What is Responsible Investment?

What is Responsible Investment?

World over the concept of Responsible Investing is gaining ground. Fund houses are coming up with responsible investment funds. Some funds are withdrawing their investment from some sectors which is against their responsible investment policy. Indices are being published covering only responsible investment options, even in India. And these investments are giving better returns to the investors. More and more corporates are following responsible investment policies.

Definition

University of Cambridge for Sustainability Leadership defines Responsible Investment is an approach to investment that explicitly acknowledges the relevance to the investor of environmental, social and governance factors, and of the long-term health and stability of the market as a whole. It recognises that the generation of long-term sustainable returns is dependent on stable, well-functioning and well-governed social, environmental, and economic systems.

In simple words, companies which adhere to responsible norms are termed as ESG Responsible Companies and Investment in these companies are termed as Responsible Investment. ESG Responsible stands for Environmentally, Socially and Governance Responsible.

What is meant by ESG?

Many sectors are considered generally as not ESG-Compliant. For example, Nuclear Weapons, Greenhouse gas emitting sectors, manufacturing of tobacco and tobacco products, waste generation,   etc. are considered to be environmentally negative, Human Rights violations, Child Labour, sexual harassment, cyber security etc. are considered for Social scorecard. Track record of board of directors and their age, number of independent directors and women directors, attendance in Board meetings and committee meetings, remuneration to directors, whistle blower complaints, bribery and corruption, overall ethical standards are considered as Governance Scorecard.

The UNPRI is an investor initiative in partnership with UNEP Finance Initiative and UN Global Compact. It describes six principles of Responsible Investment:

1.    Incorporate ESG issues into investment analysis and decision-making processes.

2.    Be active owners and incorporate ESG issues into the ownership policies and practices.

3.    Seek appropriate disclosure on ESG issues by the entities in which they invest.

4.   Promote acceptance and implementation of the Principles within the investment industry.

5.    Work together to enhance their effectiveness in implementing the Principles.

6.    Report on our activities and progress towards implementing the Principles.

World over various other NPO’s and investors groups are propagating the ESG concept. SVVK is one of such investor association formed in Switzerland. EMPEA, a global industry association for private capital in emerging markets based in USA, IPF Environmental, Social & Governance (ESG) Interest Group based in UK are some other groups focussing on ESG.

Additionally, many investment houses and fund houses are promoting ESG on their own.

Indian Scenario

In India also, this trend is gaining currency in fast pace.

National Stock Exchange (NSE) in association with Stakeholders Empowerment Services (SES) conducted a study on ESG and its impact on companies. Out of the 50 samples they took, they concluded that companies have better scorecard in terms of ESG and the overall ESG score the sample stood at 71%.  They have also found that those companies have offered better returns to the investors.

NSE has come out with 2 indices viz. Nifty100 ESG and Nifty100 ESG Enhanced. These companies gave better returns to the investors compared to Nifty100.

Some Indian AMC’s have launched ESG funds in India. SBI, Axis and ICICI Prudential are some of them.

Recently, Norges Bank Investment Management, which is a $ 1 Trillion wealth fund based in Norway, announced that it is withdrawing from the Indian company Page Industries Ltd, a major player in textiles  and apparels for alleged human rights violations.

Similarly, SVVK, a Swiss association for responsible investment formed by seven major institutional investors based in Switzerland, excluded Tata Power, L&T, Bharat Dynamics, and Walchandnagar Industries as they are connected to nuclear weapon manufacturing.

To Conclude

As the Responsible Investment movement is gaining currency all over the world and increasing awareness and response to ESG among investors, corporates are now forced to align their policies in tune with the ESG principles. It will help then to attract and retain better investment. It will enhance their goodwill and valuation.

It will be a win-win solution for both the corporate and investors in the long run, of course with short term additional cost commitments for the corporates. 

Classification under GST

Classification is the process by which the correct HSN/SAC of the product/service is arrived at and thus the correct GST rate is determined.  Classification is important in GST due to various reasons.

• If you wrongly classify a goods/service to a tariff item which has a lower tax rate (eg. you classify an 18% goods/service to 12% or 5% or exempted), you will be forced to pay the difference with interest and penalty. Even if you recover the GST from your buyer, he will not get the credit of this GST, in certain cases. 

• If you classify something to a higher rate, then also, you will be forced to pay the excess collection to the government and at the same time, your buyer will be asked to reverse the wrong credit he has taken based on your invoice. He will be liable for interest and penalty also.

