawaharlal Nehru. As far as business wasconcerned, the two had different ideologies. While,Pandit Nehru dreamt of a modern and industrializedIndia, Bapu had a vision which was more conventional—that of self-reliant India with emphasis on thecottage / tiny / small scale industry. Anyway, at thetime of independence, the economy of the country wasin shambles and then there was this agony of partition.There was hardly any industry in the right shapeworth its name. The only thing which was positive

was a “positive outlook” (in today’s parlance the “feelgood factor”) with a desire to grow and marchforward towards the growth and development of thenation.

Socialism without accountability is disastrous

We adopted socialistic pattern of society.While the intentions were highly laudable the effectsproved to be catastrophic for the economy of thenation. Little emphasis was laid on the developmentof infrastructure and the word profit was looked uponwith contempt. The Government which could havefocused on governance of the nation for growth andstability also got into running of the business.Accordingly, umpteen number of public sectorundertakings (PSUs) proliferated, which later turnedout to be the centers of inefficiency. These PSUscontinued making losses year after year proving tobe a big burden on the exchequer of the nationresulting in a huge debt burden on the nation, internalas well as external. PSUs made losses and these losseswere made up by the Government. with noaccountability on the part of the PSUs whatsoever.Thus the inefficiency received direct encouragementfrom the Government—perhaps unwittingly.

Pitfalls of Controlled Economy

Thus with the socialistic pattern of society, theeconomy was controlled through the so-called Licenseand Permit Raj. If an individual or economy of a nationhas to prosper and grow it needs three things :(1) optimum utilization of its resources (2) technology& capital, and (3) continuous value addition by eachand everyone. Unfortunately, post-independence andpre-nineties all theses characters were found to be fartoo inadequate as far as the Indian economy wasconcerned.

It was purely a Sellers’ market. Everything whichwas made could be sold. And it could be sold becausethe demand far exceeded the supply. And everythingwhich ran smoothly was nationalized in the garb of

RANDOM THOUGHTS


public interest. The example of nationalization of AirIndia one can hardly forget in this context. In fact, thecontrolled economic structure ensured that not manyindustries were set up or if set up then not expanded.As a result of such structure, gains were of coursethere but the same restricted to a limited few. Whothese few were is anybody’s guess.

Close to International BankruptcyWhat was the end result? What else could it be?

Came the year 1991, and the country was on the vergeof international bankruptcy. The foreign reserves werejust adequate for taking care of import requirementsof eleven days. The country which used to be a donorto the world had to hold a begging bowl. Not manywould forget that four hundred metric tonnes of goldhad to be pledged by the country in favour of IMF soas to tide over the payment crisis. And as any lenderwould do, the IMF/World Bank imposed manyconditions which, of course, inter alia, included thatthe country would need to adopt reforms so as toensure that the economy was set to move on the rightpath. It was around the same time that the discussionsand deliberations commenced in the forties withMaastricht Treaty culminated in the establishment ofthe World Trade Organization (WTO) of which Indiahas been a founding member.

Internet Revolution

In the Indian context, the quantitative restrictionshave been removed from almost all the items. Todayyou want to import an item from anywhere in theworld, you can simply do so. You do not have to gothrough the hassles of obtaining the import license orany such permission or approval. Custom dutieshave been lowered and will be lowered further progre-ssively so as to match the world standards. Subsidies,are being withdrawn. First it was the sales tax incen-tives, now it may be the turn of the export incentives.It is going to go on like this now. There is a free flowof foreign direct investment. Today you can see moremultinationals in the country like never before.

In this changed environment, challenges are therefor all to face. WTO and the Internet have produced atruly paradigm shift in the business and profession.Today as a manufacturer, my competition is not withthe other manufacturers in the same city or state oreven the country. Today, as a manufacturer, I facecompetition from each and every part of the world. Itmeans, not only I need to know my own cost, but Ialso need to know the cost at which the same goodsare being produced elsewhere in the world. And Ineed to make sure that I am not only quality

competitive but also price competitive and deliverycompetitive.

This is equally applicable to a managementprofessional—be it a Cost Accountant, CharteredAccountant, Company Secretary, or a Lawyer.

If we do not do what is stated above, we stand thesame risk which Ambassador and Fiat brands of carshad in India. Where are these models and companiesproducing them today? A black & white TV brandcalled “Weston” for which there used to be a bigdemand and it was available on premium. Where isit today?

Challenges before the Indian Economy

Now the question is “What is the mantra to surviveand grow in today’s global scenario”. And before wediscuss the answer, let’s look at the challenges thatwe face. An indicative summary of the same is :

1. Dismantling of the international borders andthe world becoming a big village

2. Global meltdown3. Unprecedented Financial Credit Crisis4. Customer focus with overpowering Buyers’

market5. Quality consciousness of the highest order and

price competitiveness like never before6. Global competition for the manufacturing

sector as well as the service sector includingmanagement and legal services

7. Mass scale entry of multinationals8. De-industrialisation.

Strategies to face the global environment

So what are the options that we have to surviveand grow in such a scenario or it is end of the road.I for one would feel that, in short term, thesituation may be full of threats and difficult times,the long term is safe, particularly for those whoare prepared to change and break the mindset. Weare heading towards a perfect market scenariowhich would ensure that in the ultimate analysiseveryone who adds value is a winner. Those whoare efficient and effective would gain in any case andthose who are not would be forced to pull up theirsocks and upgrade themselves to the changedstandards.

At the macro level, there is bound to be shake upacross the board and one would see lot moreconsolidation in the form of merger and amalga-mation. Size is going to matter. “Bigger the better” isgoing to be the buzzword. Size would decide your

RANDOM THOUGHTS


negotiation power. Economies of scale will gainprominence. One would need to join hands with thecompetition in whatever form to enhance itsnegotiation power while dealing with the vendors andcustomers and so also to ensure optimum utilizationof its resources.

And of course at the micro level, Cost ReductionStrategies, Innovative ideas and implementationthereof by the business firms and the professionalfirms is going to be critical for growth, sustenanceand better profitability. Customer is going to be theking and the Customer’s delight is going to be thenew age mantra for growth—sustenance andprofitability.

Basically, it is sustained level of competency inone’s chosen field that is going to be the survival andgrowth mantra for anyone and everyone. And if it isnot achieved for whatever reason, sooner than later,we will find ourselves having been overrun bysomeone.

Thus one has to be in synch with the requirementsof the customer and so also with the ground realitiesof the economy. One can go on talking of level playingfield, but the only way in which one can get it is bycreating one by himself. All kinds of protections,reservations and subsidies are going to be the thingsof the past. And this is going to happen sooner thanlater. So if I was to design a strategy for survival andgrowth in the global scenario, I would most certainlyinclude the following in armoury :

1. Remember, the Vision and Mission statementsare not permanent documents. Revisit themonce in a while.

2. Work for attaining highest level of productivityin every aspect of the business.

3. Remain constantly aware of the “Risks” and beprepared for it.

4. Attain Price Competitiveness of the highestorder

5. Create Culture of Cost consciousness in thewhole organisation.

6. Work with Customer-centric attitude at alllevels.

7. Absolute optimization of resources.8. Be driven by an urge to “create wealth” and

not “amass wealth”.9. Continuously feeling pulse of the economy and

creating strategies for responding to changes.10. Ability to respond fast, speed of activity.

11. Change in attitude at all levels.12. Accountability at all levels.13. Deliver flawless service, job and products with

no compromise on quality whatsoever.14. San the “chalta hai attitude”—for good and

forever.15. Find out the role of your product/service in

the final product of your customer.16. Ensure and maintain high energy levels across

the organisation.17. Remember, Innovation is a journey and not a

destination.18. Forget the hierarchical systems. One who adds

value is important.19. Continuous introspection, evaluation and

monitoring.20. Compliment rather than compete even with

your competitors.21. Build expertise and become an authority in

your chosen field.22. Keep pace with technological advancement and

adopt the same.23. Value Human Resource. Don’t throw them

away simply because you can. Find our waysand means to retain them. Because, ultimatelywhatever an organisation achieves it is throughthe Human Resource only.

24. Finally, don’t ignore and pay only lip serviceto “Transparency and Good CorporateGovernance”. Ensure sincere and seriousimplementation of them in the organisation.

Today all the players in the industry andprofessions—big, small or medium—are in the samesituation. While, the vendors insist on promptpayments and continuous price increase, thecustomers demand longest possible credit and theproduct choice with no bounds. Gone are the days ofannual automatic price increase from the customers.Now you earn profit from the cost which you cut atyour end. And the situation is going to be more seriouswith the passage of time. The world standards aregoing to be the benchmarks and not the national bestwhich may not really be the best.

And, therefore, constant adherence with the above-said survival kit will provide the necessary respiteand succor to the ones who wish to make and leavetheir mark on the portal of the industry or profession.This is going to be our survival and sustenance kit inthe new Globalized Economy. ❐

RANDOM THOUGHTS

“Never try to teach a pig to sing; it wastes your time and it annoys the pig.” — Paul Dickson


New Takeover Regime 2011 : An overview

Gopal Chandra MondalM.Com, M.Phil. ACS, ACMA,Director—F & A, andCompany Secretary, IDFC, New Delhi

In September 2009, market watchdog SEBI hadconstituted an expert committee under thechairmanship of Late Sri C. Achuthan, the former

chairman of Securities Appellate Tribunal, in orderto review the simplification of the existing TakeoverRegulation and to suggest suitable changes, as deemfit, to align with the best global practices. Thiscommittee is known as Takeover Regulation AdvisoryCommittee (TRAC). The Committee, on July 19, 2010,has released its comprehensive reports suggesting thechanges in the rule of game of takeover with a newdraft Takeover Regulations. The draft regulationswere open for pubic comments till August 2010. OnJuly 28, 2011, SEBI in its meeting had accepted by andlarge most of the recommendations of TRAC.

Securities Exchange Board of India (SEBI) notifiedthe much-awaited new regulation called SEBI(Substantial Acquisition of Shares and Takeovers)Regulations, 2011, on September 2011, four days afterthe chief architect of the code C, Achuthan, breathedhis last. The new Regulations took effect on October22, 2011.

Key changes in the New Takeover Regulation :I. Introduction of new definitions and

modification of existing definitionsII. Increase in initial trigger limit from 15% to

25%III. Creeping Acquisition Limit raised from 15%-

55% to 25% - 75%IV. Increase in offer size from 20% to 26%V. Non–compete fees or control premium to the

sellers in the offer priceVI. Voluntary Open offerVII. Recommendation on the open offer by Board

of Target CompanyVIII. Derails provisions relating to indirect

Acquisition of share or controlIX. Determination of offer priceX. Exemption of open offerXI. Conclusion.An Analysis of the Important Provisions of SEBI

(Substantial Acquisition of Shares and Takeover)Regulations, 2011, is setout :

I. DefinitionThe definition of “acquirer” as given in the new

Regulation is more or less same with the one existingin the SEBI Takeover Regulation 1997 with an additionof the word “through”

SEBI SAT Regulations, 1997

“Acquirer” means anyperson who, directly orindirectly, acquires oragrees to acquire shares orvoting rights in the targetcompany, or acquires oragrees to acquire controlover the target company,either by himself or withany person acting in concertwith the acquirer.


“Acquirer” means any per-son who, directly or indire-ctly, acquires or agrees toacquire whether by himselfor through or with anyperson acting in concert withhim, shares or voting rightsin or control over a targetcompany.

New Regulations, 2011, has recognized a personas acquirer even where the acquisition whether ofshares or voting rights or control has been made byhim through person acting in concert with him i.e.through special purpose vehicle or through thecontrolling entities.

The definition of “control” has been introducedin the new Regulations, which is similar torecommendation of TRACT Report with an exceptionthat the word “ability” has been removed.

TRACT had recommended to enlarge the scope ofthe term Control to include “ability” along with“right” to appoint majority of director or control themanagement or policy decision. The intention behindthis recommendation is to include de facto controlrather than just de jure control to trigger open offerobligations.

The term “negative control”, as used by the SEBIin its various judgments, orders has not been definedin the new Regulations, 2011. By using the negativecontrol, acquirer would restrict the Company to passthe special resolution in the general meeting of theCompany. For example: acquirer holds 25 shares outof the total of 100 shares of the Company. In a generalmeeting of the company, only the 75 memberspresents out of 100 members. So the percentage of

TAKEOVER & ACQUISITION


holding of acquirer in that meeting is 33.33% (25/75¥ 100), which is more than 26% and very importantfor special resolution.

The definition of “Shares” has been broadenedin the New SEBI SAT Regulation, 2011. The definitionis modified to include depository receipts, which istreated at par with the equity shares carrying votingrights.


“Shares” means shares inthe share capital of acompany carrying votingrights and includes anysecurity which would entitlethe holder to receive shareswith voting rights but shallnot include preferenceshare.


“Shares” means shares in theequity share capital of atarget company carryingvoting rights and includesany security which entitlesthe holder thereof to exercisevoting rights. Explanation:For the purpose of thisclause shares will include alldepository receipts carryingan entitlement to exercisevoting right in the targetcompany.

New Definition Introduced :● “Enterprises Value” means the value =➣ Calculated as market capi- Total cash and cash equivalents

talization of a company, plus➣ Debt➣ Minority Interest and➣ Preferred shares

The concept of enterprises value is very importantin case volatile capital market.

● “Volume weighted average market price”mean

The number of equity shares traded in the stockexchange ¥ the price of each equity share

Total no. of equity shares traded on the stock exchange● “Volume weighted average price” means

The number of equity shares bought ¥price of each equity share

Total no. of equity shares bought● “Weighted average no. of total shares” meansThe number of shares at the beginning of a period,

adjusted for shares cancelled, bought back or issuedduring the aforesaid period X a time weighting factor.

II. Increase in initial Trigger limit for open offerfrom 15% to 25%

The initial threshold limit for triggering open offerwas increased from 10% to 15% and now to 25% ofthe voting capital of the company. The increase inthreshold of 10% (i.e from 15% to 25%) is a welcomestep in comparison to the global practices in other

countries, where the initial threshold limit rangesbetween 30% to 35%.

The new threshold of 25% applies from October22, 2011. With the new Takeover Regulations, nowthe acquirer can increase its holding to extent of24.99% without attracting an obligation to give anOpen Offer to the shareholder of the Target Company.

Implications● It would be beneficial to Private Equities (PE),

Foreign Institutional Investor (FII) and other investorsto increase their shareholding up to 24.99% withouttriggering the cumbersome and costly TakeoverRegulations. Earlier it was restricted to 14.99% only.

● With this new Takeover Regulations, promoterscan also consolidate their holding up to 25% withouttriggering open offer.

● Company would be able to raise more capital incost effective manner in coming months.

● The Individual shareholder would also eligiblefor open offer trigger points that mean they can alsoincrease their holding up to 24.99% without triggeringthe new Takeover Regulations.

● With such strategic buy-out by the Promoters aswell as investors may be influence to ramp up priceof securities in the capital market.

● With the new threshold limit (i.e 24.99%);investor would be able to block special resolution inTarget Companies with relative ease.

Therefore, the increasing the open offer thresholdlimit to 25% is likely to be war for takeover reputedcompanies. No transitional provisions are mentionedin the new Takeover Regulation for increasing theirholding.


CreepingAcquisition

Limit

Old Takeover New Takeover

Open offer for minimum20% of share capital

Open offer 26%shareholding

Trigger Point

0%

100%

Mamximumpersimmible

PromoterShareholding

CreepingAcquisition 5%

per financial year

Trigger Point

0%

100%

75 CreepingAcquisition Ltd.

25

51%

Creeping Acquisition<5% per financial year

<5% consolidation allowedthrough market purchase/buy back

15

55

75


III. Increase in Creeping acquisition range from15-55% to 25-75% limit

In the New Takeover Regulations, there is onesingle and clear creeping acquisition bracket i.e.25-75%, which is very simpler than the earlierregulation.

In earlier Regulations, there was range of 15-55%with a limit of creeping acquisition not more than 5%each financial year and a one-time increase of 5% onlythrough stock exchanges with the range of 55-75%without making an open offer.

Implications● This would be good opportunity for the

Promoters to bump up their holding to the maximumlevel of 75%, which was a challenge in earlierresolution.

● Creeping acquisition limit of 5% is same as earlierRegulations.

● Creeping acquisition of 5% per year is availablefor all the shareholders holding 25% or more.

● Through creeping acquisition, if the acquirertogether with PACs increases beyond the maximumpermissible non-public shareholding, the acquirerwould require to bring down the non-publicshareholding to the level specified within twelvemonths from the date of completion of the offerperiod.

● The manner of computation of 5% creepingacquisition has been clarified in new Takeover Code.For this, gross acquisitions would be considered fordetermining the quantum and any dilution ordecrease in shareholding/voting right would beignored.

● This would be a defense mechanism againsthostile takeover threat.

IV. Increase in offer size from 20% to 26%The minimum offer size has been increased from

the existing 20% of the total issued capital to 26% ofthe total issued capital as of 10th working days fromthe closure of the tendering period.

The increase of 6%, fails the whole logic of TRACrecommendations. The rational behind the TRACrecommendation was to increase the offer size to 100%of remaining shareholders so that an equalopportunity to exit the Target Company could beprovided, who desires to exit from the Company.SEBI increased marginally offer size (i.e. 26%) due tostiff opposition and lobbying from India corporatehouse. Besides, the Indian Banking law restricts banksfrom funding acquisitions.

Implications● However, the logic of increase offer size to 26%

does not known, the move is good for domesticpromoters and the general public shareholders.

● Technically, an acquirer can now acquirecontrolling stake of 51% (i.e. 25% for initial triggerlimit plus 26% through open offer) in the company.This would reduce the public float and liquidity inthe market with the shares being concentrated in fewhands.

● The cost and fund involvement of open offerwould go up.

● This will require huge amount of Fund and onlythe serious investor can make such acquisition andshall trigger offer.

V. Non–compete fees or control premium to thesellers in the offer price

Non-compete fee means the amount ofcompensation payable to the selling promoter for notbeing able to carry on the same business of the TargetCompany for the relevant period.

SEBI SAT Regulations, 1997, allowed to pay suchfee to extent of 25% of the whole transaction value tothe promoters of a company, which is a part of themost M&A transactions. Any payment of such fee inexcess of 25% would be part of offer price to theshareholder of the Company.

