Assurance Update March 2019Price Waterhouse Chartered Accountants
LLP Assurance Update 2
Contents
1
4
Taxation7
2 Accounting and Financial Reporting5
Listing Obligation and Disclosure Regulations – the key
reminders
3 Banking and Capital Markets6Select FRRB
Observations: AS 13
1. Significant Beneficial Owner under the Companies Act, 2013
Background
The Ministry of Corporate Affairs (the “MCA”) vide its notification
dated February 8, 2019 has notified the Companies (Significant
Beneficial Owners) Amendment Rules, 2019 and brought about
significant changes to the Companies (Significant Beneficial
Owners) Rules, 2018 notified vide MCA notification dated June 13,
2018. In addition to the certain amendments in respect of
declaration and return in respect of Significant Beneficial
Ownership and duties of a company, the most significant amendment
is to the definition of Significant Beneficial Owner (the
“SBO”).
This article throws light on the new definition of SBO and the
related amendments brought in the Companies (Significant Beneficial
Owners) Rules, 2018 (hereinafter the “SBO Rules”)
Who is a Significant Beneficial Owner (SBO) ?
Section 90 of the Companies Act, 2013 read with rule 2(h) of SBO
Rules defines a significant beneficial owner in relation to a
reporting company to mean an individual, who acting alone or
together, or through one or more persons or trust, possesses one or
more of the following rights or entitlements in the reporting
company :
i. holds indirectly, or together with any direct holdings, not less
than 10% of the shares; (emphasis added)
ii. holds indirectly, or together with any direct holdings, not
less than 10% of the voting rights in the shares; (emphasis
added)
iii. has right to receive or participate in not less than 10% of
the total distributable dividend, or any other distribution, in a
financial year through indirect holdings alone, or together with
any direct holdings;
iv. has right to exercise, or actually exercises, significant
influence or control, in any manner other than through direct
holdings alone.
Explanation VI to the definition of SBO under Rule 2(h) prescribes
that the instruments in the form of global depository receipts
(GDRs), compulsorily convertible preference shares (CCPS) or
compulsorily convertible debentures (CCDs) shall be treated as
‘shares’ for the purpose of this clause. Accordingly, while
computing the
above percentages of 10%, the denominator shall include these
instruments in addition to the Equity Share Capital of the
company.
It is noteworthy that the definition not only envisages acquisition
of significant beneficial ownership by shareholding but also by
virtue of right to exercise or actual exercise of significant
influence or control. Control has been defined u/s 2(27) of the Act
to include the right to appoint majority of directors or to control
the management or policy decisions exercisable by a person or
persons acting in concert. Significant Influence has been defined
under Rule 2(i) of the SBO Rules to mean the power to participate,
directly or indirectly, in the financial and operating policy
decisions of the reporting company but is not control or joint
control of those policies. The threshold of not less than 10% does
not apply while assessing significant influence or control, however
this should also be through indirect holdings or together with any
direct holdings.
Further, the definition envisages to cover only those individuals
who have the rights or entitlements indirectly. Where an individual
acquires the aforesaid rights or entitlements only through direct
holdings, he shall not be covered under the definition of SBO as
above. This is also clarified vide the Explanation I to the above
definition which states that if the individual does not hold any
right or entitlement indirectly under clauses (i), (ii) and (iii)
above, he shall not be considered to be a SBO.
Price Waterhouse Chartered Accountants LLP Assurance Update 4
How is direct and indirect holding determined ?
As discussed above, the definition of SBO stresses a lot on
‘indirect’ holding of an individual in the reporting company.
Hence, it is very important to understand the meaning given to the
terms direct and indirect holdings under the definition in order to
correctly identify SBO. These have been clarified by way of
Explanation II to Explanation IV to the Rule 2(h) of the SBO
Rules.
Direct holdings
Explanation II clarifies that an individual shall be considered to
be holding a right or an entitlement directly if he satisfies any
of the following two criteria :
(i) The share(s) giving these rights or entitlements is/are held in
his name (i.e. he is the registered owner of the share(s));
or
(ii) The share(s) giving these rights/ entitlements is/are not held
in his name but he acquires beneficial interest in that/those
share(s) under section 89(2) and has made the declaration of
beneficial interest as required thereunder.
Indirect holdings
Indirect holdings of an individual in the reporting company have to
be determined based on the individual’s relationship with the
non-individual member of the reporting company.
(a) Where the member is a body corporate
The term ‘body corporate’ for the purpose of this clause includes
an entity incorporated or registered in India or abroad, but
excludes a limited liability partnership. Where an individual holds
majority stake in the body corporate or in the ultimate holding
company (whether incorporated in India or abroad) of that body
corporate, he shall be considered to hold a right or entitlement
indirectly in the reporting company.
(b) Where the member is a Hindu Undivided Family (HUF), the Karta
of the HUF shall be considered to be holding indirect right or
entitlement in the shares of the reporting company held in the name
of HUF.
(c) Where the member is a Partnership Firm
A partnership firm can become a member of a company only through a
partner. In this case, an individual who is a partner of the firm
or who holds majority stake in a body corporate which is a partner
in the firm or who holds majority stake in the ultimate holding
company of the body corporate which is a partner in the firm, shall
be considered to be holding indirect rights or entitlement in the
shares of the reporting company held in the name of the partnership
firm.
(d) Where the member is a Trust (through trustee), an individual’s
right or entitlements in a reporting company shall be considered to
be held indirectly if :
• In case of a discretionary or charitable trust, he is a trustee.
A discretionary trust is a trust where the settlor does not fix the
beneficiaries but the trustee has the power to decide which
beneficiaries will benefit from the trust and in what proportion.
For example, a ‘will’ trust set up by a person for passing on his
estate after his death to his wife, children and grandchildren,
without specifying the ratio in which it should be distributed. A
charitable trust is a trust set up for charitable purposes, for
example, for advancement of education in rural areas, promotion of
public health etc.
• In case of a specific trust, he is a beneficiary. A specific
trust is a trust where the beneficiaries and their share in the
income or corpus of the trust is specified. For example a ‘will’
trust set up by a person for passing on his estate after his death
to his wife and 2 children, in the ratio of 2:1:1.
• In case of a revocable trust, he is the author or settlor. A
revocable trust is a trust where the grantor/author of the trust
has a right to modify or cancel the provisions of the trust (revoke
the trust) and receives the income of the trust during his
lifetime. The estate passes on to the beneficiaries only after his
death.
Example : Scenarios analyzing Mr. A’s status in relation to Company
B, the Reporting Company
Direct Holding = 6.5%
Indirect Holding = 4.5%
Total direct + indirect = 11%
Whether covered in above clause : Yes, indirect holding together
with direct is more than 10%
Direct Holding = 0%
Indirect Holding = 10.8%
Total direct + indirect = 10.8%
Whether covered in above clause : Yes, indirect holding together
with direct is more than 10%
Direct Holding = 11%
Indirect Holding = 0%
Total direct + indirect = 11%
Whether covered in above clause : No, as there is no indirect
holding
Mr. A
Company A
Company B
6 .5 %
9 0%
Price Waterhouse Chartered Accountants LLP Assurance Update 5
(e) Where the member is a Pooled Investment Vehicle or an entity
controlled by the Pooled Investment Vehicle which is based in
member State of the Financial Action Task Force on Money Laundering
and the regulator of the securities market in such member State is
a member of the International Organization of Securities
Commissions and the individual in relation to the pooled investment
vehicle,-
- is a general partner; or
- is an investment manager; or
- is a Chief Executive Officer where the investment manager of such
pooled vehicle is a body corporate or a partnership entity.
A pooled investment vehicle is an entity that combines funds from
many investors and invests it according to a strategy. Mutual Funds
and Pension Funds are examples of a pooled investment
vehicle.
The Financial Action Task Force (or FATF) is an inter- governmental
policy making body set up with the objectives to set standards and
promote effective implementation of legal, regulatory and
operational measures for combating money laundering, terrorist
financing and other related threats to the integrity of the
international financial system. There are currently 38 members of
the FATF which comprises 36 member jurisdictions and 2 regional
organisations. Most of the major financial centre countries across
the globe (including India) are members of the FATF. (Source :
http://www.fatf-gafi.org)
The International Organization of Securities Commissions (IOSCO) is
the international body that brings together the world's securities
regulators and is recognized as the global standard setter for the
securities sector. It develops, implements and promotes adherence
to internationally recognized standards for securities regulation.
Its membership regulates more than 95% of the world's securities
markets in more than 115
jurisdictions; securities regulators in emerging markets account
for 75% of its ordinary membership. (Source : www.iosco.org) The
Bombay Stock Exchange (BSE), National Stock Exchange (NSE) and the
Multi-commodity Stock Exchange (MCX) are members of the
IOSCO).
Where a pooled investment vehicle or an entity controlled by a
pooled investment vehicle does not fall in the jurisdiction as
described above, the Explanation IV to Rule 2(h) states that the
provisions as specified for any other member (being a body
corporate or HUF or partnership firm) shall apply.
Some related definitions
Reporting Company
Reporting Company has been defined to mean a company defined under
section 2(20) of the Act, which is required to comply with the
requirements of section 90 of the Act. This necessarily means that
only a company incorporated under the Companies Act of India, is
required to report under the SBO Rules.
