Saturday, February 27

IND AS103 Business Combination



Business Combination
The term ‘business combination’ in Ind AS 103 is a broader term than ‘amalgamation’. It is defined as a transaction in which an acquirer obtains control of one or more businesses. An acquirer may obtain control in a number of ways including, for example, by transferring cash or other assets, incurring liabilities, issuing equity instruments or without transferring consideration. There is a presumption of control if an entity owns more than 50% of the equity shareholding in another entity, though this may not always be the case.

Business
Ind AS 103 defines a business as an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participants. A business generally consists of inputs, processes applied to those inputs and the ability to create outputs.

For Example, R Ltd. acquires a group of assets of E Ltd. including the procurement system. R Ltd. also offers employment to E Ltd.’s employees and R Ltd. plans to integrate the acquired plant into its existing accounting and human resources. The acquisition by R Ltd. will constitute to be a business because it contains all of the inputs and processes necessary for it to be capable of creating output to provide return in future. Although the administrative systems (accounting and human resources) of E Ltd. are not acquired by R Ltd., the acquired plant will be integrated into existing system of R Ltd. Since all the acquired group of assets is a business, the acquisition is accounted for as a business combination.

Business combinations occur in a variety of structures. IndAS 103 focusses on the substance of the transaction, rather than the legal form. The determination of whether the activities and assets acquired constitute a business at the acquisition date is made from the view of a market participant, rather than based on how they were used by the seller or how they might be used by the specific acquirer. Therefore, it is not relevant whether the seller operated the set as a business or whether the acquirer intends to operate it as a business.
In most cases, it will be straightforward to determine whether the acquired set of activities and assets constitutes a business. However, in some cases careful analysis of the specific facts and circumstances and the application of judgement will be required. The overall result of a series of transactions is considered if there are a number of transactions among the parties involved. For example, any transaction contingent on the completion of another transaction may be considered linked. Judgement is required to determine when transactions should be linked.

Accounting method
All business combinations within Ind AS 103’s scope are accounted for using the Acquisition Method. The acquisition method views a business combination from the perspective of the acquirer and can be summarised in the following steps:

  •       Identify the acquirer
  •       Determine the acquisition date
  •       Recognise and measure the identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquiree
  •       Recognise and measure the consideration transferred for the acquiree
  •       Recognise and measure goodwill or a gain from a bargain purchase (as capital reserve)

Identifiable Assets: The acquiree’s identifiable assets (including intangible assets not previously recognised), liabilities and contingent liabilities are generally recognised at their fair value (as per Ind AS 113).

Non-Controlling Interest: If the acquisition is for less than 100% of the acquiree, there is a non-controlling interest. The non-controlling interest represents the equity in a subsidiary that is not attributable directly or indirectly to the parent. The acquirer can elect to measure the non-controlling interest at its fair value or at its proportionate share of the identifiable net assets. [Currently, ‘Minority Interest’ arising on consolidation is measured at proportionate share in the book values of the net assets of the subsidiary].

Consideration: The consideration for the combination includes cash and cash equivalents and the fair value of any non-cash consideration given. Any equity instruments issued as part of the consideration are fair valued. If any of the consideration is deferred, it is discounted to reflect its present value at the acquisition date, if the effect of discounting is material. Consideration includes only those amounts paid to the seller in exchange for control of the entity. Consideration excludes amounts paid to settle pre-existing relationships, payments that are contingent on future employee services and acquisition related costs.
Contingent Consideration: Contingent Consideration is a portion of the consideration may be contingent on the outcome of future events or the acquired entity’s performance. Contingent consideration is also recognised at its fair value at the date of acquisition.







Goodwill: Goodwill is recognised for the future economic benefits arising from assets acquired that are not individually identified and separately recognised. Goodwill is the difference between the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets acquired. If the non-controlling interest is measured at its fair value, goodwill includes amounts attributable to the non-controlling interest. If the non-controlling interest is measured at its proportionate share of identifiable net assets, goodwill includes only amounts attributable to the controlling interest–that is, the parent.