• Similarly, if you claim Input Credit based on an invoice you received with a wrong GST, then you will be forced to reverse the excess ITC claimed, with interest and penalty. So it is very important to check whether the GST charged by your supplier is correct or not.

• If you are a reseller, charging a wrong GST based on the GST charged by your supplier will not absolve you from the penalties of wrong classification.

• Further, you may be denied the duty drawback/other export incentives, if you wrongly classify your goods/services.

• Loss of orders, Loss of credibility with customers, Extra cost of re-establishing business with the new/old customers, Unavoidable loss on account of discounts given to customers etc are other indirect damages you will have to suffer.

Classification is a complex procedure based on Customs Tariff, various GST rate and exemption notifications and various rules of interpretation established under Customs Tariff and decided cases. It is not a simple job.

Never decide on a classification based on google search or your supplier’s invoice. There can be subtle differences in the nature of goods/services which may change the GST rate of those goods and services.

Classification is area which needs extreme expertise and always take the help of a professional to avoid loss and damages in future.

Good day to you!

How to fix your remuneration in a closely held entity?

How can you fix your remuneration in a closely held entity?

There is always a confusion and a lot of doubts when it comes to a discussion as to how to remunerate a director/partner in a closely held business entity, where some of the director/partners are working directors/partners and others are silent.

The first and foremost principle you have to remember is there is no hard and fast rule regarding the fixing of remuneration for a closely held entity. Of course, there are some regulations like the Companies Act, 2013 and Articles of Association for companies, partnership deed for partnerships and Income Tax Act.

But the basic premises under which decisions are taken will be the mutual understanding and agreement, at the same time within the contours of the statutory regulations as above.

On a Macro level, for fixing of a compensation so many factors are to be considered.

1.    What is your organisational philosophy?

-       Sometimes you may decide that all will be paid equally irrespective of the role they carry or irrespective of effort they put in OR

-       you may decide to pay a fixed minimum for all and a variable portion depending on the rolls played by each. OR

-       you can decide that only those parties who are spending time and effort will be compensated and silent partners will not get any compensation as they are not spending any effort. OR

-       you may decide to pay a fixed minimum for all, and a variable portion based on the performance/profit of the entity.

Your mutual agreement is your philosophy.

2.    How will you give credit to the investors vis-à-vis the managers?

Here another factor may come in – the investment of each party. It may be equal or unequal. So how will you consider that aspect also? Especially in recent times, where people investing in an entity and people running the entity may be different. Some investors may be silent, and some may be working partners also. In some cases, all investors will be silent and working partners will not put any investment.

So how will you give credit for that? Everything may not be possible as per rule book. For example, company law prohibits payment of interest on equity share capital. So, you will have to be within the four corners of the law at the same time pay the remuneration.

3.    What should be the mode of compensation – in cash or in kind?

You can pay a person in cash (bank). A payment in kind means other than cash or bank. The most popular method is increased stake in the entity. In Company, we call it Sweat Equity.

A payment in cash means immediate cash outflow for the entity whereas sweat equity will not result in cash outflow in the short run. But this will have the effect of increasing the shareholding or capital of that person compared to others. Increase in capital means increased control in the entity.

4.    So how will you sort this out?

The best way is to structure it as a combination of the above.

For example, you can fix a particular percentage as return on the amount invested.  This percentage can be fixed considering the cost of funds of investors, the current bank interest rate, the return that may be available from alternate investment options etc. This will ensure an equitable compensation to the parties based on the quantum of money invested by them.

Then you can think of compensation to those who are actually working parties. Renumeration to the working parties can be based on the effort and time they put in.  The contribution of each party may be in different areas –somebody will be doing the marketing, somebody will be doing the administration and paperwork, somebody finance etc. Based on the effort and time you can mutually agree for the compensation.

But, if you are not able to assess the individual effort and time, it is better to make the compensation equal.

5.    But I was getting a fat paycheck before starting this business!

Yes, you might be. But scenario here is different. You are the owner of the business and not a mere employee. You need to have a holistic vision on the future of the business.

Entering into a business means taking huge risk on your shoulders. And the higher the risk, higher will be the returns also. And there is no limit for your earnings if you succeed in the business.

However, the remuneration need not be based on the salary he drew when he was in employment earlier or based on the salary some other multinational entities pay to a similar employee etc. Because, you are a new business and you will definitely have cash flow pressures in the initial years. So, outflow of funds on account of salary to business owners may impact the working capital of the entity and the business owners will have to pump in the funds again into the company.

But if the entity is cash rich and having no pressure on working capital, you can fix the salary at market levels.