Majority Stake
The definition of “Majority Stake” in relation to a body corporate
has been inserted by the Companies (Significant Beneficial Owner)
Amendment Rules, 2019 vide Rule 2(d) in the SBO Rules, to mean
:
i. holding more than one-half of the equity share capital in the
body corporate; or
ii. holding more than one-half of the voting rights in the body
corporate; or
iii. having the right to receive or participate in more than
one-half of the distributable dividend or any other distribution by
the body corporate.
The above definition is relevant in determination of Significant
Beneficial Owner where the member of a reporting company is a body
corporate or a partnership firm in which a body corporate is a
partner.
Acting together
Explanation V to the Rule 2(h) of the SBO Rules clarifies that any
individual or individuals acting in person or through trust shall
be deemed to be ‘acting together’ they act with a common intent or
purpose of exercising the rights and entitlements or exercising
significant influence or control over the reporting company
pursuant to an agreement or understanding, which can be formal or
informal.
The article has prepared on matters of general interest only and
does not constitute professional advice. You should not act upon
the information contained in this publication without obtaining
specific professional advice.
Price Waterhouse Chartered Accountants LLP Assurance Update 6
2. Supreme court judgement : Revisiting ‘basic wages’ for provident
fund contributions
This article discusses the recent Supreme Court decision in case of
Vivekananda Vidyamandir And Others Vs The Regional Provident Fund
Commissioner (II) West Bengal- February 2019 which lays down
principles for excluding an allowance from the definition of “basic
wages” for Provident Fund contributions with a background of
certain other Supreme court decisions in its support.
Background
The Supreme Court decision in case of Manipal Academy of Higher
Education vs. Provident Fund Commissioner dates back to March 2008,
wherein it was held that leave encashment would not form part of
basic pay as defined in Section 2 of the Employees’ Provident Funds
and Miscellaneous Provisions Act, 1952 (The ‘Act’).
The judgement inter-alia discussed the principles of the Supreme
Court decision of Bridge and Roof Co. (India) Ltd. vs. Union of
India (1963), in its support.
Synopsis of the Bridge & Roof Co2. case law is as
follows:
Section 2(b) of the Act deal with ‘Basic wages’.
Section 2(b)(ii) excludes dearness allowance, house-rent allowance,
overtime allowance, bonus, commission or any other similar
allowance payable to the employee in respect of his employment or
of work done in such employment from the definition of Basic
wages.
This exception suggests that even though the main part of the
definition includes all emoluments which are earned in accordance
with the terms of the contract of employment ,certain payments
which are in fact the price of labour and earned in accordance with
the terms of the contract of employment are excluded from the main
part of the definition of "basic wages".
Section 6 of the Act deals with 'Contributions and matters which
may be provided for in Schemes' which requires contribution to be
calculated as % of the basic wages, dearness allowance and
retaining allowance.
Basis of inclusion of dearness allowance in section 6 for the
purpose of calculation of ‘Contribution’ and exclusion from
definition of basic wages in Section 2(b)(ii) is that whatever is
payable in all concerns and is earned by all permanent employees is
included for the purpose, of contribution under section 6, but
whatever is not payable by all concerns or may not be earned by all
employees of a concern is excluded for the purpose of
contribution.
Dearness allowance, for example is payable in all concerns either
as an addition to basic wages or as a part of consolidated wages
where a concern does not have separate dearness allowance and basic
wages.
Applying above principles House-rent allowance which may not be
payable to all employees of a concern and which is certainly not
paid by all concern is excluded from the
definition of "basic wages", even though the basis of payment of
house- rent allowance where it is paid is the contract of
employment.
Similarly, overtime allowance although generally in force in all
concerns however is not earned by all employees of a concern. It is
earned in accordance with the terms of the contract of employment;
however since it may not be earned by all employees of a concern it
is excluded from "basic wages".
Commission or any other similar allowance is excluded from the
definition of "basic wages" since these are not necessarily payable
by all concerns; nor do these are necessarily earned by all
employees.
In view of above, the basic principles that needs to be applied on
a combined reading of Sections 2(b) and 6 are as follows:
(a) Where a component of wage is universally, necessarily and
ordinarily paid to all employees such emoluments are considered as
part of the basic wages.
(b) Where the payment is available and is to be specially paid to
those who avail of the opportunity is not considered as part of the
basic wages (e.g. overtime allowance as explained above)
(c) Conversely, any payment by way of a special incentive or work
is not basic wages.
Price Waterhouse Chartered Accountants LLP Assurance Update 7
Based on these underlying principles, certain High courts (Madhya
Pradesh, Gujarat and Madras) have treated certain allowances like
conveyance/ transportation allowance, special allowance etc. as
component of ‘Basic wages’ for the purpose of determining provident
fund liability if the same are being paid uniformly, necessarily
and ordinarily to all employees.
Relying on various judgements, as also discussed above, the Supreme
Court of India in case of Vivekananda Vidyamandir and Others
(February 2019) has laid down the following principles to exclude a
particular allowance from the definition of “basic wages” to
compute the deduction towards provident fund contributions.
- The allowance should be either variable or linked to any
incentive for production resulting in greater output by an
employee; and
- The same is not paid across the board to all employees in a
particular category, or is being paid especially to those who avail
the opportunity.
In the extant case it was noted that no material had been placed by
the establishments to demonstrate that the allowances in question
being paid to its employees were either variable or were linked to
any incentive for production resulting in greater output by an
employee and that the allowances in question were not paid across
the board to all employees in a particular category or were being
paid especially to those who avail the opportunity.
In order that the amount goes beyond the basic wages, it has to be
shown that the workman concerned had become eligible to get this
extra amount beyond the normal work which he was otherwise required
to put in.
The wage structure and the components of salary were examined on
facts, both by the authority and the appellate authority under the
Act, who arrived at a factual conclusion that the allowances in
question were essentially a part of the basic wage camouflaged as
part of an allowance so as to avoid deduction and contribution
accordingly to the provident fund account of the employees.
As noted in the case of The Daily Partap vs. The Regional Provident
Fund Commissioner, Punjab, Haryana, Himachal Pradesh and Union
Territory, Chandigarh,1998 , the Act is a piece of beneficial
social welfare legislation and must be interpreted as such.
Conclusion
Thus, it needs to be noted that the crucial test is one of
universality and accordingly allowances will need to be evaluated
for the purpose of determining the provident fund
contribution.
The Supreme court judgement for Vivekananda Vidyamandir may be
accessed at https://www.supremecourtofindia.nic.in/supremecourt/
2008/2232/2232_2008_Judgement_28-Feb-2019.pdf
The article has prepared on matters of general interest only and
does not constitute professional advice. You should not act upon
the information contained in this publication without obtaining
specific professional advice.
Price Waterhouse Chartered Accountants LLP Assurance Update 8
3. Listing Obligation and Disclosure Regulations – the key
reminders
Background
The SEBI Committee on corporate governance [Committee] was formed
on June 2, 2017 under the Chairmanship of Mr. Uday Kotak with the
aim of improving standards of corporate governance of listed
companies in India.
The SEBI (LODR) (Amendment) Regulations, 2018 have come as a follow
up to the decision taken at the SEBI Board meeting held on March
28,2018, wherein the Board had accepted a number of recommendations
of the Committee. Certain recommendations have also been referred
to
various agencies (government, other regulators, etc.) since the
matters pertain to them.
Timelines have been defined to provide the listed entities with
sufficient time and resources for implementation of these
amendments. Previous month article dealt with the amendment in the
areas related to (i) Disclosure and Transparency; and (ii)
Accounting And Audit Related Issues. This month article sets out
the amendments to Chapter IV, Enhanced Monitoring Of Group Entities
and to Chapter V which relates Promoters/Controlling
Shareholders And Related Party Transactions. In this next issue we
propose to include amendments relating to Board and its
committees.
Applicability of SEBI (LODR) (Amendment) Regulations, 2018
As mentioned in the notification save as otherwise specifically
provided for in these regulations, they shall come into force with
effect from April 1, 2019
Regulations Particulars Timelines Rationale and impact
Regulation 16(c) Definition of “material subsidiary” revised to
mean a subsidiary, whose income or net worth exceeds ten percent
(earlier: twenty percent) of the consolidated income or net worth
respectively, of the listed entity and its subsidiaries in the
immediately preceding accounting year.
April 1,2019 Threshold for determining ‘material subsidiary’
modified to enhance monitoring and governance of material
subsidiaries
Regulation 24A Secretarial audit for every listed entity and
material unlisted subsidiaries incorporated in India, including
private companies
Annual reports for year ended March 31, 2019 and thereafter
There were no specific requirement for secretarial audit under the
erstwhile SEBI LODR Regulations. Secretarial functions are critical
to efficient board functioning. Accordingly, the listing
regulations have been amended to provide for secretarial audit for
listed entities and their material unlisted subsidiaries
incorporated in India.
