The
PRESIDENT Dr. H. R. Subramanya VICE PRESIDENT Pravakar Mohanty MEMBERS Dr. Sanjiban Bandyopadhyay, A. S. Durga Prasad, M. Gopalakrishnan, K. G. Goyal, D. V. Joshi, V. C. Kothari, Bibhabananda Majumder, B. M. Sharma, Rakesh Singh, Chandra Wadhwa, Dr. D. Jagannathan, N. K. Prasad, B. C. Malu, S.G.Y.Narayanan SECRETARY Dr. Debasis Bagchi DIRECTORS Examinations Chandana Bose cbicwai@vsnl.net Studies Swapan Dey sdicwai@vsnl.net Technical A. P. Kar icwai@vsnl.com Administration & Finance R. N. Pal rnicwai@vsnl.net Research & Journal Siddhartha Sen ssicwai@vsnl.net EDITOR Siddhartha Sen ssicwai@vsnl.net Editorial Office & Headquarters 12, Sudder Street, Kolkata-700 016 Phone : 2252-1031, 2252-1034, 2252-1035, 2252-1602, 2252-1492 Gram : STANDCOST, website : www.myicwai.com/www.icwai.org Membership Deptt. : kbicwai@vsnl.net Fax No. : 91-33-22527993/2252-1026 Delhi Office ICWAI Bhawan 3, Institutional Area, Lodi Road New Delhi-110003 Phone : 24631532, 24618645, 24643273, 24622156 Gram : STANDCOST, Fax : 91-11-24622156, 24631532, 24618645 E-mail : icwai@vsnl.com E-mail CEP : icwaiprgm@vsnl.net.in E-mail Journal Dept. : icwaijournal@hotmail.com

« Official Organ of The Institute of Cost and Works Accountants of India

Management Accountant
Executive Digest Book Scan For Attention of Members For Attention of Practising Members Region & Chapter News

Volume 40 No. 5 May 2005
Editorial & Communique Editorial : The ‘miracle’ of free trade 341 ............................................ President's Communique 342 Cover Features Value Added Taxation in India by Sitaram Agarwal 343 ............................................ Value added tax - an overview by Debasish Dutta 349

375 403 417,418 415 409

Professional Updates Tax Titbits by S. Rajaratnam 393 ............................................ Corporate Governance in United Kingdom (UK) by S. C. Das 366 ............................................ Glimpses of changes made in foreign trade policy 2004-2009 by A. B. Nawal 383 ............................................ Activity based costing & supply chain cost management by A. N. Raman 359 Finance & Accounting Intangible Accounting Practices - A case Study of Dr. Reddy’s Laboratorie’s Ltd. by Dr. P. K. Chakraborty 362 ............................................ Accounting for Asset ImpairmentRelevant Issues by Dr. Prakash Pinto 395 Balanced Scorecard The balanced scorecard A tool for corporate performance measurement by D. Mukhopadhyay

IDEALS THE INSTITUTE STANDS FOR u to develop the Cost and Management Accountancy profession u to develop the body of members and properly equip them for functions u to ensure sound professional ethics u to keep abreast of new developments. The views expressed by contributors or reviewers in this Journal do not necessarily reflect the opinion of The I n s t i t u t e o f C o s t a n d Wo r k s Accountants of India nor can the Institute by any way held responsible for them. The contents of this journal are the copyright of The Institute of Cost and Works Accountants of India, whose permission is necessary for reproduction in whole or in part.

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Finance & Capital Markets Green shoe option in IPO by R. Nagarajan 398

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The Management Accountant Technical Data
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IN THIS ISSUE
Value Added Taxation in India
Sitaram Agarwal An exposure on value added tax (VAT) in India with a note on economic and fiscal reform through VAT

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Value added tax - an overview

Debasish Dutta This paper gives an overview of VAT, how it is calculated, the tax policy issues involved, how it fared in countries under the European Union.It also briefly covers both the existing Cenvat and the proposed State level VAT in India Intangible Accounting Practices - A case Study of Dr. Reddy’s Laboratories Ltd. Dr. P. K. Chakraborty Different aspects of intangible value and their impact on corporate value creation have been highlighted by a case study of Dr Reddy's laboratories

The balanced scorecard - A tool for corporate performance measurement

D. Mukhopadhyay Balanced Scorecard forces the management to take into account operational measures for bringing about operational improvements.

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Accounting for Asset Impairment- Relevant Issues

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Dr. Prakash Pinto It is a matter of prudence under GAAPs that assets should not be overvalued in the balance sheet. But when the long lived assets are depreciated on the basis of historical cost under historical cost accounting, the treatment may result in impairment of assets.

Green shoe option in IPO

R. Nagarajan GSO is an option that allows underwriter of an Initial Public Offering to sell additional shares to the public.

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Editorial
The ‘miracle’ of free trade
From early 90’s the mighty wave of ‘free trade’ is sweeping across the globe. Till date fierce debate is continuing on its merits and demerits in the context of underdeveloped and developing economies like India. Is it going to make a poor country poorer with the exception of a small section of privileged? Is free global competition, on a historically determined non-level playing field, going to shut out indigenous industries, make local workers jobless and compel even qualified professionals run for shelter as GATS (General Agreement on Trade in Services) takes over the scene? Although richer nations bang in unison extolling the virtues of free trade as the only way world can survive, cries and whispers are now heard from the lands of the same world leaders of global free trade! NAFTA, the WTO, and other global guardians promised an economic paradise if only all quotas and tariffs were eliminated, letting the magic of the global free market create a bonanza of new export jobs. But their schemes turn out to be scams even for rich countries like USA – says Jim Hightower, the best-selling author of “Let’s Stop Beating Around the Bush”. One of their brainwaves, according to Hightower, was to eliminate all of the world’s quotas on clothing, which took effect in January. This has been disastrous for American folks in the real world, which the theorists apparently never visited. In only three months, their policy has resulted in the closing of 17 American textile and clothing factories and the loss of 17,000 American jobs. Just throwing open the doors of American domestic market made retailers as Wal-Mart, Nike, and Gap going to get all of their stuff produced in low-wage countries like China – later Bangladesh (and why not India?). Since January, imports of Chinese-made knit shirts, trousers, and underwear (products that were still mostly being made in America) were up by as much as 2,000 percent! The honcho of Warnaco, one of the biggest clothing makers in the world, bluntly says: “We will always go to the least expensive place. There will be a shift to China over time.” Experts expect that 70 percent of U.S. clothing will soon come from China and that the 665,000 remaining textile and clothing jobs in America will vanish in the next few years. The moral is simple: business will go where there is cost competitiveness, which is just not low wages but a blend of clever resource and logistic management with strategic cost competitiveness - the area of core competency of cost and management accountants. And that is the key factor of survival and success. Unless this is fully realized in our national policy perspectives and cost and management accountants given their right place in national economic management, we cannot survive, in the global economy today.

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President's Communique
Dear friends It was a refreshing month of April, 2005. As we celebrated Diamond Jubilee year of the Institute, in its third leg, at Chennai, we had attempted to rejuvenate the sprit of competency building through knowledge enhancement stream. The Institute has come out with following Monographs in draft stage and accordingly the same were declared open for critical examination, at the Chennai conference held on April 16, 2005: Ø Ø Ø Ø Ø Ø Monograph on Predatory Pricing Monograph on Anti Dumping Monograph on Arms Length Pricing Monograph on Research and Development Monograph on Joint and By-Product Monograph on Input Tax Credit

The above Monographs deal with subjects of contemporary and contextual interest to the Profession of Cost and Management Accountancy in India. I believe that the hub of the process of India’s Economic Development lies in its ability to manage the costs of its economic activities. In a competitive market place, there is an urgent need for professional approach to understand the pricing techniques of global competitors and proactive steps to overcome predatory pricing or anti-dumping. In a multi product manufacturing capabilities, the cost structuring of individual products poses a challenge and it has definite impact on the cost of joints products and by products and in turn on the life cycle of the product. Moreover, the function of Research and Development in any organisation is no more independent but forms an integral part of overall organizational strategy. Hence, the need is correctly felt to strategically view the role of Research and Development. The input cost being very close to the profession of cost accountancy, it is necessary to analyse the tax provisions relating tax on input costs. I sincerely thank my colleague in the Central Council Sri.M.Gopalakrishnan, for his untiring and timely efforts in bringing out these publications. I also take this opportunity to thank all the authors who contributed their valuable time and effort for these publications With the introduction of VAT into our economic system, it has become necessary to position the Profession’s view on the subject of input taxation and claiming credit for the same under VAT. The publications should contribute to the professional knowledge is the prime objective behind the publications. Hence i earnestly appeal to all the Members to go through the above publications from our website and suggest further improvements and suggestions so as to bring out qualitative Guidance Note / Cost Accounting Standard for use amongst our membership. We are also proud to bring out the guidelines for the Members to become Associates and Fellows of the Institute and also on CEP credits. Updating the rules and procedures on Members activities, is yet another purpose behind the recent publications. I am sure the members would spare some time to go through and suggest improvements and modifications so as to incorporate the same in the final publications. We go to Kolkata to celebrate the last leg of our Diamond Jubilee Celebrations. We intend to bring out few more draft monographs on topics of relevance to our Profession. The VAT has been formally introduced in the country from April 1, 2005. With the good efforts of our colleagues at the NIRC, the Accounting definition under the Delhi VAT Act, 2005, includes the members of our Institute also. They are now eligible to conduct VAT audit for business units specified under the Act. It’s a great development for the Profession and I invite all the members to examine the relevant Act in their respective States, and let me know if there are any such developments for the Profession. With best wishes and thank you

Dr. H. R. Subramanya (President) 342
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Cover Feature

Value Added Taxation in India
An exposure on value added tax (VAT) in India with a note on economic and fiscal reform through VAT

breviated name of Value Added Taxation (or Tax). It is a kind of indirect tax. Value added taxation is a percentage of tax on value (Ad valorem) added to the product or service at each selling point. The implication is that each sale transaction attracts tax unless exempted. The total burden of tax is ultimately on consumer. The meaning of VAT must not be mixed up with a tax on manufacture of goods such as Excise Duty, etc. or Service Tax on providing services such as tax on an actuary, management consultant, etc. Objectives of VAT: VAT is preferred over other methods of indirect taxation to meet the following objectives: Eliminate multiplicity of taxes such as entry tax, turnover tax, sales tax, surcharge, additional surcharge, Excise Duty and other related duties on manufacture, etc. Prevent double taxation with cascading effect. Eliminate inter-state tax (e.g., Central Sales Tax). *
B.Com., LL.B., LL.M. (England), FICWA. FCS.

M

This paper examines the types of costs that are normally incurred for environmental considerations and the accountig and disclosure practices presently followed by the corporates who are the main pollutants.The Sitaram Agarwal * paper also builds a case for environmental taxation and proposes an alternative model to the existing command and control model in our country while examining existing policy support and institutional & infrastructural of VAT: VAT fighting environment pollution.tax burden in Rationalize over all eaning facilities for is abprocess of goods and services until sold for consumption. Replace existing system of inspection by built in assessment by the dealers and internal auditing. Make the tax structure, simple, efficient and transparent. Improve tax compliance. Coordinate revenue growth with development by Ad valorem rate of tax. Develop fair and healthy competition in the interest of consumers. Create level playing field enable industry and trade to meet the challenge of globalized economy. VAT in World Countries: There are two types of political systems: central and federal. In a central political system VAT is introduced by the central government, which is often referred to as the federal government or at federal level and operated in that fashion from one level or one stage of government. In federal political system (such as Brazil, Canada, etc.) VAT is at two levels - one at the centre and another at the state level. Although the structure of VAT in central and

federal political systems does not appear too much different, but the overall effects and ramifications are importantly different, depending upon the power of taxation under the constitution of the respective countries. Brazil and Canada have introduced VAT. In 1960, Brazil began VAT, in mid 1970 France adopted and thereafter gradually by other European countries (including Bulgaria, Luxembourg, Norway, Sweden, Turkey, United Kingdom etc.). In Asia Bangladesh (1991), China (1994), Nepal (1997), Pakistan (1990) Sri Lanka (1995), etc. have introduced VAT.[1] Central Level VAT in India: Today at the central level the CENVAT (Excise Duty on manufacture of goods) + Service Tax appears and looks very much like VAT as known in rest of the world but reluctantly I regret to state that it is far away from the actual international meaning and its practice. The true measurement scale of perfect adoption and implementation of VAT is achievements of its objectives (supra). State Level VAT in India: On 17th January 2005, Dr. Ashim Dasgupta, Convenor, Empowered Committee and Finance Minister of Government of West Bengal has issued White Paper on State-level Value Added Tax. This White Paper contains the main design of VAT, as evolved on the basis of a consensus among the States through repeated discussions in the Empowered Committee. This design is for introduction of State Level Value Added Tax totally independent of Central Level VAT, which is operated, levied and collected at central level. Comments on White Paper on State Level VAT: My comments, objections and suggestions on State Level VAT in following paragraphs are on the basis of opening remarks by Dr. Parthasarthi Shome and clarification of probable queries by Dr. 343
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Cover Feature Ashim Dasgupta at CII Seminar on 13th December 2004[2] and my own perception, experience and general exposure to VAT as it is internationally understood and practiced and also with reference to Rajasthan Value Added Sales Tax Act, 2003 (yet to come in force) wherever relevant, presuming that VAT laws of other States would be identical and similar. I. The design of Indian State-level VAT is on Brazil basis[3]: (i) GOI (Government of India) claims that Brazil is much more comparable to India. Brazil had introduced the state (not central) level VAT in mid -1960. However GOI also confirms that over the time Brazil has found that in order to accommodate different states, different industries, different concerns the tax structure has become complex. If one looks at the history of progress of the VAT in Brazil, it is, a step by step, yet clearing up the distortions. Similar problem and controversy as of Brazil are also likely to arise in India on the implementation of State level VAT. (ii) Canada has introduced a VAT at the provincial level, as well as central level. Canadian experts tell how they do this VAT in a country of 13 million people with endless financial resources and rather complex VAT and computerization. (iii) USA is the super world power, developed and a large democratic country, but it has not introduced VAT. There is no explanation. (iv) The VAT is a State subject in terms of Entry No. 54 of State List of Constitution of India, therefore the States will have freedom for appropriate variations, but it is anticipated, with mutual consent of all the other States. In case of some of the States back out from consensual agreements, it would be a very heterogeneous VAT, administratively not at all simple. (v) The VAT has been introduced in about 130 countries all across the world. India intends to introduce VAT, believing that such a large number of countries must have some benefit from VAT. If we look at the 130 countries, most of them do not have a federal system of government like India. (vi) In the Twenty-first Century India intends adopts model of reforms of a country, which is lesser developed than India, leaving aside better developed countries. It raises doubt whether India is working under any influence, which may not be in the interest of India. II. Concept of VAT and Set-off/Input Tax Credit[4]: The concept is good but there is no provision for input credit for tax (CST), which is levied and collected by State on inter-state sales. The design of State Level VAT is incomplete. The existence of CST paid on inter-state sales will give unfair advantage of 3% to 6% in market competition and future growth and industrial development to rich (export surplus) States, such as, Maharashtra, Karnatak, Kerala, Tamil Nadu, Orissa, Andhra Pradesh, West Bengal, Haryana, etc. over poor industrially developing or backward States, mainly land locked, as explained by example hereunder: Example: - Suppose a dealer of rich state (M) sells (exports or by stock transfer) to a dealer of poor state (R) and R is required to pay lesser tax (CST) or tax on stock transfer/consignment sale @ 4 % than the domestic rate (say VAT @ 10%). In this process M would forego or lose some revenue (say @ 6%), but R would be losing market outlet for its domestic production and tax revenue (@ 10%) also to the extent dealers imports from M. Thus buyers of R are accommodated by M, but industrialists of R complain, because it is cheaper to buy from M, R do not have sufficient incentives to establish industrialization in R and even the existing industry of R will lose market to M. The affect will be more sever in case poor state (R) import inputs from rich state (M) and re-export after value addition to another poor State, say X. In this process R State industry would ruin and state revenue will fall. Rich state shall be getting richer and richer and poor state getting poorer and poorer gradually. III. Coverage Credit[5]: of Set-Off/Input

There is no provision for input credit for tax paid on inter-state purchases/stock transfer/consignment sale. Therefore incidence and impact of inter state stock transfer/consignment sale of goods are similar to that of CST. For a buyer inter-State goods would be cheaper than Intra State goods as explained by example (supra). This will create distortion in the exiting markets and would give unfair market advantage to rich States at the exthe management accountant, May, 2005

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Cover Feature panse of poor States. IV. Carrying Over Tax Credit[6]: (a) On input goods and services: The carrying over excess tax credit exceeding the tax payable on sale in a month to the end of next financial year would mean scarce and costly finance of a dealer would block for about two years without any return on capital and it would call for exercise for claiming refund and also hassle of receiving payment from ill reputed bureaucracy. (b) Input tax credit on capital goods: Adjustment of tax credit on capital goods in equally monthly installments over a maximum period of three years would mean scarce and costly finance of a dealer would block for about three years without any return on capital and it would call for exercise for claiming refund and also hassle of receiving payment from ill reputed bureaucracy. Moreover, tax credit on capital goods would be available to a dealer only if these are integrally connected to manufacturing of goods for sale, and there will be negative list for capital goods not eligible for input tax credit and 'capital goods' do not included any equipments or appliances used in an office of a dealer or used in execution of works contract[7]. The meaning of 'capital goods' is very wide and it covers raw materials and consumables for many kinds of industries and there are consumables, which are consumed in the process of manufacturer during the financial year and as such it would be difficult to maintain account to claim input credit over a period of years as ‘capithe management accountant, May, 2005 tal goods’ as per requirement of VAT provisions. The meaning of 'capital goods' is not precisely defined and subject to interpretation by tax authorities, which is usually pro revenue. Thus apart from dilatory and cumbersome procedure for claiming and receiving input credit the meaning of term 'capital goods' is itself controversial for eligibility of credit to a dealer. The 'Value Added Sales Tax' is to replace the existing 'Sales Tax', which is not a levy on ‘manufacture’. State is eligible only to levy tax on the sale or purchase of goods other than newspapers subject to the provisions of entry 92A of List I (Entry No. 54 of List II of Constitution of India) and not on manufacture. Value Added Tax is a percentage of tax on value added to the product or service at each selling point. Therefore VAT is a tax on a sale transaction of goods (including of 'capital goods') irrespective whether it is own manufactured or purchased for resale unless it is exempted. The term “capital goods” is misnomer according to legal terminology. There is no definition in of term 'capital goods' in Rajasthan State Sales Tax Act, 1994, Central Sales Tax Act, 1995, Sale of Goods Act, 1930 and Constitution of India. The word ‘goods’ has been defined in Article 366(12) of the Constitution of India as “goods” includes all materials, commodities and articles. In the leading case Union of India vs. DCM [1997 (91) ELT 23 (SC)] the Supreme Court has held that in order to be goods the articles must be capable of coming to the market to be bought and sold. Therefore, a product (not goods) which is not movable or marketable is exempted from levy of excise duty. In view of the established characteristics viz., movable and marketable can not exclude equipment or appliances used in the office. There has been unimaginable development in communication, information technology and method of marketing (such as TV shopping, catalogue sale, etc.) therefore modern equipment and appliances (such as fax, photo copier, computer, mobile telephones, UPS, AC, etc.) have become necessity for increased productivity of improved quality of goods. Input credit on equipments and appliances used in an office will increase revenue with increase turnover more than the amount of input credit allowed. In developed countries office equipments are not excluded but treated at par with other goods and these are equally eligible for input credit without any discrimination. V. Treatment of Exports, etc.[8]: The procedure for refund for tax paid within the State on all exports made out of the country within three months from the date of claim mean scarce and costly finance of a dealer would block for about three months without any return on capital and it would called for exercise for claiming refund and also hassle of receiving payment from ill reputed bureaucracy. VI. Input Procured from Other States[9]: Similar to CST paid on interstate sales rich States will have unfair advantage of 3% to 6% in market competition and future growth and industrial development over poor States as explained by the example earlier. VII.Treatment of Opening Stock[10]: This provision assumes that all tax paid goods purchased before April 2004 have been sold out by 31 March 2005. It appears that such assumption and provision for input credit on Opening Stock has been made without due con345
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Cover Feature sideration of (i) working process flow of individual industry and trade, (ii) cascading effect of tax, (iii) cash flow and other financial implications and (iv) hardship of dealer for claiming input credit on Opening Stock, VIII.Compulsory Issue of Tax Invoice, Cash Memo or Bill[11]: Receipt and issue of Tax Invoice, Cash Memo or Bill are in the interest of buyer to obtain proper document for claiming input credit. IX. (a) Registration[12]: The compulsory limit for registration with annual gross turnover exceeding Rs. 5 lakhs is very low. In the age of liberalization of economy one dealer can not expect margin of profit more than 10%, therefore, annual profit would be about Rs. 50,000 or Rs. 4,200 per month, which can not meet living expenses of a retail dealer's family of five person, he does not have ability to comprehend complicated tax laws and comply them. For existing dealer, determination of annual turnover beyond exemption limit by the Department might be debatable issue and he may be subject to uncalled harassment and panel action. The provision of voluntary registration (based on provision in Rajasthan) is cumbersome in comparison with developed countries of world. In ordinary course a dealer would avoid voluntary registration as far as possible. Different exemption limit among States (particularly neighbours) would result unfair trade practices. The compulsory registration limit and exemption limit should be identical in all States. Similarly composite scheme should be identical in all States. X. Taxpayer's Identification Number (TIN)[13]: Believe that TIN is the key to approach all the other references of a dealer on the subject of Permanent Account Number (allotted for corporation/income tax), ESCI, EPF, establishment registration number and other particulars as employer and other information related to compliance of Government Laws. XI. Return under VAT[14]: Simplified Self-Assessment Return Form is important and necessary for its timely compliance. .In UK, VAT Authorities send self-addressed return form alongwith self-addressed envelope to the registered dealer, a fortnight before the due date of submission of return. This form bears all the information (such as name, address, VAT registration No., due date for submission of return, etc.) of dealer and dealer is required to fill up only data (value) about purchases within UK, purchases from EC countries, imports from other than EC countries, Sales within UK, Export to EC countries, Export outside EC countries, input tax credit, output tax payable and balance tax payable/excess credit refundable. This is one page simple form, which can be filled up easily, even by self-employed dealer with elementary knowledge of business from the books of accounts he maintains. Indian VAT authorities should also follow the similar practice of self-addressed return form for timely compliance. In India variety of financial year ending (Diwali, Calendar, Samvat, March, etc.) is followed depending on the nature of business. The average volume of trade in each quarter consisting of three months also varies from dealer to dealer. In case of monthly return dealer should be given option to choose ending on 15 or end of the month. Similarly, in case of quarterly return, a dealer should be given option to choose any combination of three months quarter ending in January or February or March for a year of 12 months as may be convenient to him. It helps the dealer as well as Department to spread workload over all the months through out the year. The method of payment to Government Account through challan is full of hassle and such procedure has become obsolete in present time of developed information technology and strict law against bouncing of cheques. Therefore payment of tax should be acceptable by cheque. However, if Tax authority is keen for payment through prescribed challan and receipted challan must be enclosed with the return, then form of challan in duplicate duly filled in all particulars including name and registration number of dealer except the amount, date of payment, and bank stamp acknowledging receipt of payment should form part of the Return Form (sent by VAT Office) and payment should be acceptable at any branch of a scheduled bank. Scrutiny of Return and Payment Against Detection of Technical Mistake: Many the times officers between Assessment Scrutiny Section and AG Audit have different interpretation and views on an issue or subject of law. In any otherwise interpretation of an issue dealer is asked to pay with fine and penalty under a show cause notice. There is no protection to an honest dealer against such bureaucratic system of harassment. For ambiguity or anomaly of law a dealer should not and must not be penalized. the management accountant, May, 2005

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Cover Feature XII.Procedure of Self-Assessment of VAT Liability[15]: State-level VAT does not meet the objectives such as (a) integration of economy at national level as to enable integration with world economy (b) prevent multiplicity of taxes, (c) cascading effect of tax, etc. XIII.Audit[16]: The proposed 'Audit' system would be in sequence of internal departmental audit of each return, external audit of a certain percentage of dealers, anti-evasion (special audit) and then AG audit. The proposed provision has fully reflected and reintroduced the bureaucratic approach and weakness of the scrutiny of selfassessment returns. This proposed audit system is nothing new except old wine in new bottle. It is not necessary as why there is a external audit of a percentage of dealers and special audit, when already there is a provision for statutory independent audit of companies and tax audit for the organizations having turnover above Rs. 40 lakh by Charted Accountants. It means that Government under-value the authority and proficiency of independent agency constituted by and under enactment passed by Union Parliament and its own employees. This will lead to continue abuse of Inspector Raj, retard trade and industry and consequently affect government revenue adversely. XIV. Declaration Form[17]: In case of VAT transaction tax liability is on purchaser. The problem arises when a dealer is not eligible for input credit on his purchases therefore his concessional sale does not convert into zero rated sale. the management accountant, May, 2005 XV. Incentives[18]: The handling of full rate taxable and incentive related sales clubbed together are very difficult without affecting VAT channel. Incentives by individual States would lead unfair competition. XVI.Other Taxes[19]: Exclusion of Octroi is against the very fundamental concept of VAT. XVII.Penal Provisions[20]: The existing provisions in the State Sales Tax Acts are very severe. It appears that India is still under imperial rule governed by colonizers and Government has the same mindset, attitude and approach for enforcement of fiscal law. Compliance of law is more important than making law. Law should not be such which are avoided or evaded and even not enforced equally to all offenders. XVIII.Coverage of Goods under VAT[21]: Exclusion of certain goods, which are input in goods and services sold, from purview of VAT purview is not desirable at the time of its introduction. XIX. VAT Rates and Classification of Commodities[22]: The tax liability depends on classification of commodity and usually it becomes controversial issue on the point of classification of particular goods between a dealer and tax authority. Harmonized System of Nomenclature may kindly be adopted for the purpose of schedule of tariff and exemptions for all goods under the proposed tariff. XX. Compensation of loss to State Governments by Union Government[23]: It appears that as yet neither any formula has been worked out for determination of loss nor method of payment of such loss, if any, has been agreed upon between the Central and State Governments. Compensation of loss is an important issue between the Union Government and State Governments. For maintaining perfect understanding and coordination among all the governments, rules of determination of revenue loss and method of payment must be decided in advance of introduction of VAT. XXI. Continuation of inter-state Central Sales Tax in addition to VAT[24]: Continuation of CST would give unfair advantage to some States as explained by example (supra) hence present form of VAT is discriminatory, unfair, inequitable and unjustified. Once Central Government has agreed to compensate the State Governments then abolishing CST in phases is not desirable. Other VAT related issues in process by Empowered Committee[25]: The other VAT related issues in process by Empowered Committee such as Phasing out CST, Taxation Information Exchange System, VAT on Imports, Collection and Appropriation of Service Tax by the Centre and States, Integration of VAT on imports, service tax and additional Excise Duty on certain items are very important for successful introduction and implementation. The introduction of incomplete VAT system with incomplete preparation would likely face the same situation as happened in Brazil and might frustrate the reform forever in India. 347
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Cover Feature Suggestions against objections and comments: (1) Central Sales Tax (CST) must be abolished completely before introduction of State Level VAT by mutual agreement between Central and State Governments for compensation of loss in lieu of CST either by adjustment against liability, if any or cash payment on monthly basis. (2) There should be no barrier and restriction on movement of goods. (3) Thereafter India must target for 'integrated (Central +States) national level VAT consolidating all indirect taxes including local bodies taxes, etc. into one rate. The VAT receipts should be automatically and instantly credited to the respective accounts of Central Government and State Governments on day to day basis of collection of tax on sales transactions within respective States proportionately as per formula predetermined by a national commission. This might need amendment to Constitution of India or agreement between Central Government and State Governments and among State Governments. (4) The law relating to levy, collection and administration of VAT in all States throughout India must be identical without any exception. It would be better if there is one 'Value Added Taxation Authority of India'. (5) The VAT law in India must be similar to a country (such as United Kingdom), where VAT is successfully working without any hick ups. In this respect attention is drawn to following few practices of United Kingdom: (a) Input credit balance in VAT Return is refunded by payment on cash basis; (b) All goods including so called capital goods and office equipments, etc. without negative list are eligible for input credit; (c) There is no need for making any claim for refund for input credit for exports or credit balance in input credit account at the end of month; (d) Registration for VAT should be simple and without security. (e) Facilitating compliance for submitting Returns etc.; (e)Payment of tax by cheque; etc. (6) The VAT system must make fullest use of information technology and VAT should be introduced only with full advance preparation Conclusion: According to Jagdish Bhagwati "Economic globalization constitutes integration of national economies (of different countries) into international economy through trade, direct foreign investment (by corporations and multinationals), short-term capital flows, international flows of workers and humanity generally, and flows of technology"[26] Dr. Vijay L. Kelkar[27], has stated," The key principle of globalized economy is that one can not export corruption, waste, indiscipline, inefficiency and taxes, etc., seller country of goods and services will have to bear them at its own. Globalization means that factors of production -- labour and capital are mobile". Economic and fiscal reforms in indirect taxation through Value Added Taxation has twin objects: (a) provide level playing field to Indian trade and industry to meet cutthroat and fierce competition from imports and for exports under globalization of economy within frame work of WTO agreements and (b) increase revenue realization at lower rate of tax (equal to lowest of other countries) from consumers by efficient system. In India the total indirect taxation comprising of (i) Central Government, (ii) State Governments, (iii) Local Bodies, (iv) Cross-subsidization and (v) Sleaze payments is between 40% to 50% which is extremely very high as against the countries with whom India has to compete is only about 20%. Simultaneous State-level VAT with Central- level VAT would not meet objectives of VAT. For instances, State-level VAT will not eliminate cascading effect, the sales tax will be charged on the gross amount after charge of Central levy of Cenvat and Service Tax; two independent tax administration systems all over India will remain in existence, hence there will be no economic advantage, which could be by one tax administration. A unified VAT will reduce cost of production of goods and services to a great extent for export as well as indigenous market, etc. The objectives of VAT can be met only by economic integration at national level i.e. only one Centre Level VAT and sharing revenue between Central and State Governments. In order to cut time and expenses it would be desirable to train few of our officials on job in countries (not Brazil or Canada), but where VAT is smooth in practice, like United Kingdom. In economic reforms politics must be eschewed. The barometer of welfare of a country is its gross domestic production (GDP). The GDP is total production of goods and services and depends on the state of industry and trade. Industry and trade are carried on commercial principles and not as philanthropic organizations. Nowadays 'offence for defence' has become a fashion. Trade and industry is defamed for evasion of tax, but earnest and honest dialectic will unfold the Continued to page 358 the management accountant, May, 2005

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Cover Feature

Value added tax :an overview
This paper gives an overview of VAT, how it is calculated, the tax policy issues involved, how it fared in countries under the European Union and why it is difficult to implement VAT in the United States. It also briefly covers both the existing Cenvat and the proposed State level VAT in India and highlights some of the difficulties in shifting to a single comprehensive VAT rate.