Goodwill = Consideration Transferred + Non Controlling Interest in the acquiree – Fair Value of Net Identifiable Assets

Goodwill is recognised as an asset and tested for impairment annually or more frequently if there is an indication of impairment.

Capital Reserve: In some cases such as a distress sale, acquisition may result in a gain rather than goodwill. Before recognising a gain on a bargain purchase, Ind AS 103 requires the acquirer to reassess whether it has correctly identified all of the assets acquired and the liabilities assumed. If there is gain even after such reassessment, Ind AS requires such gains to be recognised either through Other Comprehensive Income (OCI) and then accumulation in equity as Capital Reserve or directly in the Capital Reserves. [IFRS requires that the excess of the fair value of the identifiable net assets over the consideration paid should be recognised in the profit and loss account]

Common Control: For business combinations between entities that are under common control, there is specific guidance included in Ind AS 103. Such business combinations are accounted for using the pooling of interests method. [Common control business combination is not covered under IFRS 3]. Under the pooling of interests method:
  •    All assets and liabilities of the acquiree are reflected at their previous carrying values in the books of the acquirer.
  •    No adjustments are made to reflect any fair values, nor are any new assets recognised.
  •    The only adjustment permitted is the adjustment towards uniform accounting policies.



Wednesday, February 24

Chasing Abnormal Returns or Alpha

Despite efficient markets which provide normal returns in the long run, active fund managers and capital market participants such as investors and traders often seek abnormal returns. Given the large pool of securities, market often 'misprices' some securities which provide opportunities to these fund managers to generate abnormal returns.

This abnormal return is known as Alpha Return.

The amount by which the investment is mispriced by the market becomes part of the total return expected by the manager over the holding period of investment. 

We call it ex-ante Alpha and is given by:

ex-Ante Alpha = Expected Return - Required Return
Note that we use various models to calculate the Required return such as Capital Asset Pricing Model (CAPM) ans represents a fair return expected on similar assets with similar risks.

Example:
Now Let's see how can we calculate the Expected Return.
For example, if an Analyst believes that a security which is currently priced at Rs 80 which should be actually priced at Rs 95 [i.e. it is undervalued by Rs 45]. This should be normalised within a year and the stock should be trading at its fair value in a year. Further, there should be a price appreciation of Rs 5 during this period. In this case, the Expected Return should be

Expected Return = [(95 - 80) + 5] / 80 = 25%
If the Required Rate of Return calculated using any of the methods (e.g. CAPM or APT) is 12%, the Alpha Return would be 25% - 12% = 13%


On a similar note, Managers calculate ex-Post Alpha whcih is given by:
Ex-Post Alpha = Historical Holding Period Return - Historical return on similar assets


Sunday, February 21

All you wanted to know about One Person Company (OPC) under Companies Act 2013

The Companies Act 2013 has promoted structured business organisation even for individuals. Why run an uncontrolled, unregulated sole proprietorship business when you can be guided and recognised by an Act?

Even if you are an individual, you can now create and run a company under Companies Act 2013 - a ONE PERSON COMPANY. 

Section 2(62) defines One Person Company as a company which has only one person as a member.

Here are some things that you should know about One Person Company:
  • One Person Company (OPC) is a private company
     
  • The said member (shareholder) should be a natural person.
  • The words “One Person Company” shall be mentioned in brackets below the name of the company, wherever it is printed, affixed or engraved [Section 12(3) second proviso].
  • The memorandum of OPC shall indicate the name of the person who shall become the member of the company in the event of the death of the subscriber. The name of such person can also be changed by the member [Section 3(1)(c) first proviso].
  • No person shall be eligible to incorporate more than one OPC or become nominee in more than one such company.
  • No minor shall become member or nominee of OPC or can hold shares with beneficial interest.
  • The OPC shall not be required to hold annual general meeting [Section 96(1)].
  • The financial statement of a OPC may not include the cash flow statement [Section 2(40)] proviso.
  • Where there is only one director on the Board of directors of a OPC, for any business required to be transacted at a meeting of the Board of directors of the OPC, it shall be sufficient if the resolution is entered in the minutes book and signed and dated by such director. Such date shall be deemed to be the date of the meeting of the Board of directors for all purposes under the Act [Section 122(4)].
  • The provisions of Section 98 and Sections 100 to 111 (both inclusive) dealing with meetings of members do not apply to a OPC.