Regulation 24(1) In order to ensure enhanced monitoring of group
entities, it is now required that at least one independent director
of entity to be director of unlisted material subsidiary, whether
incorporated in India or not whose income/ net worth exceeds 20% of
consolidated income/ net worth of the listed entity and its
subsidiaries in the immediately preceding accounting year [April 1,
2019]
April 1,2019 Many Indian companies operate through global and
Indian subsidiaries in view of business needs. These subsidiaries
are an integral/material part of the listed entity. An appropriate
level of review and oversight is required of the board of the
listed entity over its unlisted subsidiaries for protection of
interests of public shareholders. Accordingly, regulation has been
amended in the interest of better monitoring at a consolidated
level.
Price Waterhouse Chartered Accountants LLP Assurance Update 9
Regulation Particulars Timelines Rationale and impact
Regulation 2zb All promoters/promoter group entities that hold 20%
or above in a listed company to be considered ‘related parties’ for
the purpose of SEBI (LODR) Regulations w.e.f. April 1,2019
April 1,2019 Certain promoters/promoter group entities were not
getting categorized as related parties under the listing
regulations as they didn’t fall strictly under the definition of
‘related parties’ as per the relevant accounting standard.
Transactions with such persons were not getting categorized as
‘Related Party transactions’ under the listing regulations.
Regulation 17(6)(ca) Shareholders approval by special resolution
every year for annual remuneration payable to a single
non-executive director based on remuneration paid w.e.f April
1,2019
April 1,2019 It was observed that certain non-executive directors
(generally promoter directors) were receiving disproportionate
remuneration from the total pool available vis-à-vis all other
non-executive directors. Accordingly, amended Regulation 17(6)(ca)
provides for shareholders approval by special resolution for annual
remuneration payable to a single non- executive director based on
remuneration paid.
Regulation 23(1), 23(1A)
Policy on materiality of related party transactions’ The policy
formulated on ‘materiality of related party transactions’ and on
‘dealing with related party transactions’ to include clear
threshold limits duly approved by the board of directors and such
policy shall be reviewed by the board of directors at least once
every three years and updated accordingly.
Royalty and brand payments to related parties : Notwithstanding the
above, a transaction involving payments made to a related party
with respect to brand usage or royalty shall be considered material
if the transaction(s) to be entered into individually or taken
together with previous transactions during a financial year, exceed
two percent of the annual consolidated turnover of the listed
entity as per the last audited financial statements of the listed
entity.
April 1,2019 It has been decided that clear threshold limits, as
considered appropriate by the board of directors is required to be
disclosed in the materiality policy to address any difficulties in
its enforcement.
A number of companies make payment towards royalty/brand usage.
While royalty payments are recognized as there is value in brand
strength and product technology, which drive sales or margins,
shareholders must comprehend the terms and conditions of such
payouts. Therefore, the companies are required to make disclosures
on the value a company derives from a brand or technology for which
it has agreed to pay royalty, brand, or technical fees to the
parent company/promoters.
Regulation 23(4) Regulation amended to allow related parties to
cast negative vote for approval of material related party
transactions, as such voting cannot be considered to be in conflict
of interest.
April 1,2019 The Committee deliberated upon managerial remuneration
based on the data available and observed that certain non-executive
directors (generally promoter directors) were receiving
disproportionate remuneration from the total pool available
vis-à-vis all other non- executive directors.
Regulation 23(9) The listed entity shall submit within 30 days from
the date of publication of its standalone and consolidated
financial results for the half year, disclosures of related party
transactions on a consolidated basis, in the format specified in
the relevant accounting standards for annual results to the stock
exchanges and publish the same on its website w.e.f half year
ending March 31,2019
w.e.f half year ending March 31,2019
Disclosure required in order to strengthen transparency on related
party transactions,
Schedule V.A.2A Disclosures of transactions of the listed entity
with any person or entity belonging to the promoter/promoter group
which hold(s) 10% or more shareholding in the listed entity, in the
format prescribed in the relevant accounting standards for annual
results for annual reports filed for the year ended March 31, 2019
and thereafter.
For annual reports filed for the year ended March 31, 2019 and
thereafter.
Regulation amended in order to strengthen transparency on related
party transactions
The article has prepared on matters of general interest only and
does not constitute professional advice. You should not act upon
the information contained in this publication without obtaining
specific professional advice.
Price Waterhouse Chartered Accountants LLP Assurance Update
10
4. Select FRRB Observations: AS 13
This article summarizes certain key observations of Financial
Review Reporting Board in respect of Accounting Standard 13,
Accounting for Investments. These observations have been extracted
from ICAI Publication: Study on Compliance of Financial Reporting
Requirements: Volume III. The publication contains various
instances of non compliances with the reporting requirements that
have been noticed by the Board during the course of review of the
general purpose financial statements of enterprises. We intend to
cover all accounting standards in the months to come - keep
watching this space!
S. No.
Matter contained in the Annual Report FRRB Observations
1 In the Annual Reports or a number of companies the accounting
policies with regard to valuations of long-term investments have
been stated as follows: • Long-term investments are carried at
cost. No provision is
being made for diminution in the value of investments as they are
long term investments.
• Non-current investments are stated at cost. No provision for
diminution in value, if any, has been made as these are long- term
investments and in the opinion of the management any decline is
temporary.
• Investments other than current investments, made by the company
are intended to be held for long-term; hence, diminutions in value
of quoted investments are generally not considered to be of
permanent nature.
• Long-term investments are stated at cost. • Long-term investments
are stated at cost and provision for
It may be noted that paragraph 32 of AS 13, provides that: “32.
Investments classified as long term investments should be carried
in the financial statements at cost. However, provision for
diminution shall be made to recognize a decline, other than
temporary, in the value of the investments, such reduction being
determined and made for each investment individually.”
From the stated policies it is noted that in certain cases
provision for diminution in value of long- term investments is not
made as these are long-term investments or in the opinion of the
management any decline is temporary or diminutions in value are not
considered to be of permanent nature. It was viewed that presuming
every decline to be temporary or not of permanent nature may not be
correct. Based on prevailing facts and circumstances one may decide
whether any decline is a ‘temporary decline’ or ‘other than
temporary decline.’
In few cases the policy simply states that long-term investments
are valued at cost. This indicates that provision for diminution in
value has not been considered. In one case, provision is considered
only on the basis of management perception. In some other cases,
long-term
Price Waterhouse Chartered Accountants LLP Assurance Update
11
S. No.
Matter contained in the Annual Report FRRB Observations
diminution in value in the perception of the management will only
be considered. • Long-term investments are stated at cost less
provision, if
any, for permanent diminution in value. • Long-term investments are
carried at costs. Provision for
diminution in the value of long-term investments has been made as
applicable.
Investments are stated at cost less provision, if any, for
permanent diminution in value. It was viewed that there is a
difference between ‘permanent diminution in the value of
investments’ and ‘other than temporary diminution in value of
investments’.
Accordingly, it was viewed that the stated policies on valuation of
long term investments are not in line with the requirements of
paragraph 32 of AS 13.
2 From the Annual Reports of some companies it has been noted that
Other Income inter alia includes the following: • Profit on sale of
Investments
Less: Loss on sale of investments • Dividend Income • Gain of
investments sold, net • Dividend Income on
Investment in Subsidiaries Investment in Associates Other
Investments
• Profit on sale of investments • Interest received •
Interest-Others
In the Annual Report of couple of other companies one of the notes
to accounts states as follows: • Miscellaneous income includes
income from mutual fund
investments (non-trade) of Rs. XXX • Other Operational Treasury
Income includes income from
mutual fund operation of Rs. xxx, Profit on sale of investments of
Rs. Xxx and Dividend income of Rs. Xxx.
It may be noted that paragraph 35(c) of AS 13, requires following
disclosures: “35(c) the amounts included in profit and loss
statement for: (i) interest, dividends (showing separately
dividends from subsidiary companies), and rentals
on investments showing separately such income from long term and
current investments. Gross income should be stated, the amount of
income tax deducted at source being included under Advance Taxes
paid”
(ii) profits and losses on disposal of current investments and
changes in the carrying amount of such investments;
(iii) Profits and losses on disposal of long term investments and
changes in the carrying amount of such investments.”
It may be noted that paragraph 9.2.4 of General Instructions to the
Revised Schedule VI as given in ‘Guidance Note on the Revised
Schedule VI to the Companies Act, 1956, also requires that: “Other
income items such as interest income, dividend income and net gain
on sale of investments should be disclosed separately for Current
as well as Long-term Investments as required by AS 13 “Accounting
for Investments…”
It may be noted from the above requirements that dividend and
interest income from investments as well as profit or loss on
disposal thereof should be disclosed separately for current
investments and long-term investments.
It was, however, observed that in none of the reported cases the
nature of investment from which dividend/interest income and
profit/loss from sale of investment have arisen viz. current
investments and/or long term investments has been disclosed.
Accordingly, it was viewed that such presentation is not in line
with the requirements of AS 13 as well as Revised Schedule VI to
the Companies Act, 1956.
Price Waterhouse Chartered Accountants LLP Assurance Update
12
S. No.
Matter contained in the Annual Report FRRB Observations
3 The following accounting policy on investments has been disclosed
in the Annual Report of a company: ‘Investments are classified as
long-term and current on the basis of decision taken by the Board
of Directors at the time of making investments.’
It may be noted that paragraph 35(a) of AS 13, requires that: “35.
The following information should be disclosed in the financial
statements: (a) the accounting policies for determination of
carrying amount of investments;’ It was observed that as disclosed
in the accounting policy the classification of investments as
current and long-term investments is based on the decision taken by
the Board of Directors. However, the policy for determination of
carrying amount of investments has not been disclosed.