A has sales of Rs.350, purchases of Rs.100, value added of Rs.250 and a VAT of Rs.25 (10% of Rs.250) Under the credit or invoice method VAT is calculated separately on sales and purchases and the ultimate VAT liability is VAT payable on sales minus VAT paid on purchases. In the above table Firm A has a VAT payable on sales of Rs.35 and a VAT paid on purchases of Rs.10 which amounts to a net VAT liability of Rs.25. Under the addition method VAT is calculated on the total components of value added viz rent, wages, interest and profit. In the above table Firm A pays a VAT on the total components of value added of Rs.250 (Rent Rs.50, Wages Rs.150, Interest Rs.25 and Profit Rs.25) which works out to Rs.25 (10% on Rs.250) Though the VAT liability is the same under the subtraction, credit and addition methods, there are important and significant differences and policy implications in each of the above methods. For example if an exemption is allowed (as is most often the case), differences arise in the amount of VAT collected which can have different policy implications. Under the subtraction method, an exemption results in a lesser amount of VAT being collected. From the data in Table 2 if Firm A is exempted from VAT the VAT collected reduces by Rs.25 (From Rs.100 to Rs.75) (see Table 3) At this point it might be useful to make a distinction between exemption and zero rate VAT. The above table shows a case of zero rated VAT where the firm (Firm A) do not have to pay the VAT on sales but also gets a credit for VAT paid on purchases. This type of VAT is generally allowed for exports in all countries. An exemption from VAT, on the other hand, is a situation where a firm do not have to pay the VAT 349
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Debasish Dutta *

C

entral Value Added Tax (Cenvat) on Central Excise Duties was introduced in India in 1986. Previously called MODVAT, its name was changed to CENVAT with effect from April 1, 2000. Subsequently Service Tax was brought under the ambit of CENVAT. State level Value Added Tax will be introduced in most states with effect from April 1, 2005. This paper gives an overview of VAT, how it is calculated, the tax policy issues involved, how it fared in countries under the European Union and why it is difficult to implement VAT in the United States. It also briefly covers both the existing Cenvat and the proposed State level VAT in India and highlights some of the difficulties in shifting to a single comprehensive VAT rate. 1. Concept of VAT and the intricacies of its calcutation A Value Added Tax (VAT) is a multi stage sales tax. It is different from a

retail sales tax in that while the retail sales tax is levied lumpsum in one stage of the production distribution process (retailer), VAT is levied in parts at every stage of the production distribution process. It culminates with the customer who generally pays the full amount of the VAT. An example can clarify the VAT process(Please refer Table 1 on next page). In contrast to VAT, sales tax is collected in one lumpsum (Rs.500) and falls on one stage of production (retailer). VAT is, therefore, a tax on the value added by a firm on its products. Value added can be viewed as either the difference between sales and purchases or as the sum of the components which go to make up the value added such as rent, wages, interest and profit. This distinction is important because though the invoice or credit method of determining VAT liability is widely used in Europe, tax liability can also be calculated by either the addition or subtraction methods. These alternatives are illustrated in Table 2 on next page. Under the subtraction method VAT liability is calculated on sales minus purchases. In the table next page Firm

*

M. Com., AICWA, CAIIB, PGCGM (IIM), MBA (USA) Joint General Manager, Simplex Concrete Piles (India) Limited

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Cover Feature TABLE 1 The VAT Process Raw Materials Supplier Sells to manufacturer for Collects 10% VAT and pays to Government Manufacturer Sells to wholesaler for Collects 10% VAT Gets credit for VAT paid to supplier Pays to Government Wholesaler Sells to retailer for Collects 10% VAT Gets credit for VAT paid to manufacturer Pays to Government Retailer Sells to consumer for Collects 10% VAT Gets credit for VAT paid to retailer Pays to Government Total VAT collected TABLE 2 Comparison of three methods of calculating liability for a 10% VAT Firm A Firm B Firm C Total Manufacturer Wholesaler Retailer Economy Rupees Rupees Rupees Rupees Subtraction Method Sales Purchases Value Added (Sales minus purchases) VAT Credit Method Sales Tax on sales Purchases Tax on purchases VAT (Tax on sales less tax on purchases) Addition Method (Factor payments plus net profit) Rent Wages Interest Profit Total VAT 350
350

Rupees 1000

Rupees

Rupees

on sales but they also do not get to deduct the VAT on purchases. Since the total amount of VAT collected under the credit system remains the same irrespective of whether any exemptions are granted or not, the policy implication will be that the tax policy authorities will be under tremendous pressure from different business groups to grant exemptions for specific products. Before leaving this section it might be useful to understand two concepts which are frequently referred to in VAT viz cascading effect and destination principle. It is often said that VAT reduces cascading effect of taxes. The cascading effect can best be understood from table 5. TABLE 5 Cascading Effect of Taxes Rupees Raw Materials Supplier Cost Excise duty @ 10% Total cost Profit {say 10%) Sale Price Manufacturer Cost Excise duty @ 10% Total cost Profit {say 12%) Sale Price Wholesaler Cost Excise duty @ 10% Total cost Profit {say 13%) Sale Price Retailer Cost Excise duty @ 10% Total cost Profit {say 14%) Sale Price 1000 100 1100 110 1210 1210 121 1331 160 1491 1491 149 1640 213 1853 1853 185 2038 285 2324

100 2000 200 100 100 4000 400 200 200 5000 500 400 100 500

350 100 250 25 350 35 100 10 25

850 350 500 50 850 85 350 35 50

1100 850 250 25 1100 110 850 85 25

2300 1300 1000 100 2300 230 1300 130 100

50 150 25 25 250 25

100 300 75 25 500 50

20 200 20 10 250 25

170 650 120 60 1000 100

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Cover Feature What has happened in the above system is because of excise duty being charged at every stage {without any vat credit), it has inflated the cost to the final consumer. Out of the final price of Rs.2324 paid by the customer, excise duties amount to Rs.555 or 23.88% of the final price paid by the consumer. This is called the cascading effect of a tax and it can be corrected through VAT (CENVAT). Dr. Parthasarathy Shome of the Ministry of Finance has said on numerous occasions that state level VAT will be based on the destination principle. The destination principle is followed in all European Union countries and in other countries as well. Since VAT is payable once the sale takes place including inter state sales, and if states have different rates of VAT, the question arises as to which state's VAT rate should be used. If the VAT rate is that of the seller state, it is known as the origin principle. If the VAT rate is that of the buyer state, it is known as the destination principle. As stated earlier in the European Union countries as also other countries, the destination principle is followed meaning that the VAT rate of the importing country is used for inter country sales. 2. TAX POLICY ISSUES Purchases Tax on purchases VAT 100 10 -10 350 0 85 850 85 25 1300 130 100 Implementing a VAT can bring up a number of tax policy issues, some of which are discussed below. 2.1 VAT and Regressivity A VAT imposed at one uniform rate would be regressive because lower and middle income people spend a larger percentage of their income on consumption than upper income people. Professor Laurence J. Kotlikoff1 argues that a VAT is regressive only if it is calculated with reference to current income and can become prothe management accountant, May, 2005 351
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TABLE 3 Calculating liability for a 10% VAT under subtraction method where firm A is exempted. Firm A Firm B Manufacturer Wholesaler Rupees Subtraction Method Sales Purchases Value Added (Sales minus purchases) VAT 0 50 25 75 350 100 250 850 350 500 1100 850 250 2300 1300 1000 Rupees Firm C Total Retailer Economy Rupees Rupees

TABLE 4 Calculating liability for a 10% VAT under credit method where firm A is exempted Firm A Firm B Firm C Total

Manufacturer Wholesaler Retailer Economy Rupees Credit Method Sales Tax on sales 350 0 850 85 1100 110 2300 230 Rupees Rupees Rupees

(Tax on sales less tax on purchases) Under the credit method an exemption do not result in a lesser amount of VAT being collected. If Firm A is exempted from VAT the total VAT collected does not reduce because Firm B does not get a VAT credit for purchases (0 instead of 35).

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Cover Feature portional or even progressive if calculated with reference to the present value of current and future resources. To quote his example "Suppose person A earns, in present value 30 when young and 70 when old, and person B earns 70 when young and 30 when old…..since both have the same lifetime resources, 100, the ratio of lifetime resources would be the same for A and B". A VAT would then appear proportional if measured against lifetime resources and regressive if measured against income resources when young or income resources when old. While the argument is sound, it is doubtful if the tax authorities evaluate the long term impact when imposing any tax. One solution to reduce the regressivity of VAT is to exempt VAT from necessities. Michel McKee, however, argues that exemption does not reduce the regressivity of VAT because exempting the necessities benefit the well to do as well as the poor. The only solutions to reduce the regressivity of VAT are the acceptance of a graduated multiple VAT and the institution of changes to reduce the tax burdens in other tax legislations. A graduated multiple VAT can lead to massive administrative problems some of which are discussed under "VAT and administrative problems". 2.2 VAT and Federalism VAT preempts on a tax base which has traditionally been enjoyed by the state governments. The traditional arguments of the proponents of VAT is that a VAT will increase the revenue earning of the states because it has a wider tax base. In a very interesting article, Charles E. McLure Jr., Senior Fellow at the Hoover Institution of Stanford University examined eight coordina352
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tion schemes to try and make a VAT workable. He concludes with the view that the only viable option is option 7 (Tax Sharing) which, however, would result in a considerable loss of state fiscal sovereignty. In his words "Federal entry into the retail sales tax area might produce an aggregate tax rate that could not be enforced satisfactorily…it might even force or almost force state agreement to a system in which the Federal government collects taxes on behalf of the states, as in option 7, with consequent loss of state fiscal sovereignty." 2.3 VAT and Economic Impact Imposing a value added tax without reducing any other tax will be inflationary. A staff study of IMF, however, found that in 21 of the 31 countries that were analyzed, VAT had no major impact on prices. In four countries VAT may have contributed to increase in prices by causing expansion of the economy. In five countries there was a one time increase in price level. Only in Norway was it found that VAT caused inflation. The study concluded that VAT was not inflationary. Cambridge Research Institute's study, however, indicate that one year after introduction of VAT, consumer prices rose 2.7% in Germany, 6.2% in France, 7.1% in Netherlands and 12.3% in Denmark. VAT was considered significantly responsible for these increases. 2.4 VAT and Export Implementation of a VAT without reduction in other taxes, do not, contrary to commonly held views, stimulate export trade. This is because the export sector has no VAT and exempting the export sector from a newly to be introduced VAT would not make any difference. On

the contrary, if imposition of a VAT results in inflation, the price of exports may rise, making it less competitive for the export sector to compete in the international economy. Imposing a VAT on imports do not affect imports because the domestic products are charged VAT too. A VAT can boost exports only if it is accompanied by a reduction of other taxes (say corporate income taxes). This reduction would make the firm more competitive in the international market. 2.5 VAT and Savings A VAT can boost savings. Since the tax is imposed on consumption, people would be motivated to consume less and save more. In this regard, VAT is superior to income tax in fostering economic growth. Ultimately, however, savings will depend on the after tax rate of return. 2.6 VAT and Administrative Problems A multiple VAT, apart from high administrative costs, can create dilemmas for Government. "In Britain the VAT on children's clothes was once lower than that on adults, so the customs department had a long list of what qualified for the favoured rate, measurements and all. When the miniskirt came into vogue, stores tried to pass it off as kidswear" "In France, where medical products are taxed at a very low rate, an extended parliamentary debate focused on whether Head and Shoulders shampoo is a cosmetic or a medicine (The decision : it is a cosmetic)". A multiple VAT should, therefore, clearly specify the items which are exempt, which are zero rated, and which item falls in which grade of the VAT. A multiple VAT can have trementhe management accountant, May, 2005

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Cover Feature dous administration costs. The IRS of the United States estimate that a provisional plan for administering a consumption type credit method VAT when fully phased in would cost $700 million a year and necessitate the hiring of about 20,000 additional employees. 2.7 VAT and increase of Government revenues Congressional Budget Office of the United States estimate that a 5% VAT on a "broadly defined consumption base" would increase revenues by $492 billion in a five year period and a 5% VAT on a "narrower base" would increase net $292 billion in a five year period. 2.8 VAT and political impact Repeated attempts to introduce VAT in USA has met with failure. In 1980, Al Ulman, Chairman of the Ways and Means Committee, imposed a 10% invoice VAT on business. This was expected to produce $160 to $260 billion annually at 1984 income levels. His proposal was defeated. Al Ulman lost his seat in the same year from sales tax free Oregon. In 1986 Bob Packwood, Chairman of Senate Finance Committee, proposed a $ 75 billion federal sales tax to compensate for the corporate tax breaks in his version of the Tax Reform Bill. His proposal came up for such severe criticism that he quickly dropped the proposal. Since then, he has condemned sales taxes as the "most regressive, most unfair kind of tax imaginable". Traditionally the Democrats favour a tax policy which stimulates the economy through high progressive taxation with tax relief to lower and middle income groups. Conversely, the Republicans favour the "trickle the management accountant, May, 2005 down" theory of tax policy, which espouses reducing tax liabilities of upper income groups to enable them to invest in the economy, the benefits of which will trickle down to the poor and middle income groups. From an ideological viewpoint VAT would not be acceptable to the Democrats because of its regressivity unless it is accompanied by reduction in other taxes. In the United States, however, tax policies are not decided on the strength of ideology but on the influence of powerful special interest groups who with their money, personal influence and pressure make the members of Congress accede to their wishes. Many of the legislators are not corrupt. They support the special interest groups because they are so much dependent on them for campaign funds. 3. VAT EXPERIENCE IN EUROPE Article 1 of the First Derivative of the EEC dated April 11, 1967 with regard to the harmonization of the laws of the member states relating to turnover taxes (67/227/EEC) reads : "The member states are to replace their present system of turnover taxes by the common system of tax of value added defined in Article 2. In each member state a law to effectuate this replacement is to be promulgated as rapidly as possible, so that it may enter into force at a date to be fixed by each Member State taking into account the state of the economy but not later than 1 January 1970. After the entry into force of this law, a Member State may not mention or introduce any measure of standard rate compensation for imports or exports in respect of turnover taxes with respect to trade between the Member States." Prior to the enactment of this law, France had some form of industrial VAT, but most countries introduced a VAT after the EEC enactment. The countries and when they adopted a VAT are shown in the following table. TABLE 6 When Countries adopted VAT France Denmark West Germany Netherlands Luxembourg Belgium Ireland Italy United Kingdom Year 1954 1967 1968 1968 1970 1971 1972 1973 1973

In most countries VAT replace some form of previously existing consumption tax. The country and what tax they replaced are shown in the following table. TABLE 7 What tax was replaced by VAT France West Germany wholesale sales tax multi stage turnover tax Sweden single stage retail sales tax Netherlands multi stage turnover tax Luxembourg multi stage turnover tax Norway single stage retail sales tax Belgium multi stage turnover tax Italy multi stage turnover tax United Kingdom Purchase tax EEC required all countries in Eu353
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Cover Feature rope to adopt a consumption type VAT with liabilities calculated under the credit method. All EEC countries have at least two VAT rates. All countries have exports taxed at zero rate VAT meaning that the exporter can not only exempt his goods from VAT but also obtain a VAT credit for purchases. Typical VAT rates in the European Union are shown in the following table. Some countries do have variable rates for example lower rate for transport. Most services are however charged in the rates shown in the table. TABLE 8 VAT Rates in the European Union Country Germany, Lumembourg Spain Portugal U.K. , Holland Greece Italy, Austria France Belgium, Ireland Finland Sweden VAT % 15 16 17 17.5 18 20 20.6 21 22 25 mandates certain guidelines for the VAT, the implementation and administration of VAT remains a matter of national law in each of the member states. 4 PROPOSED VAT IN INDIA 4.1. CENVAT 4.1.1 Brief History and Salient Features The Government of India had set up an Indirect Taxes Enquiry Committee way back in 1976 under the Chairman of Shri L.K.Jha who strongly recommended the adoption of VAT in India. It recommended adoption of MANVAT, a VAT at the manufacturing level. As a result, the MODVAT scheme was introduced with effect from May 1, 1986. Initially it covered selected items in only 37 Chapters which was gradually extended to 77 Chapters. Textile sector was brought under MODVAT in 1996 and the tobacco sector in 2000. MODVAT was extended to the capital goods sector with effect from March 1, 1994. MODVAT was renamed as CENVAT (Central Value Added Tax) with effect from April 1, 2000. All inputs used directly or indirectly (except HSD. LDO and petrol) are eligible for Cenvat. The salient features of CENVAT Credit Rules 2004 are discussed below. q q

making payment of excise duty on final products, removal of inputs or after being partially processed, removal of capital goods, amount under rule 16(2) of Central Excise Rules 2002 and service tax on output service; CENVAT credit in case of capital goods shall not exceed 50% of the duty paid on such goods in the same financial year. The balance 50% may be taken in any subsequent financial year; CENVAT credit will not be allowed on that part of the input claimed as deduction under the Income Tax Act 1961. Further credit will be allowed only on paid input services on which service tax has been paid as per the invoice/bill. Credit will also not be allowed if input is used to manufacture exempted goods or render exempted services; Manufacturers and service providers are required to maintain separate accounts for receipt, consumption and inventory of inputs and services meant for excisable goods and taxable services; Credit of whole of service tax paid on consulting engineers services, architects services, interior decorator services, management consultancy services, real estate agent's services, commissioning and installation agency, technical testing and analysis services, construction services and intellectual services will be allowed provided the input goods and services are not used for exempted goods and services; Documentary evidence will be the basis for availing CENVAT credit.

q

q

q

United Kingdom is the only member of the European Union who does not charge a VAT on food. Excepting Denmark, Finland and Sweden all member countries charge a low VAT on food. Many member countries have special rates for energy, transport, drugs etc. A breakup of VAT charged on food, the special rates and the general rates on goods and services are shown in Table 9, next page. EU has mandated that the standard minimum VAT must be 15%. It needs to be mentioned that while EU 354
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CENVAT Credit Rules will replace CENVAT Credit Rules 2002 and Service Tax Rules, 2002; CENVAT credit shall be allowed to any manufacturer/producer or final products or output service provider in respect of excise duty (Schedule I and II in Tariff Act), additional excise duty, national calamity contingent duty, education cess on excise duty, service tax and education cess or service tax if such duties/taxes are paid on any input, capital goods or any input service; CENVAT credit can be utilized for

q

q

The Finance Bill 2005 has brought about some amendments in the CENVAT credit rules which are discussed below. q q

Domestic manufacturers can now take take credit of the additional the management accountant, May, 2005

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Cover Feature TABLE 9 VAT Rates on Different categories in the European Union Country Food Special Rates All other goods and services 21 25 7 4 3 2.1 10/12.5 9/13 6/12 15 18 16 20.6 21 20 15 17.5 30 luxuries 12 wine 12 drugs, books 12 transport 5 energy 17 20 22 25 17.5 from one factory to another. In such cases, while the assessee would be entitled to take only 50% CENVAT credit, he will be liable to pay full normal duty at the time of clearance. 4.2. Proposed State Level VAT 4.2.1 Brief History and Salient Features As stated in the White Paper on State level VAT, the first preliminary discussion on State level VAT took place in a meeting of State Chief Ministers convened by Dr. Manmohan Singh, the then Union Finance Minister in 1995. In the meeting convened by Mr. Yashwant Sinha, the then Union Finance Minister in 1999, the Empowered Committee of State Finance Ministers was set up. It is largely due to the efforts of the Convenor of the Empowered Committee of State Finance Ministers, Sri Asim Kumar Dasgupta (who is also the Finance Minister of West Bengal) and the Union Finance Minister, Mr. P.Chidambaram that the VAT will be implemented in the states from April 1, 2005. Haryana has already implemented VAT. Five states viz Haryana, Rajasthan, Bihar, Tripura and Jammu and Kashmir have enacted the legislation, including an Ordinance, without presidential assent. Presidential assent has been communicated to eleven other states viz. Madhya Pradesh, West Bengal, Kerala, Andhra Pradesh, Karnataka, Gujarat, Assam, Delhi, Maharashtra, Chattisgarh and Meghalaya. In Punjab, Orissa, Pondicherry, Manipur, Daman & Diu, Dadra and Nagar Haveli, the VAT legislation is ready and has been sent for Presidential assent. The state legislators of Jharkand, Uttar Pradesh, Rajasthan and Tamilnadu are yet to approve VAT. The Finance Minister has clarified that the existing sales tax regime will continue in states that do not implement 355
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Belgium Denmark Germany Greece Spain France Ireland Italy Luxembourg Netherlands Portugal Austria Finland Sweden United Kingdom

6 25 7 8 6 5.5 2.3 4 3 6 5 10 17 21 0

12

duty of customs levied under sub section (5) of Section 3 of the Customs Tariff Act, as amended by Clause 72 of Finance Bill 2005 for payment of any excise duty on their finished goods. Service providers are not allowed to take credit of this additional duty; q can be utilized for paying additional excise duty on pan masala and tobacco products. 4.1.2 Reactions to CENVAT by Chambers of Commerce FICCI said that both the provisions relating to allowance of only 50% of CENVAT credit for capital goods received in the factory in the financial year and the balance 50% in subsequent financial years provided that the capital goods are still in the possession of the manufacturer to be unfair. The Chamber pointed out that such provisions would result in high incidence of duty in case of an assessee who purchased the capital goods in the current year and sold it as such in the same year. Also the duty will be high on assesses with multi locational factories where capital goods are transferred

Credit of this additional duty can be utilized only for payment of excise duty (including special excise duty and additional excise duties) on final products and not for service tax. Credit of this additional duty in respect of capital goods can be taken in one installment (as against two installments in other cases); CENVAT credit has now been allowed for additional excise duty on pan masala and certain tobacco products. Credit of no other duty

q

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Cover Feature VAT from April 1, 2005. 4.2.2. White Paper on State level VAT The White Paper on VAT set the ground rules for its introduction from April 1st, 2005. The salient features of the White Paper are listed below : q q q

Traders with a turnover of less than 5 lacs will be outside the purview of VAT; The upper turnover limit of being classified as a "small trader" has been raised to Rs.50 lacs (from Rs.40 lacs in the draft document). These dealers will have the option to opt for a composition scheme whereby they will pay VAT on a small percentage of their gross turnover, but they will be unable to claim input tax credit. However, the scheme is optional. They can opt to pay normal VAT and avail credit of input tax. The States have the option to either exempt or impose 4% VAT on grain in the first year. This is a departure from the draft document; Tax paid goods bought during the last 12 months but remaining in stock on April 1 would also be eligible for input tax credit; Units located in Export Oriented Units (EOUs) and Special Economic Zones (SEZs) will be granted either exemption from payment of input tax or a refund of the input tax paid within three months. VAT on imports, service tax and items under additional excise duty will be integrated into the VAT system from the second year if decisions are taken expeditiously at the national level.

not compatible. Besides, no roadmap has been defined for phasing out CST. They also call for abolition of all local taxes including octroi and entry tax. q The VAT will replace a web of sales taxes such as turnover tax, surcharge, additional surcharge etc.; Central sales tax will be phased out; VAT will cover around 550 goods, of which a large number of commodities will fall in the 12.5% rate; Another 270 items will attract 4% VAT; A special 1% floor rate will cover only gold and silver ornaments, precious and semi precious stones; 46 items will be exempt from VAT with 10 items to be decided by individual states and the rest being common across the country; VAT on AED items relating to sugar, textiles and tobacco will not be imposed for one year after the introduction of VAT; Aviation turbine fuel and petroleum products (petrol, diesel and motor spirit) will be out of VAT regime. If the tax credit exceeds the tax payable on sales in any year, the excess credit will be carried over to the end of the next financial year. If there is any excess unadjusted input tax credit at the end of the second year, the same will be refunded; Input tax credit on capital goods will be available subject to its not falling within the negative list and such credit can be adjusted over a maximum of 36 installments. The States can reduce the number of installments. q q

Contrary to the Government's claim that prices will decrease after introduction of VAT, industry feels it will usher in an inflationary trend as prices of many products of daily use will be going up. Traders body complained that carrying over the excess credit procedure is a lengthy process and will result in their regular visits to the department. They also said that the list of 46 commodities under the exempted category and 270 categories under the 4% category has not been brought out.

q

q

q

q

q

q

q

q

Reactions from Chambers of Commerce9 are discussed below. FICCI : Abolish all local taxes, including octroi and entry tax instead of merging them into VAT. ASSOCHAM : Move to keep around 270 products of basic necessity such as drugs and farm produce in the 4 per cent VAT category welcome. PHDCCI : VAT will improve the competitiveness of local industry, both in Indian and international markets. CAIT : Since most items are in the 12.5 per cent tax slab compared with the current 8 per cent, the move will lead to a jump in inflation. 4.2.4. Problems relating to CST The concerns of the industry regarding CST are genuine. The way VAT is structured will mean that a) If goods are purchased from another state, credit of CST paid in another state will not be granted by the state where the goods are consumed or sold. the management accountant, May, 2005

q

q

q

q

The government is actively considering raising the minimum turnover limit for the purpose of levying VAT to Rs.10 lacs (from Rs. 5 lacs as stated in the White Paper). 4.2.3 Reactions to State level VAT by Industry and Chambers of Commerce Industry's reactions to state level VAT are highlighted below. q q

Industry feels VAT and CST are

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Cover Feature b) If goods are sent to another state on stock transfer basis, credit will be allowable only to the extent of tax paid on inputs in excess of 4%. Both the cases will defeat the very purpose of VAT and more important might violate Article 303 and 304(a) of the Constitution. Kelkar Committee in para 7.2 of its final report submitted in December 2002 had expressed apprehensions of legal implications of Article 304(a) in State Level VAT. Article 303 of the Constitution of India states "Neither Parliament nor the legislature of State shall have power to make any law giving any preference to one state over another, or making any discrimination between one state and another" As per Article 304(a) State government can impose tax on goods imported from other states, but cannot discriminate between goods imported from other states and goods manufactured within the state. In State of U.P. v Laxmi Paper Mart AIR 1997 levy of differential sales tax on exercise books made from paper purchased within the state and made from paper purchased from outside the state and sold within the state was held to be discriminatory and offending Article 301. A similar judgement was delivered in Andhra Steel Corporation V CCT (1990) 78 STC 243 (SC). In Loharn Steel Industris Ltd. V State of AP AIR 1997, sales tax payable on finished product was exempt if raw material was purchased within the state. This was held to be discriminatory. One way of avoiding the constitutional wrangles can be through adopting a "zero rated final products" for inter state sale/transfers. Zero rating means that tax is not levied on the fithe management accountant, May, 2005 nal product but input credit is still available. Presently state level VAT provides for zero rating for exported goods only. This can be extended to inter state sale/transfers also. 5. VAT UNIFICATION IN INDIA There has been widespread demands on the Finance Minster, Mr. P.Chidambaram, to unify the VAT meaning he should find ways to shift to a single rate comprehensive VAT unifying CENVAT, VAT and Service Tax. The Finance Minister has said that he ultimately wants to shift to Goods and Service Tax (GST). What he means is that he wants to shift to a system where service tax, which is a Central Tax can be combined with Cenvat. It will then be known as Goods and Services Tax. But this is not a uniform system. While there will be a GST at the centre as a substitute for Cenvat and Service Tax, state level VAT will continue separately. Total unification of CENVAT, Service Tax and state level VAT with a single VAT rate may not be possible in India because sales tax (which VAT will be replacing from April 1, 2005) is authorized by Entry 54 of the State ListList II. They cannot be combined without amending the Constitution. Such an amendment may not be legally feasible as it will mean shifting from a Federal structure to a unitary structure. Further the requisite number of states may also not agree to such a change.
END NOTES
1 Kotlikoff, Laurence J. "The case for a value added tax" Tax Notes Apr 11, 1998 2 McKee Michael, "Value added tax: are they fair" Tax Notes, Oct 31, 1998 3 McLure Charles E. Jr. "Value added tax" Tax Notes Mar 28, 1998 5 Smith, Webber and Cerf "What you should know about the VAT" p. 45 6 Kupfer, Andrew "The case for a consumption tax" Fortune, August 15, 1999 7 McIntyre Robert S. "Vat is a good idea" Atlantic V259 January 1987 p 28 8 Smith, Webber and Cerf "What you should know about the VAT" Appendix A p. 173 9 Business Standard, Jan 18, 2005 "Chambers for phasing out CST"

BOOKS Aaron, Henry J. "The Value Added Tax" Brandon, Rowe and Stanton "Tax Politics" OECD Studies in Taxation "The impact of consumption tax at different income levels" Office of the Secretary, Department of the Treasury, "Tax Reform for fairness, simplicity and economic growth : The Treasury Department Report to the President, Vol 3, Value Added Tax" Prest A.R. "Value Added Taxation : The Experience of the United Kingdom" Reddy, Veera P. "Central Excise Manual Law & Procedure" Parthasarathy C and Agarwal Sanjiv "A Handbook of Service Tax - Law, Practice and Procedures" Professional Book Publishers "The Constitution of India" Bare Act Smith, Webber and Cerf "What you should know about the VAT" Sobel, Lester A. "The Great American Tax Revolt" Tait, Alan A. "Value Added Tax" Teplitz and Brooks "Alternative Tax Proposals" Walker, C.E. and Bloomfield, M.A. "The Consumption Tax" ARTICLES " A Tax everybody could live with" Kuttner, Robert,Tax Notes September 22, 1998 " Car sales hit Vat bump" The Business Standard, Mar 9, 2005 " Chambers for phasing out CST" Business Standard, Jan 18, 2005 " Chambers for phasing out CST" Business Standard, Jan 18, 2005 " Confusion over Vat makes traders go in circles" The Economic Times, Feb 26, 2005 " Corporates face taxing times in Vat regime" The Business Standard, Feb 21, 2005

Office of the Secretary, Department of the Treasury, "Tax Reform for fairness, simplicity and economic growth : The Treasury Department Report to the President, Vol. 3, Value Added Tax p. 21

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Cover Feature
" Centre to compensate Vat loss to states" The Economic Times, Feb 5, 2005 " Deshmukh says Vat bill is ready" The Financial Express Mar 2, 2005 " Effects of a Federal VAT on the States debated" Douglas Carol, Tax Notes August 8, 1998 " FM may sweeten Vat pill, raise threshold to Rs.50 lakh" The Economic Times, Jan 18, 2005 " Foodgrain exempted from Vat, 4% optional rate for tea" The Financial Express, Jan 11, 2005 " Govt. may raise turnover limit for VAT to Rs.10 lakh" The Economic Times, Mar 9, 2005 " Minimizing administration and compliance costs" Turnier William J., Tax Notes, Mar 28, 1998 " Nationwide bandh against Vat paralyzes traders" The Financial Express, Feb 21, 2005 " No Vat, if states not ready" The Business Standard, March 16, 2005 " Non-Vat states to pay sales tax" The Economic Times, Mar 15, 2005 " Small traders may get more Vat relief" The Economic Times, Mar 8, 2005 " States at crossroads as Vat date nears, 30% revenue at stake" The Economic Times, Jan 30, 2005 " The case for a value added tax" Kotlikoff, Laurence J., Tax Notes Apr 11, 1998 " The case for a consumption tax" Kupfer, Andrew, Fortune, August 15, 1999 " US has sales tax instead of Vat" The Economic Times, Jan 31, 2005 " Value added tax: are they fair" McKee Michael, Tax Notes, Oct 31, 1998 " Value added tax" McLure Charles E. Jr., Tax Notes Mar 28, 1998 " Vat is a good idea" McIntyre Robert S., Atlantic January 1997 " Vat ceiling for filing returns may be changed" The Business Standard, Jan 6, 2005 " White Paper on State-Level Value Added Tax" By The Empowered Committee of State Finance Ministers, Jan 17, 2005 Web Sites http://www.eurunion.org/legislat/VATweb.htm http://www.atozservices.info/ centralexcisecenvat.htm http://news.helplinelaw.com/0704/d_eco_kelkercommittee.php http://dateyvscom/salestax_vat.htm

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Value Added Taxation in India whole truth as who is ultimate accountable and responsible for such false and untenable allegation. Industry and trade believes in honest working without hassles but they are compulsorily made escape goats to lower their image in public eyes by interested persons. Success of any reforms depends on involvement, cooperation and dedicated commitment of all concerned stakeholders, individuals, institutions and organizations working in common interest for welfare of country as a nation.
1. Value Added Tax by Ravindra Raniwala Tax Consultant, Jaipur. 2. Confederation of Indian Industries (CII) held Seminar on Design on State-level VAT and its implementation on 13 December 2004. At this seminar in his opening remarks, Dr. Parthasarthi Shome, Adviser to Union Finance Minister explained a bit about the VAT process and in particular in international context as well as the relationship between the centre and states or provinces of other countries, which have introduced

State-level. Dr. Parthasarthi Shome was one of the most eminent economists responsible for perfecting the Value Added Tax in Brazil. He has been personally connected with the implementation of VAT in several countries. And Dr. Ashim Dasgupta, Chairman Empowered Committee on State-level VAT addressed the said seminar and also clarified probable queries on State-level VAT. Dr. Ashim Dasgupta is Finance Minister of Government of West Bengal. 3. Ibid. 4. White Paper dated 17 January 2005 issued by Empowered Committee, Para No. 2.2. 5. Ibid. Para No. 2.3. 6. Ibid. Para No. 2.4. 7. Section 2(7) of the Rajasthan Value Added Sales Tax, 2003 (yet to come into force). 8. Ibid. at Para No. 2.5. 9. Ibid. Para No. 2.6. 10. Ibid. Para No. 2.7. 11. Ibid. Para No. 2.8. 12. Ibid Para No. 2.9. 13. Ibid. Para No. 2.10. 14. Ibid Para No. 2.11. 15. Ibid.Para No. 2.12. 16. Ibid.Para No. 2.13. 17. Ibid. Para No. 2.14. 18. Ibid. Para No. 2.15. 19. Ibid. Para No. 2.16. 20. Ibid. Para No. 2.17.

