KPMG Accounting and Auditing Update - November 2014

November 2014

ACCOUNTINGAND AUDITINGUPDATE

In this issue

Mutual funds - accounting and reporting issues p1

Ind AS 16 - accounting for fixed assets p5

The Companies Act, 2013 - deposits p8

Understanding the COSO 2013 Framework p13

Significant influence p15

Regulatory updates p17

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© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The capital markets are at an all-time high and after a period of strife, it appears that things are finally looking up for the mutual fund industry as well. For some time, this was an industry that was waiting to explode and grow and finally it looks like the required platform has been set in place. A mix of regulatory changes that have created a level playing field for mutual funds viz-a-viz the insurance industry, some much needed industry consolidation and finally the surge in market valuations and investments has made this industry our focus for this month’s issue of the Accounting and Auditing Update. Some challenges continue to remain and as we highlight some of the more recent changes that affect the industry and its accounting and reporting issues; the fundamental lack of penetration and participation of a large section of the population in mutual funds, reflects the untapped potential of this industry, and therefore, signals a bright future for this space.

This month we also examine some of the key changes that Ind AS application will have in one of the most pervasive and common accounting area; that of fixed assets. We also highlight the key differences and salient features of the COSO 2013 framework for internal control and contrast this with the previous version i.e. the COSO 1992 framework; this is particularly relevant as Indian companies are in the midst of evaluation of various frameworks for implementation of the internal financial controls reporting requirements under the Companies Act, 2013.

We have highlighted the key impacts of the Companies Act, 2013 in the area of acceptance of deposits by companies. We also cover a number of regulatory and reporting updates this month as well as an examination of the concept of ‘significant influence’ in an accounting context.

As always we would like to remind you that in case you have any suggestions or inputs on topics we cover, we would be delighted to hear from you.

Happy reading!

Jamil Khatri

Deputy Head of Audit, KPMG in IndiaGlobal Head of Accounting Advisory Services

Sai Venkateshwaran

Partner and Head,Accounting Advisory Services, KPMG in India


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Mutual funds accounting and reporting issues

This article aims to

• Highlight the accounting and operational challenges faced by mutual funds industry arising out of recent regulatory developments.

An overview

The Indian mutual fund industry was one of the fastest growing and competitive segments of the financial sector until early 2000. However, till very recent times, it could not maintain growth momentum due to various reasons such as economic down-trends in global markets, increase in inflation and increasing interest rates in domestic markets. But more recently, riding on rising stock markets and optimism built around the new government’s reforms agenda, mutual funds have witnessed strong inflows in the recent months. The industry managed over INR9.6 trillion of AUM (Asset under Management) at the end of September 2014.1

It is well acknowledged that mutual funds offer various benefits to its investors such as portfolio diversification, access to equity and debt markets at low transaction costs, tax efficiency and liquidity, which are difficult to obtain through other investment vehicles. However, it also has its own challenges such as lack of investor awareness, lack of participation from a large proportion of the population, limited incentives for distributors of mutual fund products as compared to other financial products, and lack of product differentiation.

In an industry where products are not bought but have to be sold and where dependency on third party distributors is more than own distribution channels, discontinuation of ‘entry load’ considerably disturbed the economics of mutual funds. The industry players struggled to strike a balance between aggressive growth and profitability.

Realising the needs of the industry such as enhancing retail participation, increased need of investors’ education especially in smaller cities and towns, etc., the Securities Exchange Board of India (‘SEBI’ or ‘Regulator’) introduced various measures to re-energise the industry through a circular issued in September 2012.

Again, to provide further growth impetus and to ensure sustainable growth of the mutual fund industry, the SEBI approved long term policy proposals in February 2014. The focus of these proposals was to enhance the reach of the industry, to recommend additional tax incentives for investors which could act as a motivation to channelise more savings into mutual funds and to define the obligations of various stake holders.

Financial reporting framework for mutual funds

As per Regulation 50(3) of the SEBI (Mutual Funds) Regulations, 1996 (the SEBI Regulations), mutual funds are required to follow the accounting policies and standards as specified in Ninth Schedule to the SEBI Regulations so as to provide appropriate details of the scheme-wise disposition of the assets of the fund at the relevant accounting date and the performance during that period together with information regarding distribution or accumulation of income accruing to the unit holder in a fair and true manner.

As per an opinion3 issued by the Expert Advisory Committee of the Institute of Chartered Accountants of India (ICAI), a mutual fund is required to comply with the accounting standards issued by the ICAI generally, except for those requirements of the Accounting Standards for which specific accounting policies and standards have been prescribed by the SEBI Regulations.

In the following paragraphs, we discuss various accounting and operational challenges emerged while implementing the above regulatory developments.

Additional ‘total expense ratio’ (TER) for ‘beyond top 15 cities’ (B-15 cities)

In September 2012, the SEBI permitted the mutual funds to charge additional TER up to 30 basis points on daily net assets of a scheme, if the new unit capital inflows from beyond top 15 cities (B-15 cities) are at least (a) 30 per cent of gross new inflows in the scheme or (b) 15 per cent of the average assets under management (year to date) of the scheme, whichever is higher. In case inflows from B-15 cities are less than the higher of (a) or (b) above, additional TER on daily net assets of the scheme is allowed on a proportionate lower inflow basis. Further, the additional TER on account of inflows from B-15 cities so charged is to be clawed back in case the same is redeemed within a period of one year from the date of investment.

Mutual funds faced teething problems such as generating requisite data from Registrar & Transfer Agents (RTA), tracking unit capital generated from B-15 cities and redemptions thereof, adjusting the claw-back commission due to redemptions taking place within one year from the date of subscriptions, identifying expenses incurred in such B-15 cities and accruing appropriate additional expense.

There was certain amount of ambiguity as to whether such additional TER is a ‘grant’ or an additional limit given for raising AUMs from B-15 cities. Considering the purposes behind this regulatory provision, it can be reasonably construed that it is an additional limit given to mutual funds, provided the expenditure is actually incurred. Funds monitor the accrual of such expenses viz-a-viz actual expenditure incurred at periodic intervals. Excess accrual, if any, needs to be reversed in a timely manner.


1. Association of Mutual Funds in India (AMFI) website

2. Expense ratio is the fee charged by a fund house to manage and operate the fund. These charges include management fees.

3. EAC opinion volume no XXVIII and query no. 5

The Indian mutual fund industry operates in an economic landscape which has undergone rapid changes over the past couple of years.

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Fungibility in TER

Fungibility in TER was another major development that was introduced in September 2012. The change aimed at providing flexibility to the mutual funds in incurring various expenses incurred by them, including management fees. Mutual funds were allowed to charge various expenses to the schemes within overall limits specified in Regulation 52(6) of the SEBI Regulations. Prior to September 2012, regulations provided a sub-limit for management fees within an overall total expense limit. Effective October 2012, the SEBI removed the sub-limits relating to management fees, thereby creating flexibility in charging management fees and other expenses to the schemes.