New SEBI SAT Regulations, 2011, has dispensedwith non-compete fee as per recommendation givenby TRAC. The intention behind the removal of suchfee is on the sprit of equal treatment of allshareholders. Under this Regulations, any direct orindirect non-compete fee or control premium paid tocontrolling shareholders would be added to the offerprice.

Implications● The logic behind the removal of such fee may

not be acceptable to the promoters. Most of thebusiness in India is in family owned and promoterrun, where they contribute their unique knowledgeand expertise substantially rather than just being inrealms of management. This is a loss to the promotersas on non-compete fee would not part of their deal.

● This would mean that promoters would notprovide any preferential treatment that would be atpar with other shareholders.

● Promoters may not be willing to exit from theCompany without getting something additional fromtheir efforts.

VI. Voluntary Open offerThe new Takeover Regulations provides a separate

provision for Voluntary Offer. Under the newRegulations, an acquirer together with persons actingin concert shall be entitled to make a Voluntary Offer



for acquiring shares subject to compliance withfollowing conditions:

● Minimum offer size should be 10% of the totalshare of the Company

● At the time of voluntary offer, prior holding ofsuch persons should have at least 25% or morebut not more than maximum permissible limit.

● After completion of offer, aggregate share-holding cannot breach the maximumpermissible requirement.

● No acquisition of shares is made in preceding52 weeks otherwise than open offer.

● Not acquire of share during offer period.● Such offer restricts to acquire any further shares

of company for a period of six months aftercompletion of open offer except throughanother Voluntary Offer or Competing Offeror Bonus issue or stock splits.

Implication● Such Voluntary Offer may be helpful for smaller

percentage of shareholders. The important is that theright of the acquirer to increase their shareholdingthrough “creeping acquisition” still subsists in eachfinancial year without being required to make an openoffer.

● Through it if the acquirer together with PACsincreases beyond the maximum permissible non-public shareholding, the acquirer would require tobring down the non-public shareholding to the levelspecified within twelve months from the date ofcompletion of the offer period.

VII. Recommendation by Board of TargetCompany

The new SEBI SAT Regulations makes it obligatoryon the part of Board of Target Company to constitutea committee of independent directors to make areasoned recommendation on the open offer. Suchnew regulation is in contrast with the existingregulations (generally not followed in most takeovers)which had left this requirement at the choice of thedirectors of the Target Company.

Implication● This would assist the public shareholding with

greater insight to make a reasoned decision.● Such an unbiased recommendation or commend

on the open offer should be published innewspaper to help the public shareholding.

● This may create conflict of directors’ interestissue, particularly where they hold shares inthe target company.

VIII. Indirect acquisition of shares or controlSEBI SAT Regulations, 1997, limited the scope of

indirect acquisition. There was no separate regulationfor the same. Explanation to Regulations, 10 & 11 of1997 code, acquisition shall mean and include indirectacquisition by virtue of acquisition of companies,whether listed or unlisted, or whether in India orabroad.

New SEBI SAT Regulations, 2011, expands thescope of definition of indirect acquisition underRegulation 5.

Regulation 5(1) : Indirect acquisition means

Regulation 5(2) : Circumstance in which indirectacquisition is to be deemed as direct acquisition :

Acquisition of

Shares Voting Rights Controlor orØ

ØOver

Any Company Other EntiryØ Ø

or

that wouldenable

Ø

Any person PACØ Ø

and

Exercise ControlØ Ø

Direct the exercise ofsuch % of voting right

to

or orØ

Ø Over

TargetCompany

ØAttract the obligations to

make a PA

Acquisition of

ØTarget Company

ØIn access of

80% of

NAV as a % ofConsolidated NAV ofthe entity or business

Sales turnover as a% of consolidated salesturnover of the entity

or business

NAV as a % ofConsolidated NAV ofthe entity or business

ØØ Ø

On the basis ofØ

Most recent annualaccount

Ø



Implication● Indirect acquisition will also trigger the

requirement of public announcement.● The wolds “other entity” under Regulation 5(1)

are wide enough to cover foreign companies/bodiescorporate, Limited Liability Partnership (LLP) andTrust etc.

IX. Determination of Offer PriceThe new Takeover Regulations provides market

price based parameter for determining the offer price.It provides differential pricing formula for open offerarising due to direct acquisitions as well as indirectacquisitions.

Offer Price

SEBI 1997 CODE SEBI 2011 CODE

▲

▲▲

▲

● Negotiated price under acquisitionagreement

● Highest price paid by acquirer orPAC during a “look-back period” of26 weeks prior to the PA

● Higher of average price for 26 weeksand 2 weeks prior to the PA

▲

Direct acquisition or indirectacquisition deemed to be directacquisition under Regulation 8(2)

Indirect acquisition underRegulation 8(3)

▲ ▲

▲

● Negotiated price underacquisition agreement

● Highest price paid by acquireror PAC during a “look-backperiod” of 26 weeks prior to thePA

● Volume-weighted averagemarket price (VWAMP) paid orpayable by acquirer and PAC inthe preceding 52 weeks of PA

● 60 days volume-weightedaverage market price(VMAMP) for frequentlytraded shares

** Where the shares are notfrequently traded, the pricedetermined on valuationparameters including bookvalue, comparable tradingmultiples etc. and the per sharevalue computed, if applicable.

In addition to the parametersmentioned in under Regulation8(2), the offer price would beincreased @ 10% p.a. calculated onpro-rata basis for the period fromthe date of the primary transactionbeing announced in the publicdomain until the date of actualdetailed public statement providedsuch period is more than 5 workingdays.

The following points may be noted:

● Where the acquisition in excessof 15% of the NAV, the SaleTurnover or the marketcapitalization, the acquirer shallbe required to compute anddisclose the per share value ofthe target company.

● Where the acquisition is lessthan 15% on all the parameters,the acquirer shall not require todisclose the price of the targetcompany.

▲ ▲

● The new Takeover Regulation provides thevolume weighted average market price for 60 daysinstead of simple average of the weekly high and lowof the closing price/daily intra-day high and lowprice of the shares, which are readily available in themarket.

● The 26 weeks and 2 weeks average price deletedfrom the offer price parameters. 26 weeks priceaverage was not reflective of prevailing market priceand distorted the value of the shares. 2 weeks averageprice considered a volatile period for offer priceparameter.

● Volume weighted average market price is a moreaccurate determinant of the prices at which share areactually transacted and it would also eliminate theouter effect of high and low prices.

● A look-back period of 52 weeks (instead ofprevailing of 26 weeks) is to be treated as anti-abuseprovisions as it would make more expensive to deferthe public announcement intended by the acquirer.

X. Exemption from open offerRegulation 10 of new Takeover Code provides a

list of exemption, which is correspond to Regulation3 of the 1997 takeover Code.

Some of the important exemptions are :● Corporate Debt Restructuring (CDR) : Unlike

in SEBI Takeover Code 1997, new code 2011 providesthat acquisition pursuant to such scheme is exemptfrom open offer obligations provided if theshareholders’ approval by way of special resolutionpassed by Postal ballot and no change of control overthe target company takes place through suchacquisitions.

● Buyback of Shares : Unlike in SEBI TakeoverCode 1997, new SEBI Takeover Code 2011 containsexemption provisions for increase in shareholdingpursuant to buyback by Target Company :

➣ Where a shareholders holding increases beyond25% threshold limit pursuant to buy back, suchincrease shall be exempt from open offers obligationprovided such shareholder reduces his shareholdingbelow 25% within a grace period of 90 days.

➣ In case a shareholder’s stake is between 25%-75% and the increase in stake due to buyback is morethan annual creeping acquisition limit i.e. 5%,exemption from open offer is available subject to thefollowing:

➣ Where such shareholder has not voted in favourof resolution authorizing the buyback under Section77 of the Companies Act, 1956.

● Such increase in stake does not change in controlover the target company,

● The mechanism of offer pricing is to giveminority public shareholding an equal exitopportunity on same terms to the substantial or largeshareholders.



● Such resolution is passed by way of postal ballot,● In case of Board Resolution, such shareholder in

the capacity of director has not voted.● Voting right on Preference Shares : New

Takeover Code, 2011, has amended the definition of“shares” to include preference shares. It contains theexemption provisions in a situations where votingright accrue to preference shareholders on account ofnon-payment of dividend.

● Inter se transfers : New Takeover Code 2011provides that acquisition pursuant to inter se transferof shares among qualifying parties are exempt fromthe obligation to open offer.

● Right Issues : Acquisition through right issue isexempt from open offer when the acquirer has notrenounced any of his entitlement and the price of theright issue is not higher than the ex-right issue priceof target Company.

ConclusionThe New Takeover Code, 2011, would be certainly

a ne game changer for merger and acquisitions inIndia. The new takeover code seems to be much betteraligned to the international practices. With theabolition of non-compete fees, both promoter andminority public shareholders would now get the same

price for their shares being acquired by acquirer. Themarginal increase of offer size from 20% to 26% asagainst 100% recommendation of TRAC would helpdomestic acquirer to minimize the cost of acquiringdue to lack of access to bank funding and the otherside minority shareholders would get the exitopportunity.

However, the logic of increase offer size to 26%does not known and not clarifies in New Regulations.Where the acquirer together with PAC increases theirholding beyond maximum permissible non-publicshareholding, the acquirer becomes ineligible to makea voluntary delisting offer under SEBI (Delisting ofEquity Shares) Regulations, 2009, unless a period oftwelve months expires. The logic for waiting 12months is not clarified by SEBI New Takeover Code.An unbiased recommendation for Open offer byIndependent Director would help the publicshareholding.

The new exemption for open offer available forCorporate Debt Restructuring and Buyback of sharesis a very good step in the new code. The Individualshareholder would also be eligible for open offertrigger points which may intricate the whole processof consolidation strategies for promoters. ❐


a very good mental discipline for preparing therational mind to receive intuition.

Role of the Leader : Pulling it TogetherAnd finally comes the question what is the role of

the leader in a creative team? It is to orchestrate theteam and hold it together. The leader here is more ofa system integrator than a commander. His or hermain tasks are :

● Constantly remind and hold before the team-members the larger mission and the immediatetargets.

● Provide sufficient freedom and autonomy forthe team members but at the same timemotivate them to share their ideas andcollaborate with others.

● Resolve interpersonal conflicts and attend tothe needs of the individual members and theteam as a whole.

● Monitor the progress of the creative process,provide feedback to the team-members andmake course-corrections wherever necessary.

Elizabeth Long Lingo of Vanderbilt University,who has done extensive research on the productionof country music, gives the example of the produceras a leader of a creative team. The music businessrequires the integration of many parties likesongwriters, publishers, artists. The person whobrings them all together is the producer. He operatesin the centre of the whole creative process without

being the focus of attention. He has to orchestratethe creative output of a diverse group of expertswithout over-controlling them. His task and hisprofessional satisfaction come from helping others torealize their unique talents and achieve a collectivegoal-a hit record. ❐

References■ Amabile, Teresa and Khaire, Mukti (2008), ‘Creativity

and the Role of the Leader,’ Harvard Business Review,October, p. 78-87.

■ Adler, Paul and Heckscher, Charles and PrusakLaurence, (2011) ‘Building a Collaborative Enterprise,’Harvard Business Review, July-Aug, p. 84-91

■ Brown, Tim, (2008) ‘Design Thinking’ Harvard BusinessReview, June, p. 59-66.

■ Hall, Joseph and Johnson Eric, (2009)‘When Should AProcess Be Art, Not Science?’, Harvard Business ReviewMarch, p. 40-47

■ Hamel, Gary, (1999) ‘Building Silicon Valley Inside,’Harvard Business Review, Sep-Oct, p. 71-84.

■ Cook, Scott, (2008), ‘The Contribution Revolution:Letting Volunteers Build Your Business’, HarvardBusiness Review, October, p. 38-44

■ Sri Aurobindo, Collected Works, Vol. 9, Future Poetry,Sri Aurobindo Ashram, Puducherry, p. 90

■ The Mother, Collected Works, (1972) Sri AurobindoAshram, Puducherry, Vol. 9, p. 422-23

■ Amabile, Teresa and Khaire, Mukti (2008), ‘Creativityand the Role of the Leader,’ Harvard Business Review,October, p. 78-87.



Mergers and Acquisitions in the New Economic Order

Dr. Ashish VarmaPh.D, FCMA, PGDBMAssistant Professor, IMT Ghaziabad

Ujjwal Tiwari Assistant Manager

Deloitte Haskins & Sells

The corporate sector all over the world isrestructuring its operations through mergersand acquisitions in an unprecedented manner

in order to successfully overcome the challenges posedby turbulence caused in the world relating to businesscycles. One of the striking features of the presentmergers and acquisitions scenario is the presence of alarge number of cross-border deals, which is an easierway of internationalization comparing Greenfieldmode of entry. Further, this is leading to a gradualshift in the organic ways of foreign investment intoinorganic means of brownfield investment.Conceptually, Greenfield investment means when thecompany invest in another country through settingup new firm whereas Brownfield investment meansmaking investment in already established firms.India’s emergence as a major developing economy andits potential to drive global economic growthalong with China in this century is beingacknowledged by economists across the globe. Asustained growth of 8%- 8.5% combined with a hugedomestic demand, is attracting global corporatestowards India. This coupled with the increasingappetite of Indian companies for M&A activity inIndia with more and more companies scouting forpotential targets.

ConceptsA merger has been defined as an arrangement

whereby the assets of two (or more) companiesbecome vested in, or under the control of one company—(which may or may not be the original twocompanies), which has its shareholders, all orsubstantially all—the shareholders of the twocompanies. In a merger, one of the two existingcompanies may form a new company by transferringtheir business and undertakings—including all otherassets and liabilities—to the new company. Althoughthe term merger and amalgamation appearsynonymous, there is difference between the two.Amalgamation means when two or more companiesmerge together to form a new company, the processis known as amalgamation. The amalgamatingcompanies lose their identity and the shareholders ofthe amalgamating companies become shareholders of

the amalgamated company. The various types ofmergers are :

a. Co-generic mergers or mergers within the sameindustry; and

b. Conglomerate mergers or mergers withindifferent industries.

Co-generic mergers take place between companiesoperating in the same industry i.e. horizontal mergersor when two or more companies which are engagedin different functions within the same product i.e.vertical merger.

Conglomerate merger take place betweencompanies from different industries. The businessesof the merging companies lack commonality in theirend products or services. A company achievesdiversification by acquiring companies from differentindustries. A conglomerate merger is a complexprocess that requires adequate understanding acrossdiverse businesses.

TakeoverTakeover is a strategy of acquiring control over

the management of another company- either directlyby acquiring shares carrying voting rights or indirectlyby participating in the management. Where the sharesare closely held by a small number of persons, atakeover may be effected by an agreement with theshareholders. However, where the shares of thecompany are widely held by the general public, itinvolves the process as set out in the SEBI(substantially acquisition of shares and takeovers)regulations, 1997.

Mergers and Acquisition happening globallyCredit Crisis and its impact on M&AsThe unprecedented global financial crisis and

resultant economic slowdown has not come as asurprise for the dealmakers who, at that point of time,were forced to go back to the drawing boards in orderto rework the terms of almost each and everytransaction on account of valuation differences,funding issues etc.

Further, deals worth several billions of dollarswere axed as conditions in the credit markets



deteriorated, the permanent one being KaupthingBank’s last minute decision to call off its planned $4.39billion takeover of Dutch rival NIBC Holdings. Thewrite down of billions of dollars of mortgage loanshad dried up the capital of most of the financialinstitutions. While institutions took every possiblesteps to shore up their equity through privateplacements, equity issues through private placements,equity issues and financial assistance from thegovernments, the plunging market value of theirstocks foiled most of their fund-raising exercisetoo..As a clear impact, many companies were forcedto be merged /acquired into / by larger companiesto avoid bankruptcy. Some of these deals were :

Serial Deal Value of deal OutcomeNo. (in US$)

1. Bank Of America—Merill Lynch $44.4 billion Bank of America has attained leadership position in retailbrokerage and wealth management. The combinationadded to the bank’s existing $589 billion assets undermanagement, an approximately 50% ownership in thefinancial Blackrock, which has $1,400 billion in assetunder management.

2. Lyod TSB—HBOS $22 billion This deal has created a new banking group with totalassets exceeding £1,000 billion, making it the last fourthlargest bank in Britain and the largest market positions incurrent accounts, mortgages, savings and loans. Lyods’combination with HBOS has lead to significant annualsavings of over £1 billion per year by 2011, or around10% of the combined cost base.

3. Wells Fargo—Wachovia $15.4 billion This acquisition has led Wells Fargo to have big retailbanking network and has created it as one of the strongestfinancial firms in the world.

Appendix 1 : Forced mergers and acquisition in the recent yearsSince the liberalization of foreign investment/

foreign exchange policies coupled with rapideconomic growth have driven foreign/Indiancompanies to acquire softer targets in India/abroad.Interestingly, most of the M&A deals transactionsamongst the Indian corporate sectors have beendriven by some of India’s largest and oldest corporatehouses.

However in the recent past, India contributes lessthan 1% in the global M&As deals that took in theyear 2010 and 2011. Further, even in the Asia-pacificregion, India’s share in the M&A activity is less than1% which is much lower as compared to othercountries.

(Source: merger market: Press release—GlobalM&A Round-up for Half-year End 2010)

With the advent of liberalization of governmentregulations, substantial proportion of FDI camethrough the mergers and acquisition route which has

helped in acquiring companies in both inbound andoutbound areas. The movement of FDI on a month-on-month basis is illustrated :

Appendix 2 : Flow of FDI in 2011 (Source: RBI report)

The continuous fall in the FDI during the year 2011clearly depicted the skeptics in the minds of theinvestors for risk involved and low return scenarioglooming over the country. However, despite of theheadwinds like global slowdown, rising inflation, highinterest rates, volatile stock market and the weakeningof rupee, there has been steady growth in the mergersand acquisition in the country in 2011.

There have been 961 deals which valued to US$51billion compared to 971 deals amounting to US$62billion in 2010, in both M&A and PE deals. Thoughthere has been dip of 15% on the mergers andacquisition activity, there had been nine deals whichhave been more than a billion dollar each, which issecond only to last year where we had ten deals.