21. 22. 23. 24. 25. 26.

Ibid. Para No. 2.18. Ibid. Para No. 2.19. Ibid. Para No. 4.2. Ibid. Para No. 4.3. Ibid. Para No. 4.1 and 4.4 to 4.9. Jagdish Bhagwati is University Professor at Columbia University and Andre Meyer Senior Fellow in International Economics at the Council on Foreign Relations. A former Special Adviser to the United Nations on Globalization, he is one of the worlds foremost authorities on international trade. The author of more than forty-five volumes and three hundred articles, he writes frequently for The New York Times, The Wall Street Journal, The Republic, The Times Literary Supplement and The Financial Times. Columbia University has established a chair named after Jagdish Bhagwati in 2004. In Defense of Globalization by Jagdish Bhagwati published by Oxford University Press, Edition 2004, Page No. 3.

27. Dr. Vijay L. Kelkar, is one of the senior most Indian Civil Servant also held positions as Former Executive Director, International Monetary Fund; Former Adviser to Minister of Finance and Company Affairs and Chairman, Task Force, Fiscal Responsibility and Budget Management; and Ex-Chairman, Task Force on Indirect Taxes, set up by the Government of India, on 3 September 2002. u

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Professional Updates

A. N. RAMAN'S COLUMN

ments are shared by all the entities in the chain. · inventory build up should not be the recourse to manage the demand imbalances between the tiers of the chain Features of the new relationship · Joint problem solving · Demand for quality at source · Information sharing

Activity based costing & supply chain cost management ll organisations depend on suppli-ers for inputs and an es timated 60-70% of the final cost of manufactured items is from purchased materials, components and services. The performance of the overall customer-supplier network called the supply chain, affects the competitive advantage of every company. JIT/ TQM acknowledges the importance of the supply chain to competitive advantage. Extending improvement beyond a company requires that managers take a new look at the costs and trade-offs of working with suppliers and that customer and supplier adopt. Collectively known as logistics management , the field is undergoing a revolution of sorts, partly because of the growing numbers of customers that are becoming JIT/ TQM companies and consequently the growing quality and service requirements being imposed on suppliers and third-party carriers. Issues downside and upside · Purchased materials are a major source of variability in the cost, quality and delivery of finished products. · Defective materials increase manufacturing costs and cause production delays and late deliveries. · Dependence on multiple suppliers has its own problems. *
Management Accountant, Chennai

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· Quality -caused problems are exacerbated in pull production where there is no stock to protect against shortages. · A specialised supplier can produce like items at a lesser level of resource consumption. · A supply chain can be more flexible to changes in the product mix as the demand pattern shifts in the market. · Resources needed for focusing on quality can be diffused to supply chain. · By using a specialised supplier the customer can take advantage of the learning curve of the vendor and his core competence. Many companies are now going through a de-integration or outsourcing phase and are sending greater portions of the value added work in their products to suppliers. To eliminate the ill effects of outsourcing management must begin a new look at the way customers and suppliers relate to each other and this is partly known as supply chain management. Philosophy of supply chain management The philosophy of the supply chain management is as below: · view the entire chain as a single integrated entity · Cost, Quality and Delivery require-

· Criteria for purchase other than price · Design capability at source · Sharing of business volumes between multiple sources · Application of electronic data interchange for movements. Cost management in a supply chain environment Traditional costing systems have tracked only the purchase price associated with a particular part number or supplier and bury the costs of ordering, expediting, receiving, inspecting, and using goods in the overheads. Companies that have embraced JIT/TQM focus not on purchase price but on the total costs in the supply chain through the concept of total cost of ownership. The total cost of ownership should include the following elements: · costs of purchasing including the costs of ordering, freight,and incoming quality control: · costs of holding including the costs of storage, insurance, obsolescence and the costs of money, · costs of poor quality including the costs of rejection, re-receiving, scrap, rework, repackaging, downtime and warranties and · costs of delivery failure including the costs of expediting , premium transportation, downtime, and lost sales owing to late deliveries etc. 359
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Professional Updates Activity Based Costing and Total Cost of Ownership The design of ABC models can ease the computation of cost of ownership by providing for the following activities in the dictionary; · Receive materials · Inspect materials · Return materials · Move materials · Store materials · Scrap obsolete materials · Rework on incoming materials · Order materials · Delayed production due to late deliveries · Expedite delivery of materials for avoiding production shut down. · Designing specific material requirements Case Study on Make or Buy thru Total Cost Of Ownership thinking Part1 A company currently manufactures a link plate used in the assembly of a final product. Using a traditional costing method and the following data , calculate a cost estimate for the face plate: Materials Linkplate Fan mounting plate Front Plate Back Plate Stand Off Heat Sink Screws (6) Labour Machine Shop - drilling heat sink (lot of 10 pieces) Labour rates - Indirect @ 18.14 : Direct @ 11.04 4.72 32.41 16.54 13.85 3.46 10.35 0.17 Labour Activity Machine set up Run Time Clean and deburr Paperwork Inspection Heat sink anodize Heat sink move Overhead Overhead rate computed @ 120 % of direct labour hour Completed cost estimate Materials Labour Overhead Total PART 2 Several days after we have completed our traditional cost estimate, we receive a quote that you requested from a supplier who can provide the link plate for 117.38. At first, it looks like we can save your company 7.11 for each part by buying from the supplier. However, there are additional costs which we will incur if we choose the buy route: Material Cost 4 bolts for heat sink @ .05 each 0.20 Labour Bolt heat sink-- .95 hrs 10. 49 Assembly of link plate--.66 Total 11.35 It actually costs 128.73 to buy the part. With these costs added in, it seems like it costs 4.24 more to buy, rather than make the product. It would seem from this method of estimating that your mind is made up: you should continue making the link plate . But before we make that decision, we also try an Activity Based Cost estimate. 81.50 19.54 23.45 124.49 Indirect Direct 1.10 hrs 12.14 .42 hrs .25 hrs .05 hrs .50 hrs .50 hrs .17 hrs 4.64 2.76 0.91 9.07 9.07 3.08

Table showing cost of ownership in two items of a company Integrated circuits Purchase price Overheads Inspection Warehousing Insurance Handling Transportation Purchasing total Price + overhead Testing 2.50 Circuits Purchase price Overheads Inspection Warehousing Insurance Handling Transportation Purchasing total Price+Overhead Testing 0.55

OEM warranty End user maintenance Cost of ownership 360
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0.45 2.95 0.22 ------3.17 0.53 1.06 4.76

Defect replacement Final test replacement Field replacement Cost of ownership

0.45 1.00 2.00 --------3.00 15.00 42.00 40.00 100.00

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Professional Updates PART 3: A cost estimate using Activity Based Costing arrives at the following results for overhead, using and indirect labour rate of 18.14. The first set of figures reflects the overhead costs incurred if the company makes the part. The second set of figures reflects the costs incurred if the company buys the link plate . Cost of Receiving and inspection Make Linkplate Parts Receive Time Inspect Time Link plate .17 hr .5 hr Fan mounting plate.17 hr .5 hr Front plate .17 hr .5 hr Back plate .17 hr .5 hr Standoff .17 hr .25 hr Heat sink ext. .17 hr .5 hr Totals 1.02 hrs 2.75 hrs Cost3.77 hrs x 18.14 = 68.39 Buy Linkplate Parts Receive Time Inspect Time .17 hr .17 hr . 34 hrs .5 hr .5 hr 1.0 hrs Buy Linkplate Parts Time to Stock Time to Pull Job Link plate .03 hr . 03 hr Heat sink .03 hr . 03 hr Totals . 06 hrs . 06 hrs Cost. 12 hrs X 18.14 = 2.18 The company would spend 6.89 less on Stocking if it bought the link plate instead of making it. Cost of Buying Make Linkplate Parts Parts Order Time . 1 hr . 1 hr . 1 hr . 1 hr . 1 hr . 1 hr . 6 hrs 10.88 Buy Linkplate Parts W/O assemble link plate Totals Cost W/O Time .03 hr .03 hrs .03 hrs X 18.14 = 0. 54

The company would spend 15.79 less on Planning if it bought the link plate instead of making it. Now, let’s summarize what we have calculated and determine the Total Cost for the link plate if we buy it and if we make it: Make BuyDifference

Link plate Fan mounting plate Front plate Back plate Standoff Heat sink ext. Totals Cost . 6 hrs X 18.14 = Buy Linkplate Parts Link plate Bolt on sink Totals Cost

Material Cost 81.50 117.38 ( 35. 88) Labour cost Activity Cost Receiving Stocking Buying Planning TOTALS Total Cost 68.39 24.30 9.07 10.88 16.33 2.18 3.63 0.54 44.09 6.89 7.25 15.79 74.02 46. 53 19.54 11.15 8.39

Link plate Heat sink Totals Cost

1. 34 hrs X 18.14 = 24. 30

Parts Order Time . 1 hr . 1 hr . 2 hrs

104.67 30.65 205.71 159.18

The company would spend 44.09 less on Receiving and Inspection if it bought the link plate instead of making it. Cost of Stocking Make Linkplate Parts Time to stock Time to Pull Job Linkplate .03 hr 03 hr Fan mounting plate.03hr .03 hr Front plate .03 hr .03 hr Back plate .03 hr .03 hr Heat sink drilling.03 hr .03 hr W/O for EPR .17 hr .03 hr Totals . 32 hrs .18 hrs Cost. 50 hrs X 18.14 = 9.07 the management accountant, May, 2005

. 2hrs X 18.14 = 3.63

The company would spend 7.25 less on Buying if it bought the link plate instead making it. Cost of Planning Make Linkplate Parts W/O Time

A – W/O cut and drill heat sink. 03 hr B—WIP receipt Machine shop.03 hr C – W/ O send to EPR .17 hr D—Heat sink to EPR .5 hr E--- Pick – up heat sink from EPR; Cut receiver .17 hr Totals .90 hrs Cost .90 hrs X 18.14 = 16. 33

Now, as you can see, it actually costs $46.53 less to buy the Link plate than to make it , even though a traditional costing method indicated the opposite. It pays to use Activity Based Costing because it reflects the true total cost of a part . How many other make / buy decisions do we make in your company based on traditional methods? q

RETIREMENT Ms.Juthika Bose retired from the services of the Institute on 30th April, 2005 after a long and eventful tenure. 361
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Accounting & Finance

Intangible Accounting Practices - A case Study of Dr. Reddy’s Laboratories Ltd.
Different aspects of intangible value and their impact on corporate value creation have been highlighted by a case study of Dr Reddy's laboratories Ltd.

(1) To measure intangible values of Dr. Reddy's Laboratories Ltd by computing four important measures namely;Economic Value Added (EVA), Market Value Added(MVA), Brand Value and Total Shareholders Return (TSR) and to study the variations of these indicators during the period under study through the computation of Mean,Standard deviation (SD), co-efficient of Variation (CV) of each measure. (2) To analyes and interpret these individually to assess the level of intellectual value possessed by the company. Methodology of the study

Dr. P K. Chakraborty* .

n the present competitive scenario when every corporate in India is striving hard to maintain and if possible to increase its market share and building a good corporate image in the society, intangible accouting has assumed a very important role in corporate accouting and reporting practices. But in the absence of any legal compulsion in this regard,the practice followed by the corporate world is not uniform and only a few of the companies deal with this subject in the annual reports published by them. Intangible accouting attempts to explain the excellence achieved by a company in augmenting shareholders value creation through its intellectual properties measured in terms of certain indicators such as Economic Value Added (EVA), Market Value Added (MVA), Total Shareholders Return (TSR), Brand Valuation, Human Resource Accounting etc. Calculated Intangible Value (CIV) is a measure to focus on the ability of an enterprise to utilize its intangible assets to outperform other enterprises with the
* Chief Finance Manager, B. C. C. Limited, Post - Kaylanagar Dhanbad, Jharkhand.

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same level of tangible assets. Thus it may be considered as a premium the enterprise enjoys in terms, due to the value created by it and reflects "how the company differentiate itself?" These measures need to reflect the company's strength to earn increased proportion of return compared to its competitors and thus influence the price of the company's stock in the capital market and focus on its reputation and image in the market place. Objective of the study As it has already been pointed out; the practice of measuring and disclosing intangible values in the Annual published accounts in India is not uniform anong the corporates. Of late, some eminent companies are showing some interest in this regaed. Dr. Reddy's Laboratories Ltd is one of such corporate whose endeavor in this direction is the subject matter of our discussion in our present article. The specific objectives of this study are as follows: To present a short review of the theoretical background concerning different aspects of intangible value and its impact on the value creation by a company:

The company that has been selected for this study is one of the leading pharmaceutical Company in India and fairly represents Indian pharmaceutical industry. The relevant data for the period 1999-00 to 200203 have been collected from secondary source i,e. published Annual accounts of the company for the respective years. Data so collected have been classified, analysed and interpreted appropriately as per the requirement of the study with the help of different statistical tools and techniques. Profile of the Company Dr.Reddy's Laboratories Ltd, is one of the leading manufacturer of bulk drugs and formulation in India and abroad. The turnover of the Company during 2002-03 was Rs.1598.00 crores with a post tax profit of Rs.392.10 crores. 60% of the total sales of the Company was from international market. It has 16 plants situated in India. Out of these 16 plants 2 are located in Pondicherry and the remaining plants are located at different places of Andhra Pradesh. It has one plant located in United Kingdom and one plant in China, but the management accountant, May, 2005

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Accounting & Finance both these plants are under the ownership of its two subsidiary companies. It has share capital base of Rs.38.26 crores with 7.652 crores equity share of Rs.5.00 each fully paid. Number of employees employed as at 31.03.03 was 5852. It has 18 subsidiary companies as on 31.03.03. Its registered and corporate office is situated at 7-1-27 Ameenpet, Hyderabad 500 016, Andhra Pradesh. Theoretical background Different accounting ratios like profitability ratios, turnover ratios, solvency ratios are being computed and interpreted to measure the efficiency of economic activity undertaken by a firm and this practice has been conceived during an era when most assets were tangible and measuring them was required merely for accounting purpose. But gradually the importance of these assets lost its prominence in the economic activity and the economy steadily and continuously turns towards knowledge economy where knowledge, creativity, ideas etc. are becoming prominent. Now it is perceived and recognized in the corporate world that these intangible assets could make or break a company and a company should as a strategy try to leverage these assets to improve its performance and position. With business expanding globally and rapidly, it is very important to have a strong base of intangible assets that only remain countable in the long run to pervade across functions and hierarchies. Economic Value Added Stern and Stewart, a consultancy firm introduced a performance measure called Economic Value Added (EVA) to indicate the minimum return required by the shareholders to invest in the company's shares. Economic Value added (EVA) is the excess of actual return earned by a firm over such minimum return required the management accountant, May, 2005 by the shareholders or investors. Here, actual return implies the net operating profit after tax (NOPAT) and minimum return denotes cost of capital employed (WACC x CE) to earn that profit. To put it in an equation form, EVA=NOPAT- (WACC x CE) Where, NOPAT = Net Operating profit after tax WACC=Weighted Average Cost of Capital CE=Capital Employed NOPAT is calculated from net profit after tax as appeared in the Profit and Loss Account by adding back interest payments and subtracting and adding non operating income and non operating expenses respectively. But in actual practice some other adjustments are made with the net profit to calculate NOPAT to convert accounting profit to economic profit. Stern-Stewart have mentioned 164 types of such adjustment that are kept out of purview of this article for time and space constraints. WACC is the weighted average of the cost of all types of own capital and borrowed capital such as equity share capital, preference share capital, debentures, secured and unsecured loans etc. with weights equivalent to the proportion of each element in the total capital of the company. Capital employed denotes all finds belonging to the equity shareholders, preference shareholders and all interest bearing loan capital. Market Value added Market value added is used as a supplementary to economic value added to evaluate the performance of a company in the stakeholders value creation. It measures the market value of the company over the value of the investor's capital. In case of EVA economic profit is taken into consideration, which is the value added by the company over a given period, the MVA is a measure of the investors perception of value added. It may be considered as a cumulative measure of corporate performance. MVA= Current market value of debt and equity- Economic book value, where Economic book value= Share capital + Reserve + Debt. Total Shareholders Return Total Shareholders Return (TSR) is a composite indicator which takes into account total shareholders' fund and the dividend declared / proposed by the company. It represents the change in the capital value of a company over a period of one year, plus dividends, expressed as a percentage of gain or loss on the beginning capital value. Capital value implies capital employed excluding Debt capital. The exclusion of debt capital provides more accuracy in measuring the Total Shareholders' Return (TSR). TSR=(Closing capital value-Beginning capital value +Divdend) ¸ (Beginning Capital value x 100) Brand Value Why a particular customer asks for a particular brand when similar other products are available in the market at the same price or even at a lower price? One simple answer to this question is, due to the brand value attached to the product. This brand strength is a composite attribute of several internal and external factors of a final. The dictum in any knowledge driven economy is Certum ex Uncertis, that is "Certainty out of Uncertainty". In the market driven economy that we operate, the only durable competitive advantage would be to build strong brand equity and add value and 363
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Accounting & Finance strength to our delivery system. Table-l EVA of Dr. Reddy's Laboratory's Ltd. (Rs. in million) Particular Shareholder Fund Debt-Loan Term Total (Employed) NOPAT Weighted Average Co Capital Capital Changes (b) EVA (a-b) 19 20 20 200 20 42 47 52 154 18 30 39 10 47 41 Table-3 TSR- Total Shareholders Return of Dr. Reddy's Laboratory's Ltd. (Rs . in million) Particular Closing value Beginning Capital Value 20 14 11 20 55 47 76 12 89 20 199 47 420 42 361 56 589 12 122 68 711 Findings EVA Economic Value Added (EVA) of Dr. Reddy's Laboratory's Ltd has shown a mixed trend during the study period. From a value of 155 million of rupees during 1999 it rose up to 1300 during 2003 with the highest value during 2002. (2703 million) and lowest value of 57 million during 2000. The increase in EVA during 2002 was mainly due to more than proportionate increase in NOPAT compared to capital employed. During the year total capital employed was to the tune of 15504 million showing an increase of 148% over the figure of the previous year (2001). But NOPAT during the year was 4672 million showing an increase of 345% over the figure of 2001. The EVA was one of the lowest during the year 2000 mainly due to lower rate of profitability (NOP AT) on the capital employed which was only 14.16% compared to 30.13% during 2002. During the period under study, the mean EVA was 870 million with standard deviation of 1025 and co-efficient of variation of 118% showing a very high degree of variation. The result reflects lack of consistency. The company should pay its due attention by regulating capital employed to generate adequate profitability (NOPAT) and ensure a steady growth of this very important indicator. Compared to 2002, the position during 2003 was very alarming as there was drop of EVA by more than 50% over the value of 2002. Additional capital employed to the tune of 3369 million has generated profit (NOPAT) to the extent of - 1127 million resulting into a negative growth. The company should undertake detailed analysis to identify its causes and formulate its strategy to combat the situation and to add to its value creation activities. the management accountant, May, 2005

72 87 62 155 18 11 12 10 467 35

Addition during the year 32 Dividend Total Return 57 38

14 13 14

12 11

% Return Beginning value

33

18

16

19

10 11 91 190 22 15 57 13 270 13

Table 4 Brand Value of Dr. Reddy’s Laboratory's Ltd Rs. in million Particulars 20 20 37 20 200 16 –

Table 2 MVA of Dr. Reddy’s Laboratory’s Ltd. (Rs. in million) Particulars Current value of Debt 19 20 20 200 20 30 39 10 47 41

Three aggregate Weighted pro 37 Remunera of Capital WACC Brand profit

Number Outstanding shares (Million) 32 32 32 Average price(Rs) Average market value equity

22 15 15 13 20 27

18 18 15 16 20 33

10 55 99 45 20

— – — — —

77 77

Tax Brand Ea Multiplapplied

50 12 13 791 91

16 38 41 605 69

Brand Value

91 285

Market of debt and equity 19 42 42 605 69 Book value Debt and Equity72 87 62 155 18 Market added 11 33 36 450 50 Net during the year — 21 31 832 55

Table - 5 Statistical parameters Particulars EVA MVA TSR Brand Value M 87 97 22 18 SCo-efficient of Variation 1 7 6 2 118 73 31 139

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Accounting & Finance MVA Net market value added (MV A)year wise has projected a mixed trend during the period under study. From 21817 in the year 2000, it went down to 3120 in the next year (2001) and again shoot up to 8327 during the next year (2002) and again registered a decline in 2003 and settled at 5919 million. This is corroborating the ups and downs in Economic Value Added (EVA) during the study period as these two indicators are more or less complementary in nature. The highest net MVA during the year 2000 was mainly attributable to the rise in the average market value per share by Rs 707 over the price of 1999. Net MV A during 2001 was the lowest showing a value of 3120 million. If we analyse the main reason we can see that while the increase in average share price during 2000 was about 140% over its preceding year(l999), it was only about 9% in the year 2001 over its preceding year price of Rs. 1213 per share. While coming to the statistics, the MVA shows a fluctuating trend during the study period. On an average it was Rs. 9796 million with a Standard deviation of 7181 and co-efficient of variation of 73% thereby projecting a very high degree of variation during the period. TSR (Total Shareholders Return) The year wise computation of TSR (Total Shareholders Return) depicts a rising trend excepting for the year 2000 both in absolute value and in terms of percentage return over beginning capital value. The Total Shareholders Return during the year 1999 was Rs. 711 million which had slightly declined to Rs.685 million during the next year. In terms of percentage return we also observe that it went down to 16.3% in the year 2000 compared to 19.7% in the year1999. But from the year 2000 onwards there is a consistent upward trend both in absolute value and in terms of percentage of total shareholders' return. As against Rs. 685 million the management accountant, May, 2005 in 2000, the figure goes up to 890 million in 2001 and 3839 million in 2002. In percentage return on beginning capital value, the figure was 16.3 during 2000 that goes up to , 18.7 in the next year and finally settled at 33.9 during 2002. The picture is very encouraging and carries very good message to the shareholders towards satisfaction of their expectation. The mean value of percentage return was 22.15% with standard deviation of 6.91 and co-efficient of variation of 31% that transpires a more or less stable position and performance of the company in respect of Total Shareholders Value (TSR). Brand Value Brand value ranges from Rs.2854 million during 1999 to Rs.33620 million in 2002 with an average of 18325 during the study period. From the year 1999 to 2002 there was consistent increase in brand value. During 2001, the increase was by more than 220% over the figure of 2000 and in the year 2002, the increase was more than 260% over that of 2001. But during 2003, the figure shows a declining trend with a value of 27667 compared to 33620 during 2002 thereby showing a decrease of more than 18% over the figure of 2001. This was mainly due to decline in brand earning in 2003 compared to 2002 by about 18%. Statistical analysis also confirms the fluctuating trend, on an average it was 18325 with a standard deviation of 25388 and co-efficient variation of 139% showing a very high degree of variation. Conclusion Dr. Reddy's Laboratory's Ltd possesses a very good image in the capital market and as such its shares are quoted in the Stock Exchange at a very high price. The investors are willing to pay more for its shares due to its positive growth in Economic Value Added (EVA), Market Value Added (MVA) as well as increase in the Total Shareholders Return (TSR) over the years. Its Brand earning in the market is very attractive and the Company has acquired a good quantum of Brand value. All these factors have contributed to the corporate image and goodwill of the company. The practice of the company in the disclosure of these intangible accounting parameters in the Annual published accounts of the company will definitely attract public interest and acts as a confidence building measure in the corporate world. Without this type of specific disclosure, it is not possible for the general investing public to go beyond the balance sheet figures and work out such details and the vital information of intangible accounting could never come to light. On the basis of such intangible accounting parameters valued opinion about the performance and position of the company could be formed and that in no way less important than the true and fair view as reported by the auditors. As the earth revolves round the Sun, all functions and activities of a corporate house revolve round the shareholders; value creation. It requires total commitment from all business processes- production planning and control, product mix, capital budgeting, budget and budgetary control, cost analysis, product pricing, market strategies, incentive and motivation, cash flow, project analysis and monitoring, salary and compensation administration, computerization and management information system and all other activities. In short, we can refer it as a value management and the intangible parameters as discussed indicate its degree and quality towards this achievement. The companies in India should learn from such disclosure practices and it is hoped that more and more companies would join their hands in this type of endeavor in the years to come bearing in mind that shareholders' value creation is not only the responsibility but the identity of a corporate in the present era. References;-Annual Published Accounts of Dr. Reddy's Labortory's Ltd u of the respective years. 365
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Professional Updates

Corporate Governance in United Kingdom (UK)
In this paper, the author explains the present governance system, prescribes changes in regulatory measures in certain areas and outlines the emerging changes towards a revised and improved system of corporate governance in UK, as corporate Britain is currently undergoing a period of self-analysis to ensure avoidance of costly corporate disasters in future.

which seek to balance the interests of investors, shareholders and creditors. The 1948 Act was regarded as a milestone. The 1985 Act is the latest version. Section 683 defines the joint stock companies with limited liability. Such companies are divided into two types - (a) Limited (Ltd.) & (b) Public Limited (plc). A Ltd. Co. is expressly forbidden in law to issue shares to the public. A plc having a minimum capital of £ 50,000 may issue shares to the public (Sec 118). The legal structure rests on very simple principles. The owners (shareholders) appoint agents (directors) to run the business. The directors report annually on their performance to shareholders. In practice, there are two-link chains of accountability in plcs - i) management to directors & ii) directors to shareholders. Directors and Boards The British Companies Act 1985 requires all companies registered after 1st November 1929, to have at least two directors. There is no distinction between executive and nonexecutive directors. The super structures of the management of a British company is : board, board committees, chairman, executive directors and non-executive directors. Although the Companies Act & other regulatory bodies viz. Stock exchange & Takeover panel lay specific duties on directors but there is no mention of what they should do in regard to running of the business. However, number of useful documents for the responsibilities of directors are available which are mentioned hereunder: (i) The Roles & Duties of Directors : a Statement of Best Practice (Institutional Shareholders' Committee 1991). (ii) A Practical Guide for Non-Executive Directors (PRONED 1987). the management accountant, May, 2005

S. C. Das *

overnence system in British companies were little known, discussed, or even read until the emergence of long, deep recession in UK in 1990 and a series of high profile corporate failures, frauds and malpractices in some of the renowned companies viz, Polly pack International, Maxwell, Coloroll were unearthed, which raised the issue of corporate accountability in the public mind and in the house of commons. Various Committees set up thereafter have immensely contributed towards toning up the governance system in British corporates. In this paper, the author explains the present governance system, prescribes changes in regulatory measures in certain areas and outlines the emerging changes towards a revised and improved system of corporate governance in UK, as corporate Britain is currently undergoing a period of selfanalysis to ensure avoidance of costly corporate disasters in future. The author firmly believes that UK's interests can be best served by a sound governance system in which everyone * 366
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has to play his role--- the chairman, the board, the employees, the state, the shareholders & stake holders, the banks, the financial institutions and trustees. A few years ago the subject of corporate governance was little discussed or read. Most of the shareholders were not even aware of the governance system to be introduced in the company management. Emphasis has been heightened in the UK partly due to long, deep recession in UK in 1990 and partly due to a series of high profile corporate failures, frauds & disasters where the weakness of corporate; governance was clearly a contributory factor. The collapse of Polly Peck International, Maxwell, Coloroll etc. raised the issue of corporate accountability both in the public mind and in the house of commons. Corporate Britain is currently undergoing a period of self-analysis to ensure avoidance of expensive corporate disasters in future. Legal Framework The present UK law is contained in the latest series of Companies Acts,

M. Com., FICWA, MWSOM (UK), AIAM

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Professional Updates (iii) Guidelines for Directors (Institute of Directors, 1990). The U.K. has never developed a formal two-board structure like Germany. The U.K. boards, unlike Japanese boards, are small in sizes. The average size of the boards for the top 10 British companies are 16. The Bank of England in its quarterly bulletin in May 1988 mentioned that out of 549 companies in The Times 1000, 39% had the sizes between 6 & 8 and 29% between 9 & 11. A majority of boards of U.K. companies have non-executive chairman. Many boards have a majority of inside (executive) directors. Only 42% of all directors are outside / non-executive directors. 9% of the largest U.K. companies have no outside directors at all. 66% of the U.K. boards meet monthly or around 10 times a year. Sometimes 2-day strategy meetings of the boards also do take place. Around 14% of company boards meet every quarter. All UK companies do have a top executive who is generally called the managing director or CEO or COO. The PRONED 1990 survey showed that 26% of the top 100 companies in The Times 1000 had combined the roles of Chairman / Managing Director / CEO together. The U.K. corporate prefers individual leadership, with personal responsibility, risks and rewards. The CEOs enjoy the supreme power and thereby sometimes get corrupted by it. A survey of 1991 showed that the average basic salary of CEOs in U.K. companies with a turnover of more than £ 500 million was £ 140,000 plus an average bonus of 8% of salary. A sample from the Times 1000 showed that 81% of the 196 companies gave their CEOs cash related bonuses. In large companies the CEOs' salary & bonuses had risen from £ 110,000 in 1981 to £ 329,000 in 1989. In the year 1990, in the companies with turnover more than £ 1.50 billion, the highest paid director received a salary of £ 3,88,000 & share options £ 12,52,000 and had shares worth £ 58,52,000 (approx.). In British law there is no post as Chairman of the company. In practice, the directors, of course, meet in the board committee and they elect someone to chair it. The role of the chairman varies greatly, depending on the size, complexity and nature of the business, the division of his duties with CEO and the time devoted to the job. In the UK, most chairmen are part-time and few others are full time. A chairman is the public face of the company and often handles external relations jobs. The chairman has a crucial role in setting the tone for the business. He has the responsibility in smooth & effective running of the board. It is his duty to get right size, balance and composition of the board with the assistance of his board colleagues. He must conduct the meeting in such a way that he gets the best from the members present. He will work closely with CEO with integrity. The Chairman has to have considerable power with such a range of responsibilities. The Cadbury Committee felt strongly that it is desirable in principle to have separation of powers. But the Committee did no make firm recommendation in this regard. The code makes it clear (Para 1.2) that there should be a clearly accepted division of responsibilities at the head of a company, which will ensure a balance of power and authority, such that no one individual has unfettered powers of decision. Where the chairman is also the chief executive it is essential that there should be a strong independent element on the board, with a recognized senior member. In fact, many British companies are excellently run with roles of Chairman & CEO combined because they have good strong boards as well the members of which are fully capable of keeping the top man in check. An analysis of many recent cases of company collapse showed that on the one hand the two roles were combined making the top man super powerful & tyrant and on the other, the board members were too weak to control their top executives. Non-Executive Directors In 1980, the Bank of England along with other banks, the Stock Exchange, the Confederation of British Industries and the British Institute of Management set up PRONED to promote the wider use of non-executive directors in the boards of the British companies. In December 1992, a committee on the financial aspects of corporate governance, chaired by Sir Adrian Cadbury, published its "Code of Best Practice" meant for the directors of UK companies. The code calls for a strong independent element on the board in the form of independent directors, the need to make executive directors more accountable to shareholders and the need to establish effective audit, compensation and nomination committees. The code also says that the board should include non-executive directors of sufficient calibre and number for their views to carry sufficient weight in the board's decisions. The effect of the Cadbury code is to make the presence of nonexecutive directors (NEDs) mandatory in quoted companies as these

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Professional Updates companies must have audit committees with minimum 3 non-executive directors. In December 1991, the Institutional Shareholders' Committee, in their statement "The Responsibilities of Institutional Shareholders in the UK" mentioned that the institutional investors should take a positive interest in the composition of boards of directors with particular reference to the appointment of a core of non-executives of appropriate calibre, experience and independence. They should support the appointment of compensation and audit committees. A new committee on corporate governance was also established in November 1995 of which Sir Ronald Hample was the Chairman. This was set up to review the implementation of various recommendations of Cadbury Committee & Greenbury Committee as also to look afresh at the roles of directors, shareholders and auditors in corporate governance. Hample Committee in its final report published in January 1998 supported the view of Cadbury code for appointment of sufficient numbers of NEDs in the board so that there exists a balance of executive directors & nonexecutive directors (including independent non-executives) and no individual or small group of individuals can dominate in taking board's decision. The majority of NEDs should be independent and the boards should disclose in the annual report which of the non-executive directors are considered to be independent. The Hample Committee also felt that in order to bring effectiveness in the working of the board, at least 1/3rd of the total members of the board should comprise of the non-executive directors. The Committee also reported that whether or not the roles of Chairman & CEO are combined, a 368
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senior non-executive director should be identified to whom concerns can be conveyed. There should generally be no fixed rules for the length of service or age of non-executive directors but the board should be vigilant against the risk of advanced age and less efficiency of these directors. According to PRONED's 1990 survey of the top 100 UK companies, 96% had 2 or more non-executive directors and 82% 3 or more. The larger the company, the higher the proportion of NEDs. The UK corporates have probably some of the best boards in the world with competent executives & non-executive directors chosen on merits & experience. But the UK system imposes severe strains particularly on the NEDs. They share in full the responsibilities of their executive colleagues though their knowledge of business may be far less. A non-executive director often feels alone, fearful of raising an obvious important point or checking a basic assumption in the meeting. Therefore, the NEDs must make their position clear after knowing which issues are to be considered and which are not. In fact, their value to the board lies in considering difficult issues with objectivity, seeing the issues in the broad context of the company as a whole, and questioning the critical assumptions on which proposals are based. They must contribute positively to discussions with skill, tact and courage. The NEDs are reasonably paid. PRONED mentioned that an average remuneration of £ 12000 to £ 15000 p.a. are generally paid to a NED for 12-15 days work in a year. Unlike Germany, the UK boards do not encourage employee representation in the board and the two-tier board system.