Fungibility of expenses gave some much needed flexibility to mutual funds/asset management companies (AMCs) in allocating various expenses incurred by them to the individual schemes. Depending upon overall expenses incurred by the schemes; AMCs can charge higher or lower management fees at periodic intervals.

While a scheme may accrue expenses at the expense rate permissible by its offer document, continuous monitoring is required to ensure that actual expenses have been incurred. Constant monitoring of actual expenses incurred and correct estimation of probable expenses will allow AMCs to charge appropriate management fees on a regular basis and in a timely manner.

To avoid operational difficulties such as monitoring the actual expenses incurred vis-à-vis the expenses accrued and the frequent adjustments to the management fees, there exists another school of thought which believes primarily in incurring all expenses by AMC and charge the requisite management fees to schemes on a consistent basis. If the fund house adopts this approach, then it could entail a change in contractual arrangements with various service providers such as custodian, RTA, bankers, distributors, etc. Under this approach, AMCs will have to be extremely cautious in determining the appropriate differential fees to be charged to direct and regular plans of the scheme.

Another fundamental reason for adoption of the above approach by mutual funds could be the benefit of service tax input credits. Under the conventional approach, spill-over of expenses beyond the total

permissible expenses are borne by AMCs. Reimbursement of such spill-over expenses do not entail service tax input credit benefit to AMCs. However, in the approach described above, since AMCs incur all the expenses, they may be able to take the benefit of the service tax input credits.

Currently, most mutual funds have stabilised their TER accrual process under new regime. The expense accrual process is continuously analysed, actual expenses incurred are monitored more frequently and appropriate rectification measures are taken.

From an auditing standpoint, the following aspects are key considerations:

• understanding reasons for fluctuations in management fees

• appropriate authorisations

• compliance with the offer documents

• accuracy of fee computations

• consideration of service tax related accounting.

Investors’ education and awareness

In September 2012, the SEBI permitted mutual funds to annually set aside at least two basis points of daily net assets towards investor education and awareness initiatives within the maximum limit of TER.

Although regulation does not specifically define the activities which will fall within ‘investor education and awareness’ programme, the general understanding is that all expenses incurred on conducting seminars related to investor awareness especially in Tier II and III cities, hoardings, booklets in various business magazines and newspapers, etc. promoting investor awareness may fall within the purview of such awareness programmes.

It can be challenging to evaluate and critically examine end-use of such expenditures and to check whether the purpose of investors’ education and awareness is met at large as opposed to promoting a particular scheme or a product.

In case of Fixed Maturity Plans (FMPs)/close ended schemes, mutual funds can encounter a situation wherein, an accrual towards investor education and awareness has been created in the books but the scheme’s term has expired before the utilisation of such accrued amounts. Currently, there is no specific

regulatory guidance on the treatment of such unspent amounts at the maturity of such schemes. Also, such closed schemes are usually not subjected to audits in subsequent periods. This poses some added responsibillity on AMCs and trustees of funds to ensure an appropriate utilisation of unspent balances.

Commission to distributors

Mutual Funds pay various types of commissions to its distributors such as upfront brokerage, trail brokerage, special incentives, Systematic Investment Plan (SIP) incentives, etc. Commission to distributors is one of the major expenditure heads of a scheme.

Various models such as a combination of upfront and trail commission, high upfront commissions coupled with limited or no trail commission for few years and moderate trail commission thereafter, all trail commission, etc. are prevalent in the market. Claw back clauses have become a part of commission structures in order to bring in more discipline in selling and distribution practices and to achieve the objective of long-term investment by investors.

After the end of the ‘entry load’ era and the lack of traction in transitioning to an ̀ advisor -investor’ fee based model, initial commission to distributors are largely being paid by mutual funds or its investment managers.

One of the relevant accounting considerations is whether the upfront/advance commission paid should be expensed immediately or whether such upfront payments/commission can be amortised. Generally, such payments provide an enduring contractual benefit to the funds and could qualify for amortisation. In particular, a careful consideration of facts and circumstances is required including focussing on lock-in clauses and claw-back provisions and the adequacy of expected asset management fees on the AUM generated which is directly relatable to the payments made.

The determination of an appropriate period over which the upfront/advance commission paid by schemes or AMC are to be apportioned remains a challenge for mutual funds. Key areas which are usually considered in determining amortisation period are as follows:

• nature of services provided by the distributor


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• nature and period over which distributors are required to render services

• contractual arrangement with distributor specially period of claw back

• terms of other commissions (i.e. trail) paid.

Considering the overall magnitude of commission expenditures and long period over which the benefit of distributors’ services are availed, in certain cases, these expenses are paid for investment managers initially and are recovered from the schemes over the period of benefit. Periodic evaluation is required to assess recoverability from schemes, otherwise the investment manager will likely need to recognise such the expenditure in its books as expenses.

Increase in net worth of AMCs

As per the SEBI’s pronouncement4, all AMCs of mutual funds are required to have a minimum net worth of INR500 million. As per the SEBI Regulations, net worth is defined as share capital plus free

reserves. However, free reserves is not defined in the SEBI Regulations. In the absence thereof, generally the definition of free reserves given in the Companies Act, 1956 was considered by most AMCs. Considering the definitions under various sections of the Companies Act, 1956, one could reasonably argue that securities premium could be a part of free reserves. However, in terms of the provisions of section 2(43) read with section 52(2) of the Companies Act, 2013, definition of free reserves specifically excludes securities premium. Considering that the securities premium forms a significant part of the net worth, AMCs may face challenge to meet net worth criteria. Ideally a clarification from the SEBI is required in this context to permit the continued consideration of securities premium in free reserves for the limited purpose of its net worth requirements.

Mis-selling – fraudulent

Under the Companies Act, 2013, mis-selling is considered to be within the definition of fraud. The Companies Act,

2013 covers the entire spectrum of securities which include mutual fund units. If a financial advisor makes a promise, statement or forecast which is false or misleading (many of these factors are very difficult to verify) then there could be significant consequences under the Companies Act, 2013. This is, in addition, to any consequence that the advisor would face under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) (Amendment) Regulations, 2012 which have been notified in December 2012.

Conclusion

Some of the measures taken by SEBI should help the mutual fund industry to move ahead with greater confidence on its growth trajectory. However, implementation challenges continue to be an area of focus for most mutual funds and the growing size and complexity of regulations and compliance requirements are often a source of tension within such organisations.


4. Securities and Exchange Board of India (Mutual Funds) (Amendment) Regulations, 2014 dated 6 May 2014

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Ind AS 16accounting for fixed assets


• Provide an overview of the changes associated with Ind AS implementation in India with respect to property, plant and equipment.

• Highlight the areas of difference between Indian GAAP/Ind AS and the requirements of Tax Accounting Standards (Income Computation and Disclosure Standards) which are expected to be implemented in India shortly.

