assurance update march 2019 - pwc

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.
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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%
(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.
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.
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
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.
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
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
S. No.
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.
S. No.
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.
S. No.
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.
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
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.
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.
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.
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
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.
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.
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.
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.
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

assurance update march 2019 - pwc

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