Accordingly, it was viewed that the stated policy is not in line
with the requirement of paragraph 35(a)of AS 13.
4 From the Annual Report of a company, it has been noted that the
accounting policy on investment inter alia states that cost
includes interest attributable to funds borrowed for acquisition of
investments. (equity instruments)
It was noted from the stated policy that cost includes interest on
funds borrowed for acquisition of investments. It may be noted that
AS 16 prescribes that borrowing cost can be capitalized if it is
directly attributable to acquisition of a qualifying asset.
Further, qualifying asset has been defined as an asset that
necessarily takes a substantial period of time to get ready for its
intended use or sale.
It was viewed that equity instruments are available for their
intended use or sale when acquired and hence capitalization of
borrowing cost with the cost of investments is against the
principles of AS 16.
5 In the Annual Report of a company, it has been noted that its
investment in a wholly-owned subsidiary has been stated at nil
value at the end of the year under review while in the previous
year significant value has been stated for which no provision for
diminution in value exists in the books although the accounting
policy on investments states that long-term investments are stated
at cost, less provision for other than temporary diminution in
value, if any.
It appears from the note to the financial statements that
investment in wholly owned subsidiary has been written off during
the year and this writing down has been done as part of an internal
restructuring. The note further states that over last few years,
the performance of the subsidiary was affected due to the recession
which impacted the end customers resulting in falling revenues and
operational losses. Subsequently, it has been decided to wind up
this subsidiary.
It may be noted that paragraph 17 of AS 13, provides that: “17.
Long-term investments are usually carried at cost. However, when
there is a decline, other than temporary, in the value of a long
term investment, the carrying amount is reduced to recognize the
decline. Indicators of the value of an investment are obtained by
reference to its market value, the investee’s assets and results
and the expected cash flows from the investment. The type and
extent of the investor’s stake in the investee are also taken into
account. Restrictions on distributions by the investee or on
disposal by the investor may affect the value attributed to the
investment.”
It was noted from the note on investments as well as note to the
financial statements that the investment in the subsidiary has been
written off during the year under the review. It was further noted
from note that over last few years, the performance of the
subsidiary was affected due to the recession, which resulted in
falling revenue and operational losses.
It was viewed that an appropriate provision against the investments
in the subsidiary should have been recognized in the years when the
indication of decline in value of investment other than temporary
had arisen instead of writing it off only when the decision to wind
up the Subsidiary has been taken. Accordingly, it was viewed that
the requirements of AS 13 have not been complied with.
Price Waterhouse Chartered Accountants LLP Assurance Update
13
S. No.
Matter contained in the Annual Report FRRB Observations
6 In the Annual Report of a company cost of sales has been sown as
follows:
Opening stocks Add: Purchase of Goods Add: Purchase of Shares Less:
Closing Stock of Goods Less: Closing Stock of Shares
Further the related accounting policy is set out below:
“….Securities acquired with the intention to trade considered as
stock-in-trade. Investment classified as “stock-in-trade” are
valued at cost or market price, whichever is lower…”
It has been noted that the company was dealing in shares as well as
goods and therefore closing stock comprises of both goods and
shares. With regard to shares held as stock-in-trade, it was
observed from the stated accounting policy that investments
classified as stock-in-trade were valued at cost or market price
whichever is lower.
It may be noted that paragraph 1(c) of AS 2, Valuation of
Inventories and footnote 1 as given under AS 13, Accounting for
Investment, provide as follows: AS 2 “1. This Standard should be
applied in accounting for inventories other than: (c) shares,
debentures and other financial instruments held as stock-in-trade;
and…” ….. “Footnote 1 under AS 13 1 Shares, debentures and other
securities held as stock-in-trade(i.e., for sale in the ordinary
course of business) are not ‘investments’ as defined in this
Standard. However, the manner in which they are accounted for and
disclosed in the financial statements is quire similar to that
applicable in respect of current investments. Accordingly, the
provisions of this Standard, to the extent that they relate to
current investments, are also applicable to shares, debentures and
other securities held as stock-in-trade with suitable modifications
as specified in this Standard.”
From the above, it was viewed that the investments held as
stock-in-trade should be valued on the basis of principles
prescribed for current investments under AS 13. It may further be
noted that paragraph 31 of AS 13, provides that: “31, Investments
classified as current investments should be carried in the
financial statements at the lower of cost and fair value determined
either on an individual investment basis or by category of
investment, but not on an overall (or global) basis.”
It was therefore observed that shares held as stock-in-trade should
have been valued at lower of cost and fair value. However in the
reported case, such shares have been valued at lower of cost and
market price.
It was viewed that it is not always necessary that fair value of
investment in reflected by its market value until or unless there
is an active market for such investments. Accordingly, the
accounting policy as adopted for valuation of shares held as stock
in trade is not in line with the requirements of paragraph 31 of AS
13.
This article is extracted from the ICAI publication “Study on
Compliance of Financial Reporting Requirements (Compiled from the
records of Financial Reporting Review Board) Volume III” on matters
of general interest only.
Price Waterhouse Chartered Accountants LLP Assurance Update
14
5. Accounting and Financial Reporting ICAI and MCA
The Institute of Chartered Accountants of India (ICAI)
Exposure drafts of Standard on Internal Audit
The Internal Audit Standards Board of ICAI has issued Exposure
Drafts of the following standards on Internal Audit:
1. Standard on Internal Audit 370, Reporting Results to
Management
The objectives of issuing Internal Audit Reports on individual
internal audit assignments is to:
(a) Share with the auditee, details of all significant findings
based on audit procedures undertaken;
(b) Permit management to understand the issues and take corrective
actions in a methodical and comprehensive manner; and
(c) Provide a sound basis for any assurance being provided by the
Internal Auditor
https://resource.cdn.icai.org/54295iasb-sia370.pdf
2. Standard on Internal Audit 360, Communication with
Management
The objectives of this Standard on Communication with Management
are to ensure the following:
(a) There is clarity between the Internal Auditor and the
management with regard to the scope, approach and
objectives of an internal audit.
(b) To help inform, persuade and act on matters important to the
conduct of an internal audit by promoting a continuous dialogue and
free flow of
information between the Internal Auditor and management.
(c) To help resolve any conflicts in a timely manner
3. Standard on Internal Audit 240, Using the Work of an
Expert
The objectives of using the work of an Expert is to:
(a) Obtain technical assistance and support from competent experts
where the internal audit team does not possess the necessary
knowledge and expertise;
(b) Internal audit procedures conducted in complex and specialised
areas meet expected quality standards;
(c) Outcome of the internal audit work is credible and reliable;
and
(d) Work performed is in conformance with the applicable
pronouncements of the ICAI
https://resource.cdn.icai.org/54293iasb-sia240.pdf
4. Standard on Internal Audit 230, Objectives of Internal
Audit
The purpose of defining the Objectives of Internal Audit are
to:
(a) Document the constitution and establishment of the Internal
Audit function and the terms of the out-sourced internal audit
arrangement;
(b) Provide clarity to the Internal Auditor and its stakeholders
regarding the nature of the internal audit set-up and it’s
working;
(c) Ensure linkage between what is expected of the Internal Auditor
and how those expectation can be met within the Framework governing
Internal Audits; and
(d) Promote better understanding on key operational areas such as
accountability & authority, roles & responsibility, and
such other functional matters.
https://resource.cdn.icai.org/54292iasb-sia230.pdf
5.Standard on Internal Audit 110, Nature of Assurance
The main objective of this Standard is to provide clarity on:
(a) Whether the internal auditor can provide any assurance at all
(including no assurance assignments);
(b) Essential requirements which must be satisfied to be able to
provide the assurance; and
(c) Nature of assurance that can be provided (Negative or Positive)
and under what circumstances.
https://resource.cdn.icai.org/54291iasb-sia110.pdf
Exposure Draft -Revised Guidance Note on Accounting of Political
Parties
As per the Guidelines on transparency and accountability in party
funds and election expenditure matter, issued by the Election
Commission of India (ECI), the accounts maintained by Political
Parties should conform to the Guidance Note issued by the ICAI
providing Guidance on accounting of Political Parties.
Accordingly, the objectives of this Guidance Note are to recommend
the following:
(a) An accounting & financial reporting Framework for the
preparation and presentation of financial statements of Political
Parties. This includes recommendation of appropriate basis of
accounting, the prescription of sound accounting principles
pertaining to recognition, measurement, presentation and disclosure
of various items of income and expenses, assets and liabilities in
the financial statements of Political Parties keeping in view the
peculiarities of the activities of Political Parties.
(b) Applicability of Accounting Standards issued by the Institute
of Chartered Accountants of India to Political Parties.