Background and setting the context

Under the current accounting standards as per Generally Accepted Accounting Principles in India (Indian GAAP), AS 10, Accounting for Fixed Assets and AS 6, Depreciation, provide the requisite guidance on accounting for fixed assets. Under Ind AS, the corresponding standard for this topic is Ind AS 16, Property, Plant and Equipment (PPE).

While both standards are similar in many aspects, there are areas where either there are subtle differences or where Ind AS provides additional guidance which is not available under Indian GAAP. The subsequent paragraphs capture the current accounting practices and how these would undergo a change once Ind AS is implemented in India.

Key impact areas on Ind AS implementation

Initial measurement

• Administration and other general overheads - In general, administration and other general overheads are excluded from being capitalised as part of fixed assets. However, the current guidance under Indian GAAP permits capitalisation of these costs provided they are specifically attributable to construction of a project, to the acquisition of a fixed asset or bringing it to its working condition. Accordingly, in practice start-up costs or pre-operative expenses often end up being capitalised. Under Ind AS, administration and other general overhead costs are specifically excluded from being capitalised as part of fixed assets and hence, are required to be charged to the statement of profit and loss in the year in which they are incurred.

• Foreign exchange differences - To protect companies from the impact of volatile foreign currency exchange

rates, Indian GAAP provides an option to add to/deduct from the cost of a depreciable asset, the exchange differences arising on restating long-term foreign currency monetary items that are used to acquire such property, plant and equipment. Recently, the Accounting Standards Board (ASB) as part of its project of revisiting the earlier carve-outs from Ind AS has proposed to remove this option. This proposed amendment is a welcome move as the scenario has changed with the currency markets being more stable, and also this amendment would align the accounting under Ind AS to the global practices i.e. IFRS. Once this proposed amendment is incorporated in the Ind AS standard and Ind AS is implemented in India, all companies that would be covered under the proposed roadmap of IFRS convergence in India would have to recognise foreign exchange differences (except for foreign exchange differences which are regarded as an adjustment to interest costs) to the statement of profit and loss in the year in which they are incurred.


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• Asset retirement obligations - Ind AS 16 requires an estimate of the costs for dismantling or removing of the asset or restoration of the site to be included as part of the initial cost of the asset with recognition of a corresponding liability. The amount to be capitalised on initial recognition is to be computed by present valuing the expected costs to be incurred. Subsequent to initial recognition, the discount is required to be unwound and charged to the statement of profit and loss as an interest expense with a corresponding increase in the liability amount. Under Indian GAAP, the illustrations forming part of AS 29, Provisions, Contingent Liabilities and Contingent Assets, state that if an entity has a present obligation towards decommissioning and restoration, it should account for the liability at the best estimate of the costs expected to be incurred to settle the obligation. Further, the Guidance Note on Accounting for Oil and Gas Producing Activities states that the costs for abandonment estimated based on current prices should be capitalised as part of the cost centre at the outset as the liability to remove an installation exists the moment it is installed. Both AS 29 and the Guidance note do not require discounting of the costs to present value. Currently, there is diversity in practice on recognition of these obligations with several companies recognising these only at the time when they are incurred.

• Impact of deferred payment arrangements - In case of deferred payment arrangements beyond normal credit terms, Ind AS requires that the difference between the cash price equivalent and the total payment is recognised as interest over the period of credit unless such interest is capitalised in accordance with Ind AS 23, Borrowing Costs. Under the current accounting practices under Indian GAAP, the transaction amount is the amount that is capitalised.

Depreciation

• Useful lives – Ind AS requires an asset to be depreciated over its useful life. The standard defines useful life as the period over which an entity is expected to be available for use by an entity or the number of production or similar units expected to be obtained from the asset by an entity. At present under

Indian GAAP, even though accounting standards require depreciation to be provided based on useful life, many companies followed the minimum rates prescribed under Schedule XIV to the Companies Act, 1956. This practice has undergone a change in the current year with the introduction of the Companies Act, 2013 which in addition to prescribing indicative useful lives under Schedule II also provides the flexibility of using useful lives of the property, plant and equipment with appropriate justification supported by technical advice. This change introduced by the Companies Act, 2013 would align the accounting practices in India with the requirements of Ind AS.

• Component accounting - Ind AS 16 requires each part of the item of PPE that is significant in relation to the total cost of the item of PPE to be depreciated separately based on their individual useful life. The determination of whether a component of an item is significant would require a careful assessment of the facts and circumstances and could also relate to non-tangible activities such as major inspections or overhauls. A classic example on component accounting would be an aircraft which has two significant components with different useful lives i.e. the airframe and the engine. The current accounting principles under AS 10 encourage that the total expenditure of an asset be allocated to its components and depreciation estimates for such components be made separately. However, there is diversity in practice at present on this topic with not many companies following this principle and actually identifying components of assets for separate capitalisation and depreciation computation.

This GAAP difference (between Indian GAAP and Ind AS) is also expected to be eliminated with the Companies Act 2013 mandating component accounting from 1 April 2015 (voluntary from 1 April 2014).

• Other impact areas – In addition to the above, there are certain other differences between Indian GAAP and Ind AS as mentioned below:

– A change in method of depreciation (e.g. from written down value to straight line or vice versa) is treated as a change in estimate under Ind AS and the change would have

a prospective impact. However, currently under Indian GAAP, a change in method of depreciation is treated as a change in accounting policy which requires a retrospective application. However, the deficiency or surplus arising from retrospective application of the new method of depreciation is adjusted in the accounts in the year in which the method of depreciation is changed.

– Ind AS requires the residual value, useful life estimate and method of deprecation to be reviewed at least at the end of each financial year, with any change to be accounted on a prospective basis as a change in estimate. There is no such requirement currently under Indian GAAP.

Revaluation model

Under the current Indian GAAP accounting practices, revaluation is considered as a substitute for historical cost. It is common for companies to selectively revalue their assets and record gains in a separate revaluation reserve. Ind AS, on the other hand, provides an accounting policy choice to follow the revaluation model for a class of assets and does not permit selective revaluation of assets within the same class. However, the deficiency or surplus arising from retrospective application of the new method of depreciation is adjusted in the accounts in the year in which the method of depreciation is changed.

Further, under Indian GAAP, the incremental depreciation charge on account of the revaluation is recouped from the revaluation reserve and hence does not impact the statement of profit and loss. Under Ind AS, the incremental depreciation on account of the revaluation is also required to be charged to the statement of profit and loss. However, the incremental depreciation charged is not allowed to be recouped into the statement of profit and loss.

Ind AS 16 provides that the revaluation surplus included in equity in respect of an item of property plant and equipment may be transferred to the retained earnings when the asset is derecognised. This may involve transferring the whole of the surplus when the asset is retired or disposed of. However, some of the surplus may be transferred as the asset is used by an entity. In such a case, the amount of the surplus transferred would be the


difference between the depreciation based on the revalued carrying amount of the asset and depreciation based on its original cost. Transfers from revaluation surplus to the retained earnings are not made through the statement of profit and loss. Thereby, under Ind AS while revaluation could assist in improving the net worth of a company, it could also result in higher depreciation expense in the subsequent periods compared to current practice.