Though the first half yearly M&A activity reportshowed similar growth as of the last year’s first halfyear, with M&A deal values amounting to US$ 28.4billion compared to US$28.9 billion in H1 2010, the



second half year has witness relatively lower activitycompared to corresponding period in the previousyear which clearly reflected the looming economiccertainty. The major reasons for the slowdown in theinvestment scenario are :

● European crisis● Weakening of Indian rupee● Rising Inflation● Introduction of strict regulatory norms● High Interest rates.Despite of the above facts, the deal volumes have

remained robust throughout the year. The other majorchange witnessed during the year was theintroduction of merger control provisions by theCompetition Commission Of India (CCI) andgovernment regulations on specific M&As such asinbound acquisition of drugs and pharma companiesrequiring approvals for the same. Though suchregulatory steps will cater greater transparency in themergers but, however, it will impact the timeliness ofthe closure of deal with delay in the process whichwill hamper the restructuring deals in future.

The overall deal that happened in the year 2011 isshown :

Volume Value (US$ bn)

Year to date 2009 2010 2011 2009 2010 2011

Inbound 74 91 132 3.9 9 26.9

Outbound 82 198 132 1.4 22.5 10.4

Cross Border 156 289 264 5 31 37

Domestic 174 373 342 6.7 18.3 5 Total M&A 330 662 606 12 50 42

PE 206 253 347 3.4 6.2 7.7

QIP 54 56 8 8.6 6.2 0.9

Grand Total 590 971 961 24 62.2 50.9

Appendix 3 : M&A deals in 2011

A remarkable trend reversal was observed in thecross border deals with focus on deal activity shiftingfrom outbound to inbound as can be seen in the tableabove. One of the major reasons for the reversal wasdue to the premium valuations that made the Indianbusinesses look attractive. Out of the nine deals valuedat over a billion dollars each transacted during theperiod, six were in bound. Another reason for the shiftcould also be the relatively stable Asian/Indianeconomy in comparison to a few other uncertainEuropean economies. Domestic deal activity in theyear has witnessed relatively low values as comparedto 2010, mainly due to continuing focus on mergersand restructuring activities, despite volumesremaining buoyant.

TrendIn recent years, we have seen outbound deals

overtake inbound deals. However, the trend haschanged with inbound deal growing by 200% andoutbound deal has declined by 50%. Though thenumber of deals are exactly the same in both, the dealvalues is significantly higher in inbound thanoutbound. Such a trend depicts a clear picture offoreign companies/investors, especially Japanese andUS companies, remaining bullish with the India’sgrowth story. The major reason for the big leap inthe inbound deal was due to the premium valuationsthat made the Indian businesses look attractive forthe investors/companies. Policy changes insectors such as aviation and retail has initiated theinbound deals in the economy. The other reason forthe growth was the relative stable Asian/Indianeconomy in comparison to a few other Europeaneconomies.

The top deals that have happened during the yearare :

Acquirer Target Sector % Stake US$million

Vedanta Plc Cairn India Oil & Gas 59% 8,670**

British Petroleum Reliance Industries Oil & Gas 30% 7,200

Vodafone Group Vodafone Essar Telecom N.A. 5,000Plc

Mundra Port SEZ Abbot Point Port Shipping & 100% 1,957Ltd (Adani Group) Ports

GVK Power & Hancock Group- Mining 79% 1,260Infrastructure coal mines, port /

rail project

iGate Corporation Patni Computer IT & ITeS 83% 1,209Apax Partners Systems

**Multiple transactions

Appendix 4 : Top M&A deals that took place in 2011

As far as domestic transactions are concerned, thevalue of deals has gone down but has stepped up interms of number of deals. This gives a fair indicationthat most of the companies are going for restructuringand mergers that has happened in the Indianeconomy.

In 2011, there were 9 deals that was over 1 billionplus in valuation. The largest deal were in Oil andGas sector signifying that global players are exploringopportunities to participate in the Indian growth storyin this sector.

Trend of Private Equity (PE) deal investmentPE firms are investment vehicles that use

fundamental analysis to make investment in equityshares of unlisted and listed companies. PE firms raisecapital either from their limited partners (LPs), whorange from high-net-worth individuals to institutional



investors. For making an investment in a listedcompany. PE firms may buy stakes either by acquiringexisting shares or by making a fresh investment byinfusing funds into the listed company itself. Suchtransactions are called Private Investment in PublicEquity (PIPE).

PE firms may also be distinguished on the basisof the stage at which they invest. While some firmsmay invest in early stages ventures that have thepotential to grow exponentially, other firmsmay commit capital to growth stage companies thathave already established themselves in localmarkets and have potential to bring new or improvedproducts and services into existing or newmarkets. Value unlocking for the PE firms and thepromoters of these companies typically happensby way of an initial public offering (IPO). Aninvestment made by way a PE firm immediately pre-IPO is termed as late-stage investment. The eventualaim of most PE firms therefore is to take the companypublic and list it on a stock exchange. PE firms usuallyexit wholly or partially in the IPO to free up theirlocked capital and return some of it to their limitedpartners.

In 2011, Private Equity firms have made asignificant comeback making large investment atvarious stages across sectors, geographies andindustry segments. The traditional investments whichwere in real estate and infrastructure has again cameto fore-front after many years. Infrastructure has beenthe most sought after investment sector in the currentyear which was around 50% of the overall investmentin the economy. This shows the present trend in termsof pushing the infrastructure in the nation for theeconomic growth. The other sectors which had alsogot significant investment is automotive, technologyand pharmaceuticals.

Appendix 5 : Quarterly report of PE investment in 2011

PE deals showed significant activity in 2011 witha 23% increase in deal values over 2010. The

resurgence in PE activity could possibly be attributedto sluggish IPO & QIP activity coupled with return inconfidence levels which were seen lacking in 2009 andthe first half of 2010. There have been 347 PE deals in2011 totaling a value of US$ 7.7 bn. While pure playPE has increased in both value and volumes over 2010,QIP investments have been negligible this year.

The biggest PE investment deal was the 30%stake in Hero investment by Bain Capital andGovernment of Singapore for a total investment of$8.48 billion. These funds were used to buy the 26%stake held by Honda in Hero Honda Motors for $851million.

Many private equity firms, both globally and inIndia, were also active with several assets changinghands. One of such deal related to exit effected bySequoia Capital India and Lightspeed vantures fromTutor Vista Global, an online education service firmin favour of UK based publishing house PearsonPLC.

Likewise all the top PE deals that had happenedduring the year are :

Investor Investee Sector Stake US$million

Bain Capital, Hero Investment Automotive 30% 848Government ofSingapore

Apollo Global Welspun Corp Manufacturing N.A. 284Management

Texas Pacific Shriram Capital Banking & Financial 15% 257Group Services

Macquarie SBI GMR Airports Real Estate & N.A. 200Infrastructure Holding Ltd InfrastructureInvestments

Standard Char- GMR Airpots Real Estate & N.A. 200tered PE (Mauri- Holding Ltd a Infrastructuretius), JM Finan- unit of GMRcial-Old Lane InfrastructureIndia CorporateOpportunitiesFund, NYLIMJacob BallasIndia Fund

Goldman Saches ReNew Wind Power & Energy N.A. 200Power

Blackstone Embassy Proper- Real Estate & 37% 200Developments Infrastructure

Appendix 6 : Top PE Deals in 2011

As per the sector-wise breakup, the traditionaloption like real estate and infrastructure were the mostpreferred in the year. The total PE investment in Realestate and infrastructure was around US$1.7 billionof overall funding in India. As compared to last year,



there was heavy inflow of cash in the road, railwayand airport projects which took large portion of theoverall investment.

Other major sectors driving PE activity wereautomotive (US$ 1bn), Power and energy (US$ 892bn),Banking and finance (US$ 816mn) and IT and ITES(US$ 783bn).

Recent Updates on mergers and acquisition

The government, through its Company Bill 2011,has approved provisions made to facilitate between2 or more small companies or between holdingcompany and its subsidiary or such other class ofcompanies as may be prescribed. Fast track mergerwould require approval of ROC, OL, membersholding at least 90% of shares and majority ofcreditors representing 9/10th in value.

This provision clearly brings forth the govern-ment’s motive to ease out the procedure of mergerfor small companies so that the compromise orreconstruction can be taken without much formalities.

To conclude, the year has emerged fairly resilientin terms of deal appetite, despite challengingcircumstances. However, stabilization of economicfactors is critical for deals to continue the momentumgoing forward. The rise of global equity markets andthe improvement in the business sentiment have


Month Investment value (US $) Composite year gap(2011) (2010)

January 2.5 billion across 67 deals 3.90 billion across 86 deals

February 8.27 billion across 76 deals 1.95 billion across 84 deals

March 9.79 billion across 78 deals 13.65 billion across 51 deals

April 5.13 billion across 102 deals 3.07 billion across 136 deals

May 5.38 billion across 99 deals 8.60 billion across 72 deals

June 3.33 billion across 102 deals 3.77 billion across 107 deals

July 2.60 billion across 86 deals 14.55 billion across 54 deals

August 2.55 billion across 78 deals 1.56 billion across 45 deals

September 2.95 billion across 82 deals 1.29 billion across 101 deals

October 2.29 billion across 73 deals 1.87 billion across 81 deals

November 2.95 billion across 76 deals 4.35 billion across 63 deals

December 2.26 billion across 45 deals 3.44 billion across 91 deals

Total 51 billion across 961 deals 62 billion across 971 deals

Appendix 7 : Month-on-month detail on M&A in India

enticed corporates to once again pursue the policy ofinorganic growth.

With the exception of a few blue blips like Eurozone crisis, it should be commonly assume that theglobal economy is on the path to recovery which will,in turn, foster economic growth and, finally, help inincreasing the transaction deals pertaining to mergersand acquisitions. ❐

“Surround yourself with the best people you can find, delegate authority, and don’t interfere as long as thepolicy you’ve decided upon is being carried out.” — Ronald Reagan


Evaluation of Credit Risk Management in Urban Co-Opera-

tive Banks—A Study in Hooghly District

Anupam MitraACMA, Assistant Professor, Dept. ofCommerce, Raja Peary Mohan College,Kolkata

Introduction

Cooperation is a form of organization whereinpersons voluntarily associate together ashuman beings on a basis of equality and work

together for a common goal. Cooperatives are basedon the values of self-help, self-responsibility,democracy, equality, and solidarity. In the traditionof their founders, cooperative members believe in theethical values of honesty, openness, socialresponsibility and caring for others. Co-operativeBanks in India are registered under the Co-operativeSocieties Act, 1904. The cooperative banks are alsoregulated by the RBI. They are governed by theBanking Regulations Act, 1949, and Banking Laws(Co-operative Societies) Act, 1965. Co-operative banksare of two types—Rural Co-operative CreditInstitutions (RCCI) and Urban Co-operative Banks(UCB) as shown below. For a start, it’s easy to set upa cooperative bank, since there are just tworequirements: a minimum capital, and a minimummembership.

Credit risk is defined as the possibility of lossesassociated with a diminution in the credit quality ofthe borrowers/counterparties. Credit risk manage-ment means a critical assessment of a borrowing entityand of investments to ascertain its viability. Since mostproblems in banks begin with bad loans, and sincelending policies are primarily determined by banks’boards, RBI’s inability to establish its authority overthe boards makes the situation precarious fordepositors. The various possible reasons of loandefault are willful default, loss of job, change infinancial condition, wrong loan appraisal, inflation etc.

Literature ReviewSeveral studies were conducted on the activities

of UCBs in India by the committees appointed by theRBI and the Govt. of India. Sketches on the major onesare :

● RBI taken up the first study of UCBs in the year1958-59.

● The Indian Central Banking Enquiry Committee(1931), observed : The duty of these urban banks

should be to try to do for the small trader, the smallmerchant and the middle class population.

● The Rural Banking Enquiry Committee (1950),also commented on the role that urban co-operativebanks could play in providing banking facilities.

● The Working Group on Industrial Financingthrough Co-operative Banks (1968), (known as DamryGroup) appointed by the Reserve Bank recognizedthe key role which urban banks could play inproviding finance to cottage and small-scaleindustries.

● The Madhavdas Committee (1979), evaluated therole played by urban co-operative banks in greaterdetails and drew a roadmap for their future rolerecommending support from RBI and Governmentin the establishment of such banks in backward areasand prescribing viability standards.

● While the Marathe Committee (1992), redefinedthe viability norms and ushered in the era ofliberalization.

● The Madhava Rao Committee (1999), focused onconsolidation, control of sickness, better professionalstandards in urban co-operative banks and sought toalign the urban banking movement with commercialbanks.

Objective of StudyThe proposed study, as such, aspires to make a

humble attempt to enquire about the cause and effectof credit risk in the UCBs in Hooghly district of WestBengal during 2004-05 to 2010-11. The RBI has takenvarious initiatives for the upliftment of the urbanpeople in the form of these institutions.

The following are the objectives of the study :● To examine the financial condition of the UCBs

in Hooghly district.● To evaluate the present scenario in terms of

managing credit risk by the UCBs.● To examine creditworthiness of the UCBs in

Hooghly district● To provide some suggestion for improvements

in the UCBs.

BANKING & FINANCE


MethodologyThe research methodology has the following

approaches : a detailed survey of the existing positionof UCB with the help of structured questionnaires andpilot survey in Hooghly district.

The indicative parameters for Credit Risk Ratingshould include: Current and Savings Account (CASA)Ratio, Credit-Deposit (C/D) Ratio, and Capital to RiskWeighted Assets Ratio (CRAR).

The collected data from the selected urban co-operative banks are classified, tabulated and analyzedin a systematic manner with the help of somesophisticated statistical tools like Arithmetic Mean(A.M.), Standard Deviation (S.D.), Coefficient ofVariation (C.V.), Correlation Coefficient(r), TrendAnalysis and Test of Significance (Chi-square test)to understand the impact of credit risk managementon the UCBs profitability, liquidity and solvencyposition.

FindingsThere are 5 UCBs in the district of Hooghly. The

details are :Hooghly District 1. Uttarpara Co-op. Bank Ltd (Gr I)

2. Konnagar Samabay Bank Ltd. (Gr I)3. Nabagram Peoples Co-op. Bank Ltd. (Gr I)

4. Baidyabati Sheoraphuli Co-op. Bank (Gr I)

5. Hooghly Co-op. Bank Ltd. (Gr I)

The financial position of the UCBs in Hooghlydistrict is presented through following parameters :

(i) Deposit

The Deposit of urban banks increased fromRs. 165.9 crores as on 31 March 2005 to Rs 271.31crores as on 31 March 2011 i,e., by 64 %. The averageannual growth rate of deposit is 6%.

Trend Analysis of Total Deposits of UCBsYear Actual Values Indices Trend Values Deviation

(YC)

2004-05 165.09 100 245.22 37.92

2005-06 174.28 105 288.98 75.48

2006-07 168.65 101 332.74 159.65

2007-08 183.94 110 376.50 201.58

2008-09 205.33 123 420.26 224.97

2009-10 240.82 145 464.02 206.86

2010-11 271.31 163 507.78 206.01

YC stands for computed values of depositbased on the least squares equation in the form ofYc = a + bX, where the equation comes to Yc = 201.46+ 43.76X, with origin at the year 2004-05 and Xunit = 1 year and Y unit = rupees in crores. It isobserved that the calculated value of x2 (chi square)is 1,112.5, whereas the tabulated value of (chi square)is 12.592 at 5% level of significance with 6 degrees offreedom. As the calculated value is more than thetabulated value, it implies that the difference betweenthe actual values and the trend values of deposit aresignificant.

(ii) Loans and Advances

Deposits of Surveyed UCBs (Rs. in crores)

Sl. Bank Name 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Average AnnualNo. Growth

1 Uttarpara Co-op. Bank Ltd 52.98 55.24 45.13 42.51 43.45 50.88 55.88 –1%(4.2) (–18) (–5) (2.2) (17) (9.8)

2 Konnagar Samabay Bank Ltd. 21.59 21.96 22.43 25.26 29.26 35.64 41.22 12%(1.7) (2.1) (12) (15) (21) (15)

3 Nabagram Peoples Co-op. Bank Ltd. 28.57 30.12 28.75 30.62 35.01 40.93 44.75 9%(5.4) (–3) (6.5) (14) (16) (9)

4 Baidyabati Sheoraphuli Co-op. Bank 38.34 38.87 38.96 43.71 45.49 53.07 59.98 7.5%(1.3) (00) (12) (4) (16) (13)

5 Hooghly Co-op. Bank Ltd. 24.42 28.09 33.38 41.84 52.12 60.30 69.48 20%(15) (18) (25) (24) (15) (15)

TOTAL 165.9 174.2 168.6 183.9 205.3 240.8 271.3 6%

(.5) (–.03) (.09) (11.6) (17.2) (12.6)

Note : 1) Figure in parenthesis indicates the growth percentage2) Annual Average growth percentage is calculated on the basis of Moving Average method to get more effective

result

BANKING & FINANCE


Loans and Advances of Surveyed UCBs (Rs. in crores)

Sl. Bank Name 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Average AnnualNo. Growth

1 Uttarpara Co-op. Bank Ltd 14.44 14.57 15.94 16.07 16.11 16.47 16.5 1.5%(00) (9.4) (00) (00) (2.2) (00)

2 Konnagar Samabay Bank Ltd. 2.98 3.01 3.26 4.05 4.51 5.03 5.61 14%(1) (8.3) (2.4) (11) (11) (11)

3 Nabagram Peoples Co-op. Bank Ltd. 4.68 4.75 4.72 5.04 5.05 5.16 6.26 3%(1.4) (00) (6.7) (00) (2.1) (21)

4 Baidyabati Sheoraphuli Co-op. Bank 14.71 18.15 21.50 24.54 27.55 31.48) 36.7 14%(23) (18) (14) (12) (14) (16)

5 Hooghly Co-op. Bank Ltd. 11.44 14.40 17.16 18.05 19.27 19.36 22.4 7.5%(25) (19) (5) (6.7) (00) (16)

TOTAL 48.25 54.88 62.58 67.75 72.49 77.5 87.5 7%(13.7) (14) (.08) (0.6) (.06) (13)

Note : 1) Figure in parenthesis indicates the growth percentage2) Annual Average growth percentage is calculated on the basis of Moving Average method to get more effective result

The Loans & Advances of urban banks increased from Rs 48.25 crores as on 31 March 2005 to Rs 87.59crores as on 31 March 2011 i,e., by 81.5%. The average annual growth rate of loans & advances is 7%.