(c) Standardised formats of Financial Statements for Political
Parties.
https://resource.cdn.icai.org/54300asb43587indasapp.pd f
Exposure Draft of Definition of Business (Amendments to Ind AS
103)
Accounting Standards Board of the Institute of Chartered
Accountants of India has issued a exposure draft of the amendments
to Ind AS 103, Business Combinations, for comments. Objective of
the proposed amendments is to clarify the definition of ‘Business’
to assist the entities to determine whether a transaction should be
accounted for as a business combination or as an asset
acquisition.
https://resource.cdn.icai.org/54299asb43587indas103.pdf
Exposure Draft of the Amendments to Ind AS 1, Presentation of
Indian Accounting Standards, and Ind AS 8, Accounting Policies,
Change in Accounting Estimates and Errors
Accounting Standards Board of the Institute of Chartered
Accountants of India has issued a exposure draft of the amendments
to Ind AS 1, Presentation of Indian Accounting Standards, and Ind
AS 8, Accounting Policies, Change in Accounting Estimates and
Errors. The Exposure Draft proposes refinements to the definition
of ‘material’ and aligns this definition with other Ind AS. These
refinements are intended to make the definition easier to
understand and are not intended to alter the concept of materiality
in Ind AS.
https://resource.cdn.icai.org/54298asb43587indas8.pdf
FAQs on UDIN for Bank Audit - (30-03-2019)
With effect from 1st April, 2019, UDIN is being made mandatory for
GST & Tax Audit Reports and also considering the fact that Bank
Audit is about to commence, UDIN Monitoring Group has come out with
detailed FAQs on UDIN for Bank Audit.
https://icai.org/new_post.html?post_id=15521&c_id=240
Ministry of Corporate Affairs (MCA)
Extension of time for furnishing comments for consideration of High
Level Committee on Corporate Social Responsibility-2018
The MCA has constituted a High Level Committee on Corporate Social
Responsibility-2018 (HLC-2018) to review the existing framework and
guide and formulate a coherent policy on Corporate Social
Responsibility (CSR).
The time period for receiving comments has been extended and
comments/suggestions on the provisions of CSR in the Companies Act
2013, Companies (CSR Policy) Rules, 2014 and Circulars issued
concerning CSR may be sent at hlc.csr-
[email protected]
http://www.mca.gov.in/Ministry/pdf/InvitationPublicCo
mmentsHLC_01032019.pdf
Clarification on filing of e-form RD- 1-Conversion of public
company into private company and change in a Financial Year
(General Circular No. 03/2019 dated March 11,2019)
MCA vide notification no. G.S.R 1219(E) dated December 18,2018 has
notified Companies (Incorporation Fourth Amendment) Rules, 2018,
whereby applications u/s 2(41) (change in a financial year) and u/s
14 of the Companies Act, 2013 (conversion of public limited company
into private company), along with e-form RD-1 shall be processed by
Regional Directors
Stakeholders have expressed certain difficulties in filing e- form
RD-1 on account of aforesaid two purposes pending deployment of
revised version of e-form RD- 1. It is therefore clarified and
Regional Directors are advised to process e-form RD-1 for the above
referred applications, if 'others' is selected on account of
aforesaid two counts, till the revised form is deployed by this
ministry.
Further, it is also clarified that such applications filed in e-
form no.RD-1 should not be rejected merely on the ground that
"others" is selected and "eform is not available", till the said
form is deployed by this Ministry.
http://www.mca.gov.in/Ministry/pdf/GeneralCircularNo
3_11032019.pdf
Companies (Incorporation) Second Amendment Rules, 2019
(Notification No G.S.R.180(E) dated March 6,2019)
MCA vide Companies (Incorporation) Second Amendment Rules, 2019 has
amended Rule 30(5)(a) [Shifting of Registered office from one State
or Union Territory to another state] and second proviso to Rule
38(2) [Simplified Proforma for Incorporating Company Electronically
(SPICe) ]
Accordingly Rule 30(5)(a) requires that a company shall, not more
than thirty days before the date of filing the application in Form
No. INC.23 advertise in the Form No.INC.26 in the vernacular
newspaper in the principal vernacular language in the district and
in English language in an English newspaper with wide circulation
(earlier : with the widest circulation) in the State in which the
registered office of the company is situated.
Price Waterhouse Chartered Accountants LLP Assurance Update
16
Second Proviso to Rule 38(2), as amended , provides further that in
case of companies incorporated, with effect from the 26th day of
January, 2018, with a nominal capital of less than or equal to
rupees fifteen lakhs (earlier : equal to rupees ten lakhs) or in
respect of companies not having a share capital whose number of
members as stated in the articles of association does not exceed
twenty, fee on INC-32 (SPICe) shall not be applicable.
http://www.mca.gov.in/Ministry/pdf/CompaniesIncorpo
rationIIAmendmentRules_07032019.pdf
Companies (Incorporation) Third Amendment Rule,2019 (Notification
dated March 29, 2019)
A new rule 38A has been inserted which requires that the
application for incorporation of a company under rule 38 shall be
accompanies by e-form AGILE (INC-35) containing application for
registration of (i) GSTIN w.e.f March 31, 2019, (ii) EPFO w.e.f.
April 8, 2019 and (iii) ESIC w.e.f. April 15, 2019. The Form INC-35
has also been prescribed in this notification.
http://www.mca.gov.in/Ministry/pdf/companiesINC3rdA
mendmentRules_30032019.pdf
Companies (Indian Accounting Standards) Amendment Rules, 2019
(Notification dated March 30, 2019)
The Rules have notified the new lease standard Ind AS 116, Leases.
Ind AS 17, Leases has been withdrawn. The Rules also bring in
consequential amendments to other Ind AS as a result of
notification of Ind AS 116. This is effective from April 1,
2019.
http://www.mca.gov.in/Ministry/pdf/RuleIndAsEng_300 32019.pdf
Companies (Indian Accounting Standards) Second Amendment Rules,
2019 (Notification dated March 30, 2019)
1. Appendix C to Ind AS 12, Income Taxes has been inserted. The
appendix provides accounting for uncertainty over income tax
treatments. The appendix corresponds to IFRIC 23, Uncertainty over
Income Tax Treatments issued by the IFRS Interpretations
Committee.
2. New paragraph 57A has been added to Ind AS 12 to clarify that
the income tax consequences of dividends on financial instruments
classified as equity should be
recognised according to where the past transactions or events that
generated distributable profits were recognised.
3. Amendment to Ind AS 19, Employee Benefits. This amendment
requires an entity to: (i) use updated assumptions to determine
current service cost and net interest for the remainder of the
period after a plan amendment, curtailment or settlement; and (ii)
recognise in profit or loss as part of past service cost, or a gain
or loss on settlement, any reduction in a surplus, even if that
surplus was not previously recognised because of the impact of the
asset ceiling.
4. Amendment to Ind AS 23, Borrowing Costs to clarify that if a
specific borrowing remains outstanding after a qualifying asset is
ready for its intended use or sale, it becomes part of general
borrowings.
5. Amendment to Ind AS 28, Investments in Associates and Joint
Ventures. Investors could have long-term interests (for example,
preference shares or long-term loans) in an associate or joint
venture that form part of the net investment in the associate or
joint venture. The amendment clarifies that these long-term
interests in an associate or joint venture to which the equity
method is not applied should be accounted for using Ind AS 109,
Financial Instruments. The requirements of Ind AS 109 are applied
to long-term interests before applying the loss allocation and
impairment requirements of Ind AS 28. An illustrative example is
also provided in Appendix A of Ind AS 28.
6. Amendment has been made to Ind AS 103, Business Combinations and
Ind AS 111, Joint Arrangements to clarify measurement of previously
held interest in obtaining control/joint control over a joint
operation as follows: (i) On obtaining control of a business that
is a joint operation, previously held interest in joint operation
is remeasured at fair value at the acquisition date; (ii) A party
obtaining joint control of a business that is joint operation
should not remeasure its previously held interest in the joint
operation.
7. Amendment to Ind AS 109 to enable an entity to measure at
amortised cost some prepayable financial assets with negative
compensation.
These amendments are effective from April 1, 2019.
http://www.mca.gov.in/Ministry/pdf/RuleIndAsSecondE
ng_30032019.pdf
Reserve Bank of India (RBI)
RBI introduces the Voluntary Retention Route for Investments by
Foreign Portfolio Investors (FPIs) - Voluntary Retention Route (PR
no 2018-2019/2086 dated March 1,2019)
The Statement on Development and Regulatory Policies in the
Monetary Policy Statement dated October 05, 2018 had announced a
separate scheme called ‘Voluntary Retention Route’ (VRR) to
encourage Foreign Portfolio Investors (FPIs) to undertake long-term
investments in Indian debt markets. Under this scheme, FPIs have
been given greater operational flexibility in terms of instrument
choices besides exemptions from certain regulatory requirements. A
discussion paper on the VRR scheme was placed on the Reserve Bank’s
website for public consultation.
Based on the feedback from the public and in consultation with
Government of India, the scheme has been finalized and has been
notified today, vide, A.P (DIR Series) Circular No. 21 dated March
1, 2019.
Investment under the VRR scheme shall be open for allotment from
March 11, 2019. The details are as under:
a. The aggregate investment limit shall be 40,000 crores for
VRR-Govt and 35,000 crores for VRR-Corp.
b. The minimum retention period shall be three years.