The Appointment and Dismissal of Directors In practice, all directors are appointed by the board and ratified by the shareholders. When executives are appointed as directors the dominant voice is that of the CEO/MD. It is he who takes the responsibility for removing the directors if they are inefficient. The CEO himself can be removed by the board. There have been occasions when the shareholders have intervened directly to remove a CEO and change the board by exerting pressure. For example, in June 1992, the institutional investors in the UK were instrumental and largely responsible for removal of the CEO & Chairman Mr Robert Horton from the board of British Petroleum. In the similar way, they successfully lobbied the management of Barclays Bank for a separate CEO and Chairman in 1993. Previously, the CEO used to select NEDs among the people known to him personally or to his advisers & friends. Now-a-days, professional help from PRONED and other renowned firms is increasingly used in this regard. In British law, the directors can only be dismissed by the shareholders but not the board. In practice, the board can cause a director or even a chairman to step down. A non-executive director may resign from the board on grounds of fundamental disagreement, which sometimes becomes most useful as a deterrent. Cadbury code proposed that the NEDs should have a senior recognized member to whom they can turn if the chairman is also the CEO. This will help NEDs to be more effective in action.

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Professional Updates Board Committees The U.K. boards deal with three main committees. They are (i) Audit Committees (ii) Remuneration Committees & (iii) Nomination Committees. They are briefly discussed as follows: (i) Audit Committees The audit committees first came into existence in the USA in late 1970s as a consequence of large scale financial abuse & mismanagement. The NYSE made them a listing condition in 1978 and stipulated that these committees must be composed of outside directors. In the U.K. the audit committees were also set up due to similar reasons as in U.S. The formal functions of the committees are (a) scope of the external audit (b) appointment of external auditors (c) internal audit system (d) liaison with the internal auditors (e) examination of financial statements and (f) discussion with the external auditors on the financial statements. Audit Committees are considered to be the heart of the Cadbury report. The code (Para 4.3) stated that the board should establish an audit committee of at least 3 non-executive directors within terms of reference which deal clearly with its authority & duties. The code (note II) specified the recommendations as follows: (a) The audit committees should be formally constituted as sub-committees of the main board to whom they are answerable and to whom they should report regularly. They should be given written terms of reference which deal adequately with their membership, authority & duties. They should normally meet at least twice a year. (b) There should be a minimum of 3 the management accountant, May, 2005 members. Membership should be confined to the non-executive directors of the company and a majority of them serving on the committee should be independent of the company. (c) The external auditor, the head of internal audit should attend committee meetings as should the finance director also. (d) The audit committee should have a discussion with the auditors at least once a year without executive board members present. (e) The audit committee should have explicit authority to investigate any matters within its terms of reference and full access to information. The committee should be able to obtain outside professional advice and if necessary to invite outsiders with relevant experience to attend meetings. (f) Membership of the committee should be disclosed in the annual report. The chairman of the committee should be present to answer questions about its work at the AGM. (ii) Remuneration Committees In recent past, the pay of the top executives has created public interest and has been the subject matter of criticism in U.K. particularly when such increases were not commensurate to the increases in profits. For example in 1991 a question was raised in AGM of Prudential as to the remuneration of its chairman who received a 43% increase in pay against a fall in company's profits of 37%. Both Cadbury Committee and Greenbury Committee recommended that the boards of listed companies should establish a remuneration committee to develop a policy on the remuneration of executive directors & other senior executives. The Greenbury also recommended that the membership of this committee should be made up wholly of independent non-executive directors. The Hampel committee also agreed with the Greenbury recommendations that the determination of remuneration package of NEDs including non-executive chairman should be a matter of consideration for the board as a whole and therefore, the individuals concerned should abstain from discussion of their own remuneration. The committee also opined that a significant part of executive directors' remuneration should be linked to the company's performance by way of annual bonus, share option schemes, or long-term incentive plans. The committee also urged remuneration committees to use informed judgement in devising schemes suitable to the specific circumstance of their company and to be ready to explain their reasonings to shareholders. The disclosures in the annual report as recommended by Greenbury will enable shareholders to monitor the same. Section 12.43(X) of the Listing Rules of London Stock Exchange has implemented most of the disclosure provisions disclosed in section B of the Greenbury code and have required the companies to include in their annual report the following: a) a report by the remuneration committee on behalf of the board, showing company's remuneration policy for executive directors, and b) details of the remuneration packages of each director. The reports to the shareholders on remuneration are made in the name of the board as whole.

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Professional Updates iii) Nomination Committees In the UK corporates, the Chairman/CEO invariably has great influence on the choice of his colleagues in the board. This can result in the appointment of sycophants. As the focus on NEDs has brightened, the selection process has improved. At present, the British companies have to describe their background in the annual report. Therefore, shareholders come to know the chairman's wisdom in his exercise of patronage. A nominating committee comprising of the members chosen from the board, is responsible for the following activities: a) to give the Chairman/CEO a conscience when he chooses his own men, b) to offer alternatives to the Chairman/CEO, c) to improve the selection process. In the best run British companies, first the specification is drawn and thereafter search and selection of right man takes place. That is how a nomination committee brings an element of discipline into the whole process. Shareholders In UK corporates, the shareholders have numerous rights e.g., a) to share in the profits of the company by way of dividends, b) to share in the surplus if the company is wound up, c) to cast vote in the election of the directors in AGM, d) to obtain all information as laid down by the Companies Act and as required by the stock exchange rules, 370
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e) to subscribe for additional shares when additional capital is sought; f) to dispose of the shares at the best price freely. As per PRO SHARE estimate there are about 9.6 million individual shareholders in the U.K. corporates. The private shareholders hardly speak at the meetings, which reflects their feeling of odds, timidity & ignorance. Unlike professionals, they lack the power or knowledge to delve the issues in the meetings. They could seldom ask embarrassing questions at AGMs. Few companies even ignore sensible enquiries of the shareholders. The logical answer to combat these odds is to get together with other private shareholders and make a group. Unfortunately, the people in U.K. are encouraged to own shares but not to protect their combined interests. Institutional Shareholders Institutional investors in the U.K. hold a larger stake in domestic equities than that of U.S. institutions. In the U.K. 67% of the equity is held by U.K. institutions as compared to 47% by the U.S. institutions. According to 1989 report, about 19% of U.K. equities were held by insurance companies, 31% by pension funds, 6% by unit trusts and the balance by the other financial companies. Institutional shareholders vary greatly in size and in purpose - pension funds, insurance companies, unit trusts etc. serve differing purposes. They have different obligations and are under different pressures. The U.K. institutions have generally exerted their influence in behind the scenes discussions with management.

The institutional shareholders' committee have suggested that institutional investors should encourage regular, systematic contact with the company at senior executive level to exchange views & information on strategy, performance, board membership and quality of management. They should take a positive interest in the composition of board of directors with special reference to concentration of decision making power in the board and the appointment of non-executive directors of appropriate calibre, experience & independence. They must support appointment of audit and remuneration committees and encourage disclosure of the principles on which directors' remunerations are determined. By and large, the institutional shareholders are successful in exerting their influence on the management of their shareholding corporates. In fact they have played at times, a powerful role in changing the CEO and even board of directors (e.g. British Petroleum, Barclays Bank etc.). Annual General Meetings (AGMs) The British Companies Act requires the directors to present the annual accounts at the AGM alongwith the auditors' report for approval of shareholders. The shareholder does not have to attend in person but is entitled to appoint someone else as proxy and cast proxy vote. The British corporates' AGMs are prima facie a non-event. Normally they are poorly attended. Intriguing or embarrassing questions are hardly asked. Institutional shareholders prefer to keep quiet in the AGM in order to ask their questions quietly in some other occasion. They generally prefer the management accountant, May, 2005

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Professional Updates the privacy and discretion of private contact rather than public questions at AGMs. Only a few shareholders bother to complete their proxy forms & appoint the proxy. There is no requirement of quorum at an AGM. Therefore, the profession of proxy solicitor has not developed. The proportion of votes cast in an AGM is pathetic - it is normally less than 15%. However, the companies generally arrange AGMs in time at convenient place. In the US, the corporatre law requires the trustees of private pension funds to ensure that their shares are voted. Both the USA and France have rules relating to quorum at AGM. But nothing of this sort is regulated in the U.K. law. The external auditors are present in the AGM; but they have no right to speak unless the Chairman invites them to do so even if a direct question is asked by the shareholder to them. Perhaps, the time is ripe to revamp the procedure of the AGM in order to make it a more significant occasion and to improve accountability of the company's executive management. It will be uneconomical to inform the small shareholders on how to cast vote - rather they should be provided with a service thro: an intermediary like banks to cast votes on behalf of these shareholders as is the present practice in Germany. Bankers and Their Role The banks in U.K. play a significant role as the suppliers of short term & medium term loans / borrowings to the U.K. corporates. In 1979, only 12% of the total sources of finance required by the U.K. companies the management accountant, May, 2005 came from the bank borrowing. In 1990, the situation was totally different in the sense that the bank borrowings accounted for 28% of the total finance required by the companies. The companies come to the banks for short term trading resources and the main instrument is the overdraft. In reality, short term loans are rolled over as long as they effectively become medium & long term hard core capital. In the U.K. there is no comprehensive system for collecting data about a borrower's total indebtedness or a central organization where the banks can refer. Most of the banks do not have full facts - perhaps, severe competition compels them to lend without asking the right questions. UK banks generally do not take equity stakes to cement the relationship with a customer company. The general feeling of the banks is that such interdependence is potentially dangerous. They consider equity stakes as an unwise utilization of bank funds and such relationship with client companies is unnecessary, apart from a possible conflict of interest between their role as lenders and their role as shareholders. In recent years, UK banks have developed different types of funding including medium and long term loans. They have made organisational changes to look towards industry more constructively. Both banks and insurance companies have supervisors whose responsibility is to protect them from system risks and also to protect the depositors or policy holders against failure. The supervisors do monitor prudential ratios or liquidity ratios & other data in order to protect the shareholders of the banks & insurance companies. It is up to the Chairman and the non-executive directors of the bank to ensure that the executive management is upto the mark. If, however, the performance looks inadequate, then the shareholders have rights to monitor the operations of the banks & insurance companies and interfere directly. Stock Market The London stock market has been active since the 16th century. In 1697, the authorities felt it necessary to regulate it in order to stop the malpractices of stock brokers & stock Jobbers. Till date the market has continued to be developed. Though the market provides a small proportion of industry's funds, the market capitalization as a % of GDP in UK in 1987 vis-à-vis other countries as mentioned below will exhibit how much important the stock market is in UK : United Kingdom Denmark Holland West Germany Belgium France Spain 86% 17% 44% 16% 37% 13% 27%

In 1992, the turnover of domestic & foreign equities on the London Stock Exchange was £ 382 billion. It is not evident that the share prices in the secondary market have any direct impact on corporate governance as the share prices can move due to other external influence. But the fact remains that a consistently poor performance of the company will obviously affect the share price and

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Professional Updates the cost of further capital. Shareholders in UK have generally reacted to the bad news by selling out their stocks. Mergers and Takeovers The mergers have been quite frequent in UK like other countries. The 'take-over' is a specific form of merger whereby a company wants to acquire another against the will of its board. However, 'some friendly' mergers turn into takeovers because the target company's board does not wish to proceed. Some 'hostile bids' also end in negotiated terms. Takeovers in UK began in the 1950s and gathered momentum in the 1960s, which really took off in 1980s. In 1987, there were 905 mergers & takeovers, the bid value of which was £ 11 billion representing 3% of the market capitalization of securities. In 1988, 937 cases of merger & takeovers took place and the total bid value was £ 17 billion representing 4% of the total market capitalization of securities. The British companies aspire to grow in either of the two ways viz. i) by way of organic development or ii) by way of merger / acquisition. Companies like Marks & Spencer plc. had chosen the first way and others like Hanson plc. or BTR chose the second route for growth. Theoretically, the corporate management should never be allowed to under perform for a continuously long period. The board must ensure this aspect. If it fails, then the shareholders must address the problem. It is observed that most of the British take-overs happened due to failure on the part of boards & shareholders to discharge their respective responsi372
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bilities. We have seen earlier that, the Japanese and German shareholders do accept relatively small dividends from the companies as they believe in long-term capital appreciation or growth of the stocks they hold. But situation is totally opposite in U.K. The U.K. shareholders have often been paid more as dividend than what would strictly be good for the longterm health of the business. The companies do resort to this practice due to the fear of take-over. It is generally argued that in the U.K. system, dividends have an important signalling function by which the companies would like to communicate to the investing public as to how management views prospects as well as performance. The critics, however, argue that U.K. industry pays a high price for its signalling mechanism. Company's Report to Shareholders Previously, the directors were not providing a complete picture of their performance in the annual report of the company. They were supposed to furnish shareholders with a coherent account of how the company had performed in the last accounting year alongwith what its position was and what its prospects were. The Cadbury Report (para 4.50) recommended that boards should pay particular attention to their duty to present a balanced and understandable assessment of their company's position. The report (para 5.22) also recommended that directors should state in the annual report that the business is a going concern with supporting assumptions or qualification as necessary. The shareholders to whom the annual reports are sent for their use must be able to rely on the

accuracy of the information which is the prime responsibility of the directors. Corporate Governance Assessment of UK System From the above discussion it is clear that there are two basic principles of corporate governance which is applicable at all times and in all places as stated below : (i) the corporate management must be competent to drive the organization forward without any undue constraint due to govt. interference, fear of litigation or fear of displacement; (ii) the freedom to use managerial power must be exercised within the framework of effective accountability. In order to assess the UK system of corporate governance let us examine to what extent these principles have been followed. Freedom of Executive Management The UK corporates do not generally face any interference from the Govt. ministers or from the bureaucrates. The rules & regulations in UK are now far more comprehensive than before. The directors of UK corporates are generally not sued and therefore, they have no fear of litigation. This is partly because there are few causes of action, which apply, and partly because the machinery is not available. The UK corporates can only hope to get the best services from their managers if they can perform with sufficient confidence to take care of the business in the medium & long term. The fear of displacement which the management accountant, May, 2005

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Professional Updates is of concern in the UK system is mainly due to displacement of the competent executives - following a merger or takeover. Takeovers constitute only a small fraction of mergers. But these are disproportionate and have impact on the corporate governance of UK companies. Research has disclosed that in many cases mergers and takeovers do not work out well because bidders are obliged to act with significant ignorance. This is an imperfection in the market for companies, which the market itself cannot solve. The critics alleged that the UK system of corporate governance particularly the market pressure has placed UK industry at a competitive disadvantage against the companies from other countries in which these pressures are much less. Accountability We have observed earlier that the German and Japanese systems with their combination of internal networks and formal structure have been able to achieve high standards of performance & higher degree of effectiveness. UK system has also the same objectives. It relies mainly on boards and to a limited extent on the shareholders. It is observed that UK system of accountability of management does not work rationally. In many companies it hardly works at all. In some companies it partially works or poorly works. The Legal Framework The issue of accountability of management is fundamental to the concept of the company and that the mechanism thro : which it should work must be prescribed by law. Unfortunately the legal framework in the management accountant, May, 2005 UK which defines the governance of companies in the Companies Act is extremely sketchy. The Act has hardly mentioned for a company to have a board and its chairman. However, the Act has intended that management should be accountable to the directors who in turn, should be accountable to the shareholders. The Cadbury report has advocated that all companies need to have boards & their Chairmen. The Committee recommended that all quoted companies should appoint audit committees composed of only independent directors. This is exactly in line with the rules set by NYSE in 1978 for its listing requirements. Cadbury report also recommended (para 3.7) that companies should mention in the annual report & accounts whether they have complied with the 'Code' and should give reasons for any areas of non-compliance. The London Stock Exchange has required inclusion of such statement as one of its listing requirements. We have observed that the French law offer option to the companies either a single-tier or two-tier board system. This choice has been invariably made not on ideological ground but on personal grounds & circumstances. Perhaps, UK system should follow the French system and offer similar choice to the UK shareholders. The Cadbury report has also recommended that all quoted companies should have sufficient number of independent directors as they are needed for the effective board functioning, particularly for the functioning of audit committee. Now, if these NEDs have to do their monitoring jobs efficiently and effectively, they should be protected & safeguarded against the ruthless & dominating attitude of a powerful CEO. Therefore, there is a need for amendment of the Companies Act to give directors better protection on such companies. Shareholders The weakest link in the chain of UK system of corporate governance has been between board and the shareholders. The fact remains that many shareholders do not play any role in corporate governance as they do not see any interest being served by the companies. The system is built on the assumption that shareholders will monitor performance of the company and they will be concerned on its strategic issues. It is generally argued that management has many other interests to consider apart from the shareholders viz. employees, customers, suppliers, banks, institutions, community etc. Even with due honour to this argument it should be realised that the shareholders are the lifeblood of the company. If they are neglected and consequently the board's accountability to them is reduced, the corporate governance system will be totally weakened. Therefore, shareholders hands need to be strengthened and their incentives need to be improved. Private Companies Whenever a company either quoted or not, reaches to big size, its potential for doing damage becomes considerable enough to arouse public interest in its governance and consequentially becomes a public policy issue. The Germans' belief is also on the same line. We have observed that a small German limited company (GmbH) is run by one Managing Director (Geschaftsfuhrer). As soon as 373
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Professional Updates it grows in size and employs between 500 & 2000 people into it then it must have a supervisory board (Aufsichtsrat) accompanied by the employee representatives. In the same line it may be suggested that the big unquoted companies with say 1000 or 2000 employees should be required to have non-executive directors on the board with some degree of protection of tenure. The present Companies Act covers all types of companies - big or small. One cannot deny some genuine difficulties being faced by the small private companies to comply with all the regulations of the Act. Therefore, there is a case for reviewing the whole issue de novo, to institute a separate Act which is much shorter & simpler than the present Companies Act in order to help set up & effective running of small private companies. Banks At present the role of British banks is very negligible in the matter of corporate governance. Only in dip crisis of the client company they come forward to the rescue operation whereby they sometimes require management changes of the company as part of the price for continuing support. From the point of view of corporate governance, the main issue is the relationship between banks and the companies. The determination of both parties to reach the right relationship and their preparedness to pay for it is the most important matter. It implies a willingness on the part of banks to incur costs of keeping relationship and the experience of the bank officials dealing with the corporates. 374
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However, the leading banks of UK have taken the concept of universal banking and are now trying to offer a wide range of services so that the relationship costs are not prohibitive. Trustees In the context of corporate governance the role of trustees are very important because they are the owners of most of the UK industry. In the present day world of investment where lot of change in the investment policy has taken place, the trustees need appropriate up-to-date training. Unfortunately, the benefits of having more active and knowledgeable trustees for corporate governance have not been properly understood. The NEDs, trustees of pension funds must be independent and their personal interests should not be in conflict with the beneficiaries whom the trustees represent. Review and Conclusion There is no denial of the fact that so far U.K. governance system on corporates has not worked effectively. Therefore, a major review is required and the government must come forward with strict enforcement of law instead of leaving at the mercy of others. However, that does not mean that the government will interfere at every step but it has to ensure that the balancing of various interests work effectively within the system. The time has been ripe for an impartial and critical scrutiny of the law and immediate revision of the enactment particularly in regard to the following important points: i) segregation of the Companies Acts :

a) a simple Act for small private companies b) a comprehensive Act for quoted & big unquoted companies ii) basic role of the board, its compositions including NEDs iii) role of the Chairman iv) role of audit committee v) selection process of NEDs, tenure of the office of NEDs vi) take-over by companies, reconsideration of the role & effects of 'hostile' takeovers and the status of the employees after takeovers vii) options to the shareholders to select between two alternative types of board structure - single or two-tier. Besides, the role of shareholders must have to be made more significant. Various ways have to be explored to encourage them to play their role in the corporate governance. This may require revision of the procedure for general meetings and other subjects concerning them. Therefore, it may be concluded that everyone in the game of corporate governance has to play his role the chairman, the board, the employees, the State, the shareholders & stakeholders, the banks, financial institutions & trustees. That is how the UK's interests will be best served by sound corporate governance system. However, the UK has started at home by putting its corporate governance in order. Thus the members of the Cadbury Committee, Greenbury Committee and Hampel Committee have immensely contributed to this u direction. the management accountant, May, 2005

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EXECUTIVE D IGEST
Gambling Industry

A sure bet ?
Gambling is changing beyond all recognition. Regulatory changes and the explosion in online gaming have turned it into one of the UK’s most successful industries. ho would have predicted, 50 years ago, that gambling would become one of the most successful industries in the UK? By 2009, the UK gambling market will be worth over £10 bn, according to a report by KPMG - 20% larger than today. The main driver behind the booming industry will be casinos, which will be worth £2.5bn by 2009 a massive 217% growth rate over the next five years. The explosion in gaming business has been echoed across the developed world but while some countries, most notably the US, have viewed the growth in gambling with suspicion, the UK has embraced it. The introduction of the National Lottery in 1994, together with chancellor Gordon Brown's decision in 2001 to introduce a gross profits tax on betting, did much to encourage gambling habits in UK. The UK has become a fertile ground for the gaming industry and it is predicted that further regulatory changes contained in the Gambling Bill, which is limping its way through the parliamentary process, will attract even more business. Betting on the web Much of the recent increase in gambling activity is due to the explosion in internet-based gaming. Online betting the management accountant, May, 2005

ket for online poker, behind the US and Japan. Available research suggests that 4m people in the UK gamble online every month and that 80% of online gamblers in Europe are British. Gambling has found an ideal environment on the internet. It has been introduced to an entirely new audience of women, for example. Perhaps less willing to enter the traditional - maybe intimidating - gam-

W

exchanges (see box) are already on their way to revolutionising the way we bet on sporting events. But we are also embracing the idea of gambling on traditional casino games over the internet. Online gaming is growing at an exponential rate. According to market researchers River City and Christiansen Capital Advisers, worldwide online net gaming revenues have risen from £ 75 mn in 1999 to around £ 4 bn in 2004. Revenues are expected to reach £ 8 bn by 2009. The UK is currently the third largest mar-

bling domains of betting shops and casinos, YouGov research shows that 30%-40% of British online gamblers are women and 14% are between the ages of 18 and 29. As more and more people choose to gamble online, internet-based gaming companies have suddenly become remarkably big business. Their finances and exact profits, though, inevitably remain shrouded in mystery, which has in part contributed to the air of suspicion that surrounds the sector. 375
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Gambling Industry Going public The next few months, though, should shed new light on the industry as the secretive online gambling corporations are going public - quite literally. the scene was set in 2004 when Gaming VC Holdings, the third largest online casino operator by numbers and owner of the casinoclub.com brand, floated on AIM. The placing of 31 m shares at 420p valued the company at around £140m but the shares have rocketed since then and are now hovering around the 725p mark. All eyes are now turning towards PartyGaming, the world's largest online poker company, which announced in January that it was considering a flotation. The Gibraltar-based company has appointed advisers and if the float goes ahead, it is expected to push the company straight into the FTSE 100 with the largest single listing since Friends Provident in 2001. Soon afterwards, Cassava Enterprises, which owns the 888.com brand, hinted that it was also considering a float. Analysts estimate that a PartyGaming float could value the company at anything between £2.2bn and £3.5bn but, given the secretive nature of the company, any figure is likely to be a guess. The group made a pre-tax profit of almost £200m in 2004 but detailed financial statements are not available. What is known is that the group was set up in 1997 by a Californian lawyer, who had previously specialised in pornographic websites, and an Indian IT expert. Given the flurry of excitement that surrounded the announcement of PartyGaming's intention to float, if it goes ahead it is likely to be one of the events of 2005. 376
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US hurdles Even so, industry experts point out that the online gaming sector is riskier than it may appear. The biggest hurdle to the future growth of many online gaming companies lies in the US, where the government remains vehemently opposed to internet gambling. As US law currently stands, it is illegal to use a phone line to transmit or receive a bet, although the exact status of online gaming remains confused after the federal court ruled that online sports betting was illegal but casino games were legal. The advertising of internet gambling is severely restricted and an internet gambling bill that could restrict the use of credit card transactions on online gaming sites has been widely predicted. Even so, the US authorities seem to be fighting a losing battle as millions of US punters regularly use foreign gambling sites. Over a third of the 12m people who gambled online in 2003 were based in the US. Both US and UK online gaming companies are heavily reliant on US business. The UK's Sportingbet.com, for instance, reports that 60% of its income comes from US gamblers. Gaming VC Holdings, however, has shown that an online gaming company can be successful without US customers. The company's site, casinoclub.com, does not accept bets from US-based players, a fact which, the company says, protects it from the regulatory risk that many other online gaming companies are exposed to. Investment in the gaming industry, in other words, is not necessarily a sure bet. q Source : Accountancy

All change at the bookies Internet technology, and particularly the emergence of internet-based betting exchanges such as Betfair, has been a catalyst for change in the bookmaking industry. Betfair, set up in 2001, has already reached gross turnover of around £2bn a year. Betting exchanges allow person-to- person betting on sporting and other events, by matching punters with different opinions of the outcome. Betfair takes a commission on each bet, exposing it to less risk than a traditional bookmaker. Gamblers have embraced the concept wholeheartedly, attracted by the fact that the odds offered by exchanges are set by other gamblers and not by bookmakers. The success of online betting exchanges, however, has not gone unchallenged by traditional bookmakers. Chris Bell, CEO of Ladbrokes, and David Harding, CEO of William Hill, have both publicly criticised the exchanges, saying that their option of allowing punters to lay horses to lose a race threatens the integrity of racing. Mr Bell claimed on The Money Programme that 'at least a race a day, if not more, is being corrupted: It has also been suggested that the exchanges are vulnerable to fraud. Betfair and other exchanges have fought back, saying that the fact that punters have to register with them and use a credit card means that their audit trail is significantly more robust than that of traditional bookmakers, where bets are usually taken in cash. The traditional bookmakers have also taken the fight to government, lobbying for changes to the Bill that would require users who lay bets on Betfair for 'non-recreational' purposes to be licensed and taxed as a bookmaker. A report by the Centre for the Study of Financial Innovation at the end of last year pointed out that the advent of internet-based betting exchange had changed the nature of the industry, almost overnight. The authors, accountants Michael Mainelli and Sam Dibb, added that these changes had increased the potential returns to punters at the expense of traditional high street bookmakers. 'Adapt or die is the message for them' they said,'and most will almost certainly die.' the management accountant, May, 2005

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Science & Technology

Human healthcare and hibernating mice

agents which reduce metabolic rate in the same routine way that anaesthetics are used today to dull pain. It could provide a new way to help prevent tissue damage and death in stroke or heart attack victims, he suggests. It could also help to preserve transplantable organs for longer. "Space applications may also appear in the future, but our primary goal is to think about the medical applications in the here-and-now," he says. But it will take careful experiments to develop safe and effective agents. Roth doubts whether it would be practical to place emergency patients in special chambers containing the gas, instead favouring injected agents which do the same job. Ice-cold saline "This work is exciting and incredibly creative," says Samuel Tisherman of the University of Pittsburg's Safar Center for Resuscitation Research. He says the procedure could complement approaches his own team are developing to prevent tissue damage by rapidly flushing the body with ice-cold saline. Large-animal experiments have already achieved up to 20 minutes in suspended animation before revival with this procedure Tisherman's team is aiming for 3 hours. Researchers at the European Space Agency described the breakthrough as "amazing", but wondered if extra measures beyond the hydrogen sulphide would be needed to keep astronauts alive. "And I'm not sure astronauts would appreciate the smell as they're trying to nod off," joked Mark Ayres of ESA's Advanced Concepts Team in Noordwijk, the Netherlands. q Source : New Scientist & Science Journal 377
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uspended animation has been deliberately induced in a spe cies of mouse which does not naturally hibernate. It is the first time such a feat has been achieved, say the procedure's pioneers. If a similar response could be triggered in humans, there would be major healthcare benefits and the futuristic idea of putting astronauts into suspended animation on longhaul space flights could move a step closer to reality. The mice were induced to fall into their deep sleep after being exposed to hydrogen sulphide - the gas which gives rotten eggs and stink bombs their characteristic foul odour. The animals later revived in ordinary air. Mark Roth, head of the team which pioneered the procedure at the Fred Hutchinson Cancer Research Center in Seattle, US, explains that hydrogen sulphide all but shuts down the body's usual demand for the oxygen it needs to keep cells ticking over. Usually, cells denied oxygen - after a heart attack or stroke, for example - die quickly. But hydrogen sulphide instead sends cells into a state of dormancy. "You're shutting down the cellular hunger for oxygen," says Roth, delaying the cells' oxygen-starvation and buying time for medical treatment. Shallow breaths Roth and his colleagues exposed ordinary mice to air containing 80 parts per million of hydrogen sul-

phide, plunging the creatures into suspended animation for up to 6 hours. They were then revived with fresh air, having suffered no ill effects. While hibernating, their metabolic rates plummeted by about 90% as their cells dropped their usual demand for oxygen. Core body temperatures dropped from the normal 37°C to 15°C. "Once down to around 15°C, instead of 150 breaths per minute, they were down to just a couple of really shallow breaths a minute," says Roth. High levels of hydrogen sulphide have been known to kill people working in sewers and petrochemical plants. But research on rodents showed that certain low levels appeared to kill the animals, only for them to recover later. Roth notes that a similar "Lazarus effect" has been witnessed in patients pronounced dead after exposure to extreme cold. "Chemical thermostat" Body cells naturally make hydrogen sulphide and Roth believes the chemical enables warm-blooded animals to stay at the same temperature by regulating oxygen demand in cells. "It's our chemical thermostat," he says. So providing a slight excess of the gas, he reasoned, might interfere with metabolic rates and depress demand for oxygen. In the future, Roth foresees