6.    Why can’t we draw lower salary now and increase it as and when the business increases?

Yes, that is a good suggestion. You can think of a staggered compensation structure like a lower initial period compensation which can be increased as the years pass by or the business improves.

Another way of staggered compensation is pegging the compensation to the profits or performance of the entity. This can be slab based package or a percentage-based package.

A good rationale for opting staggered compensation method is the timing of taxation. You draw a fat salary and the entity may fall to loss due to that high salary. Here you may be forced to pay income tax on the salary. Of course, the entity can carry forward that loss for 7 years, but you will have cash outflow now and respective benefit may accrue to the entity after a period of time. So, the timing of the cash flow can be made in your favour if you plan the salary on staggered basis.

7.    We fixed the quantum of compensation. What next?

Once you decide on the quantum of the compensation, you can think of how it is given to the parties. As I mentioned earlier, it can be either a direct payment to them or it can be in the form of sweat equity or partly by cash and partly by equity.

In the case of sweat equity, you will have to take into confidence the other stakeholders also, as your percentage of capital will be increasing due to sweat equity and this may cause change in the equity holding equations.

Whatever profits remaining after the remuneration and taxes will accrue to all – including the active as well as passive partners and that can be paid to them in proportion to their investment.

8.    To Summarise

• In a closed held entity, the remuneration to the partners/directors is mainly based on mutual consent.
• In case of an entity where some of them are investors and some of them are working partner/director, it is better to compensate the investors by way of percentage on their investment.
• Compensation can be in cash or by way of sweat equity. But sweat equity will increase the stake of that person vis-à-vis others
• An equitable mode of compensation will be to remunerate each in accordance with the time and effort put in by each one. Due weightage can be given to experience also.
• Running a business and working in an organisation is totally different. It is better not to compare the remuneration to the paycheck he was getting while in employment.
• The business owners are the only responsible persons to put in the money whenever required. So, drawing higher remuneration, especially in the initial period, will result in drain in working capital and they themselves will be again force to pump in more amount into the business.
• Instead, you can think of a telescopic pay structure, whereby you can draw a lower amount in the initial periods and then increase it year by year in accordance with the increase in business.
• The best option will be a combination of all the above.
• Profits remaining after payment of remuneration can be distributed to investors considering the immediate fund requirement for working capital also.

  

* * *

Government blocks China from acquiring stake in Indian Companies

Govt. tweaks FDI norms; bars automatic investment in Indian Cos. from neighboring countries

Covid - 19 and resultant turmoil in stock market has made the Government of India to think and act fast.

By Press Note No. 3 / 2020 Department for Promotion of Industry and Internal Trade amended the FDI policy to the effect that any investments from counties which shares land border with India can be made thought approval route.

Till now, a non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited. 

However, a citizen of Bangladesh or an entity incorporated in Bangladesh can invest only under the Government route. Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors/activities other than defense, space, atomic energy and sectors/activities prohibited for foreign investment.

This policy has been tweaked to the effect that  an entity of a country, which shares land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, can invest only under the Government route.

In the event of the transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the restriction/purview above, such subsequent change in beneficial ownership will also require Government approval.

This will effectively ban foreign investment from Pakistan, Nepal, Bhutan, China, Myanmar and Bangladesh and will put the proposals in Approval Route.

There were already restrictions on FDI from Bangladesh and Pakistan. Now this change is mainly targets China.

This is important as there is reports that Chinese Central Bank has acquired 1% stake in HDFC Bank. Further, there were widespread allegations that after the Covid-19 shake out of stock markets all over the world, China is aggressively buying out many foreign companies especially companies which may pose a threat to their Chinese counterparts.

Any way, we have to wait what retaliation China is going to take. Given the low investment of India in China, whatever steps taken by the China may not have much impact on Indian investments in that country.

Recent changes in residential status as per Income Tax Act - All you wanted to know

There is a change in the provisions for determining residential status, as per the amendment in Income tax act.

The general rule will remain as same i.e. any person who is in India for more than 182 days will be treated as resident in India.

OR, if he was in India for 60 days or more in the current FY and 365 days or more in the previous 4 FY, he will be treated as a resident in India.

However, the above rule had a benevolent provision, saying that in the case of an Indian Citizen or a Person of Indian Origin (PIO), who comes back to India can stay in India for 182 days instead of 60 days as above.

The new amendment has reduced this period of 182 days to 120 days. Please note that this reduced period of 120 days applicable only for persons already abroad who are coming to India for short visits. And there is another beneficial provision also newly introduced, that this will be applicable to those persons who has Indian income is more than Rs. 15 lakhs.