Lastly, in case the revaluation method of accounting is chosen, Ind AS would also requires the entity to carry out the revaluation exercise with sufficient regularity to ensure that the carrying amount does not differ materially from the value which would be determined using fair value at the end of the reporting period. There is no guidance/requirement on the frequency of revaluation under Indian GAAP.

Borrowing costs

Under the current accounting practices, a qualifying asset is defined as an asset which takes substantial period of time to be ready for its intended use or sale. A period of 12 months is ordinarily considered as a substantial period of time unless the contrary can be justified. Under Ind AS, while the definition of qualifying asset is the same, the determination of what constitutes a substantial period of time is left to management judgement.

At present, capitalisation of borrowing costs are based on company level borrowings i.e. standalone financial statements. However, under Ind AS, the consolidated group’s average borrowing rate would need to be considered for capitalisation of the borrowing costs in the consolidated financial statements. For example, parent A makes an equity contribution in its wholly owned subsidiary B. A has obtained the funding for this equity contribution at an interest cost of 10 per cent per annum. B has used the funding obtained from A in financing the construction of a qualifying asset. In this case, under current accounting practices no borrowing costs would be capitalised in the standalone financial statements of A or B as for B there is no borrowing cost

incurred and for A there is no qualifying asset on its books. However, under Ind AS, in the consolidated financial statements of A, the borrowing cost incurred can be attributable to the qualifying asset held in B and hence, would need to be capitalised.

Transitional provisions under Ind AS 101, First-time Adoption of Indian Accounting Standards

Ind AS 101, First Time Adoption of Indian Accounting Standards provides the guidance to transition from existing Indian GAAP to Ind AS. With respect to PPE, Ind AS 101 permits an entity to continue using the carrying value of all of its PPE as per the previous GAAP and use that as its deemed cost as at date of transition under Ind AS after making necessary adjustments for any decommissioning liabilities that it may need to recognise.

This requirement, if implemented in its current state could, to a large extent ease the transition process for Indian entities but may result in carry forward of certain amounts as part of PPE which may not qualify for capitalisation under Ind AS, for example foreign exchange differences currently capitalised under Para 46/46A of AS 11, The Effects of Changes in Foreign Exchange Rates. This accounting treatment would also result in differences from the global accounting practices i.e. IFRS.

Income Computation and Disclosure Standard on Tangible Fixed Assets

The Central Board of Direct Taxes (CBDT) is in the process of issuing a separate set of accounting standards referred to as the Income Computation and Disclosure Standard (ICDS). These standards would be applied in computation of taxable income and are expected to be issued in their final form in the coming months. On the topic of fixed assets, a draft ICDS ‘Tangible Fixed Assets’ has been issued which has some significant differences from the current accounting practices/Ind AS requirements which are briefly discussed below:

– unlike the current accounting practice/ Ind AS requirements, ICDS does not permit revaluation of fixed assets since the Income Tax Act, 1961 does not recognise the concept of revaluation of assets. Therefore, for the purpose of computation of taxable income, the fixed assets will need to be carried at historical costs and any revaluation routed through the statement of profit and loss would be disallowed

– as discussed earlier, foreign exchange differences that are currently capitalised under Indian GAAP would need to be charged to the statement of profit and loss under Ind AS. As per ICDS, capitalisation of exchange differences related to fixed assets shall be in accordance with section 43A (which deals with the changes in rate of exchange of currency) and other similar provisions of the Income Act, 1961

– as per both Indian GAAP and Ind AS, where an asset is acquired in exchange for another asset, shares or securities, its actual cost shall be determined by reference to the fair market value of the consideration given or asset acquired whichever is more clearly evident. As per ICDS, the actual cost in such cases shall be the lower of the fair market value of the asset acquired or the assets/ securities given up/ issued.

Once ICDS is implemented in India, it would bring in a fresh set of challenges as entities would need to carry out several adjustments to ascertain the taxable income.

Conclusion:

Based on the above, it is evident that Ind AS once implemented in India would change the way accounting is done in India across many areas including for something as common and widely relevant as fixed assets. Hence, it is important that corporate India gears up for this challenge in time to ensure a smooth and successful transition to the new reporting framework under Ind AS.

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depositsThe Companies Act, 2013


• Discuss the key provisions relating to acceptance of deposits by companies under the Companies Act, 2013.

Introduction

The Companies Act, 2013 (2013 Act) has introduced several measures which are expected to provide protection to depositors. It has also increased the reporting requirements of companies accepting deposits by requiring them to file circulars and statements of deposits with the registrar of companies. In addition, the 2013 Act also provides for stringent penalties for any violations in complying with the provisions of this Act.

Applicability

The provisions of the 2013 Act, relating to acceptance of deposits, are applicable to all companies except the banking companies, non-banking financial companies and housing finance companies. Therefore, the provisions relating to deposits under the 2013 Act apply to following two categories of the companies:

• A company that accepts deposits from its members after passing a resolution in its general meeting according to the Rules prescribed and subject to the fulfilment of the specified conditions (section 73(2) of the 2013 Act)

• a company that is eligible to accept deposits from public (i.e. eligible company as defined in the Rules).

The 2013 Act not only regulates the deposits accepted after the commencement of the Act but also the deposits accepted before such commencement.


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Key provisions

Definition of deposits

The definition of deposits when read along with the list of exceptions provided under the Rules to the 2013 Act is much wider than that what was provided in the the Companies Act, 1956 (1956 Act) and its Rules. Various amounts received by a company are now considered as deposits which were earlier excluded from being considered as deposits.

As per the 2013 Act, ‘deposit’ includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include such categories of amounts as have been prescribed in the Rules to the 2013 Act.

The Rules under the 2013 Act, prescribes the categories and items which are not included in the definition of deposits. Unlike as per the exclusion provided in the Rules under the 1956 Act, the rules under the 2013 Act prescribe that amounts received from members and the relatives of directors are deposits even in the case of a private company. Under the 2013 Act, a private company will have to adhere to stricter norms in the case of deposits accepted from its members and it can not accept deposits from relatives of its directors, those would be considered to be public deposits. Further, amounts received towards subscription to any securities, if not allotted within 60 days of receipt, shall be treated as a deposit, if such application money is not refunded to the subscriber within 15 days from the end of 60 days of receipt. However, amounts received from directors continue to be excluded from the ambit of deposits, if such amount is not out of any funds borrowed by the director by way of loan or accepting deposits.

Also, advances received by a company for supply of goods or provision of services shall be considered as deposits if not appropriated against such supply of goods or provision of services within 365 days of acceptance of such deposits. However, security deposits taken for the performance of a contract for supply of goods or provision of services shall not be considered as deposits. Thus, every private company and a non-eligible public company will have to settle the advances against goods or services within 365 days to comply with the provisions of the 2013 Act.