What is an Associate Company under Companies Act 2013?

Under Companies Act 2013, an Associate Company, in relation to another company, means a company in which that other company has a significant influence.

- “Significant Influence” means control of at least 20%. of total share capital, or of business decisions under an agreement;
 - Associate Company is NOT a Subsidiary Company
 - It includes a Joint Venture Company irrespective of the shareholding

Further, Control includes:
 - right to appoint majority of the directors or
 - to control the management or
 - policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders’ agreements or voting agreements or in any other manner.

Monday, January 11

Companies Act 2013 - Capital required for formation of company

In its drive to improve the ease of doing business, The Companies (Amendment) Act 2015 has made some sweeping changes.

One of such change is the omission of minimum capital requirement for starting a business in company form.

The requirement of having a minimum paid up share capital has been done away with. Going forward, a Private Company would not be required to have a paid up share capital of Rs 1 Lakh. Accordingly, a Public Company would not be required to have a paid up share capital of Rs 5 Lakh.


Wednesday, December 30

Employee Stock Option Plans (ESOP)



Employee Stock Option Plans (ESOPs) also known as Equity Incentive Plans is one the commonly used compensation tools by companies. Organisations offer ESOPs to their employees as part retention strategies. Some of the other key drivers for implementing ESOPs are wealth creation for employees, enabling high performance, and instilling a feeling of ownership for the organization amongst employees.

What is ESOP?
An ESOP is a right to buy shares of the employer company at a pre-determined price. Organisations often grant their key employees an option under the plan that confers a right, but not an obligation, on the employee to buy the shares of their company. Stock options are subject to vesting, requiring continued service (and sometimes performance) over a specified period of time. Upon vesting of options, employees can exercise them to get shares, by paying the pre-determined exercise price.

ESOPs can be an important tool for both attracting and retaining good talent in an organisation. It is important to ensure that the ESOP is financially attractive for employees, tax friendly, simple to understand and administer and compliant with various regulatory requirements.
Companies engage consultants to draft an appropriate Employee Stock Option Plan, ensuring that it is compliant with the relevant provisions of income tax, corporate laws, listing requirements (under SEBI), foreign exchange regulations (wherever applicable) etc.

A retention tool
ESOPs come with a lock in period also known as Vesting period which ensures that employees stick around in the company for long. There are numerous examples where employees who stayed longer with companies in their growing phase were rewarded with handsome gains based on their ESOPs.

Ownership of Employees
Since the ESOPs entail giving shares of the company to the employees, employees become better performers (at least theoretically!) as they aim at increasing the performance of their ‘own company’ since they are the potential shareholders (owners!).

Save Cash, Reward higher
Companies plan their cash outflow by giving away ESOPs instead of cash incentives to the better performers. This saves them a lot of cash and also motivates the employees.

TAXATION OF ESOPS

At the time of Granting ESOPs: No tax implication

At the time of Exercising ESOPs: The benefits arising on ESOP’s are taxed as Perquisites in the hands of the employee and form a part of the employee’s salary income. The employer is also required to deduct TDS in respect of such perquisite. The perquisite value is computed as the difference between the Fair Market Value (FMV) of the share on the date of exercise and the Exercise price.
Specific valuation rules apply in case of listed and unlisted companies. Unlisted companies are required to determine the FMV by a Category I Merchant Banker registered with SEBI.

At the time of Sale of Shares: The gains arising on the sale of ESOP’s by the employees are considered to be Capital Gains and accordingly attract Capital Gains tax. Tax is liable to be paid in the year in which such ESOP’s are sold. The Capital Gain is computed as the difference between the sale price and the FMV on the date of exercise.