Trend Analysis of Loans & Advances of UCBsYear Actual Values Indices Trend Values (YC) Deviation

2004-05 48.25 100 61.98 3.092005-06 54.88 113 56.67 0.052006-07 62.58 129 111.36 38.022007-08 67.75 140 126.05 50.162008-09 72.49 150 140.74 64.252009-10 77.5 160 155.43 78.032010-11 87.59 181 170.12 77.76

Now, again YC stands for computed values of loans and advances based on the least squares equation inthe form of Yc = a + bX, where the equation comes to Yc = 67.29 + 14.69X, with origin at the year 2004-05 andX unit = 1 year and Y unit = rupees in crores. It is observed that the calculated value of (chi square) is 312.44,whereas the tabulated value of (chi square) is 12.59 at 5% level of significance with 6 degree of freedom. As thecalculated value is more than the tabulated value, it implies that the difference between the actual values andthe trend values of loans and advances are significant.

(iii) Gross NPA

Gross NPA of Surveyed UCBs (Rs. in crores)

Sl. No. Bank Name 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Average p.a.

1 Uttarpara Co-op. Bank Ltd 3.25 3.31 3.46 4.06 5.14 4.67 3.98(22.3) (20.8) (21.6) (25.2) (31.2) (28.3) (24.9)

2 Konnagar Samabay Bank Ltd. .38 .45 .49 .56 .67 .60 .525(12.8) (13.9) (12.2) (12.6) (13.4) (10.8) (12.6)

3 Nabagram Peoples Co-op. Bank Ltd. .44 .51 .73 .79 1.15 1.28 .81(9.4) (11) (14.6) (15.8) (22.3) (20.6) (15.6)

4 Baidyabati Sheoraphuli Co-op. Bank 1.81 2.36 2.94 3.92) 4.35 4.69 3.34(10) (11) (12) (14.2) (13.8) (12.8) (12.3)

5 Hooghly Co-op. Bank Ltd. 1.55 1.69 1.84 1.97 3.42 1.88 2.05(10.8) (9.8) (10.2) (10.2) (18) (8.4) (11.2)

TOTAL 7.43 8.32 9.46 11.3 14.73 13.12(15) (15) (15) (15.5) (19) (14.9)

Note : 1) Figure in parenthesis indicates the percentage of Gross NPA to Loans & Advances.

BANKING & FINANCE


The standard tolerance level of GNPA as per the RBI guidelines is 15% of loans & advances and it is foundthat on an average all the UCBs are below that level.

The Analysis of the financial data is done through :(A) Ratio Analysis :(a) CASA RatioCASA Ratio to Total Deposit (%) (Current & Savings Account/ Total Deposit) of Surveyed UCBs

Sl. Bank Name 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Mean C.VNo1 Uttarpara Co-op. Bank Ltd 47% 50% 53% 56% 52% 53% 56% 52% 6%2 Konnagar Samabay Bank Ltd. 48% 51% 53% 51% 47% 48% 51% 50% 4%3 Nabagram Peoples Co-op. Bank Ltd. 42% 44% 42% 43% 39% 39% 41% 41% 4.6%4 Baidyabati Sheoraphuli Co-op. Bank 67% 66% 66% 60% 51% 52% 55% 60% 11%5 Hooghly Co-op. Bank Ltd. 45% 49% 47% 46% 46% 43% 42% 45% 5%

Average 49.8% 52% 52.2% 51.2% 47% 47% 49% 49.6%

As the overall average of CASA ratio is 49.6% which implies that Savers are now putting less money intocurrent and savings accounts (CASA) of UCBs instead parking them in term deposits. Higher the CASAratios better the credit worthiness of a bank.

(b) C/D RatioCredit –Deposit Ratio (C/D Ratio) of Surveyed UCBs

Sl. Bank Name 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Mean C.VNo1 Uttarpara Co-op. Bank Ltd 27% 26% 35% 37% 37% 32% 29% 32% 14%2 Konnagar Samabay Bank Ltd. 13% 15% 14% 16% 15% 14% 14% 14% 7%3 Nabagram Peoples Co-op. Bank Ltd. 15% 15% 16% 16% 14% 13% 14% 15% 7.3%4 Baidyabati Sheoraphuli Co-op. Bank 38% 47% 55% 56% 61% 59% 61% 54% 15%5 Hooghly Co-op. Bank Ltd. 50% 51% 51% 43% 37% 32% 32% 42% 20%

Average 28.6% 30.8% 34.2% 33.6% 32.8% 30% 30% 31.4%The yearly average C/D ratio of the surveyed UCBs was 28.6% in 2004-05 and 30% in 2010-11. So there is

no gross increase in the C/D ratio during these 7 years. The Mean and C.V is computed to analyze theconsistency of the ratio during the study period. The standard C/D ratio is 60% as per the RBI guidelines.Almost all the banks are below that.

(c) CRARCapital to Risk Weighted Asset Ratio (CRAR) of Surveyed UCBs

Sl. Bank Name 2006-07 2007-08 2008-09 2009-10 2010-11 MeanNo

1 Uttarpara Co-op. Bank Ltd 11% 15% 14% 12% 13% 13%

2 Konnagar Samabay Bank Ltd. 46% 40% 42% 37%% 41% 41.2%

3 Nabagram Peoples Co-op. Bank Ltd. 36% 34% 30% 30% 30% 32%

4 Baidyabati Sheoraphuli Co-op. Bank 50% 48% 53% 53% 35% 47.8%

5 Hooghly Co-op. Bank Ltd. 23% 22% 24% 26% 25% 24%

Average 32.5% 31.8% 32.6% 36.33% 28.8% 32.5%

Higher CRAR means higher capability to absorb any unforeseen risks that may arise out of loss assets.The standard CRAR is 9% as per the RBI guidelines. All the banks are above the norms.

(B) Statistical AnalysisCorrelation Co-efficient (r)

BANKING & FINANCE


Sl. Bank Name Correlation CorrelationNo. between deposit between Loans

and loans & & Advancesadvances and Gross NPAr T value of r T value of

r

1 Uttarpara Co-op. Bank Ltd –0.36 0.73 0.70 0.73

2 Konnagar Samabay Bank Ltd. 0.97 0.37 0.91 0.37

3 Nabagram Peoples Co-op.Bank Ltd. 0.88 0.42 0.85 0.41

4 Baidyabati Sheoraphuli Co-op.Bank 0.95 0.38 0.97 0.38

5 Hooghly Co-op. Bank Ltd. 0.92 0.39 0.33 0.39

Here we find that a positive relationship existbetween deposit and loans and advances and betweenloans and advances and gross NPA. So if depositincreases, loans are also increasing but on the contrarygross NPA is also highly correlated.

Relationship between Parameters of Credit Riskof Surveyed UCBs by simple correlation

Year GNPA (%) CDR (%) L&A CRAR (%)(Rs in cr)

2005-06 15.00 30.08 54.88 —

2006-07 15.00 34.02 62.58 32.052007-08 15.00 33.06 67.75 31.08

2008-09 15.05 32.08 72.49 32.06

2009-10 19.00 30.00 77.05 36.33

2010-11 14.09 30.00 87.59 28.08Mean 15.73 31.04 70.46 32.05

r — –0.46 0.29 0.85

Here we got correlation between loans andadvances and CRAR with gross NPA but inverserelationship between GNPA and C/D Ratio.

The summarized findings are● In business, credit risk emerged as the biggest

risk for co-operative banks, which is evidentwith rising NPAs.

● It is apparent that the swelling NPA has becomea major problem of the urban co-operativebanks.

● Poor resource base is the main constraint of theurban co-operative banks.

● Most of the UCBs follow conservative creditpolicy.

● Another problem, which vitiates co-operativemovement, is the interference of the politiciansin the organization.

● Urban co-operative banks are suffering fromthe lack of professional management and inmost of the cases approach is very much casual

Recommendations● The management should keep NPAS under

control and reduce the net NPAs to the expected levelso that the bank does not fall in lower category. Itshould adopt the strategies at two stages, i.e.Pre-sanction in depth scrutiny and Post-sanctionsupervision and follow up.

● It is advised to the management to develop moreeffective credit appraisal policy and loan recoverystrategy.

● The bank needs to prepare a comprehensiveperspective plan for product diversification tomaintain a competitive edge in the market.

● The urban co-operative banks, with their newformed emphasis on prudential norms, need a highdegree of professionalism in management.

● Banks may have to quickly better their riskmanagement practices and integrate them intobusiness strategy and implementation.

ConclusionThe Urban Cooperative Credit movement in India

is a century old. A revolution in the urban co-operativesector is that a co-operative Bank turns into Pvt. Bank.Saraswat Co-operative Bank, which was establishedin 1918 to help families in distress, the largest lenderin the segment is planning to convert itself into aprivate bank and has sounded off the RBI of itsintentions. The Reserve Bank of India on 8th August2007 signed a memorandum of understanding withthe West Bengal government for setting up a state-level Task Force on Urban Co-operative Banks(TAFCUB). It would not be out of place to mentionthat the United Nations (U.N) International Year ofCo-operatives (IYC) secretariat in the month of April2011 released a logo in six languages recognizing 2012as the International Year of Co-operatives. ❐

ReferencesBooks■ Arvanitis, A. Gregory, J., Credit : The Complete Guide

to Pricing Hedging and Risk Management. Risk Books,London, 2001.

■ Basak Amit., Co-operative Banks in India : Functioningand Reform. New Century Publication, India, 2010.

■ Bhole L M., Financial Institutions & Markets, TataMcGraw-Hill Publishing, New Delhi.

■ Bistora, R L., Agriculture Development throughCooperative Banks, Deep & Deep Publications, NewDelhi, 1994.

Periodicals■ Chitab Mukund M., Urban Cooperative Bank Mergers,

The Chartered Accountant, April 2005, p. 26.■ Eugene Fama, “Risk Return and Equilibrium: some

clarifying comments” Journal of Finance, March 1968,p. 35-36.


BANKING & FINANCE


Efficient Cash Management : The Pulse of Today’s Business

Dr. Sandeep Goel

Asst. Prof. MDI, Gurgaon

Introduction

Cash is the lifeblood of every business andtherefore efficient cash management becomesinevitable in a business unit. The overall cash

management in a business world covers themanagement of a series of business processes fromacquisition of raw materials and ultimate delivery ofgoods and /or services. It ensures that the movementsof cash flow, logistic flow and financial informationflow inside and outside the enterprises. CashManagement ensures the efficient rotation of moneyin the various levels of operating cycles withoutcreating adverse situations of cash surplus or deficit.

Cash is required to meet in firm’s transactionalneeds and precautionary needs. A firm needs cash tomake payments and acquisition of resources andservices for the normal conduct of business. Also, itkeeps additional funds to meet any emergencysituation. Some firms may also maintain cash fortaking advantages of speculative changes in prices ofinput and output.

Focus AreasThe financial manager should know as to why

the cash management is a necessity. The cashmanagement strategy is built around two goals, i.e. :

(a) to provide cash needed to meet the obliga-tions, and

(b) to minimize the idle cash held by the firm.A large investment minimizes the chances of

default but penalizes the profitability of the firm. Asmall cash balance may free the excess cash balancefor investment in marketable securities and therebyincreasing the profitability of the firm. Two primeobjectives for a firm’s cash management system are :

1. Management of cash flows2. Control of cash flows.Management of cash flowsMeeting the cash outflow: The primary objective of

cash management is to ensure the cash outflow as andwhen required. Enough cash must be in hand inorder to make payments at different points of time

without any liquidity. It will help the firm in(a) avoiding chance of meeting financial obligation,which, in turn, can affect goodwill of the firm in themarket, (b) availing discounts if the payments aremade before time, (c) meeting unexpected cash flowwithout much problem.

Minimizing the cash balance : Investment in idlecash balance must be reduced to a minimum. Theobjective of cash management is based on the ideathat unused asset earns no income for the firm. Thefunds locked up in cash balance are a dead investmentand has no earnings—so a minimum cash balanceshould be maintained.

Control aspectControlling and reviewing of the cash must be

done on regular basis. The financial manager shouldtake appropriate steps for preventing any unexpecteddeviation in inflow and outflow of cash. The efficiencyof a firm’s cash management program can beenhanced by the knowledge and use of variousprocedures:

Controlling inflows : The financial manager shouldtake steps for speedy recovery from debtors. Periodicstatements should be prepared to show the outstandingbills. Incentives offered to the customers for earlypayments should be well-communicated. Once the draftsor cheques are received from the customers no delayshould be done in depositing them with the banks. Toovercome these problems concentration banking andlock box system help reducing time lag.

A firm may open collection centers in differentparts of the country to save postal delays. This isknown as concentration banking. Under this system,the collection centers are opened at different states,as near debtors as possible—hence reducing the timein dispatching. The firm may ask these debtors tomake payments at the regional centers rather thanposting them to the central office. The concentrationbanking results in saving of time of collection andhence, results in better cash management. Butconcentration banking involves some cost in terms ofminimum cash balance required by the bank.

BANKING & FINANCE


Under lock box system, the customers can mailtheir payments to a post office near their workplace.The firm may arrange with the local banks or someother agency to collect the payments and credit to thefirm’s account as fast as possible. This is a new conceptthat firms has adopted. However, some of thecommercial banks provide services to their largeclients, of (a) collecting cheques from the office to theclient and (b) sending high value cheques to the bankfor clearing on the same day.

Hence concentration banking and lock box systemattempt to reduce the mailing time of customers’payments and reduce the time during which paymentsreceived remained uncollected and speed of themovement of cash to the main office of disbursement.

Controlling outflows : An effective control overcash outflow also helps better cash management andreducing cash requirement. A financial managershould try to slow down the payments as much aspossible but the goodwill of the firm should not beeffected. There is no need to make early payments tothe creditors unless and until any discount is providedby them, however, on time payments should be made.Balance lying in the bank must be fully utilized so asto take maximum advantage out of it, but there shouldbe sufficient amount of balance in the bank when thecheque is expected to be presented for payment.

Thus effective control of outflow can result inlarger cash balance. The underlying objective helpsin delaying the payments without affecting thegoodwill of the firm.

Playing the float : When the firm receives or makepayments in form of cheques etc. there is usually atime gap between the time the cheque is written downand when it is cleared—it is known as ‘float.’ For thepayee firm, float refers to the time between the receiptof the cheque and the availability of the funds in itsaccount.

Float has three components :1. mail time : it is the period between the issue of

the cheque and its receipt by the payee.2. processing time : it is the time between the

cheque received by the payee and deposited inthe bank.

3. collection time : it is the time consumed fortransferring of funds from payer’s bank to thepayee’s account.

Investing surplus cash : On the basis of the cashbudget the financial manager may come to know ifthe cash is available for some time. So on the basis ofthis he can invest that amount for small period of timein some profitable capital project. Determination ofcash is very critical exercise and a lot depends uponthe experience of the manager. He should take careof precautionary demand as well as sudden

fluctuation in the market before going for theinvestment of the surplus cash.

Following are some of the industry examplesregarding cash collection policy. Cash policy is oneof the most essential components of cash management.The three companies discussed here are from diverseindustries. The reason is that we can appreciate betterthe cash realization policy in companies of differentnature and different industries.

Figure 1Bharat Electronics Ltd.

Figure 2Reliance Industries Ltd.

Figure 3Tata Consultancy Services Ltd.

Bharat Electronics Ltd. has the longest collectionpolicy, consisting of around 6 months. But keeping inview the nature of business of Bharat Electronicswhich is defence—it is well understood. Had itbeen into other sector this would have been anunsatisfactory picture. Reliance shows a verypromising picture having a collection period of just 3weeks. It not only enhances the cash position but alsoprovides the company an opportunity to investeffectively in various investment opportunities. TataConsultancy’s collection period of around 2 monthsis an industry phenomenon, being an IT company inthe service sector.


BANKING & FINANCE


Optimizedinformation

system

OptimizedBillings &

Collections

OptimizedPayables/

Disbursements

Effective Cash Management

Effective cash management revolves aroundfollowing key areas :

● Understand that credit collection starts withcredit extension. Resist the temptation to cut cornerswhen extending credit terms and payment guidelinesto new customers. In other words, avoid using creditextension as a sales tool.

● Learn your customers’ payable rules. Under-stand what your top customers’ procedures andprerequisites are, so your invoices can more quicklywade through them to avoid administrative delaysin payment.

● Understand the driving force behind slow/nopayment patterns. Johnson breaks all receivablesproblems into three categories : “should not pay”because the product, service or billing the customerreceived was not right (errors in business operations);“cannot pay” because the customer does not have themoney (errors in credit extension); and “will not pay”because the customer is attempting to be “shrewd”or, perhaps, unethical. Assessing problem receivablesin such a manner will allow an organization to quicklyidentify the correct action for each receivableproblem, such as quick correction of product/billingdeficiencies, extraction of a partial payment orpayment plan, or initiation of aggressive collectionefforts.

● Avoid printing checks until they are needed.Printing checks before they are needed understatesthe Accounts Payable balance and risks prematuremailing. It is a poor practice and is to be avoided.

Following diagram depicts the flow of an efficientcash management system :

Effective cash management

Tools for Cash ManagementWhen the economy is strong, companies can lapse

into sloppy cash-management practices.

Don’t let that happen to you. Try exploring theseoptions :

Sweep accounts. These bank accounts are theeasiest way to generate some income from yourcompany’s spare funds; however, they make senseonly if the money you’ll earn will be greater than thefees your bank will charge. Business owners have twotypes of sweep accounts to choose between :

● Controlled-investment accounts. Think of theseas checking accounts with the ultimate in zerobalances. Every day, your bank will leave only enoughin your checking account to cover those checks thatwere presented the night before for payment that day.The rest gets swept, quite early, into overnightinvestments. “These are the most profitable form ofsweep account, but they won’t work for your companyif you have any electronic payments or wire transfers,since those may be submitted for payment later inthe day and your account won’t have enough cash init to cover them,” warns Stephen King.

