Reports indicate that the Securities and Exchange Board of India (Sebi) is planning to make audit committees mandatory for listed companies. This is a good move but for it to really work several crucial issues need to be addressed. Firstly, it needs to be ensured that the committees consist of only those finance professionals who are not on the board of directors (BoD) of the companies or any of their associates.

Auditors - internal and statutory - should be made answerable to the audit committee. In India, the problem is not so much of independent auditors as of rubber stamp BoDs. How else does one explain a string of qualified annual reports emanating from the corporate sector? If the BoDs have neither the willingness nor the ability to prevent qualifications, audit committees will be of little help. Managements can always resort to expert or legal opinion-based accounting and the relatively poor standard of transparency will only make things easier for them.

Consider forinstance the accounting standard (AS) 11. It does not specify the treatment of bonus shares and has little relevance for the banking sector. Section 211 (3B) of the Companies Act requires disclosures if the accounting standards are not complied with.

However, what is more important is whether the audit committees will have the powers to force managements to rewrite the accounts in the event of non-compliance? This may be difficult as it can effectively be argued that qualifications may arise merely due to differences in the interpretation of various provisions by the auditors.

Sebi also needs to make specific disclosure norms for industries which can take advantage of Section 616 of the Companies Act (If the provisions of special acts like Electricity Supply Act are inconsistent with Companies Act, they override the provisions of the Companies Act).

Take for instance the case of BSES which already has an audit committee. The company complies with the Code of Corporate Governance but its annual auditedresults never disclose the clear profit earned. For a utility, the net profit figures are meaningless but these are what the shareholders have access to till the annual report is made available to them.

Another example is that of commercial banks (PSUs) which do not prepare their accounts as per schedule VI requirements. They, instead, use the Third Schedule of the Banking Regulation Act, 1949, making interpretation of results very difficult. They do not declare their gross NPAs in their annual reports but only report provisions against bad assets. Further, there is no compliance with the accounting standards on the treatment of gains or losses arising out of forex transactions (banks follow Fedai guidelines in violation of AS 11). They are also common violators of AS 15 (accounting for retirement benefits).

The least that needs to be done is that companies must be forced to disclose fully diluted equity even in quarterly results. Currently, one needs to go through the notes in the annual report toarrive at the figure. Though Sebi plans to make consolidation of accounts and segment-wise resporting mandatory, deferred tax disclosure is needed equally desperately.

Steel

Reports indicate that the steel ministry's proposal to reduce floor prices has been gathering dust in the commerce ministry. The latest comments from the Joint Plant Committee say that international steel prices have firmed up by 15-20 per cent in the last one month. The questions that arise here are: Do we really need a new reduced floor price, now? Did floor prices actually create adequeate protection for the domestic industry?

In spite of a rise in international prices, there is a rising tendency among every country to increase protectionism. So, we also need to safeguard our industry. But should the protectisnm be in the form of a floor price which is continiously revised, or should we stick to traditional anti-dumping duties which would require a minimum time of 12-18 months for taking the decision one side or theother. On the other hand, the imposition of floor price would only require approval of DGFT, which takes only two months.

Critics may claim that the whole policy of imposition of floor price did not have the desired impact of reducing steel imports. In fact, as reported earlier in The Financial Express, and later confirmed by Steel Scenario -- the monthly magazine on steel-- steel imports have been on the rise, suggesting that the whole policy of imposing floor price was not well thought of.

But a closer look would suggest that perhaps the structure of the floor price was made in a manner to benefit the entire section of the steel industry, with albeit a few exceptions. According to the data provided by SAIL executives, 86 per cent of the steel imports have been at prices far below the floor price and a mere 14 per cent of the imports have been at the floor price.

With the bulk of imports being at prices far below the floor price, there is a strong possibility that the government did not wantexporters to suffer from lower export margins due to higher import prices. At the time of imposition of floor price on December 16, 1998, the government left a grey area in the notification by keeping imports under advance license schemes outside the ambit of the floor price. Accordingly, all the exporters of steel who require HR materials could use the advance license benefits to import steel at below the floor price.

The domestic manufacturers benefitted by rolling back discounts, resulting in higher realisations to them. The loss to the industry by the floor price occurred mainly because of the remaining 14 per cent of the total imports. Senior exceutives in the steel industry say that these products include those materials not adequately manufactured in the country and also trade due to spurious activities, wherein, traders arbritrage between the difference in international and domestic prices.

Going again by the statistics provided by SAIL, we find that 6 per cent of imports has been of grades notproduced in India. The examples include CRGO grades used in electrical goods manufacture and few grades of tin-plate. With no production of these grades in India, the user industry has to import them.

This leaves approximately 8 per cent of the imports coming from what section of producers claim as a havala route. The methodology is simple. The difference between the domestic and international price is remitted to the trader who imports the material by hawala transactions.

But such transactions form only a small sub-set of the imports. With firming of international prices, it would becaome even more difficult for importers to follow such trade practices. Accordingly, the whole concept of floor price has been beneficial to the industry, except CRGO users, and any modifications suggested to incorporate these issues in the new policy would benefit the entire Indian industry.

Emcee (With contributions from Urmik Chhaya & Manish Saxena)