During this period, FPIs shall maintain a minimum of 75% of the
allocated amount in India.
c. Investment limits shall be available on tap for investments and
shall be allotted by Clearing Corporation of India Ltd. (CCIL) on
‘first come first served’ basis.
d. The investment limits under the current tranche shall be kept
open till the limits are exhausted or till April 30, 2019 whichever
is earlier.
e. FPIs desirous of investing may apply online to CCIL through
their respective custodians.
f. CCIL will separately notify the operational details of
application and allotment.
https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.
aspx?prid=46444
Expert Committee on Micro, Small and Medium Enterprises (Press
Release : 2018-2019/2221 dated March 18,2019)
RBI has constituted an ‘Expert Committee on Micro, Small &
Medium Enterprises (MSMEs)’ to understand the structural
bottlenecks and factors affecting the performance of the sector.
The Committee is undertaking a comprehensive review of the sector
to identify causes and propose long term solutions for its
development. The
Committee has, therefore, decided to invite suggestions from the
public at large on the following aspects:
1. To suggest definition of MSME for classification /
identification of MSME in the context of present system of
investment / turnover based criteria.
2. Whether District Industrial Centres (DICs) have met the intended
objective? Suggestions for improving the role of DICs.
3. What are infrastructural gaps / problems affecting the
development and growth of the MSME clusters?
4. Suggestions for addressing the structural gaps in capacity
building of entrepreneurs.
5. Whether there is awareness about bill discounting facility viz.
TReDS? Suggestions for improving onboarding and accessing finance
through TReDS.
6. Suggestions for improving the credit rating mechanism for
MSMEs
7. Any other specific suggestion/s.
https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.
aspx?prid=46579
Price Waterhouse Chartered Accountants LLP Assurance Update
18
Deferral of Implementation of Indian Accounting Standards (Ind AS)
for Scheduled Commercial Banks (Notification No RBI/2018-2019/146
dated March 22, 2019)
The legislative amendments to the Banking Regulation Act, 1949 as
recommended by the Reserve Bank are under consideration of the
Government of India.
Accordingly, basis the level of preparedness of many banks it has
been decided to defer the implementation of Ind AS for Scheduled
Commercial Banks till further notice.
https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NT146
F6A26AD4C30C4ED984F0AE5500CDDF72.PDF
Master Direction - External Commercial Borrowings, Trade Credits
and Structured Obligations (FED Master Direction No.5/2018-19 dated
March 26,2019)
Instructions issued in respect of External Commercial Borrowings
and Trade Credits have been compiled in this Master Direction in
supersession of earlier directions contained in 'Master Direction -
External Commercial Borrowings, Trade Credit, Borrowing and Lending
in Foreign Currency by Authorised Dealers and Persons other than
Authorised Dealers' dated January 1, 2016,as amended from time to
time.
https://rbidocs.rbi.org.in/rdocs/notification/PDFs/5MD2
603201979CA1390E9E546869B2A9A92614DEDBF.PDF
Deferral of Implementation of Indian Accounting Standards (Ind AS)
for Banks
As per paragraph 3 of the Statement on Developmental and Regulatory
Policies issued with the First Bi-monthly Monetary Policy 2018-19
on April 5, 2018, the implementation of Ind AS was deferred by one
year from April 1, 2018 to April 1, 2019 pending necessary
legislative amendments to the Banking Regulation Act, 1949 as also
the level of preparedness of many banks.The legislative amendments
recommended by the Reserve Bank are under consideration of the
Government of India. Accordingly, it has been decided to defer the
implementation of Ind AS till further notice.
https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id
=11506&Mode=0
Establishment of Branch Office (BO) / Liaison Office (LO) / Project
Office (PO) or any other place of business in India by foreign
entities (RBI/2018- 19/154 A.P. (DIR Series) Circular No. 27 dated
March 28, 2019)
Vide this circular, the RBI has advised that for opening of a
BO/LO/PO or any other place of business in India, where the
principal business of the applicant falls in the Defence, Telecom,
Private Security and Information and Broadcasting sector, no prior
approval of the Reserve Bank of India shall be required, if
Government approval or license/permission by the concerned
Ministry/ Regulator has already been granted.
https://rbidocs.rbi.org.in/rdocs/notification/PDFs/APDIR
27763286B8263F49EBBBE59065635213F9.PDF
SEBI Board Meeting (PR No 9/2019 dated March 1,2019)
SEBI issued a press release regarding decisions taken at its Board
meeting which are as follows:
1. Amendments to SEBI (Infrastructure Investment Trusts)
Regulations, 2014 and the SEBI (Real Estate Investment Trusts)
Regulations, 2014
2. Framework for Innovators Growth Platform
3. Corporate Debt Restructuring
The Board approved that, in the context of corporate debt
restructuring, exemptions from applicability of conditions for
preferential issue provided in SEBI (Issue of Capital and
Disclosure Requirements) Regulations, 2018 (“ICDR Regulations) and
from the obligation of making an open offer provided in SEBI
(Substantial Acquisition of Shares and Takeovers) Regulations, 2011
(“Takeover Regulations”) will be restricted to all scheduled
commercial banks (excluding Regional Rural Banks) and all India
Financial Institutions for acquisitions in their ordinary course of
business. Such exemptions will not be available for acquisition of
shares by persons other than aforesaid lenders by way of allotment
by the target company or purchase from lenders.
4. Valuation of money market and debt securities by Mutual
Funds
5.Participation of Institutional Investors in Commodity Derivatives
Markets in India
6.Amendments to SEBI (Debenture Trustee) Regulations, 1993, SEBI
(Issue and Listing of Debt Securities) Regulations, 2008 and SEBI
(Listing Obligations and Disclosure Requirements), 2015
In order to secure the interests of the debenture holders and to
enable Debenture Trustees (DTs) to perform their duties effectively
and promptly, SEBI Board has approved amendments to the regulatory
framework for DTs, which, inter-alia, include the following :
1. The minimum net worth requirement of a DT shall be increased
from existing Rs. 2 crore to Rs. 10 crore.
2. The requirement of calling for a meeting of debenture holders in
the event of default in payment obligation by issuer in case of
public issue of debt securities shall not be obligatory.
3. E – Voting shall be a valid option for DTs to obtain consent of
the debenture holders wherever applicable.
4. In case of delay in creation of charge in favour of DT within
the specified period, the issuer shall pay additional interest as
specified in the Trust Deed and disclosed in the Offer Document to
the debenture holders for the period of delay in creation of
charge.
5. In case of issuers having both listed equity and debt
securities, the certificate from the DT as per the requirement of
Reg.52 (5) of LODR shall be submitted to the stock exchange(s) by
the issuer within 7 working days from the date of submission of
financial results to the stock exchange(s).
7.Permitting permanent registration to Custodians
8.Revision of SEBI’s fee structure
https://www.sebi.gov.in/media/press-releases/mar-
2019/sebi-board-meeting_42260.html
Modification of circular dated December 7, 2018 on Disclosure of
significant beneficial ownership in the shareholding pattern
(Circular No.: SEBI/HO/CFD/CMD1/CIR/P/2019/36 dated March
12,2019)
1. Vide Circular No. SEBI/HO/CFD/CMD1/CIR/P/2018/0000000149 dated
December 7, 2018, certain requirements were specified with respect
to disclosure of significant beneficial ownership in the
shareholding pattern of listed entities. The said circular was
based on the Companies (Significant Beneficial Owners) Rules, 2018
issued by Ministry of Corporate Affairs vide notification dated
June 14, 2018.
2. Subsequent to the issue of the aforesaid circular, the Companies
(Significant Beneficial Owners) Rules, 2018 were amended by
Ministry of Corporate Affairs vide the Companies (Significant
Beneficial Owners) Amendment Rules, 2019 notified on February 8,
2019.
3. In view of the amendments to the Rules, the Circular No.
SEBI/HO/CFD/CMD1/CIR/P/2018/0000000149 dated December 7, 2018 shall
stand modified to the extent as specified hereunder:
3.1. The circular shall be applicable to those listed entities that
are reporting companies as per Companies (Significant Beneficial
Owners) Rules, 2018, as amended from time to time.
3.2. The submissions under this circular shall be in line with the
requirements specified under Companies (Significant Beneficial
Owners) Rules, 2018, as amended from time to time.
3.3. In view of the revised formats issued under the amended Rules,
the format specified in the Annexure to this circular shall replace
the format specified in the Annexure to the circular dated December
7, 2018.
3.4. In view of the revised timelines under the amended Rules, the
circular shall come into force with effect from the quarter ended
June 30, 2019.
https://www.sebi.gov.in/legal/circulars/mar-
2019/modification-of-circular-dated-december-7-2018-on-
disclosure-of-significant-beneficial-ownership-in-the-
shareholding-pattern_42324.html
Review of Investment by Foreign Portfolio Investors (FPI) in Debt
(Circular No.: IMD/FPIC/CIR/P/2019/37 dated March 12,2019)
1. SEBI and RBI, after mutual consultations, issued Circular No.
CIR/IMD/CIR/P/2018/101 and A.P. (DIR Series) Circular No. 31,
respectively, both dated June 15, 2018 reviewing the requirements
w.r.t investment by FPI in Debt securities. Both the circulars had,
inter-alia, mandated that no FPI shall have an exposure of more
than 20% of its corporate bond portfolio to a single corporate
(including exposure to related parties of corporate as defined
under section 2(76)(viii) of Companies Act, 2013).
