Maharashtra VAT(MVAT) tax audit report_interesting features

While going through form 704(electronic version) available at www.mahavat.gov.in, I noticed the following

1. Crosscheck with other statutory data:- Where details are maintained under Central Excise, Customs or State excise, the auditor is to correlate those details and report material differences. This avoids data inconsistency and serves as a fraud check if done the right way. 
2. Uniformity in activity codes: Unlike the income tax return which has limited set of activities, Form 704 asks for the activity code based on SIC/NIC classification. This would help analysis and statistics.
3. Radio buttons in several areas(tax officer jurisdiction, signatory) ensure that the data quality is good and that the form filler is reminded of the law. 
4. Emphasis on certification:- The auditor needs to give 16(!) certificates and there is a space provided in the excel sheet if he has reservations for any point. This is much more easier for the Dept and allows aggregate level analysis on systemic non compliance
5. Asking Bank account numbers:- This is probably to cross check receipts with the return in case there is need for scrutiny. 
6. Reconciliation of gross turnover with books of account:- This step would ensure that the Dept knows which area to cross check and it won;t need to ask that same explanation each time
7. Fraud check:- To guard against carousel fraud/ghost dealer, the auditor is explicitly asked to certify
1. Due professional care was exercised while auditing(really this is expected from any CA)
2. Based on the observations of business processes, practices, inventory stock and A/c books, the dealer is dealing in the commodities under audit AND sales tax related records fairly represents the business. These checks are a signal for CA to apply some forensic accounting.

Want to avoid being caught for stock manipulation? Avoid income tax issues.

While reading SEBI orders on stock market manipulation, a common thread struck me-that the initial information which kick started the investigation was from the Income Tax Department.

Since 1993, Section 138 of the Income Tax Act 1961 authorized the Assessing officer to share information with SEBI(http://law.incometaxindia.gov.in/DitTaxmann/incometaxacts/2007itact/cirsec138.htm) suo-motu. But it is only recently that visible results of this are arising.

1. Austral Coke- The IT Dept while conducting a search had found proof of bogus purchases, diversion of IPO funds and bogus sales. These offences while punishable under the IT Act 1961 itself, are graver offences under SEBI regulations. Hence, this information was passed to SEBI which passed an order in Sept 2009 which prohibited the company from raising funds
2. Sanjay Dangi- This operator had connived with promoters to jack up the share prices by 5-6 times before the issue of FCCB to institutional investors. He was caught because the IT Dept found documents in his office relating to this. SEBI then passed an order in Dec-10 prohibiting him and the concerned companies, from further capital issues.

There may be more orders but these are the 2 which come to mind. Considering that even mobsters are caught on 'tax evasion' charges, white collar criminals should be more careful

Why does'Net Owned Funds' exclude investments in similar companies?

RBI guidelines for ARC's(http://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=5847) exclude investments in other ARC's for the purpose of equity('Net Owned Funds'). And this is true even for banking capital calculations by RBI.

One may feel why is this so? Why ignore credit rating, sectoral stability etc? The rationale in this case maybe to reduce systemic risks because when one bank collapses, the other banks should be, as far as possible, stable.

Another reason maybe double counting. Imagine the case where 2 FI's(banks/ARC's) have investments in each other, both counted as equity. Effectively, the net investment is zero but the regulatory may get a false perception of capital when it is not really so.

The legal boilerplate behind WHY companies prefer QIP issues

As per the NSE India website, 29 QIP issues have taken place so far ranging from HDFC to Ansal to Vardhaman. These companies could have gone for rights issue but they chose to go for this option. Besides speed(this gets over faster and no under-subscription problem), there are legal advantages as well.

1. Presumption of 'Buyer Beware':-Unlike public issues where SEBI regulations safeguard the retail investor, QIP issues contain boilerplate to the effect that You are  a sophisticated investor and have  such knowledge and experience in financial, business and investments as to be capable of evaluating the merits and risks of the investment in the Shares. You are experienced in investing in private placement transactions of securities of companies in a similar stage of development and in similar jurisdictions. You ...(i) are each able to bear the economic  risk of the investment in the Shares, (ii) will not look to the Company.... for all or part of any such loss or losses that may be suffered, (iii) are able to sustain a complete loss on the investment in the Shares, (iv) have no need for liquidity with respect to the investment in the  Shares....This fine print bars any plea of equity by investors in case of issues
2. Presumption of Due Diligence:- Unlike in a public issue, QIP investors generally perform their own due diligence, or are provided a chance to do so. In making your investment decision, you have (i) relied on your own examination of the Company and the terms of the Issue, including the merits and risks involved, (ii) made your own assessment of the Company and its  subsidiaries, the Shares  and the terms of the Issue based  solely on the information contained in the Placement Document and no other disclosure or representation by the Company or any other party,  (iii) consulted your own independent counsel and advisors or otherwise have satisfied yourself concerning, the effects of local laws, (iv) received all information that you believe is necessary or appropriate in order to make an investment decision in respect of the Company and the Shares, and (v) relied upon your own investigation and resources in deciding to invest in the Issue;
3. No Liability for Road shows:- You confirm that you have not participated in or attended any investor meetings or presentations....or if you have participated in or attended any Company Presentations, you understand and acknowledge that the Book Running Lead Managers may not have knowledge of the statements that the Company or its agents may have made at such Company Presentations and are therefore unable to determine whether the information provided to you at such Company Presentations may have included any material misstatements or omissions...have advised you not to rely .. on any information that  provided to you at such Company Presentations... 
4. No Fiduciary Capacity:- Neither the Company nor  any of  the ... are making any recommendations to you or advising you regarding the suitability of any transactions it may enter into in connection with the Issue..no duties or responsibilities to you for providing the protection afforded to their clients or customers or for providing advice in relation to the Issue and are not acting in any fiduciary capacity;
5. No duty to verify information by Underwriters:-..By participating  in the Issue, you agree to the same and confirm that  the only information you are entitled to rely on, and on which you have relied in committing yourself to acquire the Shares  is contained in this Placement Document, such information being all that you deem necessary to make an investment decision in respect of the Shares, you have neither received nor relied on any other information, representation, warranty or statement made by.......