AGM — A rubber stamp event or report card?
Market regulator SEBI calls for enhanced monitoring mechanisms
Shreenivas Kunte

From a shareholder's point of view, a company's annual general meeting (AGM) is perhaps the most significant recurring milestone that a company can offer. Not only as a score card keeping forum to objectively assess the company’s financial health but also in bringing opportunities for shareholders to understand and vote on the innermost workings of the company. From Dhirubhai Ambani's mass shareholder following to Warren Buffett's annual shareholder letters, the AGMs have sparkled and shaped investment thought.

India’s AGMs, however, at least in the recent past, have lacked the vitality to deepen confidence. A very high promoter dominance (50% plus) has bound the minority shareholder to the role of a spectator without effective voting rights for bringing change. The annual meetings have been seen to be ritualistic, vulnerable to the risk of turning into rubber stamp events for promoter control.

The SEBI’s circular earlier this month indicates the regulator's growing discomfort on the AGM practices followed by some of the corporates. SEBI's August 1 circular has critically remarked against companies who have been allotting just 15 minutes toward conducting the AGMs. The regulator has recommended enhanced monitoring mechanisms for exchanges so that corporate governance standards are followed in letter and spirit.

Barring this one incident, the AGM season this year in India has been uncontroversial. Earlier last month, Tata Motors' promoters lost out on their executive compensation resolution to shareholder activism.

But the company’s AGM later on July 31 was fairly quiet. So far this year, from among India's top 200 market-cap companies, over 70% companies have held their AGMs. Over the next financial year, however, the new Companies Act (2013) and SEBI's initiatives could significantly enhance the reporting environment and corporate governance culture in India. The shareholder community can directly benefit from these changes. Three important takeaways at different stages in AGM stakeholder engagement emerge.

Analysis

Pre-AGM stage: In the pre-AGM stage, a listed company is required to send a notice to its shareholders for conducting the AGM along with a copy of the company's financial statements, proxy forms and items of special business that the company would like to transact at the AGM.

At this pre-AGM stage, it is important that shareholders attempt to understand the results and build a critical appreciation on the company's overall performance. Formulating well considered questions and sending these questions in advance to the company can give the company’s management time and space to prepare a comprehensive response to the queries.

During AGM: The second aspect is about discussions on issues and shareholder voting rights at the AGM. With regard to general conduct and discussion on issues, shareholders are encouraged to promote constructive engagements with the company. For example, obstructive behaviour and/or frivolous questions can make the AGM counter-productive to everyone involved. Voting is another important mechanism for exercising shareholder viewpoints. Nomination and election of Board members and management compensation are some of the key corporate governance decision points where shareholder votes could influence outcomes. In a routine AGM resolution, a simple majority of the votes cast is required. But events such as takeovers need a special resolution and a 75% winning vote. Shareholders should note that electronic voting has been made compulsory for listed companies (fully effective after December 2014). E-voting is expected to be very convenient to the shareholders as they will not be required to be physically present to cast their votes.

Post AGM: Lastly, shareholders and investors should put in effort to review their investment concerns in view of the documents shared by the company before the AGM. Researching important financial indicators — from performance to growth, profitability, market share, operations, risk, related party transactions and accounting policies can help the shareholder recognise more clearly the sources of risk and return. The ability to understand the financial performance that the company has delivered is a function of both knowledge and experience. But at a minimum, shareholders are encouraged to view the company’s key financial attributes, both as absolute benchmarks as well as relative to the company’s peers.

India is yet to re-attract the shareholder attention and overwhelming support that Reliance founder Dhirubhai Ambani cultivated or the trusteeship that Nani Palkhiwala's ACC AGMs fostered. But the infrastructure investment that is being committed in terms of positive regulatory change may help expand, deepen and democratise India’s shareholder base.

The author is a Member of Advocacy Committee, Indian Association of Investment Professionals — Member, Society of CFA Institute and Adjunct Faculty, In charge Trade/Research Lab, SP Jain Institute of Management & Research. The views expressed in this article are his own

Planning to sell property? Know how to save capital gains
Balwant Jain

People generally buy a small house at the beginning of their career and later on move to buy bigger house by selling the smaller house.