Any amount received from any other company shall continue to be excluded from the definition of deposits. Thus, any advance received from a company, shall not be considered as deposit, even if not appropriated against goods or services within 365 days.

Only an ‘eligible company’ can invite and accept public deposits

A noteworthy provision with regards to acceptance of deposits is that the 2013 Act and the Rules have prescribed certain prerequisites for a public company to invite and accept public deposits. As per the 2013 Act, only an ‘eligible company’ can accept public deposits, it being, a public company having a net worth not less than INR1 billion or turnover of not less than INR5 billion. Further, such public company should have taken a prior consent of the company in a general meeting by way of special resolution. Thus, all public companies can not invite and accept public deposits. Consequently, smaller size public companies not meeting the eligibility criteria would now face limitations in accessing public deposits.

Mandatory repayment of deposits accepted before the commencement of the 2013 Act

One of the most significant obligations imposed by the 2013 Act is that, it requires the companies to repay all the deposits accepted by them before the commencement of the 2013 Act and interest due thereon, within a year from such commencement or when they become due, whichever is earlier. However, the 2013 Act provides that a company can get a relief by way of extension of time for repayment if the Tribunal allows the same, considering the financial condition of the company, on application made by the company to the Tribunal. This provision will help in streamlining the existing deposits as per the regulations of the 2013 Act. However, it might not be an easy task for all companies to comply with this requirement. This could impact the cash flows and liquidity of some companies.

Also, clarification has been provided by way of an explanation in the Rules that in case of a company which has accepted public deposits as per the provisions of the 1956 Act, and its rules, and has been

repaying such deposits and interest thereon in accordance to such provisions, the company need not repay such deposits within a year, if it complies with other requirement of the 2013 Act and Rules and also, if it continues to repay such deposits and interest thereon on due dates for remaining period of such deposits. Thus if a company is an ‘eligible company’ within the meaning of the Rules and complies with other requirements under the 2013 Act and its Rules, it need not repay the deposits accepted by it before the commencement of this Act within one year.

To illustrate this vide an example, if a public company having turnover of less than INR5 bilion and net worth of less than INR1 billion, has accepted deposits which are maturing in 2016, the company will have to repay all the public deposits within a year i.e. before 31 March, 2015 even though it is making repayments of deposits and interest duly, as the company is not an eligible company as per the 2013 Act and Rules there under.

Introduction of deposit insurance

The 2013 Act has imposed a new obligation on companies accepting deposits by compelling the company to provide insurance to the depositor, in respect of both, the principal amount and interest due thereon. However, the 2013 Act provides that the minimum aggregate insurance should not be less than INR20,000 for each depositor. The Rules, however, have allowed a company to accept the deposits without deposit insurance contract till 31 March, 2015. The amount of insurance premium paid on the insurance contracts is to be borne by the company accepting the deposits. This provision is expected to help in protecting the interest of small depositors to a certain extent in case of default by the company.

Cap on interest rates on deposits

The 2013 Act, when read along with the rules, provides that the rate of interest on the deposits accepted should not exceed the maximum rate of interest prescribed by the Reserve Bank of India (RBI) for acceptance of deposits by NBFCs. Rules under the 1956 Act prescribed the ceiling of 12.5 per cent per annum.


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Penal provisions

The 2013 Act provides stringent penal provisions in case of fraudulent invitation and acceptance of deposits. The 2013 Act provides that every officer of the company responsible for the acceptance of deposits shall be personally responsible, without any limitation of liability, if it is proved that such deposits had been accepted with intent to defraud the depositors.

Other relevant provisions

Limits on acceptance of deposits

The 2013 Act and the Rules prescribe limits on acceptance of deposits from members and public. In case of an eligible company other than a government company, the limit for acceptance of deposits from members is capped at 10 per cent of the paid-up share capital and free reserves. Also, the limit for acceptance of deposits from the public is limited to 25 per cent of paid-up share capital and free reserves. A company other than an eligible company can accept or renew deposits from its members upto 25 per cent of paid-up share capital and free reserves. In case of government companies, the limit is extended to 35 per cent of paid-up share capital and free reserves.

Maintenance of liquid assets

Similar to the provisions of the 1956 Act, which required a company to maintain liquid assets by way of making prescribed deposits or investments, the 2013 Act also requires a company to deposit a sum not less than 15 per cent of the deposits maturing during a financial year and before the end of the next financial year in a deposit repayment reserve account with a scheduled bank. The 2013 Act also states that the sum in such account shall not be used for any purpose other than repayment of the deposits.

Creation of security

The Rules under the 2013 Act prescribes that all the deposits accepted from the members in the case of companies under section 73(2) of the 2013 Act and secured public deposits accepted by eligible companies should be secured, to the extent not covered by the deposit insurance, by creating a charge on specified assets excluding intangible assets. Such deposits are secured for the principal amount and interest thereon.

Premature repayment

Similar to provisions of the 1956 Act, the 2013 Act also provides that if the deposit is repaid before its maturity, on request of the depositor, the interest payable on such deposits should be reduced by one per cent except for few conditions like repayment for complying with other rules, etc.

Reporting requirements

The 2013 Act prescribes that every eligible company shall issue a circular containing information like the credit rating, financial position of the company and information related to deposits , etc. This circular shall be issued as an advertisement in an Engilsh and vernacular newspaper and also uploaded on the website of the company. This is expected to bring more awareness amongst the depositors and probable depositors about the financial condition of a company. Also, every company shall file a return annually with the Registrar in a prescribed form with prescribed information relating to deposits accepted by the company.

Duration of deposits

The provisions related to duration of a deposit are similar to those in the 1956 Act. The 2013 Act provides that deposits should not be repayable within six months or after 36 months of acceptance or renewal. However, subject to certain conditions, a company may accept a deposit repayable within six months but not within three months from the date of acceptance or renewal.

Conclusion

The 2013 Act seems to have much more stringent provisions relating to the acceptance of deposits as compared to the 1956 Act. Small public companies and private companies might have to bear the brunt of these new challenges in raising funds because of the strict provisions in the 2013 Act. Also, companies might have to settle some advances to comply with the provisions of the 2013 Act. This might create new challenges for such companies as they might face some unplanned cash outflows. Nonetheless, inclusion of such stern provisions gives the impression that the safety of the depositors has been given the highest priority by the lawmakers. Such provisions could go a long way in helping ensure prompt repayment of deposits and interest thereon to depositors and greater public confidence in such deposits.


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• Describe the newly added 17 principles to the COSO Framework.

Understanding the COSO 2013 Framework

The Committee of Sponsoring Organisations of the Treadway Commission (COSO) had released its integrated framework on internal controls in 1992. This framework was extensively adopted as a basis to test the effectiveness of internal control systems. Due to the changes in the business and operating environment over the past two decades, COSO updated its integrated framework on internal controls to enable organisations to effectively and efficiently develop and maintain systems of internal control.

