Investment Valuation in India

Finally India is all set to adapt to IFRS through its revised set of Accounting Standards (Ind AS) which are the converged accounting standards with IFRS starting next year. The Ministry of Corporate Affairs (MCA) has issued a notification dated 16 February 2015 announcing the Companies (Indian Accounting Standards) Rules, 2015 for the applicability of the IndAS in a phase wise manner. The applicability has been liked to the Net Worth and listing status of the companies. Starting 1-Apr-2016 all companies having a Net Worth of Rs 500 crore or more will be required to present the Financial Statements under Ind AS. This will also require comparative Ind AS information for the period of 1-Apr-15 to 31-Mar-16. [Net Worth: Net Worth will be determined based on the standalone accounts of the company as on 31-Mar-14 or the first audited period ending after that date. Net Worth calculation would be as per Sec 2(57) of Companies Act 2013 which means: Paid Share Capital...

Section 180 of the Companies Act, 2013 corresponds to section 293 of the companies Act, 1956 . Section 293 of the Companies Act, 1956 was applicable only to public companies i.e. private limited companies were exempted from this requirement and therefore they could borrow any sums of money up to any limit without the need of seeking any approval from the members of the company. Now, Section 180 is applicable to all companies i.e. public as well as private. So now onwards even private companies have to seek the approval of their members if they are intending to borrow monies in excess of their paid up share capital and free reserves.  According to section 180(1)(c) – The Board of directors of a company shall exercise the following power only with the consent of the company by a Special Resolution (SR): Borrowing of money if – Money already borrowed, together with moneys proposed to be borrowed will exceed the aggregate of paid-up share capital and free rese...

REPORTING OF FRAUD BY AN AUDITOR [Section 143(12) to (15) of the Companies Act, 2013] The Companies (Amendment) Bill 2014 was passed by Lok Sabha on December 17’14. According to the amendment, “the auditor would be required to report fraud to the Government above the mandated threshold limit. Any fraud below the threshold limit would have to be reported to the Audit Committee (AC) / Board .” Further, the amendment also provides for the companies whose auditors have reported frauds under this sub-section to the AC or the Board but not reported to the Central Government (CG), shall disclose the details about such frauds in the Board’s report . The threshold limit has not been defined. Time and manner of reporting The auditor shall immediately report the matter to CG within such time and in such manner as may be prescribed i.e. according to Rule 13. No liability of auditor An auditor shall not be deemed to be guilty for breach of any of his duties by reason of his...

Restrictions and legal requirements : No company shall enter into an arrangement by which- (a) a director of the company or its holding, subsidiary or associate company or a person connected with him acquires or is to acquire assets for consideration other than cash, from the company; or (b) the company acquires or is to acquire assets for consideration other than cash, from such a director or person so connected, unless prior approval for such arrangement is accorded by a resolution of the company in general meeting (GM) and if the director or connected person is a director of its holding company, approval shall also be required to be obtained by passing a resolution in GM of the holding company. Requirements of notice: The notice for approval of the resolution by the company or holding company in GM shall include the particulars of the arrangement along with the value of the assets involved in such arrangement duly calculated by a registered valuer. Effects of contravent...

Removal of auditor before expiry of his term [Section 140(1)] Resolution: Such removal requires a special resolution (SR) . Approval : Previous approval of Central Government (CG) must be obtained.                 Procedure for obtaining approval of CG and passing SR (Rule 7): Ø   An application shall be made to CG in Form ADT-2. The application shall be accompanied with the prescribed fees. Ø   The application shall be made to CG within 30 days of passing of the Board resolution (BR). Ø   The company shall hold the general meeting (GM) within 60 days of receipt of approval of CG for passing of the SR. Opportunity of being heard : Before taking any action for removal, the auditor shall be given a reasonable opportunity of being heard. Resignation by Auditor [Section 140(2) and 140(3)] When an auditor resigns, he is required to file a Statement in the prescribed form. ...

Eligibility for an individual An individual shall be eligible for appointment as an auditor of a company only if he is a chartered accountant (C.A). Eligibility for a firm *   A firm shall be eligible for appointment as an auditor of a company only if majority of its partners practicing in India are qualified for appointment i.e. they are C.A’s. *   Where a firm including a limited liability partnership (LLP) is appointed as an auditor of a company, only the partners who are C.A’s shall be authorized to act and sign on behalf of the firm. Disqualifications of Auditor [Section 141(3)] a) A body corporate other than a LLP. b) An officer or employee of the company.  c) A person who is partner or who in the employment, of an officer or employee of the company. d) A person who or his relative or partner *   is holding any security in the company or its subsidiary or of its holding or associate company or subsidiary of such holding company. I...