The sale of such house property entails capital gains either short-term or long-term depending on your holding period. You can save tax on capital gains arising on the sale of any asset held for 36 months or more if you invest the amount of long-term capital gains in specified assets within specified period. The article discusses these avenues:

Purchase or construction of another residential house property

The first option available is to invest the amount of capital gains in purchasing another residential house. The purchase of property can be done one year before or two years after the date of sale of old house.

You can also get a new house constructed within three years from the date of sale of the old house to get this exemption.

Though there are no clear provisions under the law, in my opinion, if you are booking an under-construction residential property, the construction by a builder should also be treated as construction for the purpose of availing this exemption. Self-construction is naturally treated as construction. You need to preserve the documents to prove the amount of capital gains invested.

It is not necessary for you to actually use the funds received from the sale of your house property for the purchase or construction of the new house property. What is required is that you purchase a new property for an amount equal to or more than the amount of the capital gains. The purchase can also be made with the help of a home loan.

Please note that this exemption can only be claimed in respect of a residential house property and not for investment made in a commercial property.

For the purpose of claiming exemption, the brokerage, stamp duty, registration charges and transfer charges etc. paid will be included in the cost of house property purchased and accordingly will be taken into account while computing the amount invested for purchase or construction of the new house.

In case you intend to claim the exemption by purchase or construction of a house and full investment in purchase or construction of the house is not made by the due date of filing of your income tax return, the amount of capital gains not so invested needs to be deposited in capital gains bank account by the due date of filing of your return.

The money in the capital gains account can be withdrawn for intended purchase or construction of the house.

In case of an under-construction property, you need to ensure that you get the possession of the property within three years so as to avoid any litigation. In case you transfer the new house within three years, the capital gains exemption allowed earlier will be taxed as long-term capital gains in the year in which you transfer the new house. Please note that the investment for this purpose can be made only in one residential house for claiming exemption from long-term capital gains arising on the sale of another residential house property. Moreover, the investment can only be made for purchasing or constructing a residential house property in India only. There is no restriction as to the number of residential houses you can own on the date of sale of the original residential house for claiming this exemption for long-term capital gains.

Purchase of specified bonds

In addition to the above avenue, there is also another avenue which can be used besides making investment in another house by way of investing your long- term capital gains in bonds of National Highways Authority of India (NHAI) or Rural Electrification Corporation (REC) for a period of minimum three years. This investment has to be done within six months from the date of sale of your house property. You can claim these benefits only up to Rs 50 lakh in respect of each property and only Rs 50 lakh during one financial year even if the period of six months spills over to two financial years.

You are required to hold these bonds for minimum three years. In case you transfer the bonds within three years from the date of purchase, the capital gains exemption availed during earlier years will be taxed in the year in which you transfer such bonds. It may be noted that even if you take a loan or advance against security of such bonds, it is treated as transfer and you forfeit the exemption availed.

This may also be noted that you can use either one or combination of both avenues available for the purpose of claiming exemption. You may also decide to claim exemption partly by investing in the house and/or bonds and partly pay the proportionate income tax to the extent of capital gains which have not been invested as above.

The above investments have to be made even if you have not received your full sale consideration in respect of your house property sold.

The author is CFO, Apnapaisa. The views expressed in this article are his own

tax advice
Gift to son-in-law is tax-free
SC Vasudeva

I have given a sum of Rs 1,00,000 by cheque to LIC for a policy taken in favour of my married daughter.

Please advise whether this payment would automatically become a gift given to my daughter or some other formality is required to be completed.

How the maturity proceeds of the policy would be treated for income–tax purpose in her hands. Is she required to file an income-tax return, in case her income is less than the maximum amount which is not chargeable to tax? Kindly advise whether a sum of Rs 1,00,000 given to my son-in-law as a gift would attract any tax on my or his hands. — Satwinder Singh

• It would be advisable to make out a letter with regard to the gift of Rs 1,00,000 for payment made to LIC for a policy taken in favour of your married daughter. The gift so made is also required to be accepted by your daughter in the shape of an acceptance letter.
• The maturity proceeds of the policy would be treated as capital in your daughter’s hand in case the premium payable under the policy does not exceed 20% of the actual capital sum assured.
• She need not file a tax return in case her income does not exceed the maximum amount chargeable to tax without claiming deduction under Section 80C of the Act.
• The gift of Rs 1,00,000 received by your son-in-law would not attract the payment of income-tax under any provisions of the Act as the gift is received from a lineal ascendant of his spouse.