2. Now, in order to encourage a wider spectrum of investors to
access the Indian corporate debt market, RBI vide A.P. (DIR Series)
Circular No. 19 dated February 15, 2019 has withdrawn with
immediate effect the above provision w.r.t. exposure of more than
20% of FPI's corporate bond portfolio to a single corporate.
3. To give effect to the same in SEBI Circular dated June 15, 2018,
the said provision in SEBI Circular dated June 15, 2018 stands
withdrawn with immediate effect.
4. Further, in accordance with Regulation 21(5) of SEBI (FPI)
Regulations, 2014, in respect of investments in the debt
securities, the FPI shall also comply with terms, conditions or
directions, specified or issued by the Board or RBI, from time to
time, in addition to other conditions specified in these
regulations. Thus, it is clarified that all the circulars and
directions issued hereinafter by RBI w.r.t investment conditions
for FPI Investment in corporate debt securities shall be complied
with as per the timelines specified in the RBI circular(s). No
separate circular(s) shall be issued by SEBI. All the
intermediaries may take steps required to operationalize the RBI
Circular(s).
Circular on Filing of Advertisements under SEBI (Mutual Funds)
Regulations, 1996 (Circular No.: SEBI/HO/IMD/DF2/CIR/P/2019/34
dated March 8,2019)
Regulation 30 of SEBI (Mutual Funds) Regulations, 1996 (MF
Regulations) on Advertisement material, requires Mutual Funds to
submit to SEBI, the advertisements issued by them, within 7 days
from the date of issue.
In continuation to the various Go Green initiatives in Mutual
Funds, the Mutual Funds are now advised to submit links to access
the advertisements to be filed under the MF
Regulations by sending the same through e-mail to SEBI at
[email protected].
However, advertisement materials like pamphlets may be submitted as
attachment along with e-mail, if the size of the attachment does
not exceed 250 KB.
Mutual Funds shall however, maintain copy of advertisements for
future references.
While sending the e-mail, the compliance officer of respective
Mutual Fund shall expressly confirm that the advertisement is in
compliance with the Advertisement code specified in the sixth
schedule of the MF Regulations.
https://www.sebi.gov.in/legal/circulars/mar-
2019/circular-on-filing-of-advertisements-under-sebi-
mutual-funds-regulations-1996_42301.html
SEBI vide circular no. SEBI/HO/MIRSD/CIR/PB/2018/147 dated December
03, 2018, has issued compliance norms for Cyber Security &
Cyber Resilience framework for Stock Brokers / Depository
Participants.
Paragraph 7 of the Annexure 1 to the aforesaid circular requires
the Board / Partners / Proprietor of the Stock Brokers / Depository
Participants to constitute an Internal Technology Committee
comprising experts. This Technology Committee should on a half
yearly basis review the implementation of the Cyber Security and
Cyber Resilience policy approved by their Board / Partners /
Proprietor, and such review should include review of their current
IT and Cyber Security and Cyber Resilience capabilities, set goals
for a target level of Cyber Resilience, and establish plans to
improve and strengthen Cyber Security and Cyber Resilience. The
review shall be placed before the Board / Partners / Proprietor of
the Stock Brokers / Depository Participants for appropriate
action.
Price Waterhouse Chartered Accountants LLP Assurance Update
20
Subsequently, SEBI has received representations from the stock
brokers with respect to para 7 of Annexure- 1. Accordingly, it is
clarified that in Para 7, the words “Internal Technology Committee”
stands replaced as “Technology Committee”.
https://www.sebi.gov.in/legal/circulars/mar-
2019/clarification-on-cyber-security-and-cyber-resilience-
circular_42374.html
Valuation of money market and debt securities (Circular
SEBI/HO/IMD/DF4/CIR/P/2019/41 dated March 22,2019)
a) Valuation of money market and debt securities of short term
maturity
The SEBI circular IMD/CIR No.16/ 193388/2010 dated February 02,
2010 read with Cir/IMD/DF/6/2012 dated February 28, 2012 currently
permit amortization based valuation of non-traded money market and
debt securities, including floating rate securities, with residual
maturity of upto 60 days. In order to make the existing valuation
practices for aforesaid securities more reflective of the
realizable value, the following has been decided:
1.1.1 The residual maturity for amortization based valuation as
referred to in SEBI circular dated February 28, 2012 shall be
reduced from existing 60 days to 30 days.
1.1.2 Further, the amortized price shall be compared with the
reference price which shall be the average of the security level
price of such security as provided by the agency(ies) appointed by
AMFI for said purpose (hereinafter referred to as “valuation
agencies”). The amortized price shall be used for valuation only if
it is within a threshold of ±0.025% of the reference price. In case
of deviation beyond this threshold, the price shall be adjusted to
bring it within the threshold of ±0.025% of the reference
price
b)Valuation of money market and debt securities which are rated
below investment grade
2.1 In order to have uniformity and consistency across the Mutual
Fund industry on valuation of money market and debt securities
rated below investment grade, the following has been inter-alia
decided:
2.1.1 All money market and debt securities which are rated below
investment grade shall be valued at the price
provided by valuation agencies.
2.1.2 Till such time the valuation agencies compute the valuation
of money market and debt securities classified as below investment
grade, such securities shall be valued on the basis of indicative
haircuts provided by these agencies. These indicative haircuts
shall be applied on the date of credit event i.e. migration of the
security to sub-investment grade and shall continue till the
valuation agencies compute the valuation price of such securities.
Further, these haircuts shall be updated and refined, as and when
there is availability of material information which impacts the
haircuts.
https://www.sebi.gov.in/legal/circulars/mar-
2019/valuation-of-money-market-and-debt-
securities_42458.html
Consultation Paper on Issuance of shares with Differential Voting
Rights (Report dated March 20,2019)
There is increasing debate about the need to enable issuance and
listing of shares with differential voting rights, commonly known
as DVRs in India; and dual class shares or DCS in the international
context. Such shares have rights disproportionate to their economic
ownership. In promoter/ founder led companies where promoters/
founders are instrumental in the success of the company, such
structures enable them to retain decision-making powers and rights
vis-à-vis other shareholders either through retaining shares with
superior voting rights or issuance of shares with lower or
fractional voting rights to public investors.
The matter was deliberated in the Primary Market Advisory Committee
of SEBI and a group (DVR Group) was constituted amongst the
Committee members to do an in- depth study of the proposal of
introduction of dual-class shares in Indian Scenario.
The DVR Group has submitted its report [DVR Group report] to SEBI.
The Report proposes to structure the regulation of DVR issuance
under two broad heads. The broad heads will cover issuance by
companies whose equity shares are already listed on stock
exchanges; and companies with equity shares not hitherto listed but
proposed to be offered to the public.
Comments in prescribed format may be emailed at
[email protected] by April 20, 2019.
https://www.sebi.gov.in/reports/reports/mar-
2019/consultation-paper-on-issuance-of-shares-with-
differential-voting-rights_42432.html
Review of Commission, Expenses, Disclosure norms etc. - Mutual Fund
(Circular No. SEBI/HO/IMD/DF2/CIR/P/2019/42 dated March
25,2019)
The circular has inter-alia modified requirements with respect to
the following :
1. Total Expense Ratio - Change and disclosure
2. Disclosure of scheme performance
3. Borrowing costs
https://www.sebi.gov.in/legal/circulars/mar-
2019/review-of-commission-expenses-disclosure-norms-
etc-mutual-fund_42468.html
Guidelines for Business Continuity Plan (BCP) and Disaster Recovery
(DR) of Market Infrastructure Institutions (MIIs) (Circular No.:
SEBI/HO/MRD/DMS1/CIR/P/2019/43 dated March 26,2019)
Considering the fact that clearing corporations are systemically
important infrastructure institutions, it has been decided that
framework on BCP and DR shall also be made applicable to all the
clearing corporations.
Upon examination and based on the recommendation of Technical
Advisory Committee (TAC) of SEBI, the modified framework for BCP
and DR shall be as under:
a.The stock exchanges, clearing corporations and depositories
(collectively referred as Market Infrastructure Institutions –
MIIs) should have in place BCP and DRS so as to maintain data and
transaction integrity.
Price Waterhouse Chartered Accountants LLP Assurance Update
21
b. Apart from DRS, stock exchanges and clearing corporations should
also have a Near Site (NS) to ensure zero data loss whereas, the
depositories should also ensure zero data loss by adopting a
suitable mechanism.
c. The DRS should preferably be set up in different seismic zones
and in case due to certain reasons such as operational constraints,
change of seismic zones, etc., minimum distance of 500 kilometer
shall be ensured between PDC and DRS so that both DRS and PDC are
not affected by the same disaster.
d. The manpower deployed at DRS /NS should have same expertise as
available at PDC in terms of knowledge/ awareness of various
technological and procedural systems and processes relating to all
operations such that DRS /NS can function at short notice,
independently. MIIs should have sufficient number of trained staff
at their DRS so as to have the capability of running live
operations from DRS without involving staff of the primary
site.
The stock exchanges, clearing corporations and depositories are
advised to submit their revised BCP – DR policy to SEBI within 3
months from the date of this circular.
https://www.sebi.gov.in/legal/circulars/mar-
2019/guidelines-for-business-continuity-plan-bcp-and-
disaster-recovery-dr-of-market-infrastructure-
institutions-miis-_42482.html
Transfer of securities held in physical mode – clarification (Press
Release No. 12/2019 dated March 27, 2019)
SEBI on March 28, 2018, decided that except in case of transmission
or transposition of securities, requests for effecting transfer of
securities shall not be processed unless the securities are held in
dematerialized form with a depository. This measure shall come into
effect from April 01, 2019.