While ESOPs have been in vogue for quite some time as an employee retention tool, it is just a piece of paper if the company doesn’t list on a recognized stock exchange or unless there is a strategic sale of company’s shares where the employees may be allowed to sell their stakes as well. 

Friday, November 13

The magic of how learners remember

I often come across students and training participants who regret that they can't remember the things they are studying or things that have been discussed during the training.

This article appeared on LinkedIn. Read Full Article here

Sunday, October 25

Investment Constraints

There are various constraints that we come across while making investment decisions. Some of them are:

Liquidity: 
Liquidity constraints refer to the need of the investor to convert quickly into cash at a price that is closer to the fair market value of the investment. Usually, if an investor purchases a long term asset such as real estate, these are termed as illiquid assets as it usually takes longer to sell such assets and get cash. In case of immediate need for cash, one may have to sell such illiquid assets at an unfavourable price.
On the other hand, marketable securities such as Money Market Funds are termed as liquid assets which can be sold and converted into cash almost any time.


Investment Horizon:
Investment Horizon (also known as Time Horizon) refers to the planned time between making an investment and redeeming such investments. A person (e.g. at the age of 25) would usually have a longer investment horizon if he plans to investment for retirement, daughter's marriage etc.

Monday, August 17

Valuation Updates - Visa invests in Stripe

Here are some valuation updates that have been reported in the global media.

Stripe
Payments services startup Stripe, founded by brothers Patrick and John Collison has taken another round of funding from Visa. The companies enables the apps and online stores to take payments from anybody, anywhere. It works with online companies that accepts payments through Credit cards while being totally invisible to end users.

Visa has bought a stake in Stripe that values the company at $5 Billion and will leverage on Stripe's technical expertise to work on new kinds of digital payments. This is at a time when Visa is facing competition from organisations which are more mobile friendly when it comes to digital payments. On the other hand, Stripe will leverage on Visa's security systems to protect the users' financial information.   

Wednesday, July 29

Valuation Ratios

Valuation Ratios help us value a company in the simplest manner. This method of valuing companies is also called Relative Valuation. A valuation ratio is a measure of how cheap or expensive a security (or business) is, compared to some measure of profit or value. A valuation ratio is calculated by dividing a measure of price by a measure of value, or vice-versa.

The point of a valuation ratio is to compare the cost of a security (or a company, or a business) to the benefits of owning it.

The most widely used valuation ratio is the PE ratio which compares the cost of a share to the profits made for shareholders per share.

The EV/EBITDA compares price to profits, but in a somewhat more complex manner. It compares the cost of buying the businesses of a company free of debt, to profits. Because someone buying a company free of debt would no longer have to pay interest, the profit measure used changes to profit before interest. It is also adjusted for non-cash items.

Price/book value compares a share price to the value of a company's assets. This ratio is generally only important for certain sectors, such as property holding companies and investment trusts. This is because investors buy shares for the cash flows they will generate, and because asset values shown in the accounts usually reflect the accrual principle rather than real economic value.

Similarly there are various other valuation ratios that have evolved over time.

The most theoretically correct way in which to value securities is to use a discounted cash flow. So why do investors and valuers rely so much on valuation ratios? One advantage of valuation ratios is that they are a lot simpler. The uncertainties around the numbers used for a discounted cash flow means that it may not be any better in practice.


It is also possible to regard valuation ratios as a quick equivalent to a discounted cash flow. Suppose one is comparing companies in the same sector, and they are broadly similar businesses with very similar risks and the same expected rates of cash flow growth. In that case a price/FCF will show the same companies as being relatively cheap and expensive as a free cash flow DCF valuation will. 

Friday, May 29

Coupon Rate

A bond carries a specific rate of interest which is also called the Coupon Rate.

For example, if the Face Value of the bond is Rs 100 and the bond is issued at 8% coupon rate, the Interest would be calculated on the Face Value of the bond. That is, annual interest would be
Rs 100 x 8% = Rs 8 per annum.


Generally, the bonds may be issued or traded at a Par (Face Value), at a premium or at a discount to Face Value.