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Global Financial Stability

World market grows ........ hanks to solid global growth and improved corporate and emerging market fundamentals, the global financial system has become healthier and more resilient, according to the April 2005 Global FinanciaJ Stability Report. Improved fundamentals combined with ample global liquidity, which has encouraged leverage (borrowing to finance higher-yielding investments) and risk taking-have also bolstered asset values. The IMF report, which is published twice a year, notes that risks remain, however, including from potential investor complacency and the possibility of faster-than-expected increases in U.S. interest rates. The report also examines the implications of transfening risk to the household from the financial sector and trends in corporate finance in emerging markets. In part because of the transparent communication strategies of major central banks, world financial markets have remained orderly as short-term interest rates have been raised in the United States and some other mature markets. Despite these hikes in short-term policy rates, yields on long-term bonds have stayed low and financial markets have experienced little volatility. Low long-term government bond yields, particularly in the United States, have partly been the result of low demand for net credit by the corporate sector, shifts in the preferences of pension funds toward fixed-income investments, and strong official foreign demand for 378
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U.S. treasury and agency securities. Low interest rates have encouraged investors to move out along the risk spectrum in a quest for higher yields, thus buoying asset valuations and compressing credit spreads Though it is hard to estimate the degree of leverage, there remain strong incentives for investors to borrow at low short-term rates to fund positions in higher-yielding assets. Investors have also been encouraged by improved corporate and emerging market sovereign fundamentals. Corporate balance sheets are generally healthy, and defaults are at cyclical lows. Key emerging market countries continue to improve their resilience by building reserves, implementing sound macroeconomic policies, and undertaking beneficial debt-management operations. Positive prospects for emerging markets For their part, emerging markets have continued to experience a largely healthy expansion of their investor base, including U.S. and European pension funds and insurance companies. Emerging market sovereigns have used this strong investor appetite well, completing a substantial portion of their external borrowing needs for 2005-and in some cases even for 2006-at low cost . Global investors have also shown a greater appetite for local market

instruments, such as domestic government bonds, which has, in turn, allowed emerging market borrowers to reduce currency risks by meeting more of their needs through local currency borrowing. The recent, albeit still very limited, global issuance of local currency emerging market bonds is encouraging. Also welcome is the fact that some countries have been able to issue local fixedrate bonds in longer maturities than before, and that local currency sovereign emerging bonds are being included in benchmark global bond indices. Tight valuations leave downside risks The recent period of high liquidity and low volatility may, how- ever, have led to some complacency and reduced investor discriminationboth of which suggest that the balance of risks is likely to be on the downside. Inflationary pressures in the United States could, for example, prompt faster-than-expected hikes in U.S. interest rates, which could, in turn, widen credit spreads and lead investors to reconsider their appetite for risk. Possible adverse developments in U.S. corporate bond markets could also spill over to emerging bond markets. Other risks stem from the need to reduce global payments imbalances. Global financial flows have been giving policymakers time to implement corrective policies, and the real effective depreciation of the dollar that has occurred since early 2002 should support adjustment of the U.S. external deficit, which would be further facilitated by greater flexibility among key Asian currencies. However, should markets the management accountant, May, 2005

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Global Financial Stability lose patience with the pace of change, asset prices could start to play a more forceful role in bringing about adjustment. One potential trigger could be a market reassessment of the likely pace of accumulation of U.S. dollar reserves by central banks, particularly in Asia. Household balance sheets In its final installment of a series exploring the transfer of financial risk, the report examines the implications for the household sector. While households have always been the ultimate bearers of financial risks, these risks have traditionally been intermediated by governments and private financial and nonfinancial institutions. A key message of the report is that government policies that seek to improve the financial stability of important financial institutions, such as the introduction of risk-based capital or similar prudential standards, should also take into account the consequent transfer of risks to households and their ability to absorb or manage such risks. In recent years, households have benefited in various ways from a significant growth in net worth relative to income. This has been associated with a shift in the composition of house-hold wealth from relatively stable bank deposits to more volatile and market-sensitive assets, which has exposed various age and income cohorts to greater risks. Moreover, planned reforms of public and private retirement benefits may give households even greater responsibility for their long-term financial affairs. These reforms confer certain benefits, such as the greater the management accountant, May, 2005 portability of pension plans, but also increase the direct exposure of households to investment and market risks, and even to the risk that they may outlive their financial plans and assets. The report suggests that in these circumstances, new instruments may be needed to facilitate long-term household savings for retirement. It also points out the importance of consistent, government policies, including stable tax policies, for encouraging long-term savings. The issuance of long-dated bonds indexlinked bonds, and longevity bonds related to the actual lifespan of a given population could help households deal with the fmancial implications of uncertain life expectancy and convert long-term savings into a dependable income stream. In addition as more households come to rely on defined contribution pensions, there may be need for greater financial education of households to increase their ability to manage risks. Governments have an important role in developing communication strategies to inform households about their retirement challenges and in coordinating with the private sector to provide financial education. It will also be important to improve household sector data so that particularly vulnerable groups can be identified. Emerging market corporate finance Recent data on emerging market corporate finance indicate an increase in bond issuance and a stagnation or decline in bank lending and equity issuance, but, in general a continued scarcity of market-based sources of funding. An analysis in the new report finds that the culprit is general weaknesses in corporate governance rather than firm-level problems. Important gaps remain, for example, in implementing and enforcing widely accepted principles of corporate governance. A growing number of recent studies demonstrate how weak corporate governance practices, such as inadequate minority shareholder protection and a lack of independent directors or external auditing committees, are magnified by weaknesses in contract enforcement, the rule of law, and judicial systems. Disclosure regulations are also vital in facilitating market discipline. When emerging market corporates lack adequate and diversified sources of funding, they typically turn to a heavier reliance on foreign currency and short-term debt instruments, which leads to wellknown vulnerabilities. Based on firm-level data, the report provides new estimates of how balance sheet mismatches develop and a better basis for understanding corporate sector behavior. The analysis also combines these mis-matches with traditional financial ratios and bankruptcy risk indicators to assess the overall fragility of the corporate sector. Ultimately. the report emphasizes. assessing vulnerabilities in emerging market corporate sectors will require a more integrated approach-one that accounts for interactions between interest rate, foreign q exchange, and credit risks. Source : Elie Canetti, William Lee, and Jorge Roldos IMF international Capital Markets Department in IMF Survey 379
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Science & Technology

Classic maths puzzle cracked
Ramanujam’s conjecture about partition of prime numbers can go a long way in encrypting credit card information and computer security over the net

for a rule that covered 11 as well - a solution called the "crank" that Andrews and colleague Frank Garvan of the University of Florida, US, helped deduce in the 1980s. Patterns Everywhere Then in the late 1990s, Mahlburg's advisor, Ken Ono, stumbled across an equation in one of Ramanujan's notebooks that led him to discover that any prime number - not just 5, 7, and 11 had congruences. "He found, amazingly, that Ramanujan's congruences were just the tip of the iceberg - there were really patterns everywhere," Mahlburg told New Scientist. "That was a revolutionary and shocking result." But again, it was not clear why prime numbers showed these patterns - until Mahlburg proved the crank can be generalised to all primes. He likens the problem to a gymnasium full of people and a "big, complicated theory" saying there is an even number of people in the gym. Rather than counting every person, Mahlburg uses a "combinatorial" approach showing that the people are dancing in pairs. "Then, it's quite easy to see there's an even number," he says.

A

number puzzle originating in the work of self-taught maths genius Srinivasa Ramanujan nearly a century ago has been solved. The solution may one day lead to advances in particle physics and computer security. Karl Mahlburg, a graduate student at the University of Wisconsin in Madison, US, has spent a year putting together the final pieces to the puzzle, which involves understanding patterns of numbers. "I have filled notebook upon notebook with calculations and equations," says Mahlburg, who has submitted a 10-page paper of his results to the Proceedings of the National Academy of Sciences. The patterns were first discovered by Ramanujan, who was born in India in 1887 and flunked out of college after just a year because he neglected his studies in subjects outside of mathematics. But he was so passionate about the subject he wrote to mathematicians in England outlining his theories, and one realised his innate talent. Ramanujan was brought to England in 1914 and worked there until shortly before his untimely death in 1920 following a mystery illness. Curious Patterns Ramanujan noticed that whole numbers can be broken into sums of smaller numbers, called partitions.

The number 4, for example, contains five partitions: 4, 3+1, 2+2, 1+1+2, and 1+1+1+1. He further realised that curious patterns - called congruences - oc-

curred for some numbers in that the number of partitions was divisible by 5, 7, and 11. For example, the number of partitions for any number ending in 4 or 9 is divisible by 5. "But in some sense, no one understood why you could divide the partitions of 4 or 9 into five equal groups," says George Andrews, a mathematician at Pennsylvania State University in University Park, US. That changed in the 1940s, when physicist Freeman Dyson discovered a rule, called a "rank", explaining the congruences for 5 and 7. That set off a concerted search

"This is a major step forward," Andrews told New Scientist. "We would not have expected that the crank would have been the right answer to so many of these congruence theorems." Andrews says the methods used to arrive at the result will probably be applicable to problems in areas far a field from mathematics. He and Mahlburg note partitions have been used previously in understanding the various ways particles can arrange themselves, as well as in encrypting credit card information sent over the internet. q Source: NewScientist.com news service the management accountant, May, 2005

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Units

Mar 2004 11.4 -63.0 20.6 -37.1 21.5 -10.3 51.1 49.4 32.4 -21.6 84.4 55.7 32.3 -18.9 165.7 -5.5 30.6 -13.1 188.6 -29.0 27.2 -10.9 250.9 1.4 23.0 -17.4 127.2 -40.4 20.3 -14.1 82.6 7.7 23.7 7.4 19.2 -37.5 21.8 -14.3 6.6 -68.7 21.7 -13.3

Apr 2004

May 2004

Jun 2004

Jul 2004

Aug 2004

Sep 2004

Oct 2004

Nov 2004

Dec. 2004

Jan. 2005

Feb. 2005

Mar. 2005

Agriculture Actual rainfall variation from normal Stock of foodgrain

mm per cent mln. tns. % change (yoy)

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52.9 3.2 37.5 6.8 2.89 2.0 51.2 11.0 53.7 9.0 28.2 8.2 2.85 10.7 49.0 10.6 45.6 5.9 28.6 7.8 2.88 8.1 48.2 4.0 48.8 6.6 27.7 6.4 2.78 1.1 46.4 4.8 47.0 6.0 28.6 7.6 2.87 0.3 50.4 14.6 49.7 9.2 26.0 -0.4 2.88 5.1 48.2 7.5 46.2 4.0 28.5 9.7 2.76 2.0 49.0 8.6 47.7 9.9 31.1 11.4 2.88 -0.1 48.6 4.8 50.4 12.2 32.4 3.5 2.80 0.9 48.0 4.4 49.4 5.1 36.0 7.8 2.88 -0.3 50.5 5.0 53.7 9.8 35.5 2.8 2.91 0.2 50.5 2.6 53.4 9.2 33.8 1.0 2.60 -5.0 46.0 -0.2 50.2 5.3 210.7 8.1 183.2 6.4 278.0 25.2 210.5 5.3 299.7 23.3 205.7 1.6 183.1 10.1 202.6 12.4 261.9 11.9 192.1 5.0 198.6 13.0 207.2 13.0 276.9 8.3 186.1 2.5 210.9 16.9 206.6 7.4 274.4 16.8 178.4 6.5 207.9 11.6 214.7 6.4 299.5 20.1 189.5 10.2 214.1 13.5 213.1 4.9 300.8 20.1 191.8 12.4 239.4 16.8 209.4 3.8 325.5 20.6 193.9 12.9 219.0 13.2 211.6 7.9 339.8 18.9 194.1 14.7 189.5 8.9 168.8 8.0 192.3 6.8 171.0 3.0 190.3 7.3 167.8 2.9 198.7 8.5 175.2 5.7 197.8 8.6 170.5 5.2 202.8 9.8 175.8 8.3 204.0 10.6 180.5 7.4 202.6 7.7 178.5 6.4 218.8 7.8 205.8 3.2 307.5 10.2 205.4 14.2 218.5 8.2 187.2 6.5 242.2 15.5 221.1 3.4 302.5 12.6 234.8 11.7 220.3 8.0 189.9 5.3 229.4 10.6 210.1 1.8 323.9 13.2 250.7 15.6

Energy/Infrastructure Coal production

Crude oil production

Power generation

Railways: freight traffic

mln. tns. % change (yoy) mln. tns. % change (yoy) bln. unit % change (yoy) mln. tns. % change (yoy)

Industry Industrial Production Index

Basic goods

1993-94= 100 % change (yoy) 1993-94= 100 % change (yoy)

Indicators : Monthly

Capital goods

1993-94= 100 % change (yoy) Intermediate goods 1993-94= 100 % change (yoy) Consumer durables 1993-94= 100 % change (yoy) Consumer non-durables 1993-94= 100 % change (yoy)

Industrial Production Industrial Production Index Mining & quarrying Electricity Manufacturing Cement

104.7 1.3

Fertilisers

381

Finished Steel

381

Automobiles

% change (yoy) % change (yoy) % change (yoy) % change (yoy) Lakh tonnes % change (yoy) ’000 tonnes % change (yoy) ’000 tonnes % change (yoy) % change

8.1 5.1 10.6 8.1 112.6 3.5 969.0 3.4 3273.0 6.9 33.1

8.9 9.1 10.3 8.8 106.4 17.3 1064.5 21.2 2704.0 -0.3 34.7

6.8 5.3 3.1 7.5 104.5 -1.6 1240.0 10.5 2942.0 5.6 9.5

7.3 2.7 4.5 8.1 98.0 -4.1 1274.6 18.8 2974.0 3.3 17.4

8.5 4.2 13.7 8.4 102.7 9.0 1325.2 7.6 3061.0 3.5 17.2

8.6 4.4 7.4 9.1 88.6 1.3 1327.2 3.1 3117.0 4.1 24.3

9.8 5.1 7.7 10.5 98.4 11.7 1282.4 4.8 3210.0 4.1 13.5

10.6 6.2 3.5 11.9 107.5 14.1 1406.4 5.2 3164.0 8.1 24.2

7.7 8.2 8.0 3.3 4.4 1.9 3.4 4.5 2.3 8.6 9.0 9.3 102.6 109.3 112.6 11.8 8.5 10.9 1342.0 1365.0 1409.5 2.6 7.1 9.8 3250.0 3327.0 3257.0 13.9 10.1 2.9 3.1 16.0 8.2

7.4
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May 23, 2005 @ 12:00 pm

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382

382
Mar 2004 Apr 2004 May 2004 Jun 2004 Jul 2004 Aug 2004 Sep 2004 Oct 2004 Nov 2004 Dec. 2004 Jan. 2005 Feb. 2005 Mar. 2005 7630 47.8 7958 34.8 -328 107.4 7.2 115 44.93 135.1 43.58 153 45.97 43.63 114 45.67 144 45.02 263 43.89 43.56 5631 34.5 6774 21.0 -1143 113.0 7.5 198 43.78 5965 32.6 7928 31.4 -1963 114.1 3.9 139 45.09 6260 47.9 8591 54.4 -2331 114.2 16.7 265 45.40 5861 27.9 7446 31.5 -1585 113.0 7.4 142 45.96 5973 36.0 7735 36.6 -1762 112.7 7.7 466 46.23 6745 27.5 8978 47.3 -2233 114.1 6357 16.6 8601 24.1 -2244 115.7 7028 43.8 9143 44.3 -2115 122.3 7118 16.8 10154 38.4 -3036 125.2 6920 32.8 10288 50.4 -3368 123.7 6730 8.1 9367 38.7 -2637 129.8 193.1 119.8 0.7 72.6 0.6 23.0 47.7 447 197.9 385 89.2 404 614.5 411 140.2 400 159.8 437 114.0 541 262.9 439 323.7 3.7 22.3 50.5 -18.1 21.6 47.1 1.9 16.6 38.6 8.7 17.8 42.7 2.8 17.1 39.5 8.0 17.8 40.2 2.1 17.0 37.8 10.4 17.6 41.0 416 156.0 46.5 33.8 0.0 12.7 19.7 0.0 2.3 17.4 23.2 0.0 0.1 23.2 78.4 54.2 0.0 24.2 50.7 0.5 23.6 26.7 40.7 0.8 3.1 36.8 60.8 53.7 0.8 6.3 19.2 2.2 0.5 16.5 22.5 1.6 0.5 20.3 9.8 21.5 50.3 55.2 31.8 0.0 23.4 -1.7 22.6 52.5 78.0 23.9 1.7 52.4 4.2 24.1 50.0 98.6 51.0 5.6 41.9 -3.2 26.4 51.4

Units

External Transaction Exports

Imports

Trade balance Forex reserves FDI approvals FDI actuals excl. acquisition Exchange rate

$ mln. % change (yoy) $ mln. % change (yoy) $ mln. $ bln. Rs. bln. $ mln. Rs /$

Capital Markets Capital Issue Public Issue Rights Issue Private Placements Monthly returns on CMIE Overall Share Price Index Avg. daily turnover on BSE Avg. daily turnover on NSE

Rs.bln. Rs.bln. Rs.bln. Rs.bln.

per cent Rs. bln. Rs. bln.

Indicators : Monthly

Industrial entrerpreneurs memoranda

Nos. Rs. bln.

Prices Wholesale price index All Commodities

Primary Articles

Fuel, Power & Lubricant

Manufactured Products

1993-94=100 % change (yoy) 1993-94=100 % change (yoy) 1993-94=100 % change (yoy) 1993-94=100 % change (yoy)

179.8 4.8 180.8 1.7 262.6 3.3 161.0 6.6

180.9 4.5 183.8 2.2 263.2 3.6 161.6 5.9

182.1 5.0 187.2 3.5 264.3 6.7 162.0 5.0

185.2 6.7 190.5 3.6 269.9 9.7 164.5 7.0

186.6 7.6 189.7 5.1 274.9 10.2 165.9 7.7

188.4 8.5 192.1 7.6 279.6 12.1 166.8 7.6

189.4 7.9 192.8 6.4 281.9 10.7 167.7 7.4

188.9 7.3 191.5 4.5 281.9 11.0 167.3 7.0

190.2 7.5 191.4 4.4 290.7 13.9 167.3 6.5

188.8 6.7 186.3 3.0 288.5 12.2 167.3 6.2

188.6 5.6 184.9 1.5 288.0 10.0 167.7 5.6

188.7 4.9 185.3 1.6 288.9 10.2 167.6 4.3

Consumer price index IW-General Index

AL-General Index

UNME-General Index

the management accountant, May, 2005
504.0 3.5 332.0 2.5 424.0 3.4 334.0 6.0 504.0 2.2 331.0 1.5 425.0 2.9 334.0 1.8 508.0 2.8 333.0 1.8 427.0 2.9 335.0 1.8 512.0 3.0 336.0 1.8 431.0 3.4 338.0 1.8

RL-General Index

1982 = 100 % change (yoy) 1986-87=100 % change (yoy) 1984-85=100 % change (yoy) 1986-87=100 % change (yoy)

517.0 3.2 338.0 2.1 434.0 3.1 340.0 1.8

522.0 4.6 341.0 3.0 437.0 4.0 343.0 3.0

523.0 4.8 343.0 3.3 437.0 4.0 345.0 3.3

526.0 4.6 345.0 3.6 440.0 4.0 347.0 3.6

525.0 4.2 344.0 3.3 439.0 4.0 346.0 3.3

521.0 3.8 342.0 3.0 436.0 3.6 344.0 3.0

526.0 4.4 341.0 2.7 440.0 3.8 343.0 2.7

525.0 4.2 333.0 0.3 440.0 3.8 343.0 2.4

May 23, 2005 @ 12:00 pm

Source : CMIE

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Professional Updates Waste & Scrap subject to norms 2. Dairy & Poultry has been included in “Vishesh Krishi Upaj Yojana” Scheme. 3. Government has decided to develop a trade mark for Handlooms similar to woolmark and silkmark. 4. Gems & jewelery – gold 18 carrets and above will be allowed subject to import being accompanying an “Assay Certificate” specifying purity, weight and alloy content. 50 but all the provisions has not been incorporated in the Customs Circular No. 12/2005 Dated 04.03.2005. Economy is booming on account of low manufacturing cost, innovative mind of Indian entrepreneurs and the fight of survival with a squirrel help of Ministry of Commerce. Now Pharma industry has to fight against Non Tariff Barrier of the European Union. India has strength to be a Power Centre and will definitely achieve the Objectives of Foreign Trade Policy. If measures are taken to reduce the transaction cost and time; and policy for not exporting Government taxes and duties is implemented in letter and spirit, then Indian Export will double every year and will also create employment at much higher speed than envisaged by the Government. Special Initiatives 1. Marine sector has been identified for special focus initiatives. a. Duty free inputs & chemicals to the extent of 1% of FOB value of Exports allowed. b. Import of Monofilament long line system for Tuna fishing at concessional rate of Customs Duty c. Self Removal scheme System is introduced for removal of 5. Duty free import entitlement of commercial sample increased to Rs. 3,00,000/- from Rs. 1,00,000/-. General Provisions of Imports and Exports 1. Ayat Niryat form has been introduced and earlier forms are totally changed. 2. DGFT shall move towards an automated environment for electronic filing, retrieval and authentication of documents based on agreed protocols and message exchange with other community including customs and Bank. “Let us hope, verification by customs will be electronically done by DGFT only”, Therefore, para 2.47 is deleted. 3. DGCI&S data will be made available with a minimum time lag in a query base structured format on a commercial criteria. 4. Grievance Redressal Committee set up on 27/10/2004 has been revamped to settle old issues like condoning delays. Regularising breaches by exporter in bonafied cases, resolving disputes over entitlements, granting extension of utilisation of licences etc. 5. IEC Trade Return to be filed by 31st December instead of 31st Oc383
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Glimpses of changes made in foreign trade policy 20042009
A. B. Nawal * ost awaited Foreign Trade Policy 2004-09 was finally announced through supplementary changes. The share of the Indian Trade has enhanced in the global market and therefore exports have achieved 24% growth and imports have seen the growth to the extent of 34%. Exports from India is 80 Billion Dollars and from Service Exports 30 Billion Dollar whereas Import was 105 billion Dollar. The growth of Indian export was in spite of weakening of dollar and the sharp increase in oil prices. A lot of expectation were not fulfilled such as Removal of Sunset Clause of Section 10B for EOU/EHTP/STP/ BTP and Section 10A for SEZ, 0% (Zero) EPCG Scheme for Agro Sector, Exemption of CST to EOU, Exemption of Service Tax to Exporters. At least Exporters should get temporarily relieved that DEPB has been extended upto 30th September 2005 and without revision of DEPB Rates as on date. "Ministry of Commerce Proposes and Department of Revenue Disposes" and it is once again proved since number of proactive measures even on simplification have not been implemented. Even Fast Track Clearance has been notified vide Public Notice No. * Cost Accountant the management accountant, May, 2005

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Professional Updates tober. 6. Bank Guarantee for other manufacturer exporter is reduced from 25% to 15%. 7. Limit of 10 Nos. of import of new / second hand prototypes / samples has been liberlised without any quantitative restrictions. Promotional Measures 1. Recognition certificate is granted to eligible exporter based on 3 years preceding export including current export till the date of application. However current export will be considered only if there is some export during any preceding 3 years. 2. Service provider will be eligible for Duty Credit Entitlement Certificate only against earning in foreign exchange & not through EEFC Account. 3. Duty Credit Entitlement Certificate allowed to be transferable only within group company & managed hotels. 4. Duty Credit Entitlement Certificate will be given under Target Plus Scheme only if Gems & Jewellery unit achieve value addition of 10% 5. Duty Free Credit Certificate can also be utilized for imports of following Agro products. Garlic, Peas & other vegetables with a duty more than 30% Coconut, Areca Nut, Orange, Lemon, Fresh grapes, Apple, pears & all fruits having duty more than 30% All spices having duty more than 30% Tea and Coffee & pepper All oil seeds Natural Rubber Edible oils. Duty Exemption & Remission Scheme (DEEC / DFRC / DEPB) DEEC 1. There are no separate License such as Advance License for Physical Export Advance License for Intermediate supplies Advance License for Deemed Export There will be only, one type of Advance License & Export Obligation against Import can be fulfilled either with Physical Export, Deemed Export Or Intermediate supplies & Supplies to SEZ. 2. Custom Duty including Basic Custom Duty, Additional Custom Duty, Education Cess, Anti Dumping Duties & Safeguard duties are exempted. 3. Value addition criteria under advance license for Tea is 50% 4. Annual Advance License is extended to all categories of Exporter with past export performance instead of Status holders & Entitlement is enhanced to 300% instead of 200% of FOB Value of Export OR Rs. 1 Cr whichever is higher. 5. Holders of Diamond Imprest License are also eligible for Advance Release Order 6. Canalising items can be sourced only against Advance Release Order through Canalising Agencies like STC/MMTC 7. Prohibited items of Export against Advance License only can be exported after obtaining Export Li8. Factory Branches also can make Advance License Application without submitting NOC from Registered Office or Declaration with respect to Defaulters etc. 9. Export to Govt. Of India / EXIM Bank Line of credit / Deferred Payment / Supplier line of credit under ECGC cover will also will also qualify for Advance License 10. Inter Unit Transfer of Same company of Duty Free Imported Goods under Advance License can be done with Prior Intimation to Central Excise and Customs Authorities. 11. In case, Ad hoc norms are lower than SION exporter has to pay proportionate Duty or undertake Additional Export Obligation. 12. Clubbing of Advance License, issued by same Regional Licensing Authority and under same Customs Notification is allowed irrespective of licensing years. However Advance License issued during 2004-09 can be clubbed even with different customs notification. 13. Export Obligation Period of Advance License can be extended only after payment of composition fees as follows (Table 1) 14. After Redemption of Advance License imported duty free goods can be sent to Job Worker for processing DFRC 1. List of sensitive items have been pruned down to nine items. Brass scrap, Paper & Paper Board & Dye stuff are allowed under DFRC 2. Provision of re-credit on account of rejection of items imported under DFRC shall be similar to facilities available to DEPB & Advance License, while allowing re-credit, 95% of value of DFRC will be allowed. the management accountant, May, 2005

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Professional Updates Table 1 First Six Months (up to 30 Months) 6 Months (up to 36 Months) Next Extension 2% of Duty Saved on Unutilized imported items 5% of Duty Saved on Unutilized imported items 2% per month of Duty Saved on Unutilized imported items 6. Facility of EPCG licence for technical upgradation can be obtained only once subject to a minimum investment of 10% of existing Plant & Machinery. 7. EPCG licence can be redeemed if 75% export obligation including average exports is fulfilled in half of export obligation period or lesser. 8. Nexus of capital goods under EPCG scheme above Rs. 50 Crore is only on the basis of independent Chartered Engineer and copy such EPCG licence will be forwarded to Central Excise authorities. 9. Provision of obtaining Installation Certificate from Central Excise Authorities has been done away with. Similarly, no Certificate of Central Excise authorities required for import of spares under EPCG Scheme. It is a really welcome move and exporters are saved from harassment. 10. Exports made to Government of India / Exim Bank line of credit and exports made under Deferred Payment Suppliers line of credit based on ECGC cover should also be counted towards fulfillment of export obligation. 11. EPCG licence holder has to file progress report for fulfillment of export obligation by 30th April in subsequent year electronically on DGFT website and obtain certificate of proportionate export obligation fulfillment. 12. Export obligation period can be extended by two years by payment of composition fees or enhancement in Export obligation as per chart given. 13. Old pending EPCG redemption, customs duty can be paid with interest @ 15% per annum for all earlier licences also. 14. In case of re-export of capital goods under EPCG, it can be re exported within 3 years after approval of DGFT and Customs. However, either proportionate duty saved be Period of Export Obligation 12 years 8 years

DEPB Temporary relief up to 30.09.2005 Even though it was announced that DEPB scheme will be withdrawn w.e.f. 31.03.2005. This policy has given a fresh lease of life to the scheme up to 30th September 2005. DEPB Benefit shall be available for supply of goods from DTA to SEZ for the period 01.04.2003 to 11.05.2004. Export Promotion Capital Good Scheme 1. Agro sector units can obtain EPCG at 5% duty instead of 0% duty as envisaged in Foreign Trade Policy 2004-09 declared on 31st August 2004 since Department of Revenue could not issue corresponding notification. However, Ministry of Commerce has given some relief of reducing export obligation to 6 times of duty saved in 12 years as against 8 times of duty saved in 8 years. 2. EPCG Licence for restricted items can be granted only after approval of Import Licensing Committee. 3. EPCG Scheme for Retail Sector introduced. Retailers having 1000 sq. meter area will be eligible for EPCG licences. Export Obligation to be fulfilled to the extent of 8 times of duty saved in 8 years. Counter sale in Foreign Currency will be considered for fulfillment of export obligation. 4. EPCG Licence can be obtained with 5% rate of duty as per the given chart . 5. Average export per year must be achieved & earlier provision of 75% has been dispensed with. the management accountant, May, 2005

Exporter Agro SSI (Import of CIF value of CG upto Rs. 25 Lacs & not crossing SSI limit) Licence more than 100 Crores or more Retailers having 1000 sq. meters area Others

Rate of Duty Export Obligation 5% 5% 6 times of duty saved 6 times of duty saved

5%

8 times of duty saved

12 years

5%

8 times of duty saved

8 years

5%

8 times of duty saved

8 years

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Professional Updates Final De Bonding Letter within seven working days. Unit will be entitled for DFRC / DEPB / DEEC / Draw Back in the transitional period. However, it will not be able to issue CT3 / Procurement Certificate. 9. Sector specific condition given in Appendix 14IC for transfer of EOU to another EOU. 10. Wastage norms as applicable to DTA Unit in Para 4A of Hand Book and 4.A.2 are made applicable. 11. Samples can be sent to another EOU for purpose of display on returnable basis within a period of 30 days on intimation to Customs Authorities. 12. Public Notice No. 50/2004 dated 24/ 01/2005 has been incorporated in Handbook of Procedures for Fast Track Clearance Special Economic Zone 1. Mahindra City is declared as SEZ for auto ancillary, apparel & fashion Accessories, Information technology & Bio informatics at Chengalpattu, Dist Kanchipuram, Tamilnadu 2. Refund of Terminal ED for supplies to SEZ will not be available 3. Subcontracting period for return of goods is extended to 90 Days from 30 Days Free Trade Warehousing Zones No change in Policies and procedures Deemed Export 1. Refund of Terminal Excise Duty & Drawback against supplies to EOU/EHTP/STP/BTP can be granted by Development Commissioner or Licensing Authorities, However Advance License and DFRC can be claimed only for Licensing Authorities. 2. Drawback / Terminal Excise Duty can be claimed within Six Months from last Date of the Month of receipt of payment. q the management accountant, May, 2005

Period

Compensation Fee per year of extension 2% of duty saved

Export obligation enhancement. 10% incremental per year of extension. 50% enhanced export obligation with manda tory bank guarantee clause. 100% enhanced export obligation with mandatory bank guarantee clause.

1st & 2nd years

3rd & 4th years

—

5th year

—

paid or balance export obligation to be fulfilled by alternate products and services. 15. Clubbing of EPCG licences. Restriction for clubbing is liberalized. All EPCG licences issued by same Regional Licensing Authority under same customs notification can be clubbed. 16. Now conversion of old EPCG licence for re fixation of export obligation based on CIF Value of Imports of Capital Goods will not be available. 17. Revalidation of EPCG licence is not allowed for imports. EOUs / EHTPs / STPs / BTPs 1. Investment criteria - Provision of fixation of investment criteria less than Rs. 1.00 Crore for sector wise by Board of Approval is withdrawn. 2. Advance DTA Sale - It has been clarified that advance DTA sale to new unit is allowed to the extent of 50% of FOB value of estimated exports of 1st year and for Pharma unit based on estimated export of first two years. 3. Tea units will not be entitled for refund of Terminal Excise Duty 4. No exemption of Service Tax. Cenvat is allowed for eligible unit and remission is also allowed. 5. Other Entitlements - No extension of credit by off shore banking will be available to EOU on terms and 386
386

condition of SEZ units 6. No permission of Development Commissioner will be required for Capital Goods to be transferred from one EOU to another EOU. Only intimation to Central Excise and Development Commissioner will suffice. 7. All Industry Rate of job worker will not be available. Job worker can claim the Brand Rate on for consumables fuels etc. 8. Exit from EOU Scheme is simplified Intimation to Development Commissioner, Excise & Customs in writing. No Application and In principle approval is needed from development Commissioner, However NOC from Development Commissioner will be required for Obtaining EPCG license Self assessment by unit with respect to calculation of duties. Intimation to Central Excise & Customs of assessment of Customs Duty. Central Excise to confirm duties on priority basis (No Days has been specified). Payment of duties by the Unit. Obtaining No Dues Certificate from Central Excise. Application for Final De Bonding.