● End-of-day sweep accounts. A safer bet for mostsmall-business owners, these accounts wait until alate-hour cutoff to determine how much to sweep intoyour overnight investments. Typically their invest-ment yields are 10 to 20 basis points (.1% to .2% of theinvestment) lower than those offered with controlledinvestments.

● Lock-box accounts. A lock box is a cash-management system that helps you collect your fundsquickly. Generally set up with the assistance of a bigmoney center or regional bank, lock boxes provideyour company with a special zip code and, usually,quicker deliveries from regional post offices. They areespecially important if you have clusters of customersin out-of-state locations and don’t want to lose dayswaiting for their checks to arrive by long-distance mail.

How to Project?

Projection of your sales and expenses is the firststep toward creating a cash flow budget that yourbusiness can rely on. This profit and loss (P&L)projection is not intended to be a detailed financialstatement. It is intended to act as a guide to help youforecast your company’s sales and expenses.

How to use this projection?

Forecast sales : During the course of the next year,what are the lowest sales figures you could expect?What are the highest? Break down your salesassumptions by product (or service) lines, startingwith the worst-case scenario. The goal here is to get ahandle on the worst possible situation. Then project

FINANCIAL MANAGEMENT



sales under the best possible conditions, with all ofyour sales efforts succeeding and customers flockingto your door.

Forecast expenses : Identify all of the expenses thatyou’ll incur to generate revenue under both the lowand high sales projections you’ve made. Costs that—whatever your sales level—are present and remainfairly constant should be entered as fixed expenses.They may include such expenses as rent/mortgagepayments, certain taxes, leased equipment payments,and basic telephone and utilities expenses. Expensesthat increase and decrease with production areconsidered variable expenses. They may include costof goods sold, cost of sales, advertising, labor, andvariable utilities.

Compare and review “best” and “worst”: Now thatyou’ve recorded both scenarios, create a “most likely”scenario by comparing the two. With this method, youwill produce a more realistic forecast upon which youcan make decisions.

Look at your profit level : Calculate profit beforedepreciation. You will have three potential profitfigures: one low, one high, and one that is most likely.Next, calculate the depreciation of your fixed assets.(Depreciation involves the amortization of the cost offixed assets over time.) Now discover your net profitbefore income taxes. Subtract “depreciation” from“profit before depreciation and income taxes” to arriveat your net profit before income taxes.

ConclusionIn nutshell, it is quite evident that a good cash

management program is a very significant componentof the overall financial management of a busi-ness. What is require for this by the firm is increasingthe revenues, improving the control and superin-tendence of cash, increasing contacts with membersof the financial community, and lowering the

borrowing costs, while, at the same time, maintainingsufficiency of funds. ❐

References■ Archer, S.H., etal. (1972), Business Finance—Theory and

Management. New York : The Macmillan Company.

■ Bhattacharya Hrishrikesh, (2004),Working CapitalManagement—Strategies and Techniques. New Delhi :Prentice-Hall of India.

■ Debasish Raj etal ( 2001), Profitability Analysis of IndianFood Products Industry : A Case Study of CadburyIndia Ltd. Management Accountant, Kolkata, 36(II).

■ Donaldson, Gordon ( 1960), Looking Around: Financefor the Non-Financial Manager, Harvard BusinessReview, Boston, Vol. 37, Jan.-Feb.

■ Ghosh, T.P.(2004), Accounting and Finance ForManagers, August 2004 Taxmann Allied Services (P)Ltd.

■ Pandey, I.M. (2006) Financial Management, VikasPublishing House, New Delhi.

■ Modigliani, F. et al (1958), The Cost of Capital,Corporation Finance and The Theory of Investment,American Economic Review, Vol. 48, June.

■ Myers L., et al, (2002), Earnings Momentum andEarnings Management, Working Paper, University ofMichigan.

■ Raheman Abdul and Mohamed Nasr (2007), WorkingCapital Management And Profitability—Case ofPakistani Firms, International Review of BusinessResearch Papers, Vol. 3 No.1. March.

■ Sansing Richard (1998), The Unrelated Business IncomeTax, Cost Allocation and Productive Efficiency, NationalTax Journal Vol. 51, No. 2.

■ Singh A et al.( 1968), Growth Profitability and Valuation,Cambridge, Cambridge University Press.

■ White Paper (2004) on Effective Cash Management,Datawatch, www. datawatch.com, March.

FINANCIAL MANAGEMENT

Reports and Publications■ Altman, E.I., Saunders A. Credit Risk Measurement:

Developments over the last 20 years. J. Bank.Finance21,1998 pp- 1721-1742.

■ RBI monthly bulletin, Sept 2006, June 2008, Sept 2009■ Report of the Madhav Das Committee (1978), published

by the Government of India, Delhi, p. 30■ Report of the Committee on Co-operation in India

(1915), published by the Government of India, Delhi,p. 11

■ Report of the Indian Central Banking EnquiryCommittee (1931), Majority Report, published by theGovernment of India, Delhi, p. 255

■ Report of the Co-operative Planning Committee (1946),published by the Government of India, Ministry ofAgriculture, New Delhi, p. 116

■ Report of the Study Group on Credit Co-operatives inthe Non-Agricultural Sector (1963), published by theGovernment of India, Ministry of CommunityDevelopment and Co-operation, New Delhi, p. 67.

■ Report of the Committee on Co-operation Part I (1969),published by the Government of Tamil Nadu, Chennai,pp.73-74

■ Report of the Banking Commission (1972), publishedby the Government of India, Ministry of Finance, NewDelhi, p. 231


“Management by objectives works if you first think through your objectives. Ninety percent of the time youhaven’t.” — Peter Drucker


Review of the Economy 2011-12 Highlights

Dr. C. Rangarajan, Chairman, Economic Advisory Council to the Prime Minister released the document ‘Reviewof the Economy 2011-12’ today (February 22, 2012). Following are the highlights of the document :

Review of the Economy 2011-12● The rate of growth in 2011-12 is now estimated at 7.1%, which is marginally higher than the projection

of 6.9% as per the Advance Estimates (AE). The Council projects a slightly higher growth for agricultureand construction than the Advance Estimates.

● Investment activity has slowed down and as a result the Gross fixed Capital formation (GFCF) for2011/12 has slipped to 29.3 per cent, a decline of almost 4 percentage points over the last four years.

● Global economic and financial conditions likely to remain under pressure during the year.● Overall farm sector GDP growth for 2011/12 will average 3 per cent, riding high on record outputs for

rice, wheat and strong trend growth in horticulture and animal husbandry.● Mining and quarrying sector likely to report negative growth for 2011/12 on account of weak coal

output growth, restrictions imposed on iron ore production, decline in natural gas production andnegative growth in crude oil output.

● Electricity sector has performed well. It is expected to grow at 8.3 per cent during 2011/12.● Manufacturing and construction have been sluggish during the first three quarters of 2011/12. This may

show improvement in the last quarter. The overall growth rate will be 3.9 per cent and 6.2 per cent respectively.● Strong growth in the services sector will continue with overall growth of 9.4 per cent for 2011/12. For

the year as a whole the Balance of Payment (BoP) position will be tight, this clearly indicates the need tokeep the Current Account Deficit (CAD) within limits.

o CAD has weakened, averaging 3.6 per cent (annualized) of GDP in the first half of 2011/12.o CAD for the 2011/12 is projected to be 3.6 per cent.

● Headline inflation has shown decline since November 2011 and more strongly in January 2012. It isprojected to be around 6.5 per cent at the end of March 2012. Policies-both monetary and other publicpolicies seem to have had the desired effect.

● Sustained high food prices particularly on account of fruit, milk, eggs, meat & fish began to get passedinto the price behaviour of manufactured goods.

● Year-on year inflation for manufactured goods rose from around 5 per cent in September 2010 to 8 percent in September and October 2011.

● Expansion of the fiscal deficit beyond its budgeted estimate of 4.6 per cent of GDP -an area of concern.Government must strive to contain and improve the efficacy of subsidies. Prospects for 2012/13

● Economy is likely to grow in the range of 7.5 to 8 per cent. Mining and manufacturing are expected toshow substantial improvement in 2012/13 over the previous year.

● Inflationary pressure will continue to ease through 2012/13 and will remain around 5-6 per cent for the year.● Vigil to be kept on food prices-focus on production as well as rolling out of adequate food logistics

network.● Greater need to invest in the infrastructure for both capacity creation as well as operational performance

in coal, power, roads and railways.● Need to make adjustments on sale of refined petroleum products to reduce the huge burden of subsidy.● In the year 2012/13 CAD is projected to be around 3.0 per cent of GDP.● Efforts be made to keep the CAD between 2.0 and 2.5 per cent of GDP over the medium term.● Capital inflows particularly in the form of equity must be encouraged along with improved domestic

conditions for investment and growth.● Government must effectively lay out a road map to achieve fiscal consolidation.● Government borrowing programme must not affect the financing needs of the private sector.● For the overall macroeconomic stability, attention must be paid to prices, exchange rate and fiscal balances.

The Institute thankfully acknowledges the above contribution of Shri B. D. Bose, Past President of theInstitute.

ECONOMIC REVIEW


India Corporate & Investor MeetFebruary 6, 2012 – The Park, Kolkata

To bring national focus on investor awareness and the roleand contribution of the corporate sector in the Indian socialand economic development, Ministry of Corporate Affairs hasorganized ‘India Corporate and Investor Meet’ duringFebruary 6, 2012 to February 11, 2012 in 5 cities. The firstprogramme was held on February 06, 2012 at the Park, Kolkatawith FICCI as the lead partner. The theme of the meet was“Corporate Growth, Governance and Inclusion”.

Shri Sidharth Birla, Vice President, FICCI and Chairman,FICCI Corporate Laws Committee in his Welcome Address atthe Inaugural Session said that FICCI had joined hands withthe Ministry of Corporate Affairs, Govt. of India to organisethe meet to focus on issues such as corporate governance,investor protection and balancing interests of all stakeholders— not just shareholders.

Shri Gaurav Swarup, Chairman, FICCI ERC in his Addresspointed out that a strong and vibrant capital market is requiredto sustain the corporate sector’s growth trajectory. Mr Swarupadded that corporate leaders have an opportunity to redefinethe role of the corporation and leverage their ability to improvethe lives of people and communities for the better.

In his address Shri Sudhir Mital, IAS, Additional Secretary,MCA, highlighted the need for financial literacy for retailinvestors and added that though Indian savings account fornearly 37% of GDP only around 4% of savings go to CapitalMarkets. Shri Mital said that simplification of technicalfinancial information, reasonable processes and role ofintermediaries are critical in raising investor confidence.

Shri Partha Chatterjee, Hon’ble Minister, Department ofCommerce & Industries, IT, IR&PE and Parliamentary Affairs,Govt. of West Bengal delivered the Keynote Address. ShriChatterjee said that the State Government’s vision was toposition West Bengal as a destination where Governancemeans transparency, accountability and efficiency and wheredoing business is an easy and hassle free process.

Dr Veerappa Moily, Hon’ble Minister, MCA, Govt. of Indiain his Presidential Address highlighted the initiatives of MCAsuch as National Competition Policy, IFRS Adoption, XBRLAdoption, and National Corporate Governance Policy. DrMoily added that the new Companies Bill’s philosophy wasto promote growth and not policing. Dr Moily pointed outthat Second Generation Reforms based on efficiency,innovation and competition was crucial for sustaining India’sgrowth story.

Inaugurating the meet, Chief Guest, Shri PranabMukherjee, Hon’ble Minister, Ministry of Finance, said thatthough inflation and growth are not always contradictory,efforts are needed to ease out the supply constraints and stategovernments have a very constructive and positive role to playin this regard. Mr Mukherjee added that the Government waswilling and ready to extend helping hand to the corporate

sector as the corporate sector has a major role in achievinghigh GDP and inclusive growth.

The inaugural session was followed by two technicalsessions on investor related issues and corporate governanceand social responsibility.

Addressing the first technical session on investor relatedissues Shri Jaideep Bhattacharya, Group President & ChiefMarketing Officer, UTI Mutual Fund cited increased lifeexpectancy, changed social structure, inflation and complexfinancial products as reasons for increased need for FinancialPlanning and Financial Literacy. Shri S V Krishnamohan,Regional Manager, SEBI highlighted SEBI’s initiatives such assimplified regulations and offer documents, grievanceredressal mechanisms online, capacity building throughworkshops in rural areas and introduction of financialeducation in schools in consultation with CBSE and Ministryof HRD. Speaking on RBI’s initiatives, Shri. P K Jena, ChiefGeneral Manager, RBI pointed out banking activity outreachprogrammes through banking correspondents and bankingfacilitators. Mr Jena said that confidence in banking sector wasbuilt over time due to prioritization of interests of depositors.In his presentation Mr. Arup Mukherjee, Assistant VicePresident, NSE highlighted the need for optimal assetallocation, risk versus return awareness in potential investors,and differentiated financial education for different segmentsof the population.

The second technical session was on corporate governanceand social responsibility. Shri B.K. Jhawar, Chairman Emeritus,Usha Martin Group made a presentation on a case study ofCSR by Usha Martin group highlighting concepts such as ‘TotalVillage Management’ (TVM), ‘Social Return on Intervention’and transition from Corporate Social Responsibility toCorporate Social Enterprise. Shri P. R. Ramesh, Chairman,Deloitte Haskins & Sells, India pointed out that to integratecorporate governance and corporate social responsibilityintegration there was a need for meaningful legislations,effective reporting, robust oversight mechanisms, rewards andrecognitions and penalties. Shri. Siddhartha Datta, Partner,Amarchand & Mangaldas & Suresh A. Shroff & Co. spoke onissues such as corporate criminal liability and holding/subsidiary structures, role of Parent Board on Subsidiary andthe need for Chief Risk and Compliance Officer. Shri RakeshSingh, Vice President, Institute of Cost Accountants of Indiapointed out the importance of long term valuation, ethicalreporting and sustainable CSR practices.

In the Valedictory Session, Shri Roopen Roy, ManagingDirector, Deloitte & Touche Consulting India Pvt. Ltd made asumming up presentation highlighting the key points whichemerged in the deliberations. Dr Veerappa Moily, Hon’bleMinister, MCA concluded the meet with his observations andway forward.

INSTITUTE NEWS


INSTITUTE NEWS

Request For CommentsCost Accounting Standards Board, the standard-setting body of the Institute, has approved therelease of Exposure Draft of Revised Cost Accounting Standard–2 on Capacity Determination(CAS–2). The proposed standard may be modified in light of comments received before beingissued as a standard in final form.

Please submit your views /comments / suggestions on the proposed Exposure Draft, preferably byemail, latest by March 26, 2012.

Comments should be addressed to :The Secretary,Cost Accounting Standards Board,The Institute of Cost Accountants of India,3, Institutional Area, Eodi RoadNew Delhi-110003

Emailed responses should be sent to: [email protected] of this exposure draft may be downloaded from the CASB website at http://www.casbicwai.org

REGIONAL COST CONFERENCE, 2012Theme : Inclusive Growth Through Industry & Infrastructure

Organised by :Durgapur Chapter of Cost Accountants

Eastern India Regional Council ofThe Institute of Cost Accountants of India

(Set up by An Act of Parliament)

Date : 24th & 25th March, 2012Venue : CMERI Auditorium, CMERI, Durgapur

Delegates Fees :Company Sponsored : Rs. 2500.00Member : Rs. 1500.00Student : Rs. 500.00

Tariff :Back Cover Outside : Rs. 30,000.00Back & Front Cover Inside : Rs. 25,000.00Special Page : Rs. 10,000.00Full Page : Rs. 5,000.00Half Page : Rs. 3,000.00Banner : Rs. 30,000.00Stall : Rs. 30,000.00Lunch Sponsor : Rs. 1,50,000.00Dinner Sponsor : Rs. 1,50,000.00Memento Sponsor : Rs. 1,50,000.00Conference Kits : Rs. 1,00,000.00


Guidelines For Conversion of Cost Accountants’ Firms(Partnership/Proprietary) Into Limited Liability Partnerships (LLPS)

In terms of Council decision dated 22nd January, 2012, the following guidelines for conversion ofCost Accountants firms into LLPs and constitution of separate LLPs by the practising Cost Accountants havebeen finalized. They are applicable for conversion of Cost Accountants’ firms into LLPs or formation of newLLPs, by the members in practice of the Institute of Cost Accountants of India (ICAI) upon coming into forcethe provisions of the Cost and Works Accountants (Amendment) Act, 2011 (i.e. 1st February, 2012), subjectto the provisions of the Limited Liability Partnership (LLP) Act, 2008 and Rules & Regulations framedthereunder :

(A) Conversion of Cost Accountant firms into LLPs

1. All the existing Cost Accountants’ firms who wantto convert themselves into LLPs are required tofollow the provisions of Chapter-X of the LLP Act,2008 read with Second Schedule to the said Actcontaining provisions of conversion from existingfirms into LLP.

2. In terms of Rule 18(2) (xvi) of LLP Rules- 2009, ifthe proposed name of LLP includes the words‘Cost Accountant’ or ‘Cost Accountants’, as thecase may be, as part of the proposed name, thesame shall be referred to ICAI by the Registrar ofLLP and it shall be allowed by the Registrar onlyif the Secretary/Authorized Official of ICAI *approves it.

3. If the proposed name of LLP of Cost Accountantfirm resembles with any other non- CostAccountant entity, as per the naming Guidelinesunder LLP Act and its Rules, the proposed nameof LLP of Cost Accountant firm may include theword ‘Cost Accountant’ or ‘Cost Accountants’, asthe case may be in the name of the LLP itself andthe Registrar LLP may allow the same name,subject to compliance to Rule 18(2) (xvi) of LLPRules as referred above.

4. For the purpose of registration of LLP with ICAIunder Regulation 108 of the Institute of Cost andWorks Accountants Regulations, 1959, thepartners of the firm shall apply, in ICAI Form ofApplication for Particulars of Offices and Firms,along with the copy of name registration, receivedfrom the Registrar of LLP and submit the samewith the concerned Office of ICAI. The Form shallcontain all the details of the offices and otherparticulars as called for, together with thesignatures of all partners or authorized partnerof the proposed LLP.