Interest paid would be tax deductible for the issuer.

Face Value of a Bond

The Face Value of a Bond is the stated value on the face of the bond and is also known as Par Value. It represents the amount of borrowing by the firm which it specifies to repay after a specific period of time i.e. at the time of maturity.

For example, if the Face Value of the bond is Rs 100 and the bond is issued at 8% coupon rate, the Interest would be calculated on the Face Value of the bond. That is, annual interest would be
Rs 100 x 8% = Rs 8 per annum.

Generally, the bonds may be issued or traded at a Par (Face Value), at a premium or at a discount to Face Value.

Tuesday, April 21

IFRS convergence is finally here 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 + Reserves (out of profits i.e. excluding Reserves out of Revaluation of Assets, depreciation write-backs and Amalgamation) + Securities Premium - Accumulated Losses - Deferred Expenditure - Miscellaneous Expenditure not written off]

Starting 1-Apr-2017, Listed companies as well as others with a net worth equal to or exceeding Rs 250 crore will also have to adopt Ind AS. 

Important Notes:
- The Ind AS will also apply to subsidiaries, joint ventures, associates as well as holding companies of the entities covered by the roadmap.
- An overseas subsidiary, associate or joint venture of an Indian company is not required to prepare its stand-alone financial statements as per the Ind AS, and instead, may continue with its jurisdictional requirements. However, these entities will still have to report their Ind AS adjusted numbers for their Indian parent company to prepare consolidated Ind AS accounts
- Ind AS will apply to both consolidated as well as standalone financial statements of a company.


Friday, February 6

Companies Act 2013: Borrowing Powers


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 reserves

*  ‘Temporary loans’ obtained from company’s bankers in the ordinary course of business are not considered as borrowings.

*  ‘Temporary loans’ means:
-        loans repayable on demand; or
-        loans repayable within 6 months of the date of the loan.

*  However, ‘temporary loans’ does not include loans raised for financing capital expenditure.

*  If the Board borrows money in excess of the limits imposed under section 180(1)(c)
of the Companies Act, 2013 shall not be valid and effectual against the company, unless the lender proves that –

(a) he lent the money in good faith; and

(b) he lent the money without having any knowledge that the limit imposed under section 180(1)(c) of the Companies Act, 2013 had been exceeded.

*  SR passed by the members shall specify the total amount upto which moneys may be borrowed by the Board.


*  If SR passed by the members does not specify the maximum amount which can be borrowed by the Board, SR shall be void.

Contributed by Shruti Agarwal

Thursday, January 15

Companies Act 2013: Fraud Reporting by Auditor

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 reporting any matter to CG if such reporting is done in good faith.

Provisions applicable to other auditors    
The provisions w.r.t reporting of fraud shall mutatis mutandis apply to-
ü  The cost accountant in practice conducting cost audit u/s 148; or
ü  The company secretary in practice conducting secretarial audit u/s 204.

Punishment for non-compliance
ü  Minimum Fine: Rs. 1,00,000
ü  Maximum Fine: Rs. 25,00,000.

Time and manner of reporting of fraud by auditor (Rule 13)
(1) When a fraud comes to the knowledge of the auditor, the auditor shall immediately forward his report to the AC.
(2) The Board is required to submit its reply or observations within 45 days.
(3) Within 15 days of receipt of such reply or observations, the auditor shall forward to CG-
  • his report; and
  • the reply or observations of the Board/ AC along with his comments.
(4) In case the auditor fails to get any reply or observations from the Board/ AC within 45 days, he shall forward his report to CG along with a note containing the details of his report that was earlier forwarded to the Board/ AC.
(5) The report shall be sent-
  • to the Secretary, Ministry of Corporate Affairs (MCA)
  • in a sealed cover by Registered Post with Acknowledgement Due or by Speed post.
(6) After the report is sent, an email shall also be sent to the Secretary, MCA in confirmation of the report sent.

(7) The report shall be on the letter-head of the auditor containing postal address, email address and contact number.

(8) The report shall be in the form of a statement as specified in Form ADT-4.