The COSO Board announced that the 1992 framework will be available until 15 December 2014, post which it will be superseded and replaced by the 2013 Framework. Therefore, all companies with a year end of 31 December 2014 and thereafter would apply the 2013 Framework in their upcoming reporting on internal controls (COSO Framework).

Source: Executive Summary - COSO Internal Control Integrated Framework - 2013

In India, this area has attracted a lot of attention recently on account of the new requirement under the Companies Act, 2013 for companies and auditors to opine on the adequacy and effectiveness of internal controls. The Institute of Chartered Accountants of India (ICAI) is in the process of issuing guidance to the statutory auditors on the audit of internal financial controls. This guidance is expected to consider the requirements of the COSO Framework.

The 2013 Framework does not change the definition of internal controls. Internal control is defined as “Internal control is a process, effected by an entity’s board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting, and compliance”.

Similarly, the five components of internal control - control environment, risk assessment, control activities, information and communication and monitoring activities - continue to remain the same under 2013 Framework. However, there has been one fine change; ‘monitoring’ component has been renamed ‘monitoring activities’. This change is perhaps to highlight the fact that monitoring component is not to be viewed as a single process but as a series of activities undertaken individually and also as a part of the other four components.

The Framework has been enhanced by expanding the financial reporting category of objectives to include other important forms of reporting, such as non-financial and internal reporting. The 2013 Framework sets out 17 principles linked to the above five components that are necessary for effective internal controls. These principles are not completely new and were implicit in the 1992 framework.

COSO 2013 Framework – summary of changes

What is not changing ….

• Core definition of internal control

• Three categories of objectives and five components of internal control

• Each of the five components of internal control are required for effective internal control

• Important role of judgement in designing, implementing and conducting internal control, and in assessing its effectiveness.

What is changing ….

• Updated for changes in business and operating environments

• Emphasis on governance

• Expanded operations and reporting objectives suitable for other purposes

• Implicit fundamental concepts underlying five components codified as 17 principles

• Updated to increased relevance and dependence on IT

• Addresses fraud risk assessment and response.


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Let us consider these 17 formalised principles which are defined under each of the respective components.

Control environment

It is the set of standards, processes and structures that provide the basis for carrying internal control across the organisation. It lays down the tone on the importance of internal controls by the top management including the Board of Directors. The five principles laid down under this component are:

1. The organisation demonstrates a commitment to integrity and ethical values.

2. The Board of Directors demonstrates independence from management and exercises oversight of the development and performance of internal control.

3. Management establishes, with board oversight, structures, reporting lines, and appropriate authorities and responsibilities in the pursuit of objectives.

4. The organisation demonstrates a commitment to attract, develop, and retain competent individuals in alignment with objectives.

5. The organisation holds individuals accountable for their internal control responsibilities in the pursuit of objectives.

Risk assessment

Risk assessment involves a dynamic and iterative process for identifying and analysing risks to achieving the entity’s objectives, forming a basis for determining how risks should be managed. Considering the potential for fraud in the current environment, one of the principles specifically requires management to consider and evaluate the risk of fraud. The four principles laid down under this component are:

6. The organisation specifies objectives with sufficient clarity to enable the identification and assessment of risks relating to objectives.

7. The organisation identifies risks to the achievement of its objectives across the entity and analyses risks as a basis for determining how the risks should be managed.

8. The organisation considers the potential for fraud in assessing risks to the achievement of objectives.

9. The organisation identifies and assesses changes that could significantly impact the system of internal control.

Control Activities

Control activities are the actions established by the policies and procedures and not the policies and procedures themselves. Considering that information technology form a significant part of the control activities, there is a specific principle over adoption of general information technology controls to achieve the objectives of the organisation. The three principles laid down under this component are:

10. The organisation selects and develops control activities that contribute to the mitigation of risks to the achievement of objectives to acceptable levels.

11. The organisation selects and develops general control activities over technology to support the achievement of objectives.

12. The organisation deploys control activities through policies that establish what is expected and procedures that put policies into action.

Information and communication

Information is necessary for the entity to carry out internal control responsibilities in support of achievement of its objectives. Considering the way business is carried out, one of the principles laid out cover the communication with third-party service providers. The three principles laid down are:

13. The organisation obtains or generates and uses relevant, quality information to support the functioning of internal control.

14. The organisation internally communicates information, including objectives and responsibilities for internal control, necessary to support the functioning of internal control.

15. The organisation communicates with external parties regarding matters affecting the functioning of internal control.

Monitoring activities

Ongoing evaluations, separate evaluations, or some combination of the two are used to ascertain whether each of the five components of internal control, including controls to effect the principles within each component, is present and functioning.

16. The organisation selects, develops, and performs ongoing and/or separate evaluations to ascertain whether the components of internal control are present and functioning.

17. The organisation evaluates and communicates internal control deficiencies in a timely manner to those parties responsible for taking corrective action, including senior management and the Board of Directors, as appropriate.

The 2013 Framework presumes that because the 17 principles are fundamental concepts of the five components, all 17 are relevant to all entities. Therefore, if it is noticed that a principle is not present and functioning in the internal controls identified by an organisation, it could signify a material deficiency in their internal control.

The challenges which are being faced by organisations in implementing the 2013 Framework mainly relate to linking the 17 principles with the various controls identified and ensuring that each of the principles are covered in the effective internal controls. Also, it is unclear whether organisations would need to apply the 2013 Framework in the preparation of non-financial information. However, a positive outcome from the refreshed framework is that organisations are once again reviewing the controls identified in detail, which are likely to lead to identification of redundant controls or the identification some other efficient way of achieving control objectives and better quality documentation. For Indian companies that have not previously used or adopted the COSO Framework, the challenges are much larger as, in many cases, the basic level of documentation, identification and testing of controls is not yet embedded into the organisation. The call to work for such companies on this important area is immediate.


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• Provides an overview of the parameters to assess whether investor has significant influence over an investee.

Significant influence


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Significant influence

An investment in an entity can take various forms depending on the level of investment and various rights and obligations attached with the investment. An investor could have an influence on an entity as control, joint control, or significant influence.

While preparing consolidated financial statements under IFRS, when an entity has control over another entity then it applies consolidation standards. Joint control requires use of equity method of accounting. Similarly, significant influence would require use of equity method while investments that do not fall in the above categories are recognised under IAS 39, Financial Instruments: Recognition and Measurement .

In this article, we discuss the parameters to assess when an entity considers if its investment in another entity meets the definition of significant influence.

Under IFRS, IAS 28, Investments in Associates, defines significant influence as “the power to participate in the financial and operating policy decisions of the investee but is not control or joint control of those policies”.

An associate is an entity over which the investor has significant influence. Significant influence may exist over an entity that is controlled by another party. More than one party may have significant influence over a single entity.

According to IAS 28, if an entity holds, directly or indirectly (e.g. through subsidiaries), 20 per cent or more of the voting power of the investee, it is presumed that the entity has significant influence, unless it can be clearly demonstrated that this is not the case. Conversely, if the entity holds, directly or indirectly (e.g. through subsidiaries), less than 20 per cent of the voting power of the investee, it is presumed that the entity does not have significant influence, unless such influence can be clearly demonstrated. A substantial or majority ownership by another investor does not necessarily preclude an entity from having significant influence.