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Balanced Scorecard

The balanced scorecard - A tool for corporate performance measurement
Besides financial measures like Return on Equity (ROE)/Return on Investment (ROI)/Return on Capital Employed (ROCE) and Eamings Per Share (EPS), Balanced Scorecard forces the management to take into account operational measures like bringing about operational improvements.

ment of interest on the debt securities, debtors' turnover and growth in sales are now routine performance evaluation parameters and the same may be compares to a doctor's routine diagnosis of a patient-through check up of physical weight, pulse rate, temperature, blood pressure, blood and urine culture. Phenomenon of globalization starts taking off during 1990s and experts like management accountants, academicians and management gurus started developing strategic thought for smooth functioning and performance measurement of the business. Management Accountants quickly shifted their thinking plane of cost management through traditional cost accounting to activitybased-costing and activity-basedmanagement. Traditional cost accounting postulates that total manufacturing cost is the summation of individual operations. But the cost that signifies competitiveness and profitability is the cost of the total processes and that is what the activity-based-costing manages. Traditional cost accounting measures what it costs to do a job or task or process but activity-based-costing also measures the cost of not doing i.e. the cost of machine downtime, the cost of waiting for a required tool or part., the cost of inventory waiting for shipment and cost of re-working or eliminating the detect parts etc. Development of 'Activity-Based-Costing' is the gift of 1990s. At the same time i.e. in 1990s, Robert S. Kaplan, the Marvin Bower Professor of Leaderslrip Development and Strategic Managemetlt Accounting of Harvard Business School, Harvard University and David P. Norton, the Founder and President of Renaissance Worldwide Strategy Group, an International Consulting Firm specializing in Business Strategy, Performance Measurement and Organizational Renewal developed the Bal387
387

D. Mukhopadhyay * oday measurement of performance of corporates has become a complex task of the management. Many organizations do not have sophisticated technology for guiding the managers to where they should be. Many old and traditional tools and techniques for corporate performance evaluation are found to be inadequate to offer a broad overall view of performance of the firms. Society and economy of a country is changing very fast and some of the traditional performance measures have even become redundant. Traditional measures are put greater importance on control than strategy aspect of business management. During last two centuries, financial statistics and parameters were the major performance indicators of a firm remaining engaged in -production and distribution of want removing goods and services. Corporate vision, mission and strategies were poorly transparent. Accurate performance evaluation of performance of the corporates is *
Assistant Professor School of Management Sciences, Bengal Engineering and Science University.

T

one of the important functions of the management in order to understand the present standing and design the future road map of the firms. Firm is a micro economic unit engaged in wealth creation for the owners. Now, there is borderless market and competition is the order of the day under WTO regime. Quality and cost are the prime determinants of corporate success and existence. 'Survival for the fittest' is the slogan in globalized system of market economy. The CEOs of the modern multinational corporates need to have necessary, meaningful and significant information for evaluating the strength, weakness, opportunity and threats of the business. Practically speaking, management requires foundation information; productivity information, competence and resource al1ocation information for making a business smoothly take off and safely navigate. Management needs to chalk out appropriate strategies after receiving the aforementioned information for emerging as a market leader. Cash-flow and liquidity position, ratio between inventories and sales, earning coverage for pay-

the management accountant, May, 2005

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Balanced Scorecard anced Scorecard System of corporate performance evaluation. It is a new performance evaluating system that offers top management a comprehensive view of the business under consideration. Philosophy of the Balanced Scorecard System Presently management wants a balanced presentation of measures that allow it view the concerned corporate from several perspectives simultaneously. Besides financial measures like Return on Equity (ROE)/Return on Investment (ROI)/ Return on Capital Employed (ROCE) and Eamings Per Share (EPS), Balanced Scorecard forces the management to take into account operational measures like bringing about operational improvements. The Balanced Scorecard includes financial measures that portray the result of action already taken and it complements with operational measures on customers' satisfaction, internal processes, and organization's innovation and improvement activities. Operational measures are the drivers of future financial performance. Balanced Scorecard is the 'Dials' in an airplane cockpit. For the complex task of flying and navigating an airplane, pilots need detailed information about different aspects of the flight- more specifically they need information on fuel, weather, speed of air, altitude at which it is flying, air pockets, destination and other indicators that summarize the current and predicted environment. The pilots are required to maintain constant contact with the Air Traffic Controllers (ATCs) and the CEO is similarly required to maintain constant and harmonious contact with the management accountant and the chief operations officer to manage the scarce economic resources in order to achieve the optimum result which would ensure a corporate to survive, succeed 388
388

and grow in uncertain future and fulfill the present aspirations of various social and economic agents like the owners, government, creditors, employees and customers. It is worth mentioning here that reliance on only one instrument or indicator can be fatal. Complexity of managing an organization today requires that the management must be able to view performance of a firm in several areas simultaneously and it is the fundamental philosophy of the Balanced Scorecard that the CEO must take off and navigate a business with the help and assistance of combined functional significance of financial and operational tools and techniques. Moreover, it is essential to put greater importance on the concept than the tools and techniques. CEO is required to proceed from micro mind-set to macro aspect business management. Basic 'Mantras' of the Balanced Scorecard The Balanced Scorecard induces the management to look into the business from four important perspectives and author of this write-up would like to call them' The Four Mantras' of the philosophy of the Balanced Scorecard and the essence of the Balanced Scorecard is standing on the foundation stone of these four perspectives and let us offers the essence and significant messages of them hereunder: a. How do Customers see the Business? - i.e. Customers' Perspective: It focuses on the analysis of different types of customers, their degree of satisfaction and mechanisms or processes, which are used by the business to deliver products and services to the customers. b. What must we excel at ? i.e. Internal Business Perspective: It aims at identifying how well the business is performing and

whether products and services offered meet the need and requirements of the customers. c. Can we continue and create Value? i.e. Innovation and Learning Perspective: It seeks to locate and identify where the employees-training budget can be best deployed with the objective of ensuring continued individual and business improvement. d. How do we look after the interest of the Shareholders? i.e. Financial Perspective: It includes cost benefit analysis and financial risk assessment and financial risk management. Financia1 Perspective aims at maximizing the wealth of the shareholders besides timely and periodical payment of dividend regularly. The Balanced Scorecard forces the management to focus on the handful of measures that are most critical to survival, success, growth and overall development of business. Firstly, the Scorecard brings together, in a single management information report, many of the seemingly disparate ingredients of corporate competitive agenda: viz.-becoming customer oriented, shortening response time, improving qua1ity, and emphasizing teamwork and employee morale, reducing new product launch time and managing perpetual succession of business and mapping the future strategies. Secondly, the Balanced Scorecard guards against suboptimisation of corporate goal. It forces the management to consider all the important operational measures together and lets it see whether improvement in one area has not been achieved at the cost of another equally profitable product or service. Balanced Scorecard ensures effective monitoring all the operational activities in a balanced manner. It shows how results are achieved. In other words, it answers to the question: Did the management accountant, May, 2005

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Balanced Scorecard the cost of set ups fall because of shorter set up times or bigger size of the batch? Balanced Scorecard Model for Corporate Performance Measurement The Balanced Scorecard Model for Corporate Performance measurement or evaluation may look like the one shown in the next page. Let us offer the explanatory asserprofit margin, return on capital employed, current ratio, acid test ratio, gearing ratio, debtors' velocity and collection period and stock turnover ratio or stock velocity. In simplicity, financial goals are to survive, succeed and prosper. Survival is measured by cashflow, success by growth in sales and operating income and prosperity by increased market share and return on equity or capital employed. The Balanced Scorecard system of corporate translate their general mission statement on customer service into specific measures that reflect the factors that really matter to the customers. Customers concern to lead time, quality of products or services, company's performance service and last but not the least the cost effectiveness. Let us offer the highlights concerns of the customers in brief as follows: Lead Time: It measures the time required for the company to meet customers' need. For existing products, lead-time can be measured from the time the company receives an order to the time it actually delivers the products or service to the customers. For new product, lead-time represents the time to market or how long it takes to bring new products from the definition stage to the time of shipment. Quality of the Products or Service: It measures defect level of incoming products as perceived and measured by customers. Defective product means incurrence of cost and cost means waste and waste leads the company to navigate at vacuum. Performance and Service: Combination of service and performance measures how the company's products or services contribute to creating value for its customers. Customers are the kings and they rule the business. Customers' satisfaction should be given supreme priority and importance under the regime of g1oba1ization and WTO. Cost: Customers want goods and services at cost effective or competitive price without impairment of quality of product or service. Cost and quality are the twin factors that have direct bearing over the psychology of the customers. Internal Business Perspective What must business excel at: The internal measures for the Balanced 389
389

THE BALANCED SCORECARD PERFORMANCE MEASURE MODEL Financial Perspective Goals How Do Customers see us Excel At ? Customer Perspective Goals Measures Measures How Do we look Shareholders ?

What Must we Excel At ? Internal Business Perspective Goals Measures

Innovation and Learning Pespective Goals Measures

Can We Continue to Improve and Create Value

tion of each ingredient of the Balanced Scorecard Model in brief hereunder: Financial Perspective: How do we look after the interest of the Shareholders: Financial performance measures indicate whether the company's strategy, implementation and execution are effectively contributing to the bottomline improvement of a corporate. Financial goals include achieving profitability, maintaining liquidity and solvency both short term as well as long term, growth in sales-turnover and maximizing wealth of shareholders and all these have already been highlighted. Financial performance indicators include the management accountant, May, 2005

performance measurement aims at analyzing shareholders' value which forecasts future cash-flows and discount them back to rough estimate of current value and this is an attempt to make financial anaJysis anti management more forward looking. It is based on the vision and mission of the corporate under view. It needs hardly any mention that vision is forward looking and mission is such a phenomenon for which the business exists. Customers' Perspective How do Customers see the Business: The Balanced Scorecard demands that the management must

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Balanced Scorecard Scorecard stems from the business processes that have the greatest impact on customers' satisfaction factors that affect cycle time, quality, skill of the employees and, of course, productivity. Companies need to identify their core competences as C. K. Prahalad and Gary Hamel assert in their path-breaking article, "The Core Competence of the Corporation" (Harvard Business Review, May-June 1990) and the critical technology needed to ensure continued market leadership. Companies should decide what processes and competencies they must excel at and specify measures for each of them. Innovative and Learning Perspective Can we continue to improve and create Value: A company's ability to innovate, improve and learn ties directly to company's value. Through the ability to launch new products, it can expand its market. Innovation and continuous learning process can bring about efficiency in operating domain of the business. Moreover, it ensures cost reduction and product differentiation to meet the varied requirement of the customer. As a result, it strengthens the financial ability through earning higher profitability and greater degree of appropriation of profit and retaining larger share of earnings to finance the forthcoming expansion of future projects of the company under consideration. How to make the Balanced Scorecard work In order to put the Balanced Scorecard to work, companies should articulate goals for time, quality, performance and service and then translate these goals into specific measures. Corporates should stop navigating only by financial measures but with combination of operational measures too. Balanced Scorecard advocates that the companies should 390
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specify how improvement in quality, cycle time, quoted lead time delivery and new product introduction would lead to capturing greater market share, operating margins and asset turnover and control and reduction of operationa1 expenses. As companies improve in quality and response time, they eliminate the need to build, inspect and re-workout conformance products or to re-schedule and expedite delayed orders. Eliminating these tasks implies that some of the people who perform them are no longer required to be retained. But the counter argument is that the companies are understandably reluctant to layoff employees since the employees are the sources of innovative ideas and creative thoughts that produce higher qualitative products and services at the reduced cycle time. Layoffs are nothing but poor rewards for past improvements and it can damage the morale of the remaining workforce and it would curtail further improvement. Remaining workforce shall be demoralized and would even contribute negative value to the organization. As a consequence, the companies will not be able to realizee all financial benefits of their improvements until their employees and other facilities work to the capacity available or the companies confront the pain of downsizing to eliminate the expenses of the newly created excess capacity. This is a word of caution and warning by the Balanced Scorecard to the managements of the corporates. Functions of the Balanced Scorecard in Real Life Situations Balanced Scorecard has received tremendous application as a comprehensive multifaceted solution to the day to day business management problems in the USA, UK,

Japan and other various economically developed countries and the wave of its wider application has also reached over India. Some of the highly professionally managed Indian Corporates are also practicing the theory and application of the Balanced Scorecard and reaping the benefits of the Balanced Scorecard System of corporate management. The functional map of the Balanced Scorecard may be represented in model as shown in the next page. Conclusion The philosophy of the Balanced Scorecard is objectively based on the principles of 3Es and 3Es signify the following connotations: El E2 E3 Economy Efficiency Effectiveness

Economy, which is generally thought of in terms of doing things as cheaply as possible and therefore it is associated with the operational level of control and strategy. Secondly, efficiency, which is thought of in tenns of productivity- (the ratio of output to input) and is concerned with the tactical level strategy and control and finally effectiveness, which is generally thought of in terms of doing the right things and this phenomenon is associated with the strategic level control and management of resources. Economy measures the amount spent on the services that are provided by each division and it would be appropriate to compare the costs with similar divisions in other corporate houses. Efficiency focuses on the relationship between the input and output from each division. The cost of each type of treatment or process can be determined and compared with past performance, expected costs or the costs in other and the management accountant, May, 2005

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Balanced Scorecard How does the Balanced scorecard function in Real Life Situations. similar corporates. Finally, effectiveness measures the extent to which the organization achieving its objectives and is therefore an extremely important aspect of the performance appraisal system. The Balanced Scorecard enunciates that internal agents of enterprise are the cost centers and the customer whose cheques never bounce is the profit centers and therefore such type of customers should be handled with utmost care and caution. The Balanced Scorecard system of business management puts greater weightage and importance on strategy than that of control aspect of corporate management. Every company should develop its ownBalanced Scorecard to reflect its own strategic and operational plans for better and optimum utilization and management of resources in order to create maximum wealth for the shareholder and ensure prosperous growth of the company in the long run. As the providers of the long-term finance to the corporates, the shareholders are very much interested to know the mission and objective of the company, The Balanced Scorecard forces the management to enlighten the existing and potential shareholders with 1ongterm plan and programmes which would effect the changes in share price and distribution of dividend. The Balanced Scorecard, in a nutshell, requires the management to secure the interest of the customers, creditors and lenders, employees and last but not the least the shareholders. The management is expected to disclose strategic and forward-looking information to the aforesaid agents of an economic entity on regular basis so that they can keep their trusts in the management and remain optimistic about their re-wards and returns. The fundamental ingredi391
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Financial Perspective

Customer Perspective Goals New Product Responsive Supply Perferred Supplier Purchases Measures Percent Sales from New Service On-time Delivery

Goal Survive Succeed

Measures Cash - Flow Growth in Sales & Operating Income Increased Market Share and Return on Equity

Share of Key Accounts

Prosper

Customer Co-operative efforts Partnership between the firm and the Customers

Internal Business Perspective Goals Measures

Innovation & Learning Perspective Goals Measures

Technology Measuring Geometry Capability Vs. Competition Manufactur- Reduction in Cycle ing Excel- Time, Improvement lence in Quality, Reduction in Unit Cost, In Crease in Yield Design Productivity Silicon Eficiency Engg. Efficiency

Technology Time to Develop next Leadership Generation Manufacturing Learning Product Focus Process Time to Maturity Percent of Products that Equal 80% Sales

Time to Market

New Product Introduction Vs. Competition

Introduction Actual Introduction of new Schedule Vs. Plan Product

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Balanced Scorecard ents of the Balanced Scorecard are those four perspectives on which we have kept our discussion confirmed to a greater extent and our conclusive remark on them is that we need to improve returns, increase sales runover and improve asset utilization in order to meet the requirement of Financial Perspective. Secondly, we are to capture new markets and extend product range to fulfill the requirement of Customer Perspective. Thirdly, it is imperative to reduce inventory level, improve inventory control and reduce lead times to meet the challenge of Intetrnal Business Process Perspective and fourthly, it is extreme1y essential to develop new products, modify existing products and welcome the innovative ideas and creative thoughts of the employees in order to meet the requirement of Innovation, Learning and Growth Perspective and finally vision, mission and strategy should be the world's best pet-food to the manufacturer. However, Kaplan arid Norton say that, the four perspectives are a template and not a straitjacket. They recognize that any firm is at its liberty to add more perspectives to enjoy competitive advantage. Kaplan and Norton further states that process quality and process time depend on the skills of the employees, on-time delivery depends on process quality and process time, customers' loyalty depends on-time delivery and return on capital employed depends on customers' loyalty. This is another view of functioning of the Balanced Scorecard to improve the performance of corporates. So long we have spoken about the conceptual message and functional effectiveness of the Balanced Scorecard to view the corporate strategically in order to improve the performance of 392
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the economic entities. We have also spoken about the benefits that accrue on adopting the Balanced Scorecard, which is the combination of financial and operational control and strategic measures. But our discussion would remain incomplete if we do not find out the limitations of the Balanced Scorecard. Firstly, it cannot be used as a panacea for every organization. The Balanced Scorecard does not lead to a single aggregate control. The popularity of measures such as Return on Investment (ROI) cannot simply be erased because they conveniently summarize how things are going i.e. it signn1s the present state of financial strength and weakness. Secondly, Balanced Scorecard Measures may give conflicting signals and confuse the management. For instance, if customers' satisfaction decline together with the financial pulse, what would be action of the management to shun one or other. Finally, Balanced Scorecard involves substantial shifts in corporate culture to implement the need to shift to understanding the business as a set of process and not a division or department and a change to the role of performance measures from a command and control approach based on responsibility to an information provision approach. It. is also expensive to implement because an overhauling of the -entire existing operational system is required to be made in order to reap the full benefits of the Balanced Scorecard as financial benefits follow the improvement in operations of the firm. Thus the limitations of the Balanced Scorecard System of business management should be given due consideration while implementing the same in real life situations and the management accountant must be inducted in the team of the Balanced

Scorecard implementation as the managetnent accountant is the specialist not only of cost management but also the management of people, growth and strategy.
References/Acknowledgement: 1. Measuring Business Performance-J. M. Broadbent-CIMA 2. Corporate Performance Evaluation in Multinationals-CIMA . 3. Enviromnent related Performance Measurement in Business-P. James and M. Bennett 4.Management and Cost AccountingC. Drury 5. Multinational Enterprises and Global Economy- J. H. Dunning 6. The Balanced Scorecard-Measures that Drive Performance- Harvard Business Review- January-February 1992,-R. S. Kaplan andD. P. Norton 7. The Balanced Scorecard- Translating Strategy into Action- R. S. Kaplan and D. P. Norton-1996 8. Measuring Business Performance-A. Neely-1998 9. Strategic Management AccountingK. Ward-1992 10. The Core Competence of the Corporation-Harvard Business Review, May -June 1990-C. K. Prahalad and Gary Hamel 11. Investors: Look at Firms' Market Share-Wall Street Journal-February 26,1990 12. Relevance Lost-R. S. Kaplan and H. Thomas Johnson-1987 13. Advanced Management Accounting - Kaplan and Atkinson 14. Cost Accounting-A Managerial Emphasis- Homgren, Foster & Datar 15. Introduction to Management Accounting- Homgren, Sundem & Straton 16. Managerial Louderback, Dominiak AccountingHofmann and

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Professional Updates

. RAJA ATNAM'S S RAJA R ATNAM'S COLUMN

Tax Titbits e on the concept of “Added value” and its application under “We must evolve new standards of measurement for determining the ranking of business. The new standards would have to be qualitative, and not quantitative VAT and Cenvat. in terms of mere output and profits. It is true that a business must do well before it can do good; but, at the same time, it is not enough that a business does well only for its owners. Dr. Alexis Carrell observed that it is not so important to add years to your life as it is to add life to your years. That sentence expresses beautifully the new standard of measurement I have in mind. Our financial papers give the figures of capital block, turnover and profits of different companies from time to time. But more important are the figures of the fund of skills, disciplines and productive human resources generated by the enterprise. These are the most valuable assets of the company, though they never appear in the accounts.”
-Nani Palkhivala

EET - A scary prospect reference to the intended migration to EET system, which is “Exempt, Exempt and Tax” has been indicated in the budget speech 2005, in following words: “157. Tax treatment of savings is a complex issue but we can benefit from the best international practices in this regard. We have already introduced EET-based taxation in the defined contribution pension scheme applicable to newly recruited government servants. Before we fully migrate to the EET system for all kinds of savings, it is necessary to resolve a number of administrative issues. Hence, without making any change for the present, I propose to set up a committee of experts that will work out the road map for moving towards *
The author, an FICWA and a renowned tax expert,was a Council Member (Govt Nominee) of ICWAI.

later, are not unknown to our tax laws. National Savings Scheme 1987, which continued till 1992, before it was replaced by another scheme in the same name,did provide for the deduction of deposits subject to tax liability at the time they are withdrawn under section 80CCA. A similar deduction existed for investments under equity linked savings scheme under section 80CCB. Contribution towards an annuity plan of Life Insurance Corporation under section 80CCC or for the pension scheme for new entrants to Central Government service on or after 1st April 2004 under section 80CCD are allowed as deductions only to be taxed in the year in which the amounts are received back. If similar schemes for future investments are introduced, there need be no fanfare about any new system, since such schemes are known in our tax laws. The publicity for the concept for EET in the budget speech is suggestive of withdrawals of relief on encashment of investments, which were eligible for concessions in the past. It is this possibility inferred from the budget speech, which has created wide-spread apprehensions that the concessions under section 80C proposed in the Finance Bill, 2005 will be subject to tax by recapturing the concession at a later date, so that the deductions may not be without any strings and without any reservations. A number of persons, who had chosen to avail the tax rebated benefits in the month of March by way of proposed contributions to insurance policies or purchase of National Savings Certificates had second thoughts on such tax-oriented investments, because of the fear generated by the unnecessary reference of a serious effort to have a commit-

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an EET system.” The above statement follows the reference to the proposal to allow deduction of a consolidated sum of Rs.1 lakh for savings substituting tax rebate, so that this is an outright deduction from income. The existing deductions, which will continue have been indicated and then comes the bombshell of proposal to set up a committee to work out a road map for moving towards EET system. What is scary about it? If one knows that one is availing a deduction, exemption or concession for which he may have to pay later, one is prepared for it in that, he may take it or leave it. One may find that some of the concessions may not be worth it, if it is likely to prove to be a future burden. Such deductions, subject to tax

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Professional Updates tee of experts for adoption of EET system. If the system were to cover the past deductions including those deductions substituting rebate, it would undermine the confidence of the public in all instruments sponsored by the Government. If the intention is not to have the new scheme with retrospective effect, this should have been made clear. It is required to be made clear even now, if the continuous flow of tax-oriented investments is to be maintained. Even if the system is to be introduced prospectively, taxation of the amount at the time of maturity would invite a stiffer liability, because of the bunching effect of accumulated income. Tax rebate or the tax benefit at the time of investments in most cases would be at a lesser rate of tax than the rate of tax at the time of withdrawal, so that it should be ensured that the tax that is levied (T) should not be more than what is exempted (E and E). The Finance Ministry is keen to make innovations and import “best international practices”. Fringe Benefits Tax (FBT) is said to have been inspired by Australia and New Zealand, where the scope of such tax is limited to those benefits collectively enjoyed by the employees. So is the Banking Cash Transaction Tax (BCTT), which is said to have been copied from Brazil, where it was a temporary measure to tide over a crisis. Taxes in the special context of fiscal system in a particular country does not become international tax practice. Fiscal system in India itself has a long history with sound infrastructure, so that what is needed is reform and rationalisation in our laws and the administrative system, 394
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rather than burdening the taxpayers and the administration with more complications. The late Mr.N.A. Palkhivala’s criticism of our annual budgets was that “our finance ministry is filled with bureaucrats to eternally mistake amendment for improvement and change for progress”. He pointed out “stability of our tax laws is to our nation, what stability in family life is to an individual”. This is a caution, which has gone unheeded year after year. Service tax with its tentacles everywhere and VAT with uncertain effect have imposed a burden on trade and industry and the uncertainty arising therefrom are yet to be settled down, so that it is better to wait before any new experiments with our tax system. International experience: The objective of fiscal policy is to encourage growth. It should trigger development by inducing persons with disposable income to save and invest and persons with entrepreneurial ability to engage themselves in industries. But the experience of most countries is that in spite of constant attempt to make the tax system an effective tool to promote economic activity, the only effective tool has been the tax cuts in preference to the others. It has been pointed out by Kemp Commission in United States that the reaction of businessmen is one of frustration as expressed by one of them in following words: “As an entrepreneur, I experience first hand horrors of our tax system. It has grown into a monstrous predator that kills incentives, swallows time, and chokes the hopes and dreams of many. We have abandoned several job creating business concepts due to the tax complexities that would arise”.

The impact of taxes is not all due to tax rate nor only due to the complexity of the tax laws, but probably much more on account of the manner in which laws are administered. Computerisation all the way: Much of the deficiencies in the tax administration are expected to be remedied once the computer is fully operational. It is for expediting computerisation that the task of issue of Permanent Account Number (PAN) has been outsourced. It is true that the computer like the robot can be more competent and less faulty. It was Mr.Kurzweil, who predicted in his first book “The Age of Intelligent Machines” as reported in “The Economist” dated 12.3.2005, that a global computer network would emerge sooner or later. He even predicted that it may not be too long before a computer can defeat a chess champion, which it actually did, when IBM’s “Deep Blue” defeated Garry Kasparov in 1997, two years before the date on which the author had predicted. Are we marching to a stage, when the computer can take over tax administration dispensing with human element? The experience in computerisation is still “garbage-in garbage-out” or in other words, the importance of human element in use of computer can never be under-estimated. u

WORDS OF WISDOM

Ignorance of the law excuses no man; not that all men know t e l w, b t b c u e ’ tsa h aw, u e a s ’t n i ecs eey mn wl ped xue vr a il la, and no man can tell how to rft hm eue i.
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Finance & Accounting

Accounting for Asset ImpairmentRelevant Issues
It is a matter of prudence under GAAPs that assets should not be overvalued in the balance sheet. But when the long lived assets are depreciated on the basis of historical cost under historical cost accounting, the depreciation accounted for the period may fail to capture some change in circumstances which cause the value of the long lived asset to decrease all of a sudden in the balance sheet. Such an unexpected decrease in the value of a long lived asset would be considered a case of impairment of asset beyond the depreciation which is recorded under normal circumstances.

ants are reluctant to write it down to net realizable value. This reluctance stems from the fact that it is difficult to arrive at a net realizable value that is not subjective and arbitrary for property, plant and equipment, unlike inventories, for which values can be more easily obtained."(Kieso and Weygandt, 1986, p.435) The general accounting procedure for accounting for long life assets is that, as and when the services of these assets are used up to produce the revenues, they are expensed for the period. It is a matter of prudence under GAAPs that assets should not be overvalued in the balance sheet. But when the long lived assets are depreciated on the basis of historical cost under historical cost accounting, the depreciation accounted for the period may fail to capture some change in circumstances which cause the value of the long lived asset to decrease all of a sudden in the balance sheet. Such an unexpected decrease in the value of a long lived asset would be considered a case of impairment of asset beyond the depreciation which is recorded under normal circumstances. The problematic issues in this connection are: 1. to define the conditions and events which recognize that impairment in value has occurred and 2. to design a method or methods for measuring the asset impairment. Though the accounting statements are prepared based on the GAAPs, the paradigm is no longer dominant . It is relevant to mention 395
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Dr. Prakash Pinto* ssets in accounting are defined as the tangible or intangible resources owned by an entity and are expected to provide future economic benefits to the entity. Hence, assets can be viewed as a bundle of services owned by an entity for generating revenues. Broadly, accounting assets are classified as long lived assets and short lived assets. Land, machinery, furniture are long life assets because these assets have the capacity to generate revenues for more than one accounting period. As against that, short lived assets generate revenues for one or less than one accounting period. Receivables, inventories are short lived assets. A long standing discussion and debate in respect to the accounting for long lived assets is the measurement ,timing and recognition of asset impairments. As mentioned earlier, assets are owned by the entity *
Senior Lecturer, Aloysius Institute of Business Administration, St. Aloysius College,Mangalore-575003

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for their revenue producing capacity and an impairment occurs whenever the revenue producing capacity of the asset is reduced or diminished. An impairment in the revenue generating capacity may be because of such events such as a significant decline in the market value of an asset, the manner in which the asset is used and the change in technology etc. The concept of asset impairment is akin to the concept of conservatism. The rule "lower of cost or market" has been applied to the measurement of the short lived assets particularly to marketable securities and to inventories. But the said rule was not applied to long lived assets till recently. In this regard the following observation is worth noting: “The general accounting standard of lower of cost or market does not apply to property, plant and equipment. And even when property, plant and equipment has suffered partial obsolescence, account-

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Finance & Accounting the following observation in this connection: "Until three decades ago, the dominant accounting paradigm was of Generally Accepted Accounting Principles(GAAP). Accounting was thought of as a natural language that evolves gradually through usage over long intervals of time. The meaning of words and expressions arises from their general acceptance. The multiplicity of meaning associated with words and the multiplicity of words to convey a given meaning endow natural languages with flexibility of expression, and virtually limitless variability .Ever since the creation of SEC, efforts were made in US to abandon the evolutionary spirit underlying the GAAP concept in favour of designing accounting rules through a deliberate process, and enforcing them through sanctions. "(Sunder, S,2003,p.3) Today, the accounting practices are guided by the standards formulated by standard setting bodies. The International Standard Setting Body(ISSB) formulates the International Accounting Standards to be followed by its member countries. So also The Accounting Standards Board(ASB) of The Institute Of Chartered Accountants Of India (ICAI) formulates the standards to be followed in the preparation of financial statements in India. The International Accounting Standard-36 dealing with Impairment of Assets has provided a general approach for the identification and measurement of asset impairment. According to this standard, an asset is regarded as being impaired if its carrying amount exceeds its recoverable amount. Assets should be reviewed at each balance sheet date for indications of impairment. If the indications are found, there should be a detailed calculation of the recoverable amount of the asset concerned. The recoverable amount is the higher of an asset's net selling price and its value in use. 'Value in use ' of the asset is the present value of the estimated future cash flows from the continued use of the asset and the salvage value. 'Net selling price' is defined as the amount obtainable from an arm's length transaction between knowledgeable willing buyers and sellers less costs of disposal. In addition to the general approach given in IAS-36, impairment is also referred to in International Accounting Standard-9, Research and Development Costs, International Accounting Standard-16, Property, Plant and Equipment and International Accounting Standard-25,Accounting for Investments. The Accounting Standards Board of the Institute of Chartered Accountants of India has recently issued the Accounting Standard (AS) 28- Impairment of Assets and the said standard is mandatory from the periods commencing 1-42004. The specific issues covered in the standard are discussed as follows. The primary objective of the AS28 is to ensure that the assets of an entity are carried in the balance sheet at no more than their recoverable amount. The standard states that an asset is carried at more than its recoverable amount if its carrying amount exceeds the amount to be recovered through use or sale of the asset. Paragraph 4 of the standard uses the following important terms with the meanings specified in connection with the identification and measurement of the impaired assets. (i) Recoverable amount i s t h e higher of an asset's net selling price and its value in use. (ii) Value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. (iii) Net selling price is the amount obtainable from the sale of an asset in an arm's length transaction between knowledgeable, willing parties,less the costs of disposal. (iv) An impairment loss i s t h e amount by which the carrying amount of an asset exceeds its recoverable amount. (v) Carrying amount is the amount at which an asset is recognized in the balance sheet after deducting any accumulated depreciation (amortization) and accumulated impairment losses thereon. The standard specifies that every enterprise should assess whether there is any indication that an asset may be impaired at each balance sheet date. If such indication exists, the enterprise should estimate the recoverable amount of the asset (para 6) Following are some of the indications identified by the standard for asset impairment. Broadly they are classified as external sources and internal sources as below: the management accountant, May, 2005

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Finance & Accounting External Sources: (i) If an asset's market value has declined significantly more than would be expected as a result of the passage of time or normal use during the period. (ii) Decline in the market value of the asset due to significant changes in the technological, market or legal environment in which the enterprise operates. (iii) Changes in the market interest rates which affect the discount rate used in calculating an asset's value in use. (iv) The carrying amount of the net assets of the reporting entity is more than its market capitalization. Internal Sources: (i) Obsolescence or physical damage of an asset. (ii) Significant changes have taken place during the period with an adverse effect on the enterprise, or are expected to take place in the future periods that will impair the asset from generating the revenues. Such changes may be plans to discontinue the operation or disposal of the asset before the previously expected date. (iii) Economic performance of the asset (or will be) worse than expected based on the evidence available from internal reporting. Measurement aspects of asset impairment As mentioned earlier, recoverable amount of an asset is the the management accountant, May, 2005 higher of an asset's 'net selling price' and its 'value in use'. The net selling price can be arrived at based on a price in a binding sale agreement in an arm's length transaction adjusted for the costs of disposal of the asset. In the absence of a binding sale agreement the enterprise must identify whether the asset concerned is traded in an active market. If the asset is traded in the active market then the net selling price is the asset's market price less the costs of disposal. If there is no binding sale agreement or active market for an asset, net selling price may be arrived at based on the best information available to obtain that amount. It must be noted in this connection that net selling price does not mean a forced sale of the asset. In computing the value in use of the asset, an enterprise should estimate the future cash inflows and outflows arising from the continuing use of the asset (including the inflows from the ultimate disposal of the asset). Such estimated cash flows should be discounted applying the appropriate rate of discount. Once the recoverable amount is estimated , if the recoverable amount of an asset is less than its carrying amount (the amount of asset carried in the balance sheet), the carrying amount must be reduced to its recoverable amount by recognizing an impairment loss in the profit and loss account of the accounting period concerned. Having recognized the impairment loss, the depreciation amount for the asset has to be adjusted for allocating the revised carrying amount of the impaired asset. Conclusion: Financial statements should show a true and fair view of the affairs of a reporting entity. Therefore assets carried in the balance sheet should be shown at a value which is no more than their recoverable or realizable value. No impairment is recognized when the estimated discounted future cash flows are more than the carrying amount of the asset. But as a matter of prudence an impairment loss must be recognized when the discounted future cash flows over the useful life of the asset are less than the carrying amount of the asset. Therefore, measurement of impairment loss and its recognition as an expense in the income statement remains the biggest challenge for the enterprises.
References: 1. Accounting Standard (AS) 28, Impairment of Assets,http:// www.icai.org 2. Clare. R.,Weetman P., and Gordon, P., International Financial Accounting : A Comparative Approach, Second ed.,Prentice Hall/ Financial Times,2002 3. Kieso,D.E. and Weygandt, J. J., Intermediate Accounting,.Fifth ed., New York : John Wiley and Sons,1986. 4. Schuetze,W.,"Disclosure and Impairment Question",Journal of Accountancy, December 1987,pp.2632 5. Sunder, S.,"Rethinking the Structure of Accounting and Auditing", Indian Accounting Review,June q 2003, pp.1-15

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Finance & Capital Markets

Green shoe option in IPO
For stabilizing post-listing share price, a company making an Initial Public Offer (IPO) through the Book Building mechanism can hold the Green Shoe Option. This is an option that allows underwriter of an Initial Public Offering to sell additional shares to the public.