5. The names of the Cost Accountant firms registeredwith ICAI shall remain reserved for the partners,as one of the options for LLP names, subject tothe provisions of LLP Act & Rules and Regulationsframed there under.

6. The following guidelines relating to seniority andother criteria shall be followed for registration ofLLP with ICAI:

(i) Where two similar or identical or nearlysimilar firm names (whether the partners ofsuch firms are same or not) have applied forregistration to ICAI, under the proposedLLP, only one such firm name who appliedfirst shall be approved and remaining firmwho has applied with ICAI, whether desiresto convert into LLP or not, will have tochange the firm name.

(ii) The name of the LLP may be like ‘X & Co.LLP’ or ‘X & Associates LLP’ or ‘XYZ LLP’and no other suffix shall be approved andregistered by ICAI.

(iii) The newly converted Cost Accountant LLPregistered with ICAI shall be allowed towork only in terms of Section 2(2) of theInstitute of Cost and Works Accountants Act,1959 and for the objects of LLP to beincorporated as per Form-2 and Form 17 ofthe LLP Rules, 2009 or as per the LLPagreement and same shall be in the natureof Professional Services allowed underSection 2(2) of Cost and Works AccountantsAct, 1959. LLP shall be subject to the sameregulations, as if they were a partnershipfirm. Mere conversion into LLP does not giveany privileges, which were not earlier withthe Cost Accountant firms.

(iv) Inter se seniority among the firms shall be

INSTITUTE NEWS


given to LLP as per the existing policy ofICAI. In other words, LLPs shall carry thesame seniority, as the firm shall otherwisehave under the existing policy of ICAI. Incase of merger of 2 LLPs, same rulesare applicable as to firms merging shallapply.

(v) The non converted firms shall also remainon the same position of seniority in relationto converted LLPs, as the converted LLPsshall have the same inter-se seniority, as thefirms had earlier to conversion.

7. These guidelines of conversion of Cost Accountantfirms into LLP shall also be applicable to theconversion of proprietary firm into LLP, subjectto the provisions of LLP Act & Rules andRegulations framed there under. The conversionof proprietary firm shall be by way ofincorporation of new LLPs.

8. The registration number (with minimum 6numbers) of LLP with ICAI, shall be the sameFirm Registration Number (FRN) allotted to thefirm before the conversion by ICAI, with theRegional Code like ‘W’ for Western, ‘E’ forEastern, ‘S’ for Southern, ‘N’ for Northern.

9. Introduction of LLP, shall not affect the existingregulations in force as regards the name allotmentto Cost Accountant firms.

10. The provisions of the Cost and Works Accoun-tants Act, 1959, the Cost and Works AccountantsRegulations, 1959 and Code of Ethics issued byICAI shall be applicable to all partners jointly &severally, of the converted Cost Accountant firmsinto LLP.

11. The following Guidelines are subject to theclarification from Ministry of Corporate Affairs(MCA), Government of India, New Delhi:

(i) Wherever the existing partnership firm hasbeen appointed as statutory auditor ofany company, after following the dueprocedure under the Companies Act, 1956and the said firm with the same partners isconverted into/has formed LLP, then thesame FRN will continue band the Board ofDirectors of the Company shall take onrecord the conversion/formation of the CostAccountant firms into LLP and the n ew LLPshall be deemed to be the Auditor of the said

company, for the said financial year, in termsof Section 58(4) of the LLP Act, 2008.

(ii) Wherever more than one partnership firm,with all the partners, desire to convert/formonly one LLP, then in that case the name andFRN may be selected of only one of suchfirms, for the purpose of registration withICAI and;

(a) The other such firms shall stand dissolved.

(b) Seniority shall be decided as per applicablerules of ICAI.

(c) The Board of Directors of all the Companies,who have appointed all the erstwhile firmsas Cost auditors, may take a declarationfrom the said LLP, with all the partners of allthe erstwhile firms on record and theappointment as Cost auditors of all theerstwhile firms made under the CompaniesAct, 1956, shall be deemed to be in the nameof the said LLP.

(B) Constitution of separate LLPs

12. All the members of ICAI in practice who want toconstitute a separate LLP are required to followthe provisions of the LLP Act, 2008 read with theRules framed there under.

13. In terms of Rule 18(2) (xvi) of LLP Rules- 2009, ifthe proposed name of LLP includes the words‘Cost Accountant’ or ‘Cost Accountants’, as thecase may be, as part of the proposed name, thesame shall be referred to ICAI by Registrar of LLPand it shall be allowed by the Registrar only ifthe Secretary/Authorized Official of ICAI *approves it.

14. If the proposed name of LLP of Cost Accountantfirm resembles with any other non- CostAccountant entity, as per the naming Guidelinesunder LLP Act and its Rules, the proposed nameof LLP of Cost Accountant firm may include theword ‘Cost Accountant’ or ‘Cost Accountants’, asthe case may be in the name of the LLP itself andthe Registrar LLP may allow the same name,subject to compliance to Rule 18(2) (xvi) of LLPRules as referred above.

15. For the purpose of registration of LLP with ICAIunder regulation 108 of the Cost and WorksAccountants Regulations, 1959, the partners of thefirm shall apply in the ICAI Form of Application

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for Particulars of Offices and Firms along withthe copy of name registration, received from theRegistrar of LLP and submit the same with theconcerned Office of the ICAI. This Form shallcontain all details of the offices and otherparticulars as called for together with thesignatures of all partners or authorized partnerof the proposed LLP.

16. The following guidelines relating to seniority andother criteria shall be followed for registration ofLLP with ICAI:

(i) Where two similar or identical or nearlysimilar firm names (whether the partners ofsuch firms are same or not) have applied forregistration to ICAI, under the proposed LLP,only one such firm name who applied firstshall be approved and remaining firm whohas applied with ICAI, whether desires toconvert into LLP or not, will have to changethe firm name.

(ii) The name of the LLP may be like ‘X & Co.LLP’ or ‘X & Associates LLP’ or ‘XYZ LLP’and no other suffix shall be approved andregistered by ICAI.

(iii) The newly converted Cost Accountant LLPregistered with ICAI shall be allowed to workonly in terms of Section 2(2) of the Instituteof Cost and Works Accountants Act, 1959 andfor the objects of LLP to be incorporated asper Form-2 and Form 17 of the LLP Rules,2009 or as per the LLP agreement and sameshall be in the nature of Professional Servicesallowed under Section 2(2) of Cost and WorksAccountants Act, 1959. LLP shall be subjectto the same regulations, as if they were apartnership firm. Mere conversion into LLPdoes not give any privileges, which were notearlier with the Cost Accountant firms.

(iv) Inter se seniority among the firms shall begiven to LLP as per the existing policy ofICAI. In other words, LLPs shall carry thesame seniority, as the firm shall otherwisehave under the existing policy of ICAI. Incase of merger of 2 LLPs, same rules areapplicable as to firms merging shall apply.

(v) The non converted firms shall also remain onthe same position of seniority in relation toconverted LLPs, as the converted LLPs shallhave the same inter-se seniority, as the firmshad earlier to conversion.

17. These guidelines of conversion of Cost Accountantfirms into LLP shall also be applicable to theconversion of proprietary firm into LLP subjectto the provisions of LLP Act, Rules andRegulations framed there under. The conversionof proprietary firm shall be by way of incor-poration of new LLPs.

18. The registration number (with minimum 6numbers) of LLP with ICAI, shall be like the FirmRegistration Number being allotted to the firmsby ICAI with the Regional Code like ‘W’ forWestern, ‘E’ for Eastern, ‘S’ for Southern, ‘N’ forNorthern.

19. Introduction of LLP, shall not affect the existingregulations in force as regards Name allotmentto Cost Accountant firms.

20. The provisions of the Cost and WorksAccountants Act, 1959, the Cost and WorksAccountants Regulations, 1959 and Code of Ethicsissued by ICAI shall be applicable to all partnersjointly and severally, of the LLP.

21. In case of any dispute in respect of theseguidelines, the same shall be referred to theCouncil of ICAI and the decision of the Councilshall be final and binding on the members of theInstitute.

22. For the purpose of any clarification regarding theapproval and registration of proposed LLP withICAI, the requests can be sent at the followingaddress:

Shri Kaushik BanerjeeDirector & Joint SecretaryThe Institute of Cost Accountants of India12, Sudder Street,Kolkata - 700 016.(*Shri Kaushik Banerjee, Director & Joint Secretaryis the Authorized Official of ICAI)

23. These Guidelines shall come into force w.e.f. 1stFebruary, 2012.

INSTITUTE NEWS


For Attention of Members

The Council of the Institute has decided that the members of the Institute shall be permitted to usethe letters “CMA” before their names after notification regarding the date of coming into force ofthe provisions of the Cost and Works Accountants (Amendment) Act, 2011 is published by theCentral Government in the Gazette of India, wherein the Associate & Fellow Members are entitledto use the letters “ACMA” & “FCMA” respectively after their names.

For Attention of MembersThe provisions of The Cost and Works Accountants (Amendment) Act, 2011 have come into forcewith effect from 1st February, 2012, whereby the name of our Institute has been changed from TheInstitute of Cost and Works Accountants of India to “The Institute of Cost Accountants of India”and the Associate & Fellow Members of the Institute are now entitled to use the letters “ACMA”& “FCMA” after their names in place of “AICWA” & “FICWA” respectively.Further, the practising members of our Institute can now enter into a Limited Liability Partnership,which has no company as its partner in accordance with the Limited Liability Partnership Act,2008. In this connection, the two notifications published by the Central Government in the Gazetteof India dated 13th January, 2012 and 30th January, 2012 are printed in this journal.Further details are published in this journal and also uploaded on ourwebsite www.icwai.org .

INSTITUTE NEWS

Govt. Notification

Ministry of Corporate AffairsNotification

New Delhi, the 6th February, 2012

G.S.R. 69 (E).—In exercise of the powers conferred by Section 29A of the Cost and Works Accountants Act, 1959 (23of 1959), the Central Government, with effect from the date of publication in the Official Gazette, hereby makes thefollowing amendments in the notification of the Government of India, Ministry of Corporate Affairs, published inthe Gazette of India vide No. G.S.R. 1693(E), dated the 3rd October, 2007, namely :—In the said notification under the opening paragraph, against the item numbers 1, 2, 3, 4 and 5, for the existingentries the following entries shall be substituted, namely :—

(1) Shri R. S. Sharma, —Chairperson (4) Shri V. Kalyanaraman, —MemberEx-Chariman, ONGC, Past President,A-1, 701, The World Spa (E), Institute of Cost and WorksSector 30, Gurgaon-122001 Accountants of India

(2) Shri Navrang Saini, — Member (5) Shri Kunal Banerjee, —MemberRegional Director (Eastern Region), Past President,Ministry of Corporate Affairs, Institute of Cost and Works AccountantsKolkata-700 025 of India

(3) Ms. Nandana Munshi, —Member [F. No. 2/23/2006-PI]Pr. Director of Commercial Audit MANOJ KUMAR, Jt. Secy.& ex-officio Member,Audit Board-1, Kolkata,No. 1, Council House Street,Kolkata-700 001


Registered No. DL.—(N)04/0007/2003—11fiP°Fı©dU ıFk0∞U-J·F0—(JŒF)04/0007/2003—11

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PUBLISHED BY AUTHORITY

10] ŒFGa Pº··FU, ËF]ÇeÅÊFFfi, °FŒFÊFfiU 13, 2012/—FZF 23, 1933 (ËFÇÅ)No. 10] NEW DELHI, FRIDAY, JANUARY 13, 2012/PAUSA 23, 1933 (SAKA)

GıF ⁄FFçF ¤FWk P⁄FŒŒF —FÚ ıFkä‹FF ºU °FF∂FU ˘Y P°FıFıFW PÇÅ ‹F˘ E·FçF ıFkÇÅ·FŒF ÇWÅ ‡—F ¤FWk fiäFF °FF ıFÇWÅóSeparate paging is given to this Part in order that it may be filed as a separate compilation.

MINISTRY OF LAW AND JUSTICE(Legislative Department)

New Delhi, 13th January,2012/Pausa 23, 1933 (Saka)

The following Act of Parliament received the assentof the President on the 12th January, 2012, and ishereby published for general information :—

THE COST AND WORKS ACCOUNTANTS(AMENDMENT) ACT, 2011

(No. 10 of 2012)[12th January, 2012]

An Act further to amend the Cost and WorksAccountants Act, 1959.

Be it enacted by Parliament in the Sixty-secondYear of the Republic of India as follows :—

1. (i) This Act may be called the Cost and WorksAccountants (Amendment) Act, 2011.

(2) It shall come into force on such date as theCentral Government may, by notification in theOfficial Gazette, appoint.

2. In section 2 of the Cost and Works AccountantsAct, 1959 (hereinafter referred to as the principalAct), —

(I) in sub-section (1),—(i) after clause (e), the following clause shall be

inserted, namely :—‘(ea) ‘‘firm’’ shall have the meaning assigned in

clause (n) of sub-section (1) of section 2 of the LimitedLiability Partnership Act, 2008; or

(ii) the sole proprietorship, registered with theInstitute;

(II) in clause (f), for the words ‘‘Institute of Costand Works Accountants of India’’, the words‘‘Institute of Cost Accountants of India’’ shall besubstituted;

(III) after clause (fa), the following clauses, shallbe inserted, namely :—

(fb) ‘‘partner’’ shall have the meaning assigned toit in section 4 of the Indian Partnership Act, 1932 orin clause (q) of sub-section (1) of section 2 of theLimited Liability Partnership Act, 2008, as the casemay be;

(fc) ‘‘partnership’’ means—(A) a partnership as defined in section 4 of the

Indian Partnership Act, 1932; or(B) a limited liability partnership which has no

company as its Partner;(IV) after clause (ia), the following clause shall be

inserted, namely :—(iaa) ‘‘sole proprietorship’’ means an individual

who engages himself in the practice of costaccountancy or offers to perform services referred toin clauses (ii) to (iv) of sub-section (2),,

(ii) in sub-section (2),—(a) after the words ‘‘in partnership with one or more

members of the Institute in practice’’, the words ‘‘or in

INSTITUTE NEWS

Govt. Notification


partnership with members of such other recognisedprofessions as may be prescribed’’ shall be inserted;

(b) in clause (i), for the words ‘‘cost and worksaccountancy’’, the words ‘‘cost accountancy’’ shall besubstituted;

(c) in clause (ii), for the words ‘‘certification of costaccounting and related statements or holds himselfout to the public as a cost accountant in practice’’, thewords ‘‘certification or auditing of cost accountingand related statements or holds himself out to thepublic as a cost accountant in practice’’ shall besubstituted.

3. In section 3 of the principal Act, in sub-section(1), for the words ‘‘Institute of Cost and WorksAccountants of India’’, the words ‘‘Institute of CostAccountants of India’’ shall be substituted.

4. In section 5 of the principal Act,—(a) in sub-section (2),—(i) for the letters ‘‘AICWA’’, letters ‘‘ACMA’’ shall

be substitued.(ii) for the words ‘‘Institute of Cost and Works

Accountants’’, the words ‘‘Institute of CostAccountants of India’’ shall be substituted;

(b) in sub-section (5),—(i) for the letters ‘‘FICWA’’, the letters ‘‘FCMA’’

shall be substituted;

(ii) for the words ‘‘Institute of Cost and WorksAccountants’’, the words ‘‘Institute of CostAccountants of India’’ shall be substituted.

5. In section 22A of the principal Act, for the words‘‘Institute of Cost and Works Accountants of India’’,the words ‘‘Institute of Cost Accountants of India’’shall be substituted.

6. In section 25 of the principal Act, in sub-section(1), in clause (iii), for the words ‘‘cost and worksaccountants’’, the words ‘‘cost accountants’’ shall besubstituted.

7. In section 26 of the principal Act, in sub-section(1), the following Explanation shall be inserted,namely :—

‘Explanation.—For the removal of doubts, itis hereby declared that the ‘‘company’’ shallinclude any limited liability partnership which hascompany as its partner for the purposes of thissection.’

8. In the First Schedule to the principal Act, in PartI, in item (7), for the words ‘‘Institute of CostAccountants of India’’, the words ‘‘Institute of CostAccountants of India’’ shall be substituted.

V. K. BHASINSecy. to the Govt. of India

Registered No. DL.—33004/99fiP°Fı©dU ıFk0∞U-J·F0—33004/99

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⁄FFçF II — äFμ∞ 3 — H—F-äFμ∞ (ii)PART-II—Section 3—Sub-section (ii)

“FPÕFÇÅFfi ıFW “ÇÅFPËF∂FPUBLISHED BY AUTHORITY

ıFk. 167] ŒFGa Pº··FU, ıFX¤FÊFFfi, °FŒFÊFfiU 30, 2012/¤FFêF 10, 1933No. 167] NEW DELHI, MONDAY, JANUARY 30, 2012/MAGHA 10, 1933

NOTIFICATIONNew Delhi, the 30th January, 2012

S.O. 191(E).—In exercise of the powers conferred by sub-section (2) of Section 1 of the Cost and WorksAccountants (Amendment) Act, 2011 (No. 10 of 2012) the Central Government hereby appoints the 1st day ofFebruary, 2012 as the date on which the provision of the said Act shall come into force.

[F. No. 12/11/2011–P.I.]Manoj Kumar, Jt. Secy.

INSTITUTE NEWS


Circular No 017 2012-CustomsF. No. 401/46/2008-Cus.lll

Government of IndiaMinistry of Finance

Department of RevenueCentral Board of Excise and Customs

North Block, Room No. 253-A,New Delhi, the 5thJanuary 2012.

To,All Chief Commissioners of Customs / Customs (Prev.).All Chief Commissioners of Customs & Central Excise.All Commissioners of Customs / Customs (Prev.).All Commissioners of Customs & Central Excise.

Subject : Refund of 4% Additional Duty of Customs (4% CVD) in terms ofNotification No. 102/2007-Customs dated 14.09.2001-regarding.