In determining whether an entity has significant influence over another entity, the focus is on the ability to exercise significant influence. It does not matter whether significant influence is actually exercised.

An entity may own potential voting rights e.g. share warrants, share call options, debt or equity instruments that are convertible into ordinary shares, or other similar instruments that have the potential, if exercised or converted, to give the entity additional voting power or to reduce another party’s voting power over the financial and operating policies of another entity. The existence and effect of potential voting rights that are currently exercisable or convertible, including potential voting rights held by other entities, should be considered when assessing whether an entity has significant influence. Potential voting rights are not currently exercisable or convertible when, for example, they can not be exercised or converted until a future date or until the occurrence of a future event.

The standard does not provide any bright line as to when an investor would be considered to have significant influence. There is a presumption that significant influence exists when 20 per cent or more voting power of the investee is held by an investor either directly or indirectly through subsidiaries. At the same time, it is presumed that significant influence does not exist with a holding of less than 20 per cent. The standard allows to rebut these presumption if an entity can demonstrate its ability, or lack of ability, to exercise significant influence.

The assessment of significant influence at border line cases e.g. when the investor holds investment closer to 20 per cent (for example, between 18 to 22 per cent) of voting rights becomes an area which requires careful assessment of facts and circumstances.

The standard also provides qualitative indicators of the existence of significant influence. They are as following:

a. representation on the Board of Directors or equivalent governing body of the investee

b. participation in policy-making processes, including participation in decisions about dividends or other distributions

c. material transactions between the entity and its investee

d. interchange of managerial personnel

e. provision of essential technical information.

In order to assess significant influence an investor should assess all the facts and circumstances i.e. assess the substance of the relationship with the investee. No one factor determines presence or absence of significant influence. It is important to note that board representation should imply meaningful board presence. For example, a group of shareholders having majority ownership who operate without regard to the views of the investor may signify lack of significant influence by investor. Significant influence may be evidenced by a right of veto over significant decisions, influence over dividend or re-investment policies, guarantees of indebtedness, extensions of credit, ownership of warrants, debt obligations or other securities or the relative size and dispersion of the holdings of other shareholders; however, significant influence may exist over an entity that is controlled by another party.


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The MCA rationalises norms relating to consolidated financial statements and internal financial controls system

The Companies Act, 2013 (the Act) was largely operationalised from 1 April 2014. The Ministry of Corporate Affairs (MCA) vide notifications dated 14 October 2014 has amended/clarified provisions relating to:

• the preparation of consolidated financial statements (CFS) by an intermediate wholly-owned subsidiary in India – amended to provide an exemption that an intermediate wholly-owned subsidiary company incorporated in India would not be required to prepare CFS. However, the requirements to prepare CFS remain unchanged for those intermediate wholly-owned subsidiary company whose immediate parent is a company incorporated outside India.

• the preparation of CFS by companies that does not one or more subsidiary but have just an associate or a joint venture – amended to grant a transition period for the financial year commencing 1 April 2014 and ending on 31 March 2015. After 31 March 2015, this relief will not be available.

• reporting on the internal financial control systems by auditors, mandatory for financial years commencing on or after 1 April 2015 – amended to grant a transition period.

• the Schedule III-related disclosures made in stand-alone financial

statements which are not to be repeated in CFS.

The amendments/clarifications are applicable from 14 October 2014.

For an overview of these amendments, please refer to KPMG in India’s First Notes dated 16 October 2014.

(Source: MCA notifications dated 14 October 2014)

The RBI reviews guidelines on joint lenders’ forum and corrective action plan

The Reserve Bank of India (RBI) on 30 January 2014 had released a ‘Framework for Revitalising Distressed Assets in the Economy’ (the Framework) effective from 1 April 2014. The Framework lays down guidelines for early recognition of financial distress, taking prompt steps for resolution, and thereby attempting to ensure fair recovery for lending institutions.

For operationalising the above Framework, the RBI has issued various notifications that provide guidelines on refinancing of project loans, sale of non-performing assets by banks, guidelines on formation of joint lenders’ forum, adoption of corrective action plan and other regulatory measures.

The RBI has received representations from banks and the Indian Banks’ Association stating that difficulties are being faced by them in effective implementation of the Framework. Therefore, on 21 October 2014, the RBI has introduced certain changes in the Framework and its guidelines.

Following are some of the important changes in the Framework and its guidelines:

• Accelerated provisioning would apply only on the bank having responsibility to convene JLF and not on all the lenders in consortium/multiple banking arrangement

• In cases where repayment proceeds not appropriated to lenders as per agreed terms, account in the books of the escrow maintaining bank would have following repercussions:

– it would attract the asset classification which is lowest among the lending member banks

– it would be subject to accelerated provision instead of normal provision and such accelerated provision will be applicable for a period of one year from the effective date of provisioning or till rectification of the error, whichever is later.

• Clarified reporting requirements of cash credit and overdraft accounts

• Banks that they do not wish to commit additional finance will have an exit option only by arranging their share of additional finance to be provided by a new or existing creditor.

For an overview of these changes, please refer to KPMG in India’s First Notes dated 30 October 2014.

(Source: RBI’s circular dated 21 October 2014 – RBI/2014-15/271)

Regulatory updates


Working group on harmonising IRDA corporate governance guidelines and disclosures with the Companies Act, 2013

The Insurance Regulatory and Development Authority (IRDA) has decided to constitute a working group for harmonising IRDA’s corporate governance guidelines and disclosures with the Companies Act, 2013 (2013 Act). The working group will, inter-alia:

• recommend changes, if any, to be made to insurance regulations especially on a) corporate social responsibility b) related party transactions c) financial statements

• undertake comprehensive review of the IRDA’s guidelines on corporate governance especially on a) composition of board and its committees b) provisions relating to independent directors c) appointment and responsibility of directors, auditors, company secretary and other key management personnel d) disclosure and reporting requirements e) provisions relating to remunerations of CEO, managing director/whole-time directors

• undertake comprehensive review of the IRDA’s guidelines on appointment of auditors and on registration, accounting, amalgamation and issuance of capital by insurance companies

• make any other recommendations as it may deem fit.

The group should complete the task within four months from the date of its formation.

(Source: IRDA’s order: IRDA/F&A/CG/ORD/225/10/2014 dated 14 October 2014)

Amendment to Schedule VII of the Companies Act, 2013

Schedule VII of the Companies Act, 2013 list various ‘activities which may be included by companies in their Corporate Social Responsibility Policies’. The MCA has amended Schedule VII to include following additional activities:

• Contribution to the Swach Bharat Kosh set up by the central government for promotion of sanitation

• Contribution to the Clean Ganga Fund set up by the central government for rejuvenation of river Ganga.

The notification comes into force from 24 October 2014.