So, if you are an NRI and you have income in India more than Rs. 15 lakhs, then you have to restrict your stay in India to 120 days in a year.

Deemed Resident

Another important addition is the concept of Deemed Resident.

Case 1: If You are an Indian Citizen with Indian income more than Rs 15 lakhs

a.     Your income is NOT taxable in any other country by reason of your domicile or residence or any other criteria of similar nature. (This means you are not paying tax in any other country, because you are Non-Resident in that country, as per the rules of that country); OR

b.     your stay in India is more than 120 days

Then, you will be deemed as a NOT ORDINARILY RESIDENT.   

Case 2: If You are not an Indian Citizen, but a person of Indian origin (holder of passport of another country)

1.     Your Indian income is Rs. 15 lakhs or more; and

2.     Your stay in India is more than 120 days but less than 182 days

3.     Whether or not you pay tax in any other country

Then, you will be deemed as a NOT ORDINARILY RESIDENT.  

In the case of a Not Ordinarily Resident, your income earned outside India from Business controlled from India or profession set up in India will be taxable in India.

   

TO SUM UP:

For NRI’s – whether you are Indian citizen or not, the first thing you have to check is whether you have Indian income more than Rs. 15 lakhs – if not, then your taxation will be as before – No change at all.

For NRI’s holding Indian Passport, if your Indian income is more than Rs. 15 lakhs, then you have to ensure two things:

1.     that you restrict your stay in India to less than 120 days.

2.     that you pay tax for your whole income, in your country of residence. (But this is not applicable to residents of those countries like UAE where there is no income tax)

For an NRI holding a foreign passport, you have to make sure that your stay in India in a year is less than 120 days.

And, if you do not comply with any of the above conditions, your income earned outside India from a business controlled from India or a profession set up in India alone will be taxable in India and not all your foreign income.

If you have already paid tax on such income in any other country, you are eligible for a tax rebate as per the Double Taxation Avoidance Agreement between India and the other country.

 

Moratorium on account of Covid-19: What you should know

What is meant by the moratorium given by the government?

The moratorium is for payment of all instalments falling due between March 1, 2020 and May 31, 2020. According to the RBI, the deferred instalments under the moratorium will include the following payments falling due from March 1, 2020 to May 31, 2020: (i) principal and/or interest components; (ii) bullet repayments; (iii) equated monthly instalments (EMIs); (iv) credit card dues.

So, if you have any repayment of loans – whether as interest or principal – it will be covered under the scheme

In the case of Working Capital limits like OD/CC, normally, you will have to pay the interest and the moratorium applies to that interest also.

How is this moratorium being given by Banks?

Each bank has published its own guidelines. Some banks have given a automatic moratorium for all borrowers. Eg. Central Bank of India, UCO Bank, IDBI Bank etc. But most of the banks have asked the customers whether they opt for moratorium or not.

Some banks informed customers that they will be eligible for moratorium, unless they opt out and some banks have said they will NOT be given moratorium unless they opt in. So you have to contact your bank to ascertain what action you have to take. Most of the banks have given the option facility in their portal. Some banks have given an SMS option also.

What will happen if you opt for moratorium?

Moratorium is only for repayment of loans. But most banks have informed that they will continue to charge interest on the loans. Only point is, you need not pay it immediately.

For example, ICICI Bank has said that interest will be debited and added to your principal outstanding. Similar is the case of HDFC Bank also.

It means, the interest will be added to the Principal. The fallout of this is, when the bank calculates the interest for next month, say April, your loan outstanding will be more by the interest charged for the month of March also. So, in effect, you will be paying interest on interest also.

What will happen to the tenure of your loans?

If you opt for the moratorium, your period of repayment will be further increased.  Considering the loan amount and interest rate, your period of repayment may extend even more than the moratorium period. In this case, your EMI will remain the same.

You have another option to approach the bank and refix the EMI so that your loan is closed within the original term. But your EMI will increase.

So should I opt for moratorium?

This is the most important question. If you have enough cash flows to pay the EMI/Interest, then best course is not to opt for the moratorium. In that way, you will pay lower interest and your loan will be closed as per your original term.

But, if you are struggling with cash flow, it will be better to opt for it. Otherwise, you will be forced to borrow at higher rates to pay the existing loans, which may drag you into a debt trap.

Ultimately, what is the benefit that the customer gets?