Sir / Madam,Your kind attention is invited to the Circular No. 18/2010-Customs dated 8th July, 2010), vide whichBoard has simplified procedure for sanction of refund of 4% SAD in case of ACP importers. Vide Para 4.1(d) of the Circular No. 18/2010-Customs, dated 08.07.2010 it was provided that the amount of 4% CVDrefund shall be sanctioned in full, on preliminary scrutiny of the documents and certificate of statutoryauditor/Chartered Accountant, for correlating the payment of ST/VAT on the imported goods with theinvoices of sale and also to the effect that the burden of 4% CVD has not been passed on by the importerto the buyer. However, as Para 6 of the said Circular only Charted Accountant can issue a certificate thatincidence of burden of 4% CVD has not been passed on by the importer to the buyer.

2. Representations have been received in the Board for amending Para 6 of the said Circular to make it inconsonance to Para 4.1 (d) ibid to enable Cost Accountants to issue the Certificates as statutory auditorsfor the purpose of refund of 4% CVD.

3. The matter has been examined in the Board. Board noted that the Circular No. 18/2010 - Customs dated08.07.2010 disentitles Cost Accountants in regard to issue of requisite certificate though they may bestatutory auditors of the importer. Board also observed that several States currently recognize CostAccountants for purpose of VAT audit and it would be a hardship to trade already using statutoryauditors/ Cost Accountants to get required certificate for amount of 4% refund from CharteredAccountants. Therefore, as a measure to facilitate the trade Board has approved the amendment of theCircular No. 18/2010 Customs dated 08.07.2010 so as to authorize Statutory Auditors/ Cost Accountants/Chartered Accountants to issue a certificate, certifying that burden of 4% CVD has not been passed on bythe importers to any other person.

4. Accordingly, para 4.1(d) and Para 6 of Board Circular No. 18/2011-Customs, dated 08.07.2010, standsmodified to above extent.

5. Suitable Public Notices or standing orders may be issued to guide the trade / industry and officers.

(Vikas)

Under Secretary (Customs-IIIA/l)

GOVT. NOTIFICATION

INSTITUTE NEWS


F. No. 52/26/CAB-2010Government of India

Ministry of Corporate AffairsCost Audit Branch

B-1 Wing, 2nd Floor,Paryavaran Bhavan,

CGO Complex, Lodi Road,New Delhi-110 003

Dated the 24th January, 2012

ORDER

In exercise of the powers conferred by sub-section (1) of section 233B of the Companies Act, 1956 (1 of1956), the Central Government, being of the opinion that it is necessary to do so, hereby directs that allcompanies to which the Companies (Cost Accounting Records) Rules, 2011 apply, and which are engaged inthe production, processing, manufacturing or mining of the following products/activities, includingintermediate products and articles or allied products thereof, and wherein the aggregate value of the turnovermade by the company from sale or supply of all its products/activities during the immediately precedingfinancial year exceeds hundred crore of rupees; or wherein the company’s equity or debt securities are listedor are in the process of listing on any stock exchange, whether in India or outside India, shall get its costaccounting records, in respect of each of its financial yhear commencing on or after the 1st day of April, 2012,audited by a cost auditor who shall be, either a cost accountant or a firm of cost accountants, holding validcertificate of practice under the provisions of Cost and Works Accountants Act, 1959 (23 of 1959).

Sl. No. Name of the Industry Relevant Chapter Heading of theCentral Excise Tariff Act, 1985

1. Jute, cotton, silk, woolen or blended fibers/textiles Chapters 50 to 632. Edible oil seeds and Oils (incl. vanaspati) Chapters 12 and 153. Packaged food products Chapters 2 to 25 (except Chapters 5, 6, 14,

23 and 24)4. Organic & Inorganic Chemicals Chapters 28, 29, 32, 38 and 395. Coal & Lignite Chapter 276. Mining & Metallurgy of ferrous & non-ferrous metals Chapters 26 and 74 to 83 (expect Chapters

76 and 77)7. Tractors & other motor vehicles (incl. automotive Chapters 84, 85 and 87

components)8. Plantation Products Chapters 8, 9, 21 and 409. Engineering machinery (incl. electrical & electronic Chapters 84 and 85

products)

Notes :1. (a) Intermediate or final products and articles or allied products of above industries if included under any other

Chapter of the Central Excise Tariff Act, 1985 not mentioned above shall also be covered under these orders.

(b) Items falling under above Chapter reference exclude those products that have been already covered vide costaudit orders dated 2nd May 2011 and 30th June 2011.

(c) Products falling under above Chapter references are to be considered against the respective industry as applicable.

2. Every company to which these orders apply shall follow the revised procedure for appoinment of cost auditoras laid down vide Ministry of Corporate Affairs’ General Circular No. 15/2011 dated 11th April 2011.

GOVT. NOTIFICATION

INSTITUTE NEWS


For Attention of Practising Members

Guidelines for Renewal of Certificate of Practice

The members of the Institute holding Certificate of Practice having validity upto 31st March, 2012 arerequested to comply with the following guidelines for renewal of their Certificate of Practice:

1. The following changes consequent to amendment of the Cost and Works Accountants Regulations, 1959vide Notification dated 4th February, 2011 published in the Gazette of India may be noted:

● The validity of a Certificate of Practice (COP) henceforth would be for the period 1st April to 31stMarch every year unless it is cancelled under the provisions of the Cost and Works AccountantsAct and Regulations, 1959 as amended.

● The Certificate of Practice issued shall automatically be renewed subject to submission of prescribedForm M-3 and payment of renewal fee and annual membership fee.

● From the year 2011-12 onwards, no renewal Certificate of Practice would be issued. However, themembers concerned may download the renewal status from the Institute’s website www.icwai.org.

2. It may please be noted that under Section 6 of the Cost and Works Accountants Act, 1959, both theAnnual Membership Fee and Fee for Renewal of Certificate of Practice falls due on 1st April each year.

3. Special attention is invited to the fact that the validity of a Certificate of Practice expires on 31st Marcheach year unless it is renewed on or before the date of expiry in terms of amended Regulation 10 of the Costand Works Accountants Regulations, 1959. Hence, a member shall be required to renew his certificate before31st March every year from the year 2012.

4. It may please be noted that mere payment of fees alone will not be sufficient for renewal of Certificateof Practice. Application in prescribed Form M-3 for renewal of Certificate of Practice duly filled in and signedon both sides is absolute necessary. Soft copy of prescribed Form M-3 for Renewal of Certificate of Practicecan be downloaded from Institute’s website www.icwai.org.

5. It is also essential to furnish a certificate from the employer in the following form or in a form as nearthereto as possible if the practising member has undertaken any employment or there has been a change inemployment:

“Shri ……………………………………………….is employed

as (designation)……………………………………..in (name of

Organisation)…………………………………….and he is permitted ,

notwithstanding anything contained in the terms of his employment,to engage himself in the practice of profession of Cost Accountancy

in his spare time in addition to his regular salaried employment with us.

Signature of Employers under seal of Organisation”

6. In order to enhance professional competence and evolve a systematic mechanism to update knowledgeof members in practice, a scheme of Continuing Education Programme (CEP) was introduced by the Instituteand the same is mandatory in accordance with proviso to sub-regulation (1) of Regulation 10 of the Cost andWorks Accountants Regulations, 1959, as amended, whereby no Certificate of Practice and renewal thereofshall be issued unless a member has undergone minimum number of hours of such training to be undergoneevery year or such block of years or such other alternative conditions as may be determined by the Council bynotification from time to time.

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As per the said scheme, the following should be complied with:(i) The member should undergo minimum mandatory training of 10 hours per year.(ii) The certificate of attendance for training will have to be enclosed with the application for renewal of

Certificate of Practice.The detailed guidelines in this connection are available on Institute’s website www.icwai.org.The requirement specified above does not apply to a member in practice who has attained the age of 65

years as on 1st April, 2012.Hence, all practicing members are requested to send their application for renewal of Certificate of Practice

for the year 2012-13 along with other requirements as indicated herein above immediately and latest within31st March, 2012.

Other Relevant Issues for Renewal of COP valid upto 31st March, 2013 :● Application for renewal of Certificate of Practice upto 31st March, 2013 has to be made in the prescribed

Form M-3 for Renewal of Certificate of Practice duly filled in and signed on both sides together withRenewal Certificate of Practice fee for Rs. 1000/- and all other dues to the Institute on account ofannual membership fees and entrance fees.

● The annual membership for Associate and Fellow Members are 800/- and Rs. 1500/- respectively. Theentrance fee for Associate and Fellow Members are Rs. 1000/- each payable at a time at the time ofapplication for admission.

● The fees may be paid by Demand Draft/Pay Order/Cheque payable at Kolkata if remitted by post tothe Headquarters of the Institute. In case remittance is made through an outstation cheque, Rs.30/- isto be included towards bank charges. The fees may also be paid directly by cash at the Headquarters orby Cash/Demand Draft/Pay Order/ Cheque at the Regional Councils or Chapters of the Institute.

● Certificate of Practice renewed upto 31st March, 2012 shall have validity till that date. Practising membersconcerned may send their application for renewal of the same in prescribed manner within 31st March,2012.

● Further, the credit hours for Continuing Education Programme (CEP) for renewal of Certificate ofPractice upto 31st March, 2012 shall be considered upto 31st March, 2012.

Request For CommentsCost Audit and Assurance Standards Board of the Institute has approved the release of Exposure Draftof Cost Audit and Assurance Standard on Audit Documentation (CAAS - 340). The proposed standardmay be modified in light of comments received before being issued as a standard in final form.

Please submit your views / comments / suggestions on the proposed Exposure Draft, preferablyby email, latest by April 6, 2012.

Comments should be addressed to :The Secretary,Cost Audit and Assurance Standards Board,The Institute of Cost Accountants of India,3, Institutional Area, Lodi RoadNew Delhi- 110003

Emailed responses should be sent to: [email protected] of this exposure draft may be downloaded from the Institute website at http://www.icwai.org

INSTITUTE NEWS


Cancellation of Registration under Regulation 25(1) of CWA ACT, 1959Registration Numbers Cancelled

For June 2012 ExaminationUp to

ERS/003664NRS/005703 (except 5161-225, 5283-5305, 5324-5393, 5402-5700)

SRS/0011913, WRS/007780, RSW/078536, RAF/005860

Re—Registration

The students whose Registration Numbers have been cancelled (inclusive of the students registeredup to 31st December 2004) as above but desire to take the Institute’s Examination in June 2012 mustapply for DE-NOVO Registration and on being Registered DE-NOVO, Exemption from individualsubject(s) at Intermediate/Final Examination of the Institute secured under their former Registration,if any, will be treated as per prevalent Rules.

For De-NOVO Registration, a candidate shall have to apply to Director of Studies in prescribedForm (which can be had either from the Institute’s H.Q. at Kolkata or from the concerned RegionalOffices on payment of Rs. 5/-) along with a remittance of Rs. 2000/- only as Registration Feethrough Demand Draft drawn in favour of The ICWA of India, payable at Kolkata.

Wishing you a very happy and prosperous New Year.

Date : 21st December 2011 Arnab ChakrabortyDirector of Studies

INSTITUTE NEWS

FOR ATTENTION OF MEMBERS

The fees payable by the members of the Institute have been revised by the Council with effect from 1st

April, 2012 from the financial year 2012-2013 onwards as follows :

Category of fees Amount Payable

Associate Entrance Fee Rs. 1,000/-Associate Membership Fee Rs. 800/- p.a.

Fellow Entrance Fee Rs. 1,000/-Fellow Membership Fee Rs. 1,500/- p.a.Certificate of Practice Fee Rs. 1,000/- p.a.

The fees payable by the retired members entitled to pay at reduced rate in pursuance of Regulation 7 (4) ofthe Cost and Works Accountants Regulations, 1959 with effect from 1st April, 2012 from the financial year2012-2013 onwards shall be as follows :

Category of fees Amount (Rs.)

Associate Membership Fee Rs. 200/- p.a.

Fellow Membership Fee Rs. 375/- p.a.


Request For Comments

Cost Audit and Assurance Standards Board of the Institute has approved the release of ExposureDraft of Cost Audit and Assurance Standard on Planning an Audit of Cost Statements (CAAS -320). The proposed standard may be modified in light of comments received before being issuedas a standard in final form.

Please submit your views / comments / suggestions on the proposed Exposure Draft, preferablyby email, latest by March 31, 2012.

Comments should be addressed to :The Secretary,Cost Audit and Assurance Standards Board,The Institute of Cost Accountants of India,3, Institutional Area, Lodi RoadNew Delhi- 110003

Emailed responses should be sent to : [email protected] of this exposure draft may be downloaded from the Institute website at http://www.icwai.org


Cost Accounting Standards Board, the standard-setting body of the Institute, has approved therelease of Exposure Draft of Guidance Note on Cost Accounting Standard on Employee Cost(CAS - 7). The proposed ED Guidance Note may be modified in light of comments received beforebeing issued in final form.

Please submit your views / comments / suggestions on the proposed Guidance Note, preferablyby email, latest by March 31, 2012.

Comments should be addressed to :The Secretary,Cost Accounting Standards Board,The Institute of Cost Accountants of India,3, Institutional Area, Eodi Road,New Delhi-110003

Emailed responses should be sent to: [email protected] of this draft Guidance Note may be downloaded from the CASB website at http://www.casbicwai.org

The Management Accountant — April, 2012 will be a special issue on

‘COST ACCOUNTING MODELS FOR PRICING’.

Articles, views and opinions on the topic are solicited from readers along with their passportsize photographs to make it a special issue to read and preserve. Those interested may send intheir write-ups by e-mail to [email protected], followed by hard copy to the Research &Journal Department, 12, Sudder Street, Kolkata-700 016 to reach by 8th March, 2012.

INSTITUTE NEWS



Cost Audit and Assurance Standards Board of the Institute has approved the release ofExposure Draft of Cost Audit and Assurance Standard on Planning an Audit of CostStatements (CAAS–320). The proposed standard may be modified in light of commentsreceived before being issued as a standard infinal form.

Please submit your views/comments/suggestions on the proposed Exposure Draft, preferablyby email, latest by March 31, 2012.

Comments should be addressed to :The Secretary,Cost Audit and Assurance Standards Board,The Institute of Cost Accountants of India,3, Institutional Area, Lodi RoadNew Delhi - 110003Email : [email protected]

Request for Comments

Cost Accounting Standards Board, the standard-setting body of the Institute, has approvedthe release of Exposure Draft of Revised Cost Accounting Standard 2 on CapacityDetermination (CAS 2). The proposed standard may be modified in light of commentsreceived before being issued as a standard in final form.

Please submit your views/comments/suggestions on the proposed Exposure.

Draft, preferably by email, latest by March 26, 2012.

Comments should be addressed to :The SecretaryCost Accounting Standards BoardThe Institute of Cost Accountants of India3, Institutional Area, Lodi RoadNew Delhi 110 003

The Management Accountant — May, 2012 will be a special issue on

‘ARMS LENGTH PRICING : ROLE OF CMA’s’.

Articles, views and opinions on the topic are solicited from readers along with their passportsize photographs to make it a special issue to read and preserve. Those interested may send intheir write-ups by e-mail to [email protected], followed by hard copy to the Research &Journal Department, 12, Sudder Street, Kolkata-700 016 to reach by 8th April, 2012.

INSTITUTE NEWS


Examination — June 2012

THE INSTITUTE OF COST ACCOUNTANTS OF INDIA(Statutory Body Under An Act of Parliament)

Examination Time Table & Programme – June 2012

Programme for Syllabus 2008Day, Date & Time Intermediate Final Foundation

09.30 A.M. to 12.30 P.M. 02.00 P.M. to 05.00 P.M. 02.00 P.M. to 05.00 P.M.Monday Financial Accounting Capital Market Analysis

11th June, 2012 & Corporate LawsTuesday Financial Management &

12th June, 2012 International FinanceWednesday Commercial and Industrial Management Accounting–

13th June, 2012 Laws & Auditing Strategic ManagementThursday Applied Direct Taxation Indirect & Direct–

14th June, 2012 Tax ManagementFriday Cost & Management Management Accounting– Organisation and

15th June, 2012 Accounting Enterprise Performance Management FundamentalsManagement

Saturday Advanced Financial Accounting16th June, 2012 Accounting & Reporting

Sunday Operation Management Cost Audit & Economics and Business17th June, 2012 and Information Systems Operational Audit Fundamentals

Monday Applied Indirect Taxation Business Valuation Business Mathematics and18 th June, 2012 Management Statistics Fundamentals

Examination FeesGroup (s) Final Intermediate Foundation Course Management Accountancy

Examination Examination Examination ExaminationOne Group (Inland Centres) ` 1250/- ` 1000/- ` 1000/- Per Group ` 2500/-

(Overseas Centres) US $ 100 US $ 90 US $ 60Two Groups (Inland Centres) ` 2250/- Rs. 1600/-

(Overseas Centres) US $ 100 US $ 90

1. (a) Application Forms for Foundation Course, Intermediate and Final Examinations are available from Institute’s Headquartersat 12, Sudder Street, Kolkata, Regional Councils and Chapters of the Institute on payment of ` 50/- per form. In case ofoverseas candidates, forms are available at Institute’s Headquarters only on payment of US $ 10 per form.(b) Students can also download the Examination Form from ICAI Website at www.icwai.org. In case of downloaded form` 50/- should be added extra towards the cost of the form.(c) Students can also submit the form online.

2. Last date for receipt of Examination Application Forms without late fees is 10th April, 2012 and with late fees of ` 300/- is20th April, 2012.

3. Examination fees to be paid through Bank Demand Draft of requisite fees drawn in favour of ‘‘The Institute of Cost Accountants ofIndia’’ and payable at Kolkata.

4. Students may submit their Examination Application Forms along with the fees at ICAI, 12 Sudder Street, Kolkata – 700016 orRegional Offices or Chapter Offices. Any query can be sent to Sr. Director (Examination) at H.Q.

5. Finance Act 2011, involving Assessment Year 2012-2013 will be applicable for the subjects Applied Direct Taxation (Intermediate),Applied Indirect Taxation (Intermediate) and Indirect & Direct – Tax Management (Final) for the purpose of June 2012 term ofExamination under Revised Syllabus 2008.