Green Shoe Option (GSO): SEBI has recently introduced Green shoe option (GSO), a new phenomenon for Indian investors. The name comes from the fact that the Green Shoe Company USA (renamed as Stride Rite in 1966) was the first to introduce this type of option. A company making an Initial Public Offer (IPO) through the Book Building mechanism can hold the Green Shoe Option. This is an option that allows underwriter of an Initial Public Offering to sell additional shares to the public. The objective of introducing Green shoe option by SEBI is to create a safety net for investors who participate in the initial public offer of a company. It is to be used as a mechanism to stabilize the post-listing share price. The introduction of GSO came at a time when primary market in India was going through a bad phase. The IPO's coming out were overpriced and prices used to fall after listing on the stock exchanges. This hurt the retail investor as it created a loss immediately on listing. As a result, investors were shying away from the primary market. In August 2003, SEBI introduced Green shoe option to protect investors from the fall in the share price. In this system, one Secondary Market Limited risks. Protected from counter party risks by the stock exchange.

R. Nagarajan *

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he financial markets have two major components, the money market and the capital market. The money market refers to the market where borrowers and lenders exchange short-term funds to solve their liquidity needs. Money market instruments are generally financial claims that have low default risk, maturities under one year and high marketability. The capital market is a market for financial investments that are direct or indirect claims to capital. The securities market has two inter-dependent and inseparable segments, the new issues (primary) market and the stock (secondary) market. The primary market provides the channel for sale of new securities, while the secondary market deals in securities previously issued. This paper aims to discuss the Green Shoe Option (GSO) in IPOs. Primary market The primary market, otherwise known as new issues market, provides channel for sale of new securities, while the secondary market deals in security in the primary market to raise bonds for investment and or to discharge some obligations. The * 398
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book signals generated with secondary market their primary markets is allocation of resources. The market wherein resources are mobilized by companies through issue of new securities is called the primary market. These resources are required for new projects as well as for existing projects with a view to expansion, modernization, diversification and up gradation. The issues may consist of equity shares, debentures, bonds and other hybrid securities on a first issue basis or rights issues to the existing shareholders. Investors apply for the securities and subscribe directly to the issues. Problems faced by Investors: S.No 1 2 Primary Market Exposed to risks.

Unprotected risks of counter party defaults in the primary market due to fly-by-night promoters. New issues are of very large amounts even for 100 crores of rupees. Where fraudulent promoters try to dupe the entire community of unsuspecting investors

3

Deals are isolated transactions involving sale/purchase of individual lots of shares/ bonds.

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Finance & Capital Markets of the Book Running Lead Managers (BRLM) is appointed as a Stabilizing Agent (SA), whose prime responsibility is to intervene when the share price falls below the issue price. The maximum period up to which a BRLM can act as a Stabilizing Agent is 30 days from the listing date. Green Shoe Option Introduced in August 2003 by SEBI Safety net to investors Stabilize the post-listing share price Mechanism of Green shoe option (GSO): When a company wants to raise money through an IPO using the Book Building process, it appoints BRLMs to manage the issue. One of the BRLMs is also appointed as an SA who is responsible for the stabilization process. The SA enters into an agreement with the issuer company, prior to filing of the offer document with SEBI, clearly stating all the terms and conditions relating to this option including fee charged/ expenses to be incurred by SA for this purpose. The SA also enters into an agreement with one or more of the promoters who lends his/lend their shares for the purpose of over allotment, specifying the maximum number of shares that may be borrowed from the promoters, which shall not be in excess of 15% of the total issue size. Over allotment is defined as an allocation of shares in excess of the size of a public issue made by the SA out of shares borrowed from the promoters. The details of the agreements mentioned above shall be disclosed in the draft process also called the Red Herring prospectus. The SA also opens an account with a bank, called the "Special Account for GSO proceeds of ___x____ company" , referred to as the GSO Bank account and an account for securities with a depository participant to be called the "Special Account for GSO Shares of __x____ company". An IPO is then floated, in which the original number of shares along with the extra shares are offered to investors (these extra shares come from lender). The money received from the investor against the purchase of shares is divided into two different bank accounts- IPO bank account and GSO bank account. The money received against the over allotment under the GSO is kept in the GSO bank account. After the offer period is over, the cutoff price and the listing date are announced. Trading in the shares begins on the listing date. In a situation where the share price falls below the issue price, the SA becomes active and uses the money deposited in the GSO bank account. He starts buying the shares of the company thus creating an artificial demand for the share in the market so that the price moves up to the issue price level. The shares thus bought from the market by the SA are credited to the GSO demat account. This intervention by the SA can be continued up to a maximum period of 30 days from the listing date or up to the time the amount lying in the GSO bank account is exhausted. The shares bought from the market by the SA, which are lying in the GSO demat account, are returned to the promoters immediately. In case, during the stabilizing period, the SA does not buy the over-allotted shares from the market, the issuer company is obliged to provide the shares to the extent of the shortfall in dematerialized form to the GSO demat account. These shares are then returned to the promoter against the shares borrowed from them. The SA transfers an amount equal to [(no. of shares) x (issue price)] to the issuer company from the GSO bank account. In case, there is a amount left in this account after this remittance and deduction of transaction expenses incurred by the SA for the stabilizing mechanism, it is transferred to the investor protection fund of the stock exchange on which the shares of the issuer company are listed and the GSO bank account is closed. The SA has to submit a report to the stock exchange(s) on a daily basis during the stabilization period. The SA also has to submit a report to SEBI in the format specified in schedule XXIX (Clause 8A) duly signed by both the SA and the company. The SA also prepares a depository statement for the GSO demat account for the stabilization period, indicating the flow of shares into and from the account. Final report for Green Shoe Option (as per Schedule XXIX, Clause8A) a) Name of the company b) Name of the SA (Registration no) c) Issue size (No. of shares) d) Issue opened on e) Issue closed on f) Over-allotment in issue (%) g) Date of commencement of trading h) Amount in the GSO Bank Account (Rs.) i) Details of promoter(s) from whom shares were borrowed (Name and Number of shares borrowed.) j) Date on which the stabilization period ended k) Number of shares bought during the stabilization period l) Date on which the company allot399
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Finance & Capital Markets ted further shares to the extent of shortfall m) Date when the shares in the GSO Demat Account returned to the promoter(s) n) Date when the money in the GSO Bank Account was remitted to the company o) Details of the Depository account (Special account for GSO securities) where shares purchased from the market were kept interalia the following: # Depository participant # Account No. # Number of shares purchased, date wise # Number of shares taken out, date wise. Benefits of Green Shoe Option: Ideally, with the intervention of the SA, the share price should not fall the issue price for a period of 30 days from the listing date. Due to this opinion, the investor has a time period of 30 days up to which he is safe and his chances of incurring losses are minimal. Conclusion: The challenge for the regulator would be to keep fradulant issues away from the market. Avoiding such issues is in the interest of the corporate world itself as it ensures that retail investors would not loose trust and stay away from capital markets. For their part, investors too should do their homework before investing in IPOs rather than grabbing every IPO with the same fervor without any concern for the fundamentals or the quality of management, etc., of the company. It is the investor's hard earned money and he should invest it carefully. Reference: 1) Gordon.e & Natarajan.K - Capital market in India - Himalaya publishing House,Mumbai 2) Machiraju.H.R. - Indian financial syatem - Vikas publishing House, NewDelhi 3) Khan.M.Y. - Indian financial systems - Tata McGrawhill Publications, NewDelhi 4) Journal of ICFAI 5) www.sebi.gov.in

Book Building process

Appointment of BRLMs*

One of the BRLM as on SA* for stabilizing process SA enters agreement with the issuer company

Another agreement with one or more promoter who lends his shares for over allotment shall not be excess of 15% of total size

The details of the agreement in draft process called “Red Herring Process”

SA opens an account with bank, “Special account for GSO* proceeds of x company”

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Finance & Capital Markets

Another securities when a depository participant, “Special account for GSO shares of x company”

IPO* floated

IPO account

Money received from investors

GSO bank account

Shares thus bought from the market by SA are credit to the GSO Demat account

Maximum period of 30days from the listing date or up to the time the amount lying in the GSO bank account

Shares returned to the promoters

There is any amount left in the account after expenses incurred by SA for stabilizing mechanism transfer of IPF* of the stock exchange and the GSO bank account is closed

SA submit a report to stock exchanges daily during stabilization period and also submit a report to SEBI* in the format specified in schedule XIXX (Clause 8A) signed by both SA and the company

Also prepare a depository statement for the GSO demat account for the stabilization period, indicating the flow of shares into and from the account.
Mechanism of Green Shoe Option: RLMs SA IPO IPF SEBI Book Running Lead Managers Stabilizing Agent Initial Public Offering Investor Protection Fund Securities Exchange Board of India. 401
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Space for Ad of Taxman’ Film Supplied by Institite

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Book Scan 6. in this connection Accounting Standard interpretation like ASI3, 4, 5, 6, 11, 12 issued by the ICAI may be discussed to bring more clarity. Principles of Cost and Management Accounting
(For ICWA Intermediate Examination)

A Practical Guide To Deferred Tax Problems Written by Santanu Kumar Ganguly Published by : Kamal Law House Price Rs. 100 The books has been written in simple & lucid language in presenting puzzling subject making Deferred Tax a simple and interesting subject. This edition, besides containing practical solution incoparates case study of different companies which has immense practical value not only to the professionals but to all those who are concerned with the subject of Deferred Tax. It is worth keeping handy. One separate chapter gives with specific issues like Loss under Capital Gain, Mat, Addition made in the assessment proceeding etc. which is very helpful and illustrative. Another chapter gives practical illustration in respect of different companies which are the exemplanary. However, this chapter should have include more illustration in respect of bank sector, mutual fund etc. It is suggested this book may be improved further by incorporating the following subjects :1. AS-22 may be compared with IAS-I2 and US GAAP.- F AS-109. 2. Reference may be made with the Companies (Auditor's Report) Order, 2003 specially for payment of statutory dues, undisputed statutory liability and disputed statutory liabilities. 3. Defened Tax arising from business combination. 4. Defened Taxes for Leasing Companies. 5. Set Off Principles may also be referred. the management accountant, May, 2005

[Revised Syllabus] by Dr. S. N. Maheswari Published by : Sultan Chand & Sons, Educational Publishers Price Rs. 275.00 Cost Accounting is the formal mechanism by means of which the costs of products or services are ascertained and controlled. Management Accounting involves collecting, analysing, interpreting and presenting all accounting information which is a helpful tool to the management. The book under review is a comprehensive presentation intended for ICWA Intermediate Stage-I Examination under the revised syllabus and also for similar other courses and it opens up a new horizon of decisionmaking. The author has dwelt on the contents of the subjects in four sections, from A to D. Section A practically deals with the fundamentals of cost and Management Accounting. Every aspect of accounting can now be discussed from various angles, -(a)Financial aspects, (b) Behavioural aspect, (c) Normative aspect, (d) Managerial and control aspect. With the increasing demand for globalisation, mechanised aspect of accounting has become a topic of the day in the field of trade and commerce. The author has started his discussion nicely dealing with these fundamentals at the very introduction of the book. It would have become more

attractive if he dwelt upon a few line on normative aspect of accounting. The critic at the same time offer his thanks to the author for the lucid and concise description of various aspects like utility, tools, limitations of -- financial management and management accounting, accounting and behavioural aspects and persons interested in accounting disclosures. The second chapter of this section entitled "Computer and Accounting" is indeed very attractive to the newcomers in computer study so far as accounting information system is concerned. In this context, accounting data and accounting information, value of information in mechanised accounting, entrophy, redundancy, etc. should have been discussed in a nutshell. But at the same time, the summarised representation of flow chart symbol in computer is so nicely represented that it will remain in the memory of the students for long. Software packages in accounting will also become attractive to the students. Section B covers the issues like Planning and control in Management Accounting.The modern trend of income position and financial position disclosure approaches more to the stream of management accounts rather than that of financial accounts. It is very much helpful to the would be executives for preparing income and financial statements in such a style that effective decision can be made promptly and correctly. Ratio-analysis chapter in the book is very nice and attractive to the students. But is there any efficacy to compare the actual performance with some conventional standard ratios ? Many are of opinion that there is nothing to be termed as standard ratio whether it is industry standard or universal standard and any comparison with standard ratios will be fallacious. A question may arise whether composite ratio is to be adopted for 403
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Book Scan inter-firm and intra-firm comparison which is meaningless in modern times. While defining the concept Fund, the author has unfortunately missed the APB opinion No.19 where "Fund" has been interpreted as "all financial resources" and not working capital which is also supported by Chartered Institute of India in accounting standard 3. This contradictory ideas about the concept create problem especially where fixed as well as current assets are purchased by a concern through issue of shares and securities. In discussing 'Cash Flow Statement', the author has nicely dealt with both direct and indirect approach. It would have become better if some important profitability and coverage ratios through case studies be dwelt upon along with splitting up of inflows and outflows of cash through operating investment and financing activities. The author has nicely analysed all the aspects of budgetory control in Section C. It would have become better if a problem of flexible budget and a brief idea about life-cycle budget with standard costing had been included in "Standard Costing and Variance Analysis" chapters. The author has made full justice in dealing with these chapters. One thing has not been mentioned here as to when investigation on variance between standard and actual be taken up. It would have become all the more interesting if the technique of a reconciliation statement between actual cost and standard cost is illustrated. The next two chapters are "Marginal Costing and Profit Planning and Decisious Involving Alternative Choices". Adequate number of illustrations covering all important issues have been given here. Section D contains topics like "Cost Concepts and Methods". From preliminary ideas 404
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about Cost Accounting and recording have been discussed in detail. The students will be much benefited by studying these chapters. The chapter "Cost Control and Cost Reduction" has also dwelt upon by the author in a summarised form. The book is a blended product of knowledge and experience. The author discussed the whole subject in an authoritative manner. It would have been an added attraction if the writer could take the pains to put in the book a bibliography and an alphabetical index in the concluding pages of the book, the readers as a whole would have been benefited more by further readings and ready references. As the book contains questions and problems from examinations conducted by the Institute of Cost and Works Accounts of India, The Institute of Chartered Accountants of India and The Institute of Company Secretaries of India and other professional institutes, the students, academic scholars and professionals on the subject will be amply rewarded from this book. The lucidity of expression and logical representation of chapters in an examination oriented approach has made the book a worthy choice to its readers. The book is handy and reasonably priced. The get up and quality of presentation is admirable. Hope this significant of book of merit will find a good market.

the industrial units there were going to be collapsed one after another general public were totally upset over the shattered economy, Andrew Carnegi, a renowned industrial magnet remarked, "Let the Germans destroy all our industries, we will soon revive our industrial strength." In fact, this type of indo-mitable spirit springs from the ingenuity of management principles and practices of true management spirit by virtue of which Japan and German could soon build up a new empire on industrial supremacy after their total devastation of industry and commerce in second world war. Under the Indian context, it is sometimes heard, that when traditional barefoot heriditary management policies can kindle the light of industries successfully, there is no utility of professional management and its intricate training. But to-day, management of large-sized industries where economy of 'masters eye' is not at all possible like the by gone days, mere rule of thumb cannot be adopted as it was done in the past by some business houses from generation to generation. In the introductory chapter, the author of this book Dr. M. Sakthivel Murugan has covered all the aspects of the nature of management mentioning and touching only the salient points there, which will be very much useful for the students. One thing which is missed here, is the discussion on the issue whether management is behavioural science as well as normative science. At the very beginning of the discussion on this subject, the objects of it should be crystal clear before the students. Again, discussion on the scope of management has become too short. A somewhat detailed discussion might have become helpful for the students to choose the stream of management they want to get specialised there in the management accountant, May, 2005

Management Principles and Practices - Dr. M. Sakthivel Murugan. Published by New Age International (P) Ltd. Publishers Price : Rs. 180.00 only During the second world war, when Germany invaded France and

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Book Scan future. Otherwise, the chapter is nice to go through. The second chapter narrates management process, functions and principles. I have no hesitation to admit that the author has made full justice in the topic keeping an eye to the students. Evolution of management has been dealt with in the third chapter. It has covered all the aspects and stages of evolution. However, I miss Marry Parker Follet' s contri- bution and Etzionnis' social relation approach separately. The discussion on "Planning" has been arranged in the fourth chapter. Planning, is, invariably associated with forecasting which is discussed in 6th chapter. Moreover, Planning premises should have been mentioned here for an overall idea of the topic. The 6th chapter concentrating on the topics of decision-making, forecasting and management by objectives. It serves a fruitful purpose to the students. In "organisation", all the aspects of this element have been nicely dealt with and it helps the students to organise their knowledge on the vital function of management. The next four chapters covering Types of Organisation Structure, Delegation and Decentralisation, Departmentation, Organisation Charts and Manuals are equally interesting to read. In "Span of Management", "Graicunas Law", has been nicely presented by the author. "Staffing" has also been logically discussed. "Training and Development" appears to be the most impressive chapter of the book as it contains all the important topics of this branch of human resource development. the management accountant, May, 2005 In Motivation, Leadership, Communication and Co-ordination, the subject-matter has been explained in a nutshell but all the aspects have been covered in a nice, lucid and interesting manner. In control chapter, fundamental principles and techniques of control has been illustrated in an elegant manner. The last chapter "Recent Trends in Management" deserves special attention. The author has logically asserted the need of changes in management. Principles and techniques due to liberalisation, privatisation and globalisation of trade and commerce under the umbrella of W.T.O., Bench-marking and Stress Management are also nicely elaborated by the author. It would be all the more interesting had there been a few words on Strategic Management in the present context. Each chapter is furnished with learning objectives at the beginning and set of questions at the end. Figures have been illustrated properly. Case studies, objective types of questions and bibliography is given at the end of the book to help the students to plan and prepare their studies for exams. It would have been better if an alphabetical index is given in the concluding pages of the book. Hope the book will find a good market. Cost Accounting is a mechanism of accounting by means of which costs of services or products are ascertained and controlled in a service enterprise or a manufacturing firm respectively for different purposes. It opens up a new horizon of knowledge for decision-making techniques specifically suitable in their typical situations. Now its study has become essential to look forward to the bright future of those entities. This may enable one to become a successful man of Industry, Trade and Commerce in near future. In a developing economy like ours. the subject of Cost Accounting is widely acclaimed and has a great significance. In these days of globalisation of industries, cost reduction, cost control productivity have become much more important than pricing which are the subject-matter of Cost Accounting. The authors have dwelt on various such aspects of Cost Accounting in the twenty-eight chapters of this book. At the initial stage. the author is justified in discussing and analysing some basic concepts and methods, types and classification of cost nicely. In chapters II, III, IV and V. Material purchase control, Material inventory control, Material issue control and Material losses have been discussed keenly and in a lucid way. They are simply worth-reading too. In chapters VII, VIII and IX Labour Cost, Labour Cost,Cost Accounting and Direct Expenses have been highlighted. It is, however, a pity, that accounting treatment of labour cost, idle-time have not been mentioned there. In chapters X, XI and XII Overheads have been aptly narrated. In chapter XIII under the head "Miscellaneous" accounting treatment of various items like Depreciation, Bad debts, Medical Service Cost, Fringe Benefit, Bonus to workers, Idle capacity etc. which needs particular attention in Cost Accounting have been categorically and systematically discussed. In chapters XIV to XVII Cost Control Account, Reconciliations of Cost and Fi405
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COST ACCOUNTING By R.S.N. PILLAI and MRS. V. BAGAVATHI Published by S. CHAND & COMPANY LTD. Price : Rs. 300.00 Only. Business is a dynamic organisation in the economic-heart of human society while

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Book Scan nancial Accounts, Integral Accounting and Unit or Output Costing have been elaborated. Students will be aptly benefitted by going through the chapters for an easy understanding of the methods. The inclusion of the chapter Auditing of Cost Accounts is a significant one. But the absence of presentation of Proforma to the Audit Report from A to F G I and II, H to K. with notes is worth mentioning. In Mechanised Accounting. if some theoretical questions were given. it would have helped the students more. The book provides a comprehensive coverage of the syllabus covering Cost Accounting courses for undergraduate, post graduate (as per U.G.C. model syllabus) and all the professional courses like C.A, I.C.W.A. etc. Special care has been taken in explaining those points which cause trouble to the students. Questions set from different Universities and professional examinations have been incorporated so as to expose to the students the latest trend adopted by these institutions in the examinations conducted by them. If at the beginning of the book, chapter-wise important rules and formulae were given, the students community would have been benefitted to a greater extent. It is also requested to the author to insert in the next edition JIT, TOM, Target Costing, Strategic Costing and Life-cycle Costing in summarised forms in order to get the students acquianted with these modern concepts of Cost Accounting. It would have been better if the writer could take the pains with a few more flow charts to have a summarised idea of the entire chapter at a glance and an alphabetical index and bibliography at the end of the book, the readers as a whole would have been highly enlightened. The book has already passed five editions. This alone bears the testimony of its popularity in the students circle. As the book takes account of recent developments, I hope, not only the teachers and the taught, even the non-finance ex406
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ecutives will get maximum benefit from the study of this book. Hope this revised and enlarged edition also will find a good market as usual.

Building Smart Teams A Roadmap to High Performance By Carol A. Beatty Brenda A. Barker Scott Published by Response Books
(A division of Sage Publications India Pvt. Ltd.)

will not provide the desired results. Organisations must set goals priorities and task strategies. Then work allocations be made according to performance schedules, handling the interpersonal stresses by undertaking several key activities. The authors have stressed on three issues to build effective team management :1) Team Management Practices, 2) Problem Solving Skills, 3) Conflict Handling Skills. The book under review comprises five chapters. The first chapter synthesises the importance of high functioning teams from the standpoint of organisational success. Then a team effectiveness model is introduced where a Roadmap is designed to obtain the coveted results. Chapter two explores the idea of creating smart team management practices using nine planner elements while in chapter three the authors explain Team problem solving for process and have introduced three key skills of expert problem solvers like communication patience synergy creation and disciplined use of problem solving process. Chapter four concentrates the ideas on handling team conflict where tools for handling team conflict, diagnosing the key causes of conflict and conflict style and protocols for managing conflict have been discussed elegantly. Chapter four fosters a supportive infrastructure for teams where the art and science of implementing teams have been dis- cussed nicely. The authors further suggest an integrated approach by mentioning eight steps to implementing teams. Each chapter is supported with exercises- figures and specialists approaches. It provides both theory and tools to get smart, fast results as a result of which the teams find ample the management accountant, May, 2005

Price Rs. 295.00 Only Organisation of any unit has become so extensive and complicated as a result of globalisation, privatisation and liberalisation of trade policies allover the world that mere individual efforts will not be enough for a successful venture. The book entitled "Building Smart Teams" by Carol A.Betty and Brenda A. Barker Scott is an endeavour for the would be managers as an essential guide to quickly creating high performance team management. Theresa Amabile (1999. p.13) opines that "When teams comprise people with various intellectual foundations and approaches to work ideas often combine and combust in exciting and useful ways." The authors collected comprehensive data on more than 80 academic and 185 industry teams since 1993 and surveyed more than 350 individuals in MBA learning teams and close to 1500 members in work teams in both the public and private sectors and have identified that the formation of an ideal management team is the guiding principle to-day by a body-corporate. The authors have explained that merely putting together such a team

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Book Scan rooms to discover their own culture performance strategies and paths to success. References and suggested further reading and an alphabetical Index at the end of the book help the readers to grasp the context nicely. But it would have been better if a couple of case-studies had been included in the book. Moreover, a question may arise whether and how building up of a smart team will be possible in case of assembling the hetrogeneous elements of a multinational corporation to-day spreading its subsidiaries in different countries with different types of man-power and mutually contradictory environments. We are interested to know the observations of the authors in future edition. Both the authors are well-versed on the subject through researchworks. They have presented their ideas in a very lucid manner. It being a well written and thought-provoking books gives the reader a comprehensive and immensely practical guide to create and manage small teams. Hope the book will be a golden treasure to every library. P. K. Basu ogy of statics in a near non-mathematical manner. The quantum of mathematical skill required is a knowledge of high school algebra. This book has been designed as a text for both one semister and ful1 year courses on statistics. The students of research should know the techniques of analysis of variance and co-variance. These statistical devices find tho largest application in experimental research. The emphasis of the book is on generating a conceptual, procedural and computational understanding of the statistical techniques right from the setting up of the statistical hypothesis in symbolic and verbal terms to the interpretation of results. At several places the complete solutions of problems have been shown in boxes to aid understanding through a compact presentation which has been kept at a fairly simple level. The author has brought in this book all the relevant important statistical tools with special reference to corelation, regression, statistical inference both parametric and nonparametric methods,time series, Fdistribution and ANOVA tables etc. The subject matter of the book has been laid down in 10 selected chapters with appendicies, giving useful informations relating to examination and various statistical tables used in statistics. As the book is mainly meant for the student of professional courses, the chapters related to decision making, viz., Normal Distribution, Sampling Distribution, Concepts, Theory of Estimation, Tests of significance, chi-square Test, F-Distribution and ANOVA,Correlation Analysis, Regression Analysis, Time Series Analysis and Non-parametric Methods are discussed here in details. Some of the characteristic features of the book are that each topic offers completeness in its treatment,a vary high readability, a clear writing style a high degree of clarity due to an extensive use of complete, step-by-step examples, crystallization of the critical issue in the students mind. Questions for self study given at the end of each chapter in the book will be of immense use to the student in self assessment, various statistical tables used at the end of the book will be very helpful to the target students. Reasonably priced at Rs.155/- the reviewer whole heartedly recommends this useful book on 'Statistics For Management' to the target student readership.