(9) The report shall be signed by the auditor with his seal and shall indicate his Membership Number.

(10) These provisions shall also apply, mutatis mutandis, to-
·       a cost auditor during the performance of his duties u/s 148; and

·       a secretarial auditor during the performance of his duties u/s 204.

Contributed by Shruti Agarwal

Wednesday, January 7

Companies Act 2013: Restriction on non-cash transactions involving directors

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 contravention:
Transaction in contravention of the above provisions shall be voidable at the option of the company, except-
(a) The company is compensated for loss by any other person and restitution of subject matter is not possible, or
(b) Rights acquired for value and without notice of the contravention of the provisions of this section.
 The new clauses under this section are:
·    A company shall not enter into any arrangement by which the director of the company or its holding company or any person connected with him can acquire assets for consideration other than cash from the company and vice versa without the approval of the company in GM.
·    Where the director or connected person is a director of its holding company, the resolution from holding company will also be required.
·    The expression person connected with the director has not been defined under the Act.
The notice of approval in GM in both the company and its holding company shall include particulars of the arrangement along with the value of assets duly calculated by registered valuer.

PS: Cash in the above provision would imply to include Cash through banking channels i.e. cheques, bank transfer, demand draft etc.

Contributed by Shruti Agarwal

Sunday, January 4

Companies Act, 2013: Removal, resignation of auditor and giving of special notice

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. The Statement shall indicate the reasons and other facts as may be relevant with regard to his resignation.
The Statement shall be filed within 30 days from the date of resignation. The Statement shall be filed with-
Ø  The company
Ø  The Registrar
Ø  Comptroller and Auditor General Of India (C&AG) (in case of a Government company)

Fine for non-filing:
Ø  Minimum: Rs. 50000
Ø  Maximum: Rs. 500000

Special Notice for not reappointing the retiring auditor (Section 140(4)]
Requirements of special notice:

a) At an Annual General Meeting (AGM), special notice shall be required for-
Ø  Appointing as auditor a person other than the retiring auditor; or
Ø  Providing expressly that the retiring auditor shall not be re-appointed.

b) However, special notice shall not be required if the retiring auditor has completed consecutive tenure of 5 years/ 10 years, as provided under section 139(2).

On receipt of notice of such a resolution, the company shall forthwith send a copy thereof to the retiring auditor.

Right of auditor to make a representation and to get it circulated:

a) The retiring auditor is entitled to make a representation against his removal. The representation (not exceeding a reasonable length) shall be in writing and shall be sent to the company.
b) He may request the company to circulate the representation to the members of the company.

Duties of the company w.r.t representation:

a) The company shall state the fact that the retiring auditor has made a representation against his removal, in any notice of the resolution that is given to the members of the company.
b) The company shall send a copy of the representation to every member of the company to whom notice of the meeting is sent (unless the representation is received by the company too late).
c) If a copy of the representation is not sent because it was received too late or because of the company’s default, then-
Ø  The auditor may require that the representation shall be read out at the meeting;
Ø  A copy of the representation shall be filed with the Registrar.


Contributed by CA Shruti Agarwal

Companies Act 2013: Auditors


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. It has been further provided that a relative may hold security or interest in the company of face value not exceeding Rs. 1 lakh.

*   is indebted to the company or its subsidiary, or its holding or associate company or subsidiary of such holding company, in excess of Rs. 5 lakh.

*  has given guarantee or provide any security in connection with the indebtedness of any third person to the company or its subsidiary, or its holding or associate company or a subsidiary of such holding company for value in excess of Rs. 1 lakh.

e) A person or a firm who (whether directly or indirectly) has business relationship with the company, or its subsidiary, or its holding or associate company or subsidiary of such holding company or associate company.