Subsequently, SEBI has received representations from shareholders
for extension of the date of compliance. In view of the same, the
following are hereby clarified:
1. The above decision does not prohibit the investor from holding
the shares in physical form; investor has the option of holding
shares in physical form even after April 01, 2019.
2. Any investor who is desirous of transferring shares (which are
held in physical form) after April 01, 2019 can do so only after
the shares are dematerialized.
3. The transfer deed(s) once lodged prior to deadline and returned
due to deficiency in the document may be re- lodged for transfer
even after the deadline of April 01, 2019.
The above Board decision is not applicable for demat of shares,
transmission (i.e. transfer of title of shares by way of
inheritance / succession) and transposition (i.e. re- arrangement /
interchanging of the order of name of shareholders) cases.
https://www.sebi.gov.in/media/press-releases/mar-
2019/transfer-of-securities-held-in-physical-mode-
clarification_42503.html
Procedure and formats for limited review / audit report of the
listed entity and those entities whose accounts are to be
consolidated with the listed entity (Circular No.:
CIR/CFD/CMD1/44/2019 dated March 29,2019)
The Kotak Committee Report on Corporate Governance, inter-alia,
suggested certain changes in the regulatory framework for Group
Audit. SEBI, while considering the recommendation of the Kotak
Committee, decided to amend Regulation 33 of the SEBI (Listing
Obligation and Disclosures Requirements) Regulations, 2015 (“SEBI
LODR Regulations”), after considering public comments, with respect
to this matter.
Accordingly, the following new sub-regulation was inserted under
Regulation 33 of the SEBI LODR Regulations, which will come into
effect from April 01, 2019. “(8) The Statutory auditor of a listed
entity shall undertake a limited review of the audit of all the
entities/companies whose accounts are to be consolidated with the
listed entity as per AS 21 in accordance with guidelines issued by
the Board on this matter”.
Consequently,
• all listed entities whose equity shares and convertible
securities are listed on a recognised stock exchange,
• the statutory auditors of such entities,
• all entities whose accounts are to be consolidated with the
listed entity and
• the statutory auditors of entities whose accounts are to be
consolidated with the listed entity
shall, with respect to the aforesaid sub-regulation as applicable,
comply with the prescribed procedures and formats.
Further, it is to be noted while the formats for periodical
financial results to be submitted by listed entities will continue
to remain the same , the formats for limited review reports and
audit reports specified vide SEBI Circular No. CIR/CFD/CMD/15/2015
dated November 30, 2015 will be replaced vide this circular.
This Circular shall come into force with effect from April 01, 2019
i.e. the date on which sub-regulation 8 of Regulation 33 comes into
force.
https://www.sebi.gov.in/legal/circulars/mar-
2019/procedure-and-formats-for-limited-review-audit-
report-of-the-listed-entity-and-those-entities-whose-
accounts-are-to-be-consolidated-with-the-listed-
entity_42537.html
7. Taxation Direct and Indirect taxes
Direct Taxation
Increase in limit of tax free gratuity (Notification dated March
8,2019)
Central Government, having regard to the maximum amount of any
gratuity payable to employees, hereby specifies twenty lakh rupees
as the limit for the purposes of the Section 10(10)(iii) in
relation to the employees who retire or become incapacitated prior
to such retirement or die on or after the 29th day of March, 2018
or whose employment is terminated on or after the said date.
https://www.incometaxindia.gov.in/communications/no
tification/notification_16_2019.pdf
Indirect Taxation
GST Council clarifies operational details and transitional norms
for lower GST rates on residential housing
The GST Council, in its thirty fourth meeting, has clarified how
the proposed reduction in the GST rate on under- construction
residential properties to 5% [1% for the affordable housing (AH)
segment] without any input tax credit (ITC) would be
operationalised, including the modalities of the transition. The
clarifications are summarised below1:
I. One-time option for existing projects
A one-time option would be available to the developers to
continue to pay tax at 12% (8% for AH) with ITC for on-going
projects, i.e., projects whose construction and booking have
commenced before 1 April 2019 but remain incomplete as on such
date. This option [to stay] would need to be exercised within a
prescribed period.
II. Applicability of new tax rates
• The new rates applicable to new projects (or on-going projects
opting for new tax rates) are as follows:
Applicability of 1% GST without ITC
o All AHs with an area of 90 square meters in non-metros/ 60 square
meters in metros with a value upto INR 4.5m.
o AH in ongoing projects under existing central and state housing
schemes.
Applicability of 5% GST without ITC
o All houses (other than AHs) in new projects.
o All houses (other than AHs) in ongoing projects regardless of
whether they were booked prior to or after 1 April 2019*.
o Commercial spaces (e.g., shops, offices etc) in a residential
real estate project in which the carpet area of the commercial
areas is not more than 15% of the total carpet area.
* New rate to apply on instalments payable on or after
1.04.19
• The developer will be required to procure 80% of the inputs and
input services [other than capital goods, Transferable Development
Rights (TDR)/ Joint
Development Agreement, Floor Space Index (FSI), long- term lease]
from registered persons.
• The developer would need to discharge GST under reverse charge
basis on the shortfall of purchases from registered persons at 18%
(except items such as cement and capital goods that may attract
different GST rates).
III. Transition for ongoing projects opting for the new tax
rate
• For residential projects, ITC would be pro-rated, based on the
percentage of invoices raised for flats booked.
• For a mixed project, ITC would be pro-rated in proportion to the
carpet area of the commercial portion in the ongoing projects (on
which GST would continue to be paid @12% with ITC) to the total
carpet area of the project.
IV. TDR/ FSI and long-term lease for projects commencing after 1
April 2019
• Supply of TDR, FSI and long-term lease premium of land by a
landowner to a developer is exempted, subject to the condition that
the constructed flats are sold before the issuance of the
completion certificate on a GST-paid basis.
• Such exemption to be withdrawn qua flats sold after the issue of
the completion certificate, although such tax will have to be paid
at 1% in case of AH, and 5% in the general segment.
• The liability to pay tax on TDR, FSI and long-term lease
(premium) to be shifted from land owner to builder under reverse
charge mechanism.
Price Waterhouse Chartered Accountants LLP Assurance Update
23
8. World Watch
European Union
• The ESMA issued three Q&As regarding the Prospectus Directive
and the Transparency Directive in the event of a no-deal
Brexit
IAASB
• The IAASB published a professional skepticism communiqué, part of
a series highlighting the IAASB’s efforts to appropriately reflect
professional skepticism in its standards
• The IAASB is seeking public comment by July 1, 2019 on three
interrelated standards that address quality management
• The IAASB issued its Proposed Strategy for 2020- 2023 and Work
Plan for 2020-2021, stating it is “putting forth a way forward that
it believes meets stakeholders’ evolving needs, and is in the
public interest”; comments due June 4, 2019
IASB
• The IFRS Foundation has published two documents summarizing work
by the IASB on possible improvements to IFRS 8 Operating Segments
and on discount rates in IFRS Standards.
• The IASB published a webcast outlining the information companies
will provide about their revenue in financial statements and notes
prepared under IFRS 15
• The IASB published a podcast on the discussion at the February
2019 meeting of the Board about IFRS 17 Insurance Contracts.
IFAC
• IFAC and AAT issued An Illustrative Competency Framework for
Accounting Technicians for professional accountancy organizations
that will support a competent, skilled and future-ready accounting
technician workforce
IOSCO
• IOSCO´s Growth and Emerging Market Committee published the
consultation report Sustainable finance in emerging markets and the
role of securities regulators
IPSASB
• The IPSASB published its Strategy and Work Plan 2019-2023:
Delivering Global Standards. Inspiring Implementation, which will
shape the Board’s work and priorities for the next five years
OECD
• The OECD is seeking public comments on key issues identified in a
public consultation document on possible solutions to the tax
challenges arising from the digitalization of the economy.
Price Waterhouse Chartered Accountants LLP Assurance Update
24
South Africa
• The Independent Regulatory Board for Auditors released its 2018
Public Inspections Report, indicating “while the report shows a
marginal decline in unsatisfactory findings at firm and engagement
level for 2018, overall the Sixth Inspections Cycle on a three-year
analysis is characterised by recurring quality deficiency
themes”
• The South African Chairman of the Standing Committee on Finance
called for public comments on the Financial Matters Amendment Bill
which includes amendments to the Auditing Profession Act,
2005
United Kingdom
• The UK FRC has proposed to increase the work required of auditors
when assessing whether an entity is a going concern
• Terms of reference for Sir Donald Brydon’s review on the quality
and effectiveness of audit were published
• The UK FRC launched a consultation into improvements to the
reporting of intangibles; comments due April 30, 2019
United States
• The Public Company Accounting Oversight Board announced it has
created a new Office of Enterprise Risk Management to implement the
Board’s strategic objective of implementing an Enterprise Risk
Management program for the organization
• The FASB issued a proposed Accounting Standards Update and
Invitation to Comment on th