Section 202 of the Companies Act, 2013 deals with Compensation for loss of office of managing director (MD) or whole-time director (WTD) or manager Reasons for payment of compensation: (a) for loss of office; or (b) as consideration for retirement from office; or (c) in connection with such loss or retirement. Compensation can be paid only to : (a) MD; or (b) WTD; or (c) Manager. Amount of compensation: Permissible period: Lower of- Ø   The unexpired tenure of directorship; or Ø   3 years. Basis: ‘ Average remuneration’ actually earned during- Ø   3 years immediately preceding the date of cessation of office; or Ø   Such shorter period for which the director has held his office. Prohibition of compensation in certain cases: (a) reconstruction or amalgamation of company takes place. As a result of such reconstruction or amalgamation, the director resigns from the company, but is appointed as MD or manager or any oth...

The Lok Sabha, the lower house of the Parliament, has passed the Companies (Amendment) Bill, 2014, which will make it easier for corporates to do business and to ensure severe punishment for illegal money pooling activities, among other things. The amendments have been proposed in order to address some concerns raised by stakeholders. The major concerns raised by the stakeholders included protecting confidentiality of board resolutions, as well as the provision of auditors being required to report suspected frauds at the companies audited by them. Under the new norms, frauds beyond a certain threshold would need to be mandatorily reported by the auditors to the government, while cases below this threshold will be reported to the audit committee of the company’s board. Also, the corporates have been exempted from the need of obtaining approvals of shareholders in the case of related party transactions valued lower than Rs. 100 or 10 percent of net worth. As per the ...

The provisions related to rotation of auditor are applicable to those companies which are prescribed in Companies (Audit and Auditors) Rules, 2014, which prescribes the following classes of companies excluding one person companies and small companies , namely: (a) all unlisted public companies having paid up share capital of rupees ten crore or more ; (b) all private limited companies having paid up share capital of rupees twenty crore or more ; (c) all companies having paid up share capital of below threshold limit mentioned in (a) and (b) above, but having public borrowings from financial institutions, banks or public deposits of rupees fifty crores or more . As per section 139(2) of the Companies Act, 2013, no listed company or a company belonging to such class or classes of companies as mentioned above, shall appoint or re-appoint- (a) an individual as auditor for more than one term of 5 consecutive years; and (b ) an audit firm as auditor ...

According to Companies Act, 2013, no person including any director or key managerial personnel (KMP) of a company shall enter into insider trading.  However, as usual, n othing contained shall apply to any communication required in the ordinary course of business or profession or employment or under any law. Meaning of ‘insider trading’- a) An act of subscribing, buying, selling, dealing or agreeing to subscribe, buy, sell or deal in any securities by any director or KMP or any other officer of a company either as principal or agent if such director or KMP or any other officer of the company is reasonably expected to have access to any non-public price sensitive information in respect of securities of company, or b) An act of counselling about, procuring or communicating directly or indirectly any non-public price sensitive information to any person. Price Sensitive Information refers to  any information which relates, directly or indirectly, to a c...

Sec 42 of the Companies Act 2013 talks about PRIVATE PLACEMENT and SHARE APPLICATION AND ALLOTMENT. The section will have huge impact on a number of private companies who have been exploiting the share applications and transfers. Private Placement offer for maximum 200 persons in a financial year; Special resolution to be passed at a Members General Meeting for each offer; Issue Price justification required in Explanatory Statement to the Notice of Meeting; Minimum share application from each person to be Rs.20,000/- face value of shares; Fresh offer not allowed until allotment of previous offer completed; Share application Money cannot be received in cash; Separate bank account should be operated for receipt of share application money; Share Application money cannot be utilized for any purpose other than allotment; Allotment to be made within 60 days of receipt of share application money, or else to be refunded within 15 days of expiry of 60 days; In case of delay in r...