Basics of Cost and Management Accounting
By : V. K. Saxena and C. D. Vashist. Publisher: Sultan Chand & Sons Price Rs. 275/In the era of libaralization, globalization and cost competitiveness, Management Accountants have to play a vital role in the society. In order to survive in the present competitive earth every producer should be cost conscious and shall have an altitude of reduction in cost through optimum utilization of available resources. Cost and Management Accounting has made rapid strides during the last few decades mainly because of the keen competition among the manufacturers and the growing of business complexities. It has therefore, occupied an important position in the present curriculum. The subject matter of this book has been logically arranged and the basic principles have been explained in an easily intelligible way so that the students may not find any difficulty in revising their course quickly before their examination. 407
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Statistics for Management
By P. N. Arora and S. N. Arora Published by S. Chand & Company Ltd. Price : Rs. 155/Tho main objective of this Book is to introduce students and research workers in psychology, education, sociology and many other social sciences to concepts, application and computational proceodures involved in statistical analysis of experimental and observational data. Here an attempt has been made to introduce the student to tho practical technolthe management accountant, May, 2005

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Book Scan There have been a large number of books in this subject but I think there is scanty supply of a good book which is tailored exactly in accordance with the requirements of the students and professionals. Hence, the main purpose of this book is to fill the present gap by concentrating only on the subject matter strictly according to the undergraduate syllabi of the Universities. The book under review has been desired to serve as a selfsufficient text with an indepth understanding not only for the purpose of examination but also for intensive studies. The authors have taken special care to develop the subject gradually and to ensure that all the cost and management accounting terms concepts, conventions and practices are lucidly explained and well illustrated. A well balanced has been maintained between theoriticaly exposition and supporting illustrations. The comprehensive exercises at the end of each chapter represent a reliable question bank from various examinations. The book consists of two parts namely Part A - Cost Accounting and Part B - Management Accounting. Part A encompasses 19 chapters. Chapter 1 and 2 cover overview of Cost Accounting concepts and materials. Chapter 2 is related to labour problems. Chapter 4 and 5 relate to DirectExpenses and Overheads. Chapter 6,7 and 8 present Job Casting and Batch casting, Single or Output costing and Contract casting repectively. Chapter 9, 10 and 11 deal with Process costing, Service costing ard Joint products and By products. The remaining chapters of Part A are related to Cost Book-Keeping reconciliation of Cost and Financial Accounting, Uniform costing and Interfirm comparison, Cost Reduction and Value Analysis, Marginal Costing and Cost Volume Profit analysis 408
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short term decision Making, Budgetary control and standard costing. Part B contains 4 chapters with two appendices and an index, Chapter 1 highlights Management Accounting and its theoritical discussion. The second and third chapters relate to Ratio Analysis and Fund Flow Analysis and Chapter 4 deals with Cash Flow Analysis. A distinguishing aspect of the Volume is the conclusion of some of the latest revised extracts from CIMA(London) Management Ac-

counting Official Terminology (revised in 1996). Each of the chapter in the book contains key Examination points/authors comments at the end. The book is moderately priced considering the all pervasive inflationary trend since the target group for the Volume is the communite of students. The methods of analysis adopted by the author are appropriate,easy to understand and comprehend and facilitate practical application. Dr. Subir Kumar Dutta, AICWA

Statement about ownership and other particulars about The Management Accountant, required to be published under rule 8 of the Registration of Newspapers (Central) Rule, 1956 Form IV 1. Place of Publication 2. Periodicity of its publication 3. Printer’s Name Nationality Address 4. Publisher’s Name Nationality Address 5. Editor’s Name Nationality Address 12 Sudder Street, Kolkata 700 016 Monthly Dr. H. R. Subramanya Indian 12, Sudder Street, Kolkata 700 016 Dr. H. R. Subramanya Indian 12, Sudder Street, Kolkata 700 016 Siddhartha Sen Indian C/o. ICWAI, 12, Sudder Street, Kolkata - 700 016 It is the official organ of The Institute of Cost and Works Accountants of India

6. Names and addresses of individuals who own the newspapers and partners or share holders holding more than one per cent of the total capital

I H. R. Subramanya hereby declare that the particulars given above are true to the best of my knowledge and belief Dated 31st March, 2005 Sd/ Dr. H. R. Subramanya Signature of Publisher the management accountant, May, 2005

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Region & Chapter News Group discussion and BusinessCommunication SeminarJaipur Chapter has organized a seminar on " Skills in report writing and business letters" as well as group discussion and seminar for intetmediate students on 9th and l0th April 2005 under the chairmanship of R.K. Dwivedi, Chairman of the chapter, The seminar was inaugurated by A.K. Shah, Executive Director, The Urban Cooperative Bank Ltd. Jaipur. Dr. Isha Sharma, HR Consultant was the Guest speaker. The students gave their presentation on different topics. The panal of judges included A.K. Shah, Executive Director, The Urban Cooperative Bank Ltd., Dr. Isha Sharma, HR Consultant, R.K. Dwivedi, Chairman of the Chapter and S.L. Swami, Director of coaching. Dr. Isha Sharma,explained the intricacies of group discussion and gave valuable tips to the students. A.K. Shah, awarded the prizes to the winners. R.K.Dwivedi Chairman, presented mementos to the guests. S. L. Swami,Director of Coaching coordinated the programme.Vinod Chittora, Secretary also graced the occasion. Shrutikant Mishra, Joint Secretary of the chapter elaborated the opportunities for Cost Accountants and presented the Vote of Thanks. LUDHIANA CHAPTER Concept Paper on Companies Amendment Bill Ludhiana Chapter organised a symposium on ‘Concept paper on Companies Amendment bill’- The discussions at the symposium were initiated by R.C.Singal, practicing Company Secretary and former Chairman of Northern India Regional 409
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Discussion on Union Budget 20052006 EIRC of the Institute of Cost & Works Accountants of India organized a Discussion Meeting on Union Budget 2005-2006 on 11th March, 2005 at 5 PM at J N Bose Auditorium, 12 Sudder Street, Kolkata - 16. C R Chattopadhyay, Chairman, EIRC welcomed the participants and introduced the Guest Speakers, Dr. Suman Mukherjee, S N S Mohapatra, Dr.Sampat Mukherjee and Niranjan Swain. Mr. Chattopadhyay then requested Harijiban Banerjee, Former President of ICWAI to preside over the meeting. More than 300 participants attended the meeting. Dr. Suman Mukherjee, a leading Tax Consultant, in his speech very lucidly explained macro aspects of the Budget. Dr. Sampat Mukherjee, an eminent Economist explained the impact of the Budget on Indian economy and opportunities for Cost & Management Accountants in view of budget changes . Niranjan Swain, Vice-Chairman, EIRC gave a presentation on various direct tax aspects of Budget 2005-06. S N S Mohapatra, a senior member of our profession and consultant deliberated on changes made in indirect taxes by the budget. Harijiban Banerjee summed up the various aspects of the Union Budget 2005-2006. Biswarup Basu, Member, EIRC extended a hearty vote of thanks. CUTTACK BHUBANESWAR CHAPTER Change of Fax No. of Chapter The New Fax No. : 0674-2405622 the management accountant, May, 2005

JALANDHAR CHAPTER The Chapter has conducted a Group Discussion for the students of intermediate on 3rd April 2005 at the chapter premises and the topics for discussion were :Stage - I 1. Different costs for different purposes. 2. Standard Costing and Budgetry Control 3. CENVAT Stage-II 1. Financial Accounting Different Accounting Concepts 2. Means of Cost Control Standard Costing 3. Budgetry Control 4. Internal Audit and Control Group Discussions were conducted by K. K. Verma - Chairman, Parveen Sharma - Vice Chairman and P. K. Verma - Secretary Stagewise topics were discussed at length by the students. Role of Cost Accountants was also explained to the students by the Secretary M P. K. Verma keeping in view the emerging trends in the economy. JAIPUR CHAPTER In the meeting of Executive Committee of Jaipur Chapter of Cost Accountants held on 20th February 2005 reconstructed/modified the committee as follows:R.K. Dwivedi, H.K. Singhal, Vinod Chittora, Srutikant Mishra, D.K.Gupta, Mamta Gupta S. L. Swami, Chairman Vice-Chairman Secretary Joint Secretary Treasurer Member. Co-Opted Member

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Region & Chapter News Council of the Institute of Company Secretaries of India; Mr. Singal explained the salient features of Concept Paper on Companies Amendment Bill he was of the opinion that the provisions of Concept paper, when amended, will be beneficial for all concerned. The discussions were followed by an interactive questions and answers session. During the course of discussions many questions were raised by participants which were duly replied by R. C. Singal. Among those present were T. R. Goyal. Chapter Chairman who also welcomed the gathering and Sanjiv Jain, Secretary of the Chapter besides members and students of the Institute. representatives from Industry and other professionals. The meeting ended with a vote of thanks proposed by Sanjiv Jain, Secretary of the Chapter. Talk on Union Budget Ludhiana Chapter of Cost Accountants organised a talk on union Budget - 2005 and discussed and deliberated the various aspects of Budgetary proposals particularly affecting the common man, salaried people, trade & industry as well as the corporate sector. The talk was delivered by S.P. Sharma, a taxation expert and a senior Company Secretary. The talk was followed by an interactive Question-answer session. During the course of discussion many questions were raised by the participants which were replied to by S.P. Sharma as well as by Chapter Chairman, T.R. Goyal to their entire satisfaction. Among those present were, Sanjiv Jain, Secretary of the Chapter, A.C. Singa1, Ex-Chairman of the Chapter, Shiv Jindal- Member Managing Committee, members of the other professions, representatives from Trade, Industry, besides members and the students of the Chapter. The meeting ended with a vote of thanks proposed by Sanjiv Jain, Secretary of the Chapter. SOUTHERN REGION to Bangalore, Tiruchirappalli and Salem Chapters. Plenary Session A Plenary Session was conducted with the welcome address by S. Ramesh , Chairman /PDC, SIRC of ICWAI. The session was chaired by A.K. Mathur, Executive Director, BHEL, Tiruchirappalli. The panel speakers were Mathew John, Commissioner, Central Excise, Tiruchirappalli., V.T.Arasu, Joint Managing Director, Cethar Vessels Limited, Tiruchirappalli, Mrs.Rita, AGM, State Bank of India, Tiruchirappalli and T M Subramanian, General Manager, Vigniyan Industries, Tarikere, Karnataka.A.Om Prakash, member, SIRC of ICWAI gave vote of thanks. Technical Session I The First Technical Session on “Cost Management initiative in the Emerging competitive environment” began with the welcome address by Sunil Chacko, Treasurer, SIRC of ICWAI. A.Madhavan, past Chairman, SIRC of ICWAI and Director, Aqualib Consultancy (P) Limited, Chennai,chaired the session.K.J.Chandran, Advocate and Tax consultant, Chennai, spoke in Valued Added Tax and the role of Cost Accountants. Dr. V. Balachandran of Alagappa University spoke on Cost modeling in WTO Regime and Trademarks.Pappu Elango, Addl.Commissioner, Central Excise, spoke on implication of Service tax and the role of cost Accountants.N Shanmugasundaram, Treasurer, Tiruchirappalli Chapter of Cost Accountants proposed a hearty vote of thanks. Technical session II D.Sudhakaran Nair, Past Chairthe management accountant, May, 2005

Southern India regional cost convention - 2005 18th and 19th February 2005. The Southern India Regional Convention 2005 under the theme “Cost Modelling in Contemporary Streams” was held in the historic city of Tiruchirappalli on 18th and 19th Feb-2005, jointly hosted by Southern India Regional Council of ICWAI and Tiruchirappalli Chapter of ICWAI. Chapters Meet A Chapters Meet was held on 18th Feb.2005 at the Convention Venue. Dr. H.R. Subramanya, President ICWAI, Haji. P S M. Hameed, Chairman, SIRC of ICWAI, R. Narayanan, Vice Chairman and DLS. Sreshti Secretary participated in the deliberations with the Chapter representatives. Inaugural Session The Convention started with the invocation by C. Murugappan, Haji. P S M Hameed delivered the welcome address and gave a brief overview of the convention. Dr.H.R. Subrahmanya, President, ICWAI, in his Presidential address explained in detail the theme of the Convention – “Cost Modelling in Contemporary Streams”. S. Jayaraman Chairman and Managing Director, Neyveli Lignite Corporation Ltd., inaugurated the convention by lighting the lamp and delivered a thought provoking inaugural address. He has also released Convention Souvenir and presented Best-Chapter Award for 2004

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Region & Chapter News man, SIRC of ICWAI delivered the welcome address for the second technical session on “Modern Techniques of Cost & Management Perspective”. T. R. Chandrasekaran, General Manager/Finance (Retd) BHEL, Tiruchirappalli chaired the session. Haji. Dr. M Shaik Mohamed, Principal, Jamal Mohamed College, Tiruchirappalli talked on Cost Modelling in Disaster Management and Structural Rebuilding. S. Saravanan, IBM Global Services India (P) Ltd, Chennai spoke on Cost Management Techniques for Managerial Decision Making in ERP and Dr.A.V.Subramanian, Consultant Neurologist, Seahorse Hospitals, Trichy made a presentation on Mind Management during competitive stress. K.Rajaopal, Asst.Secretary, Trichy Chapter rendered vote of thanks. Technical Session III The third Technical Session on Cost Modelling for Emerging Industrial Scenario started with the welcome address by R.Rangarajan, Chairman, Tiruchirappalli Chapter. The session was chaired by G.N.Venkataraman, past Chairman, SIRC of ICWAI. M.P.Jayakumar, SDGM/HRDC, BHEL spoke on Cost Modeling in Power Sector, AVNS Nagewara Rao, member, SIRC on Cost Modeling in Telecom Sector and Raguvir Srinivasan, Chief Research Analyst, Business Line on Importance of Cost Control and Cost Reduction for Corporate Turnaround with special referene to Tata Motors. G.Jayaraman, Asst. Secretary, Tiruchirappalli Chapter proposed vote of thanks. Valedictory Session Haji. PSM Hameed, Chairman, the management accountant, May, 2005 Union Budget - 2005 Direct Taxation A special address on “Union SIRC rendered welcome address and R.Narayanan, Vice Chairman, SIRC summed up the convention proceedings. The valedictory address was given by N Gopalasamy, Whole Time Director, Dalmia Cements (Bharat) Ltd.and M Gopalakrishnan, Central Council Member, ICWAI delivered the special address. The convention acknowledged the services of S.Gopalan, immediate past Chairman, SIRC of ICWAI who was felicitated by the Chief Guest. The convention came to an end with vote of thanks by C.Subramaniam, Secretary, Trichy Chapter of ICWAI. GODAVARI CHAPTER Godavari Chapter conducted a Seminar on VAT on 24th March, 2005 for the officers of commercial and Accounting functions of The Andhra Pradesh Paper Mills Ltd. and Glaxo Smithkline ConsumerHealthcare Ltd" Rajahmundry. P .K. Suri, President (Operations) of The Andhra Pradesh Paper Mills Ltd, Rajahmundry was the Chief Guest. P. Narayana Rao, Chairman of the Godavari Chapter presided over the function and explained that it is imperative for the industries to understand the principles of VAT. A.V.N.S.Nageswara Rao, practicing Cost Accountant and Council Member of SIRC explained the basic priniciples of VAT. In addition, he discussed about the White Paper on VAT, various provisions of APVAT and the set off working under Vat with few examples. C. Sankar, Secretary of the chapter gave vote of thanks. HYDERABAD CHAPTER Budget - 2005 : Direct Taxation" was organized by the Chapter on 2nd March, 2005 at Vasavi Club Hyderabad Auditorium. Pradip Kumar Sinha, IRS, Chief Commissioner of Income Tax-II, Andhra Pradesh, Hyderabad spoke on the topic. G. V. S. Subrahmanyam, Chairman welcomed the gathering. C. Sudhir Babu, Vice Chairman introduced the Chief Guest to the participants, whereas V. Bhanu N murthy Rao, Secretary proposed vote of thanks. Union Budget - 2005 - Indirect Taxation A special address on “Union Budget - 2005 : Indirect Taxation” was organized by the Chapter on 4th March,2005 at Vasavi Club Hyderabad Auditorium. Onkar Nath, IRS Chief Commissioner of Customs & Central Excise, Hyderabad Zone, Hyderabad addressed on the above subject. G. V. S. Subrahmanyan, Chairman welcomed the gathering. A. V. N. S. Nageswara Rao, Member, SIRC introduced the Chief Guest to the participants, whereas V. Bhanu Murthy Rao, Secretary proposed the vote of thanks. Industrial Tour to Madras Cement An industrial tour for the students of Stage-I,II and III was arranged by the chapter to Madras Cements, Jaggaiahpet on 7th March,2005. G. V. S. Subrahmanyam, Chairman accompanied the students. Valued added Tax-count down for implementation A members meet on "Value Added Tax-count down for implementation" was arranged by the Chapter on 23rd March,2005 at Vasavi Club 411
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Region & Chapter News Hyderabad Auditorium, A. Md., Imtiaz, Asstt. Commissioner of Commercial Taxes (VAT) Govt. of Andhra Pradesh addressed on the above subject G. V. S. Subrahmanyam, Chairman welcomed the gathering by introducing the Chief Guest whereas C. Sudhir Babu, Vice Chairman proposed the vote of thanks. Faculty Meet A Faculty Meet was arranged on 27th March, 2005 at Chapter premises. The main purpose of conducting the meeting was to improve the quality and the development of Question bank. A. S. Durga Prasad, Central Council Member attended the meeting and informed about the question bank and its usage and appraised the faculty members about E-learning project. TIRUCHIRAPALLI CHAPTER An Interactive Session on Budget 2005 was jointly organized by the Confederation of Indian Industries, Trichy Zone and Trichy Chapter of ICWAI on 11th March,2005 at Hotel Sangam, Trichy. The session was attended by a large number of representatives from various industries and officials of Central excise, Customs and Income tax department. P. V.Kannan, Chairman, CII, Trichy zone commenced the session with his opening remarks highlighting the various budget proposals and requested the delegates to freely put forth their queries for obtaining various clarifications / response from the concerned department officials present there. P.S.M. Hameed, Chairman, SIRC of ICWAI and Mr.Rangarajan, Chairman, Trichy Chapter of ICWA, highlighted the salient features of the budget 2005. Mathew John, IRS, Commis412
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sioner of Central Excise, Trichy spoke on the various changes brought about in the Central Excise duty structure in the budget. M Senthamil Selvan, IRS, Joint Commissioner of Customs, Trichy traced the origin of customs duty right from the ancient history of Tamil Nadu in a lively manner and exhorted the Industrialists to be sincere and true while declaring the value of the goods for customs duty purpose and be regular in payment. D.V.Dhannik,IRS,Chief Commisssioner of Income Tax, Trichy spoke elaborately on various changes and simplification proposed in the Budget 2005. There was interesting interaction from the various industrial representatives and a lot of queries and clarifications. The concerned officials from the departments gave their clarifications wherever possible. The issues of fringe benefit taxation and tax on cash withdrawal proposed in the budget were hot topics for discussion. However, since a policy decision is yet to be taken by the government, the matter was left at that stage. M.P. Ramasamy, Vice Chairman, CII, Trichy zone, proposed the vote of thanks and informed that such interactive sessions on topics of relevance concerning the industries will be conducted by them in future. All India Radio Programme on Accounting Profession Tiruchirappalli Station of All India Radio conducted a Phone-in-Live programme on Accounting Profession for one hour (11.00 pm to 12.00 pm) on 24th April, 2005 (Sunday).The programme was sponsered by the chapter. PSM Hameed,Chairman,SIRC of

ICWAI participated on behalf of ICWAI and clarified all queries from the students and public regarding syllabus, registration coaching, examination, valuation, employment opportunities in India and abroad,tie up with International Bodies etc.There was tremendous response to this programme from students and parents particularly from rural areas. Earlier All India Radio had given wide publicity to this programme in their regular and FM channel. VISAKHAPATNAM CHAPTER Business Communication Seminar and Group Discussion A Business Communication Seminar and Group Discussions for the students of Intermediate course were held on 13th March 2005. These programmes were conducted by F. A. Cooper, a member of the Institute and P. Seshagiri, Chartered Accountant and Faculty of the Chapter. Students actively participated in the programme. Guest Lecture The Chapter organised a Guest Lecture by A. S. Durga Prasad, Central Council Member on 19th March 2005 for the benefit of members and students. A. S. Durga Prasad, in his address guided the students about the facilities made available by the institute to learn by using institute's website, He said there was a facility to answer the question paper through E-mail and get the evaluation report. S. Satyananda Rao, Chairman of the Chapter spoke on the occasion. The meeting ended with vote of thanks by Smt Sujatha chattopadhyay, a member of the Institute and Faculty of the Chapter.

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Region & Chapter News welcome to participants. M. Eshwaran, Ex. Secretary, Coimbatore Stock Exchange was the speaker. M. Eshwaran briefed the origin and growth of the Capital Market and deliberated the recent developments in the capital market with particular reference to the role of the market regulator, The Securities and Exchange Board of India. The speaker delivered a well structured and informative presentation which was well received by participants. At the interactive session, M. Eshwaran, speaker clarified queries raised by members K. Anantharaman, Senior Member presented a memento to the speaker. R. Krishnan, Secretary gave the vote of thanks. Industrial Visit -Foundry An Industrial visit to Amtek Castings India Limited, a Foundry, manufacturing automobile components, was organized by the Chapter for students on 13th February 2005. 30 Students participated in the visit. Mr.Raveendran, Chairman PDC guided Students and Y. Sathyan, Manager-Accounts of the Company explained various process involved and sequence of operations and functioning. RANIPET - VELLORE CHAPTER Ranipet-Vellore Chapter celebrated Diamond Jubilee of ICWAI at Hotel Darling Residency,Vellore (South India) S.Sathyanarayanan, General Manager M/s BHEL, Ranipet presided on the function. S. Balachandran, General Manager M/s BSNL, Vellore, felicitation R. Thamodharan Sr. Div.Manager gave Key note address. P.S.M. Hameed, Chairman, SIRC spoke on the occasion. S. Ramachandran, Chairman, Ranipet-Vellore Chapter of Cost Accountants welcomed the Chief Guest, delegates, speakers and members. S.Sezlian, Secretary of the chapter proposed the vote of thanks. As a part of the Diamond Jubilee Celebration a seminar on VAT was organized. Eminent speakers K. J. Chandran, Sr.Advocate, S. Srinivasan, Sr. Manager M/s Sundram Motors Ltd. Chennai & K.P. Vasantha Kumar, Chartered Accountant Chennai spoke on th occasion. More than 100 delegates from government organisations, private sector, traders and large number of students participated the programme and interacted with the speaker during the interaction session. The Programme went of very well. WESTERN REGION

COIMBATORE CHAPTER Management Development Programme on "Foreign Collaboration Present scenario" The Coimbatore Chapter of Cost Accountants organized a Management Development Programme on "Foreign Collaboration - Present scenario" on Monday, the 7th February 2005. K.Gurusame, Chairman, Coimbatore Chapter of Cost Accountants gave a warm welcome to participants. K.Duraisami, Joint Company Secretary, Lakshmi Machine Works Limited, Coimbatore was the speaker. K.Duraisami briefed the gathering about the Foreign Collaboration and deliberated the Automatic routes, Know-how Fees, Royalties and the method of remittance, conditions applicable and Forms used in this process. The speaker delivered a well structured and informative presentation which was well received by participants. At the interactive session, K.Duraisami, speaker clarified queries raised by members P.R. Rangaswami, senior member presented a memento to the speaker. R. Krishnan, Secretary gave the vote of thanks. Management Development Programme on Capital Market - Recent Developments The Coimbatore Chapter organized a Management Development Programme on Capitalmarket Recent Developments on Saturday, the 12th February 2005. K. Gurusame, Chairman, Coimbatore Chapter gave a warm the management accountant, May, 2005

BARODA CHAPTER One day seminar on “Cost Reduction - a Holistic Process” The Baroda Chapter of Cost Accountants has organized "one day seminar on Cost Reduction - a Holistic Process" on 5th March 2005 at Hotel Surya Palace. The seminar was inaugurated by A K Luke, IAS, Managing Director of The Gujarat State Fertilizers & Chemicals Ltd.(GSFC) R G Kadakia, a fellow member of our institute and retired Executive Director of GNFC Ltd. was the keynote speaker. He explained the element wise applications and use of 413
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Region & Chapter News expertise of cost accountants in controlling and reducing cost. Chapter Chairman S J Joshi welcomed the Chief Guest, Keynote speaker, members and participants. Chapter Vice Chairman R K Patel, introduced the Chief Guest and Key note speaker, K. Sankhlecha, chapter Vice Chairman and Secretary proposed the vote of thanks. There were three technical sessions. The first and the third technical Sessions were addressed by A N Raman, Management Consultant. He showed how activity based costing and management practices can help the organization in cost reduction and bring about efficient management practices. The participants were delighted by real life examples presented by the speaker. Second Technical session was covered by two speakers namely S B Parikh, and N V Duggal. S B Parikh is a Practising Cost Accountant based at Baroda. He elaborated various cost reduction exercises carried out by him for his clients. N V Duggal is the General Manager (Operation) of a multi national company namely Bayer ABS Limited. He talked about the various process and techniques employed at Bayer ABS Limited to control and reduce the cost. The seminar was sponsored by insurance companies namely Iffco Tokyo General Insurance Co. Bajaj Allianz Insurance Company and Bow Associates a firm offering consultancy in insurance. GOA CHAPTER A seminar on " Budget- 2005 Indirect Tax implication and VAT"was held by Goa Chapter in association with Goa Chapter of ICSI on 4th March 2005.at Hotel Nova Goa, Panaji. Keshav K Kamat, an eminent industrialist and the President of Goa Small Industries Association was the Chief Guest. V.S. 414
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Datey the authority on indirect taxation and the Chairman of Nasik Chapter was the key speaker. Other speakers were Sheo Narayan Singh Anived, Commissioner of Customs and Central Excise (Appeals), Vijay Shankar, Vice President (Finance) Zuari Industries Ltd. Executives, businessmen and industrialists attended in large numbers. Rammohan Menon, Chairman of the chapter welcomed the gathering and introduced the chief guest, Keshav Kamat and other speakers. Mr Kamat while expressing his views on the budget and it's impact on the small industries, was highly appreciative of the role that cost accountants can play in the changed economic scenario.He also requested them to give a helping hand to small industries in Goa with their core competencies. V. S Datey, in his usual humorous style explained in detail the recent changes brought by the budget 2005. Sheo Narayan Singh Anived, Commissioner of Customs and Central Excise (Appeals) spoke about the changes and the effort that the department has undertaken to become assessee friendly. The interactive session that followed was well participated and appreciated by the delegates. Vijay Shankar was introduced to the audience by S Rane, Vice Chairman of Goa Chapter of Company Secretaries. Vijay Shankar spoke of the impact of the budget on manufacturing industries in general and fertilizer in particular. Savari Muthu, a senior Cost Accountant cum Company Secretary summed up the deliberation. Anant Chodnekar, secretary of Goa chapter of Cost Accountants conducted the proceedings. Shriaknt Gaunkar, Chairman of Goa chapter of Company Secretaries proposed the vote of thanks.

HEARTY FELICITATION R. Balakrishnan, (Membership No. - 10215) a member of the institute, has been conferred with professional designation CABM (Certified Associate Business Manager) by the Association of Professionals in Business Management (APBM). USA.

AT THE HELM

B F Modi is a member of The Institute of Cost and Works Accountants of India. He joined Blue Star as Finance Executive in the year 1983. He has risen to the post of Senior General Manager in the same organization. He is now Senior General Manager heading Air Conditioning Plant of Blue Star Ltd, at Dadra. He has been an ardent promoter of Continuous Improvement (Kaizen) programme and has implemented numerous improvement programs in the company. Under him, Blue Star's Dadra plant is considered by the industry experts as the best manufacturing facility in the country for air-conditioning products. We wish him the best for the future

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For Attention of Members

For Attention of Practising Members Guidelines for Renewal of Certificate of Practice

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he members of the Institute holding Certificate of Practice having validity upto 30th June, 2005 are requested to comply with the following guidelines for renewal of their Certificate of Practice: 1. Application for renewal of Certificate of Practice upto 30th June, 2005 has to be made in the prescribed Form `D' duly filled in and signed on both sides together with Renewal Certificate of Practice fee for Rs.500/- and all other dues to the Institute on account on annual membership fees and entrance fees. The annual membership fee for Associate and Fellow Members are Rs.300/- and Rs.800/- respectively. The entrance fee for Associate and Fellow Members are Rs.425/- and Rs.300/ - respectively payable at a time at the time of application for admission. The fees may be paid by Demand Draft/Pay Order/Cheque payable at Kolkata if remitted by post to the Headquarters of the Institute. In case remittance is made through an outstation cheque, please include Rs.30/- towards bank charges. The fees may also be paid directly by cash at the Headquarters or by Cash/Cheque/Demand Draft at the Regional Councils or Chapters of the Institute. 2. Please note that under Section 6 of the Cost and Works Accountants Act, 1959, the annual membership fee and Renewal Certificate of Practice fee fall due on 1st April each year. 3. Your special attention is invited to the fact that the validity of a Certificate of Practice expires on 30th June each year unless it is renewed on or before the date of expiry in terms of Regulation 10 of the Cost and Works Accountants Regulations, 1959. Therefore, a member signing any document as a practising Cost Accountant without having his Certificate of Practice renewed on or before the due date, makes the signed document invalid. 4. It may please be noted that mere payment of fees alone will not be sufficient for renewal of Certificate of Practice. Application in prescribed Form `D' duly filled in and signed on both sides is absolute necessary. 5. It is also essential to furnish a certificate from your employer in the following form or in a form as near thereto as possible if you have undertaken any salaried employment or there had been a change in your employment :

employment with us. Signature of Employer Under seal of Organisation" 6. As you are aware that in order to enhance professional competence and evolve a systematic mechanism to update knowledge of members in practice a Scheme of CEP was introduced in the year 2003. You may also be aware that the Scheme was made optional for the first two years subject to members completing the required number of hours in the third year. A partial modification of the said scheme has been made by the Council of the ICWAI. Therefore, it may please be noted that: a) Every member in practice from 1st July, 2003 or prior period is required to accumulate credit of 20 Hrs. for the block of three years of CEP within 30th June, 2006 for renewal of Certificate of Practice from 1st July, 2006 onwards. The minimum hours of training in a year are 6 Hrs. Any extra hours of training within the block of 3 years shall not be carried forward to next block. b) Every member in practice from 1st July, 2004 is required to undertake credit of minimum 12 Hrs. of CEP within 30th June, 2006 for renewal of Certificate of Practice from 1st July, 2006 onwards, subject to accumulation of credit of 20 Hrs. for the block of three years of CEP within 30th June, 2007 for renewal of Certificate of Practice from 1st July, 2007 onwards. The minimum hours of training in a year are 6 Hrs. Any extra hours of training within the block of 3 years shall not be carried forward to next block. c) Every member in practice from 1st July, 2005 is required to undertake credit of minimum 6 Hrs. of CEP each within 30th June, 2006 & 30th June, 2007 for renewal of Certificate of Practice from 1st July, 2006 & 1st July, 2007 onwards respectively, subject to accumulation of credit of 20 Hrs. for the block of three years of CEP within 30th June, 2008 for renewal of Certificate of Practice from 1st July, 2008 onwards. The minimum hours of training in a year are 6 Hrs. Any extra hours of training within the block of 3 years shall not be carried forward to next block. The requirement specified above does not apply to a member in practice who has attained the age of 65 years. Hence, all practising members are requested to send their application for renewal along with other requirements as indicated hereinabove immediately, in any case so as to reach us not later than 15th June, 2005. 415
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For Attention of Members

Definition of " Management Consultancy Services"
"The expression 'Management Consultancy Services' shall not include the function of statutory periodical audit, tax (both direct taxes and indirect taxes) representation or advise concerning tax matters or acting as liquidator, trustee, executor, administrator, arbitrator or receiver, but shall include besides all functions done as cost accountant the following: (i) Financial management planning and financial policy determination. (ii) Cost management planning and costing policy determination. (iii) Capital structure planning and advice regarding raising finance. (iv) Working capital management. (v) Preparing project reports and feasibility studies. (vi) Preparing cash budget, cash flow statements, profitability statements, statements of sources and application of funds. (vii) Budgeting including capital budgets and revenue budgets. (viii) Inventory management, material handling and storage. (ix) Market research and demand studies. (x) Price- fixation and other management decision making. (xi) Management accounting systems including TCM, TQM, BPR, cost control and value analysis. (xii) Control methods and management information and reporting. (xiii) Personnel recruitment and selection. (xiv) Setting up executive incentive plans, wage incentive plans etc. (xv) Management, operational, quality, the management accountant, May, 2005 environmental and energy audits. (xvi) Valuation of shares and business and advice regarding amalgamation, mergers and acquisitions etc. (xvii) Business policy, corporate planning, organisation development, growth and diversification. (xviii) Organisation structure and behaviour, development of human resources including design and conduct of training programmes, work study, time study, job-description, job evaluation and evaluation o work loads. (xix) Systems analysis and design and computer related services including selection of hardware and development of software in all areas of services which can otherwise be rendered by a cost accountant in practice and also to carry out any other professional services relating to EDP, e-filing etc. (xx) Acting as advisor or consultant to an issue, including such matters as:(a) drafting of prospectus and memorandum containing salient features of prospectus. Drafting and filing of listing agreement and completing formalities with Stock Exchanges, Registrar of Companies and SEBI. (b) Preparation of publicity budget, advice regarding arrangements for selection of (i) ad-media (ii) centres for holding conferences of brokers, investors etc. (iii) bankers to issue (iv) collection centres (v) brokers to issue (vi) underwriters and the underwriting arrangement, distribution of publicity and issue material including application form, prospectus and brochure and deciding on the quantum of issue material ( In doing so, the relevant provisions of the Code of Conduct must be kept in mind). (c) Advice regarding selection of various agencies connected with issue, namely Registrar to issue, printers and advertising agencies. (d) Advice to the post issue activities, e.g. follow up steps which include listing of instruments and despatch of certificates and refunds with the various agencies connected with the work. Explanation: For removal of doubts, it is hereby clarified that the activities of broking, underwriting and portfolio management are not permitted. (xxi) Investment counselling in respect of securities [ as defined in the Securities Contracts ( Regulation) Act, 1956 and other financial instruments.] ( In doing so, the relevant provisions of the Code of Conduct must be kept in mind). (xxii) Acting as registrar to an issue and for transfer of shares / other securities. ( In doing so, the relevant provisions of the Code of Conduct must be kept in mind). (xxiii) Acting as recovery consultant in Banking Sector (xxiv) Insurance Financial Advisory services under the Insurance Regulatory Development Authority Act, 1999, including Insurance Brokerage. 417
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For Attention of Members

FOR ATTENTION OF MEMBERS
In the 221st Meeting of the Council of the Institute held on 11th October, 2004, it was decided to issue Identity Cards to the members of the Institute. Accordingly, all members are requested to send their requisition for issue of Photo Identity Cards by filling up the following requisition from in Block Letters. It should also be ensured to enclose one loose stamp-sized photograph and affix another stamp-sized photograph with signature of the member concerned in the appropriate places earmarked hereunder. The members making requisition should ensure to have cleared all their membership dues. The Requisition Form duly filled in should be sent to the Deputy Director (Membership) of the Institute at 12, Sudder Street, Kolkata - 700 016. THE INSTITUTE OF COST AND WORKS ACCOUNTANTS OF INDIA 12 Sudder Street, Kolkata - 700 016
Telegram : Telephones : Fax Website E-mail : : : STANDCOST 2252-1031/34/35 2252-1602/1492 91-33-2252-7993 91-33-2252-1026 www.myicwai.com kbicwai@vsnl.net Please Affix One Coloured Stamp-sized Photograph Here

REQUISITION FORM FOR ISSUE OF PHOTO IDENTITY CARDS
Please Enclose One Loose Coloured Stamp-sized Photograph Here With Clip

Signature in Black Ink

PARTICULARS (To be filled up in BLOCK LETTERS)
FIRST NAME Shri/Mrs. Miss (Delete whichever is not applicable) Name in Short Membership No. Date of Admission as AICWA Month Year Date of Advancement to FICWA Month Year MIDDLE NAME SURNAME

Day Qualifications

Day

Professional Address

Journal Mailing Address

City Pin Code Telephone No. Office Fax No. E-mail Date of Birth Day Month Year Residence

City Pin Code

SIGNATURE OF THE MEMBER (IN BLACK INK)

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