6. Examination Centres: Agartala, Ahmedabad, Akurdi, Allahabad, Asansol, Aurangabad, Bangalore, Baroda, Berhampur(Ganjam),Bhilai, Bhopal, Bhubaneswar, Bilaspur, Bokaro, Calicut, Chandigarh, Chennai, Coimbatore, Cuttack, Dehradun, Delhi, Dhanbad,Durgapur, Ernakulam, Faridabad, Ghaziabad, Guwahati, Hardwar, Howrah, Hyderabad, Indore, Jaipur, Jabbalpur, Jalandhar, Jammu,Jamshedpur, Jodhpur, Kalyan, Kannur, Kanpur, Kolhapur, Kolkata, Kota, Kottayam, Lucknow, Ludhiana, Madurai, Mangalore,Mumbai, Mysore, Nagpur, Naihati, Nasik, Nellore, Neyveli, Noida, Panaji (Goa), Patiala, Patna, Pondicherry, Pune, Rajahmundry,Ranchi, Rourkela, Salem, Shillong, Solapur, Surat, Thrissur, Tiruchirapalli, Tirunelveli, Trivandrum, Udaipur, Vapi, Vashi, Vellore,Vijayawada, Vindhyanagar, Waltair and Overseas Centres at Dubai and Muscat.

7. A candidate who is completing all conditions will only be allowed to appear for examination.8. Probable date of publication of result : Foundation – 2nd August 2012 and Inter & Final – 22nd August 2012.

C. Bose Sr. Director (Examinations)

INSTITUTE NEWS


THE INSTITUTE OF COST ACCOUNTANTS OF INDIA(Statuory Body Under An Act of Parliament)

Examination Time Table & Programme – June 2012

Certificate in Accounting Technicians (CAT)

Day & Date Time Competency Level Part - II

Monday, 11th June 2012 09.30 A.M. to 12.30 P.M. Financial Accounting

Wednesday, 13th June 2012 09.30 A.M. to 12.30 P.M. Applied Statutory Compliance

Examination Fees

INLAND CENTRES Competency Level Part – II ` 730/-

1. Application Forms for CAT Examination can be down loaded from Institute’s website www.icwai.organd filed online also.

2. Last date of receipt of Examination Application Forms without late fee is 10th April, 2012 and with late feeof `100/- is 20th April, 2012.

3. Examination Fees to be paid through Bank Draft of requisite fees drawn in favour of “The Institute ofCost Accountants of India” payable at New Delhi.

4. Students will send their Examination Application Forms along with the fees to Directorate of CAT at“CMA Bhawan”, 3, Institutional Area, Lodi Road, New Delhi – 110003.

5. Examination Centres : Agartala, Ahmedabad, Akurdi, Allahabad, Alwar (Rajasthan), Asansol,Aurangabad, Bangalore, Baroda, Berhampur(Ganjam), Bhilai, Bhopal, Bhubaneswar, Bilaspur, Bokaro,Calicut, Chandigarh, Chennai, Coimbatore, Cuttack, Dehradun, Delhi, Dhanbad, Durgapur, Ernakulam,Faridabad, Ghaziabad, Guwahati, Hardwar, Howrah, Hyderabad, Indore, Jaipur, Jabalpur, Jalandhar,Jammu, Jamshedpur, Jodhpur, Kalyan, Kannur, Kanpur, Kolhapur, Kolkata, Kota, Kottayam, Lucknow,Ludhiana, Madurai, Mangalore, Mumbai, Mysore, Nagpur, Naihati, Nasik, Nellore, Neyveli, Noida,Palampur (H.P.), Panaji (Goa), Patiala, Patna, Pondicherry, Pune, Rajahmundry, Ranchi,Raigarh(Chattisgarh), Rourkela, Salem, Shillong, Solapur, Srinagar, Surat, Sahajahanpur, Thrissur,Tiruchirapalli, Tirunelveli, Trivandrum, Udaipur, Vapi, Vashi, Vellore, Vijayawada, Vindhyanagar, andWaltair.

6. A candidate who is fulfilling all conditions will only be allowed to appear for examination.

7. Probable date of publication of result: Competency Level Part – II is 22nd August, 2012.

C. BoseSr. Director (Examinations)

INSTITUTE NEWS


WIRCPune Chapter of Cost Accountants (PCCA)

Adherence to CAS issued by the Institute is nowmandatory and in light of the recent introduction ofCost Accounting Record Rules 2011 and Cost AuditReport Rules 2011, its importance has grownmanifold. The Institute expects its members todeliberate on such exposure drafts and give theirvaluable inputs. Pune Chapter considering this as acommitment to professional development organizeda CEP on 19th January 2012 to discuss the ExposureDraft on CAS-14 on Pollution Control Costs for thebenefit of its Members.

Present in the programme were Shri Dhananjay Joshi,former President of the Institute, Shri S. R. BhargaveCouncil Member, Shri Pramod Dube, Chairman of thechapter and other members. The comments from themembers present were noted and discussed in thelight of various requirements under the record andaudit rules. The areas where a consensus was reachedabout modifying certain terminology/phrasing inthe proposed ED were finalized and it was decidedto submit the same for the Institute’s consideration.A large number of members were present in theprogramme.

Surat-South Gujarat Chapter (SSGCCA)

The Surat-South Gujarat Chapter of Cost Accountantsorganized two day workshop on 21st & 22nd January2012 at Auditorium, Commerce Bhavan, K. P.Commerce College Campus, Surat. Shri V. S. Dateywas the Expert faculty.

In the inaugural speech Shri J. T. Parmar, Secretary ofSurat South Gujarat Chapter welcomed the studentsand advised them to take full benefit of the workshop.Shri V. S. Datey dealt with Indirect Taxes and VATon the first day and presented the complex topics inhis own lucid style. At the end of the function Dr.Heena Oza, Chairperson of the Chapter gave vote ofthanks. More than 250 students from Surat-SouthGujarat Chapter attended the workshop.

SIRCHyderabad Chapter of Cost Accountants (HCCA)

The inauguration of Hyderabad Centre of Excellencewas held on 22nd January, 2012 by Shri M.Gopalakrishnan, President. The Council Members,Regional Council Members, Committee Members ofHyderabad Chapter, Chairman of Vijayawada &

Nellore Chapters, and also about 100 members and40 students participated in this programme.

Thrissur Chapter of Cost Accountants (TCCA)

The Thrissur Chapter of Cost Accountants organiseda Members’ Meet on 29th of January, 2012, as part ofits New Year celebrations. The Chairman of theChapter, Shri A.P. Madhu made a presentation on thelatest developments on the Cost Audit front,highlighting the enhanced opportunities for ourmembers who are already in practice and those whoare desirous of becoming practitioners. Shri K.V. Anil,a member in practice, presented a paper on“Knowledge Management, e-Learning and Gover-nance”. This was followed by a panel discussion,wherein senior and junior members alike sharedtheir experiences on the job and it was a very livelysession, with free interchange of ideas especiallybeneficial to the younger generation of ManagementAccountants. The members of the Chapter havedecided to make this a regular affair in the years tocome.

Trivandrum Chapter of Cost Accountants (TCCA)

The TCCA organized a debate on “Allowing FDI upto 50% in Multi Brand Retail—whether it is good orbad” as part of their Professional developmentactivities. The moderators were Shri S. Rama-chandran, practicing Cost Accountant and Shri V.A.Sasidharan Nair, Sr. Vice President HLL Life Care Ltd.The debate was very interactive and a large numberof members participated in the debate.

Shri S.Hariharasubramanian, Chairman of theChapter proposed vote of thanks.

EIRCCuttack-Bhubaneswar Chapter of Cost Accountants(CBCCA)

The Cuttack-Bhubaneswar Chapter organized a oneday workshop on 29th January 2012 on “NewFramework For Maintenance of Cost Records & CostAudit”. Present in the workshop were Shri ChandraWadhwa, past president of the Institute, Shri S.C.Mohanty, Council Member, Shri S.K. Sahoo, Secretary,EIRC, Shri S.P. Padhi, RCM and other distinguishedguests. The speakers highlighted various changes inCost Audit provisions spelt out by MCA, Govt. ofIndia.

Shri N. Sahoo, Chairman of the Chapter deliberatedthe welcome and keynote address and Shri S.B. samal,Secretary of the Chapter extended vote of thanks. Theworkshop was attended by about 72 participants from

REGIONS & CHAPTERS NEWS

INSTITUTE NEWS


INSTITUTE NEWS

various public and private sectors and made it a greatsuccess.

Hazaribagh Chapter of Cost accountants (HCCA)

A seminar was organized by HCCA on 1st February2012 on DTC Bill and GST. Shri Mrityunjay Acharjee,a senior Cost accountant from Kolkata was theresource person and elaborated various provisionsand issues relating to the subject. The welcomeaddress was given by Shri Raj Kamal Prasad Singh;Chairman of the Chapter and Shri Radhey Shyam,Secretary addressed the audience and discussed thescope of Cost accountancy in career building. Theseminar was well attended by Cost Accountants,Chartered Accountants, members and students aswell as a good number of representatives frombusiness community.

Inauguration of Institute of Cost Accountants ofIndia Foundation Course at Hindustan AeronauticsLtd.

Hindustan Aeronautics Ltd (HAL), Koraput Divisionextended their wings by opening a new centre ofFoundation Course in Aeronautics, Commerce & ArtsCollege, Sunabeda, Odisha. A total of 23 students haveregistered for the Foundation course in its 1st batch2011-12. This has been a great endeavour by HAL inbringing the course in the remotely located tribal beltof Odisha.

NIRCNoida Chapter of Cost Accountants (NCCA)

Noida Chapter of The Institute of Cost Accountantsof India organized a seminar on “Investor Awarenesson Financial Markets” on 9th February 2012 at Noida,Chapter. The programme was organized jointly inassociation with Bombay Stock Exchange (BSE) andWellindia Group, Noida.

Shri Rakesh Singh, Vice President of the Institute &Chief Guest in the Seminar spoke about the need forsafeguarding the interests of Investors. He stated thatthe Institute of Cost Accountants of India hasorganized many such programmes in various citiesacross India for the benefit of common public. Hebriefed the participants about various developmentsin costing profession in last one year and requestedmembers to contribute to nation building processthrough their professional contribution. Shri B.L. Jain,

Chairman, NIRC stressed the significance of investorprotection for “Aam Aadmi” so that the society atlarge is benefitted.

Shri Suraj Prakash Chairman, Noida Chapter, whilewelcoming the guests spoke about the objectives ofthe seminar. He also told that initially businesses andcompanies were family owned with family capitaland explained how over the period businesses havegrown in sizes requiring public participation in equitycapital of the companies. He highlighted that keepingin view the size of businesses; it is economically notfeasible to run companies without public money inthe form of equity debt. He further stated that thisled to the need for protecting the interests of commonpublic investors for which Govt has over the periodtaken various steps like creation of capital marketregulator (SEBI), investor grievance redressalmechanism etc. He opined that this seminar is aimedat creating awareness among investors about theirrights and precautions to be taken while makinginvestments.

Shri Hemant Mamtani, Executive Director, wellknown equity expert and Head Equity Research atWellindia group & Shri. Harbinder Singh Sokhi,Equity experts from BSE were key speakers in theSeminar and gave presentation on various aspects ofinvestor protection and awareness about trading instock markets.

More than 150 persons participated in the seminar.

Jaipur Chapter of Cost Accountants (JCCA)

The Foundation stone for centre of excellence was laidby Dr. Mahesh Joshi, Member of Parliament, JaipurConstituency, on 4th February, 2012 at Jaipur Chapterof Cost Accountants.

On this occasion, Shri Rakesh Singh Vice President,Shri H.K. Goel, Council Member, Shri B.L .Jain,chairman NIRC, Shri Vijender Sharma, Secretary,NIRC and Management committee members ofUdaipur, Jodhpur & Kota were also present. TheProgram started with welcome speech by Dr. AshokJain, Chairman Jaipur Chapter. On this Occasion Dr.Mahesh Joshi stated that Cost & ManagementAccountants are playing important role for providingbest quality products to the consumers in today’scompetitive world & they are the important part ofthe high level management.


LETTERS TO EDITOR

Dear Sirs,

I was able to read the recent Interview of SAFAPresident Shri A.N. Raman regarding CostAccounting Profession in Transition. The view pointsof Shri A.N.R are not only relevant to CostManagement accounting profession in SAFA countriesbut also have great importance at the global levelwhere new changes are going on due to proposedmergers of Accounting and Management accountingbodies or starting of Joint degrees. The proposedmergers of accounting bodies in Canada and proposedJoint degree of CPA(US) and CIMA (UK) is creatinga gap in Cost and Management accounting professionand it’s developments in last 50 years. Shri ANRcorrectly mentioned that our most of the resources interms of actions and thinking are spent on namechange issue. Due to resolving of our name issue atthis point we should put our resources to takethe lead around the globe with our knowledgedeveloped in last 50 years particularly in Cost Auditthru (Cost compe-tency management audit fororganizations). The proposed mergers betweenaccounting bodies in North America and Europe isan outcome of recent downturns going on inrespective economies shifting of manufacturingactivities to BRIC countries, and to develop somesafeguards for respective niche market in which thesame accounting bodies operate. Similar to IMA atthis point ( We compete with China on manufacturingactivities still China is not able develop anIndependent body of knowledge for Cost andManagement accounting) The Institute should comeup with Independent viewpoints as a leader to guideworld about uniqueness of Cost and managementaccounting profession.

The Value addition thru our centre of excellenceand newly form Board of advance studies should notbe limited to SAFA or Asian countries but to this partof world where we can also explore and set theplatform to carry out projects related to various areasby advance studies Directorate, knowledge partnerand third party cost competitive course provider forvarious different bodies operating in Canada.

Source :1. An interview with SAFA Pesident done in Dec 2011and published in January 2012 of Industrial Economisttoday linked below http://www.industrialeconomist.com/curr/17.html2. IMA Response to recent Changes due to proposedmergers of Accounting Institutions http://www.multibriefs. com/briefs/ima/IMA_holds high_standards_for MA.htm 3. President Feb 2012

Communique http://www.icwai.org/icwainew/institute-presi-msg.aspHave a nice cost effective day !

With Best regardsDavinder Bhatia CMA,Cost Management specialistFounder of Toronto overseas Centre of CostAccountants of India 484 Savoline drive, Milton,Ontario , L9T7X3 Canada001-647-237-8465 /905-593-2728Fax : 001-905-693-0822email:dbhatia(5)bell.net

Dear Sirs,

It was enlightening to read the cost managementpractices followed by a few award winning companiesin the December 2011 issue of The ManagementAccountant.

However, the coverage of the practices was verybrief. As this is a topic of great interest, I request thata detailed account of these practices be published inthe forthcoming issues of the journal.

With warm regardsRavinder Kumar AroraM/6423


With the advent of the International FinancialReporting Standards (IFRS) issued by theInternational Accounting Standard Board

(IASB), Accounting Standards have assumed greatersignificance. IFRS also encompasses the Interna-tional Accounting Standards (IAS) issued by theInternational Accounting Standard Committee(IASC). In India, the Central Government bynotification has constituted the National AdvisoryCommittee on Accounting Standards (NACAS) toadvise on the formulation of accounting policies andaccounting standards for adoption by companiesunder the Companies Act. Globally, the momentumis towards convergence of Accounting Standards withthe IFRS. But there are some key issues, divergencein some areas like Construction Accounting,constraints that need to be addressed beforeconvergence can take place. Banks are not comfortablewith AS 9 (that talks of Revenue Recognition). To fallin line with IFRs, technical preparation is required—both from the industry and the professionals. Thereshould not be any conceptual differences.

In such a scenario, understanding the need andbackground for introduction of various accountingstandards mandated by the Institute of CharteredAccountants of India, their applicability or non-applicability to various entities, is all the morenecessary for a harmonious implementation ofaccounting policies. This is what the book underreview sets out to achieve. It is designed for thestudents of CA and ICAI, as also the professionalmembers of both the Institutes. It is both compactand comprehensive in coverage. Touching upon thefundamental accounting concepts viz. Going Concern,Consistency and Accrual, it proceeds to delve upon18 Accounting Standards out of the 32 Standardsissued by the Council of the Institute of CharteredAccountants of India so far, technically speaking only31, as AS 8 has been withdrawn consequent to theissuance of AS 26 on ‘‘Intangible Assets’’.

Tulsian’s Select Accounting

Standards

By CA (Dr.) P. C. Tulsian &CA Bharat Tulsian

S. Chand and Company Ltd.New Delhi 110 055

Revised Edition 2012Price Rs. 150.00

Each chapter takes up one Accounting Standardand presents in a lucid style the various aspectsrelevant to the Standard like the accounting policies,applicability or non-applicability to enterprises,disclosure requirements with practical illustrationsand solutions for the problems that were asked in therecent professional examinations. The information ispresented in a tabular format for better understand-ing with headers and key words highlighted to attractthe attention of the reader. IFRS follows : ‘FAIRVALUE’ approach as against ‘Historical Cost’prevalent here. This also has ben discussed in fairmeasure in the book.

The Accounting Standards picked up by theauthors have a lot of relevance in the present daycontext, for instance AS 11 — the Effects of Changesin Foreign Exchange Rates. There are reports that theimplemen-tation of AS 11 may be deferred given theintense pressure that is being brought on thegovernment by those who have taken foreign currencyloan and are facing the burden of inflated liabilities inthe wake of sharp depreciation of the Indian Rupeeagainst the dollar and the precedence alreadyavailable, where the Government had, during thefinancial meltdown in 2008, postponed theimplementation 2012.

Chapters on AS4—Contingencies and EventsOccurring After the Balance Sheet Date, AS 5—NetProfit or Loss for the Period, Prior Period Items andChanges in Accounting Policies, AS 20—Earnings PerShare, and AS 29—Provisions, Contigent Liabilitiesand Contingent Assets, need special mention fortheir exhaustive coverage by way of journal entries,working notes, guidelines on understanding theintricacies of each standard, various types of headsand various interpretations of the provisions forbetter understanding. Repeated references to therequirements of an accounting standard from thecompendium of accounting standards brought out bythe ICAI not only enhances the comfort level of theuser in terms of authenticity but also helps memorizethe guidelines effectively.

All this and a lot more is covered in thiscompetitively priced book that students andprofessionals should find of immense use.

M. S. VaidyanathanACMA, ACS

Sr. Manager, Indian Bank

BOOK REVIEW

member of IFAC, SAFA and CAPA) - icmai.in

Documents

Transcript of member of IFAC, SAFA and CAPA) - icmai.in