The financial statements would include Cash Flow Statements and A Statement of Changes in Equity. Sec 2(40) of the Companies Act defines Financial Statements as follows: “ financial statement ” in relation to a company, includes— (i) a Balance Sheet as at the end of the financial year; (ii) a Profit and Loss Account, (Income and Expenditure Account for not-for-profit companies) for the financial year; (iii) Cash Flow Statement for the financial year; (iv) a Statement of Changes in Equity, if applicable; and (v) any explanatory note annexed to, or forming part of, any document referred to in sub-clause (i) to sub-clause (iv): One Person Company, Small Company, Dormant Company are NOT required to prepaare Cash Flow Statement. Sec 2(85) defines Small Companies as: ‘‘small company’’ means a company, other than a public company,— (i) Paid-Up Share Capital does not exceed Rs 50 Lakhs   [or such higher amount as may be prescribed which shall not be more than ...

Sec 130 of the Companies Act 2013 prescribes that a company may apply to the Central Government / SEBI / Income Tax authorities or any other statutory regulatory body to re-open and re-cast the financial statements if: a) the relevant earlier accounts were prepared in fraudulent manner or b) the affairs of the company were mismanaged in the relevant period, casting a doubt on the reliability of financial statements If the competent court or tribunal passes an order to re-open and recast the financial statements, the company may do so. The accounts so revised or recast shall be final. #CompaniesAct2013

Sec 12 (3) of the Companies Act 2013 prescribes that every company shall...  ( a ) paint or affix its name, and the address of its registered office, and keep the  same painted or affixed, on the outside of every office or place in which its business is  carried on, in a conspicuous position, in legible letters, and if the characters employed  therefor are not those of the language or of one of the languages in general use in that  locality, also in the characters of that language or of one of those languages; ( b ) have its name engraved in legible characters on its seal; ( c ) get its name, address of its registered office and the Corporate Identity  Number  (CIN) along with telephone number, fax number, if any, e-mail and website addresses,  if any, printed in all its business letters, billheads, letter papers and in all its notices and  other official publications; and ( d ) have its name printed on  hundies , promissory not...

The importance of internal audit has been well acknowledged in Companies (Auditor Report) Order, 2003 (CARO 2003), pursuant to which auditor of a company is required to comment on the fact that the internal audit system of the company is commensurate with the nature and size of the company’s operations. However, CARO 2003 did not mandate that an internal audit should be conducted by the internal auditor of the company. CARO 2003 acknowledged that an internal audit can be conducted by an individual who is not in appointment by the company. The 2013 Act now moves a step forward and mandates the appointment of an internal auditor who shall either be a chartered accountant (CA) or a cost accountant (CMA), or such other professional as may be decided by the Board to conduct internal audit of the functions and activities of the company. The class or classes of companies which shall be required to mandatorily appoint an internal auditor as per the draft ...

A Reserve may be defined as a sum set aside out of the business profits of a business unit. It is set aside with a view to providing for unexpected or unknown future losses or for strengthening the overall financial position of the unit. The reserves represent undistributed profit of the business so it is also classified under Retained Profits. It is an example of Appropriation of profits and appears under the Liabilities (or Application of Funds) in the Balance Sheet. Since it is created after ascertaining net profits, it effectively does not reduce the profits of the business. Objectives The main purpose of creating Reserves is to stabilise the financial position of the business. The main objectives are: To strengthen the financial position of the business To increase the amount of working capital To meet future contingencies To acquire a asset for the business at a later date To meet any unknown liability or loss Types Reserves are broadly class...

Interim Budget 2014 Highlights Fiscal Deficit for 2013-14 at 4.6 percent of GDP Revenue Deficit for 2013-14 at 3.3 percent The current account deficit (CAD) projected to be at USD 45 billion in 2013-14 down from USD 88 billion in 2012-13. WPI inflation down to 5.05 percent and core inflation down to 3.0 percent in January 2014. Food inflation down to 6.2 percent from a high of 13.8 percent GDP growth Q3 and Q4 of FY 14 expected at 5.2 percent and that for FY 2013-14 estimated at 4.9 percent Through the Direct Benefit Transfer (DBT) Scheme, a total of Rs 628 crore (54,20,114 transactions) has been transferred directly to the beneficiaries till 31st January 2014 under 27 Schemes. Excise Duty Item Description Old Rate (Excise) New Rate (Excise) Notes Small Cars, Motorcycle, Scooters and commercial vehicles 12% 8% Applicable till 30-Jun-14 SUVs 30% 24% Applic...