(Source: MCA notification dated 24 October 2014)

IFRS Convergence: ICAI issues exposure drafts on financial instruments, revenue recognition and first time adoption of Indian Accounting Standards

As part of the initiatives towards India’s convergence with IFRS from 2016-17, the Accounting Standards Board of the Institute of Chartered Accountants of India (ICAI) has recently issued exposure drafts on Ind AS 109, Financial Instruments, Ind AS 115, Revenue from Contracts with Customers and Ind AS 101, First-time Adoption of Indian Accounting Standards.

While the exposure drafts on Ind AS 115 and 109 are in line with the requirements of the corresponding International Financial Reporting Standards (IFRS) (IFRS 9, Financial Instruments and IFRS 15, Revenue from Contracts with Customers), the Ind AS 101 has certain India specific transition requirements such as deemed cost of property, plant and equipment, leases and non-current assets held for sale and discontinued operations etc. from the IFRS 1, First time adoption of International Financial Reporting Standards, as issued by the International Accounting Standards Board.

[Source: Exposure Draft Indian Accounting Standard (Ind AS) 109, Financial Instruments, Exposure Draft Indian Accounting Standard (Ind AS) 115, Revenue from Contracts with Customers and Ind AS 101, First-time Adoption of Indian Accounting Standards as released by the ICAI]

Extension of the Company Law Settlement Scheme and disqualification of directors

In order to grant relief to the companies who had defaulted in filing their annual returns and financial statements within the prescribed time limit, the MCA on 12 August 2014 had decided to introduce Company Law Settlement Scheme, 2014 (scheme) to be effective from 15 August 2014 to 15 October 2014. On consideration of requests received from various stakeholders, the MCA has now extended the scheme up to 15 November 2014.

Further, section 164(2)(a) of the Companies Act, 2013 provides that a person who is or has been a director of a company which has not filed financial statements or annual returns for any

continuous period of three financial years can not be re-appointed as a director of that company or any other company for a period of five years from the date on which the said company fails to do so. Thus, in addition to the above extension of the scheme, the MCA has clarified that for companies who have filed balance sheets and annual returns on or after 1 April 2014 but before the scheme became effective i.e. 15 August 2014, the disqualification under the aforesaid section will apply only for prospective defaults, if any, by such companies.

(Source: MCA’s General circular No. 40/2014 dated 15 October 2014 and General circular No. 41/2014 dated 15 October 2014)

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SEBI (Share Based Employee Benefits) Regulations, 2014

On 28 October 2014, the Securities and Exchange Board of India (SEBI) has notified Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014 (regulations). These regulations replace the existing SEBI (Employee Stock Option Scheme and Employee Stock purchase Scheme) guidelines, 1999 (erstwhile guidelines). The regulations will become applicable from the date of their publication in the Official gazette (28 October 2014). Following are the key highlights of the regulations:

As compared to the erstwhile guidelines, the new regulations are also applicable to a) stock appreciation rights schemes b) general employee benefits schemes c) retirement benefit schemes in addition

to employee stock option schemes and employee stock purchase schemes.

The regulations contain detailed requirements in case of implementation of schemes through trusts for example:

– minimum provisions to be included in the trust deed

– appointment of trustees

– voting by trustees

– requirements for secondary acquisition of shares by the trust, etc.

The requirement of composition of compensation committee has been aligned with that of the Companies Act, 2013.

Additional items requiring shareholders’ approval have been specified including secondary acquisition for implementation of the schemes and secondary acquisition by the trust in case the share capital

expands due to capital expansion undertaken by the company.

The regulations provide that any company implementing any of the share base schemes should follow the requirements of the ‘Guidance Note on accounting for employee share based payments’ or accounting standards as may be prescribed by the Institute of Chartered Accountants of India, including disclosure requirements prescribed therein.

The regulations have specified provisions to transition to the regulations.

(Source: SEBI (Share Based Employee Benefits) Regulations, 2014 as issued by SEBI on 28 October 2014)


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The RBI reviews guidelines on joint lenders’ forum and corrective action plan

The Reserve Bank of India (RBI) on 30 January 2014 had released a ‘Framework for Revitalising Distressed Assets in the Economy’ (the Framework)

effective from 1 April 2014. The Framework lays down guidelines for early recognition of financial distress, taking prompt steps for resolution, and thereby attempting to ensure fair recovery for lending institutions.

For operationalising the above Framework, the RBI has issued various notifications that provide guidelines on refinancing of project loans, sale of non-performing assets by banks, guidelines on formation of joint lenders’ forum, adoption of corrective action plan and other regulatory measures.

The RBI has received representations from banks and the Indian Banks’ Association stating that difficulties are being faced by them in effective implementation of the Framework. Therefore, on 21 October 2014, the RBI has introduced certain changes in the Framework and its guidelines.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.


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Introducing IFRS Notes

IFRS Convergence: ICAI issues exposure drafts on financial instruments and revenue recognition

As part of the initiatives towards India’s convergence with IFRS from 2016-17, the Accounting Standards Board of the Institute of Chartered Accountants of India has recently issued exposure drafts on Ind AS 109, Financial Instruments (ED on financial instruments) and Ind AS 115, Revenue from Contracts with Customers (ED on revenue).

These exposure drafts are in line with the requirements of the corresponding International Financial Reporting Standards (IFRS) (IFRS 9, Financial Instruments and IFRS 15, Revenue from Contracts with Customers), the International Accounting Standards Board has recently issued.

In this issue of IFRS Notes, we have provided an overview of these exposure drafts along with key impact areas.

October 2014

The October 2014 edition of the Accounting and Auditing Update provides insights into the microfinance sector in India and its distinct story of a turnaround, continuing challenges and

opportunities.

We cover an article on the Companies Act, 2013 – reporting on internal financial controls and highlight some of the critical aspects of these requirements. This month we have covered some additional perspectives on related party transactions.

This issue also covers recent changes to the tax audit report and key accounting and reporting issues associated with the foreign direct investment in the retail cash and carry sector.

As is the case each month, we cover key regulatory developments during the recent past including a summary of the proposed amendments to Ind AS relating to carve-outs/ins from IFRS.

KPMG in India is pleased to present Voices on Reporting – a monthly series of knowledge sharing

calls to discuss current and emerging issues relating to financial reporting.

On September 24, 2014 we covered two topics:

1. Amendments relating to tax audit reports in India: There are a number of significant amendments to the Form No. 3CD Due to the amendments made in the Form No. 3CD, the reporting responsibilities of the assessee and the auditor have increased considerably.

2. Recent amendments to the clause 49 of the Equity Listing Agreement: To address the concerns industry associations, companies and other market participants and to help the listed companies to ensure compliance with the provisions of the revised clause 49, the Securities and Exchange Board of India (SEBI) vide circular dated 15 September 2014 has amended some of the requirements of the revised clause 49.

In our call, we discussed these amendments and developments.

Feedback/Queries can be sent to [email protected]

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KPMG Accounting and Auditing Update - November 2014