As I said earlier, if you have cash flow issues, opting for moratorium will be beneficial. Further, if you fails to pay the EMI/Interest for 3 months, your account will be classified as Non Performing Asset (NPA) and you will be forced to settle all the loans in one go. Further, your name will be reported to CIBIL which will affect your credit rating and future borrowing capacity.

What is the impact on Banks?

The biggest advantage for the banks is that they need not classify the loan accounts as NPA. This will in turn, save them from making provision in their Profit & Loss Account. Hence, their profitability will show a better figure and their Balance Sheet will show a better picture.

The bigger beneficiary in this scheme of moratorium is the banks themselves.

COVID - 19 & YOUR BUSINESS - THE CHALLENGES AHEAD

Hello friends

Another financial year is ending today and we are entering into a new financial year, amidst the uncertainties and challenges arising out of Covid-19, both in your business and personal sphere. The COVID-19 outbreak poses unprecedented challenges to businesses, governments, and societies around the world.

At this juncture, can we do something other than wait and watch, at the same time staying safe and staying healthy?

We can have an introspection to the business so far this year. We can also assess the possible fallout and challenges we may face next year due to the Pandemic. Of course, the situation is unpredictable, still we can visualise all possible scenarios and prepare ourselves for the worst. We can have a Plan A, Plan B and Plan C.

Some of the challenges we are going to face will be:

1.     Decreased business activity and resulting liquidity crunch in the market

2.     Disruptions in Supply Chain and Logistics

3.     Difficulties in Marketing efforts due to travel ban and the like

Facing the Liquidity Crunch

One of the major issues we may be going to face will be liquidity in the market. We will have to plan our cash budget very meticulously. And monitor it on a continuous basis. Wherever expenditure can be reduced, we should look into it at the same time it should not disturb the smooth functioning of the business. We have to identify the blocked cash and implement steps to realise it – be it inventory or receivables or other assets.

You have to appreciate that there will be a short term drop in the total business activity, leading to lower spending and lower consumption. So, our sales forecast should take into consideration this aspect also. We can not apply static solutions to dynamic situations. So, we should keep our eyes and ears open to grasp each and every signal the economy is generating and should be ready for every eventuality.

Make sure that you avail all the schemes and facilities offered specially to meet the Covid – 19 challenges, by the Government and banks.

Care for your Employees

In the human resources front, the thrust should be to increase the productivity per person. And if your work culture is great, the biggest support you are going to get will be from your employees. How you treat your employees now will have a massive effect on their well being, and consequently on their loyalty and productivity.

One important fact you have to appreciate is that we all are facing a Pandemic – you, your business and your employees also. It is not a time to desert your employees who are, if fact, the eyes, ears, hands and legs of your business. Be humane, Show compassion and benevolence. The universe moves on inter dependency only.

Handhold and survive

This unprecedented business crisis may drive the world into a recession. This will not be a short-term phenomenon; it is going to last a little longer. So, survival of the fittest will be the mantra for the future. But one person alone cannot stay fit where all his surroundings are collapsing. So, I would say survival by co-operation and collaboration should be the strategy to tackle this uncertainty.

As Ms. Suneeta Reddy MD, Apollo Hospitals Enterprise points out, This Pandemic Reminds Us that We are All Equal and Connected. It reminds us that we are equal regardless of our religion, culture, occupation or financial situation. It reminds us that we are all connected and the false borders we have put up give us no protection.

Every Challenge is an Opportunity

Yes, Covid – 19 is big challenge and we should appreciate that the challenges only make us stronger. As the saying goes, “rough seas make great sailors”, each challenge should drive us to identify a different opportunity. The Businessman should be able to convert a challenge into an opportunity and there lies the sustainability and growth.

Be flexible to take fast decisions. The way you react to the challenges define you and your business. Please remember, a whole world is looking at you – how you are going to face this or how you are going to react. The economy, your employees, your suppliers and customers, all other stakeholder and your family – your decisions are going to affect all of them. So be sensible, be proactive, be alert, be receptive to different viewpoints and thus make your mark.

This is a remainder

This kind of Black Swan events can occur more frequently in future and we should have a proper Business Continuity Plan and a Disaster Recovery Plane in place. You should be stable and level-headed, where the entire world may be in shambles. You should be thoughtful and decisive. Wait and Watch is not the best idea for the season. Take informed decision and communicate to lower ranks. Leaders need to be loud during the tough times and that is what everyone is expecting from a Leader.

End Note

Last but not the least, take care of your health and your family. Health and fitness give you physical strength where family gives you emotional strength. Afterall, who do you work for?

Random thoughts by CA. Jameskutty Antony

(please give me your feedback on this)