Here the term ‘business relationship’ shall be construed as any transactions enter into for a commercial purpose except:

*  Commercial transactions which are in the nature of professional services permitted to be rendered by an auditor or audit firm by the professional bodies regulated such members.
*   Commercial transactions which are in ordinary course of business of the company at arm’s length price as customer.

f) A person whose relative is a director or is in the employment of the company as a director or key managerial personnel.


g) A person

*  who is in full time employment elsewhere or
*  a person or a partner holding appointment as its auditor is at the date of such appointment or reappointment holding appointment as auditor for more than 20 companies.


h) A person who has been convicted by a court of an offence involving fraud and a period of 10 years has not elapsed from the date of such conviction. 

i) Any person whose subsidiary or associate company or any other form of entity is engaged as on the date of appointment in consulting or specialized services in reference to provision of Section 144 of the Companies Act, 2013.

Vacation of office [Section 141(4)]

*  If, after appointment, an auditor incurs any of the disqualification mentioned in section 141(3), he shall vacate his office as such auditor.
*  Such vacation shall be deemed to be a casual vacancy in the office of auditor.

Definition of ‘relative’ [Section 2(77) of the Companies Act, 2013]
‘Relative’, with reference to any person, means any one who is related to another, if-

i) they are members of a Hindu Undivided Family;
ii) they are husband and wife; or
iii) one person is related to the other in such manner as may be prescribed.

As per Rule 4 of the Companies Rules, 2014, a person shall be deemed to be the relative of another, if he or she is related to another in the following manner, namely:
1) Father (including step-father)
2) Mother (including step-mother)
3) Son (including step-son)
4) Son’s wife
5) Daughter
6) Daughter’s husband
7) Brother (including step-brother)
8) Sister (including step-sister)


Tuesday, December 23

Companies Act 2013 - Internal Audit

Applicability:
Section 138 shall apply only to such class or classes of companies as may be prescribed. As per Rule 13 of The Companies (Accounts) Rules, 2014, following class of companies shall be covered under section 138:

  1. Every listed company
  2. Every unlisted public company having- 
    1. Paid up share capital of Rs. 50 crore or more during the preceding financial year; or
    2. Turnover of Rs. 200 crore or more during the preceding financial year; or
    3. Outstanding loans or borrowings from banks or public financial institutions exceeding Rs. 100 crore or more at any point of time during the preceding financial year; or
    4. Outstanding deposits of Rs. 25 crore or more at any point of time during the preceding financial year.
  3. Every Private company having - 
    1. Turnover of Rs. 200 crore or more during the preceding financial year; or
    2. Outstanding loans or borrowings from banks or public financial institutions exceeding Rs. 100 crore or more at any point of time during the preceding financial year.
Legal requirements:
  1. Every company to which section 138 is applicable, shall appoint an internal auditor.
  2. The internal auditor shall conduct the internal audit of the functions and activities of the company.
  3. The internal auditor shall be-
    1. A chartered accountant; or
    2. A cost accountant; or
    3. Such other professional as may be decided by the Board.
  4. The internal auditor may or may not be an employee of the company.
  5. A ‘Chartered Accountant’ may be appointed as an internal auditor whether or not he is engaged in practise.
Manner and interval of internal audit:
(a)   Central Government may, by rules, prescribe the manner and the intervals in which the internal audit shall be conducted and reported to the Board.
(b)   The Audit Committee of the company or the Board shall, in consultation with the Internal Auditor, formulate the scope, functioning, periodicity and methodology for conducting the internal audit.

Legal requirements for existing companies:

If an existing company satisfies any of the criteria laid down under Rule 13 (i.e. it falls under the prescribed class(es) of companies for the purpose of section 138), it shall, within 6 months, comply with the requirements of section 138 and Rule 13.


Monday, December 22

Companies Act 2013 - Compensation for Loss of Office or MD or WTD

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 other officer of the reconstructed or amalgamated company.
(b) the director resigns voluntarily.
(c) the office of director is vacated under section 203 or 283.
(d) the director has instigated or is responsible for the termination of his directorship.
(e) the company is wound up by or subject to supervision of the Court due to negligence of director.
(f) the director is guilty of fraud or breach of trust or gross negligence in the conduct of the affairs of the company.

However, mere allegations that a director was involved in certain questionable transactions will not disentitle him from receiving compensation.