RNM Risk Based Governance ALERT
A MONTHLY R N MARWAH & NEWSLETTER CO. LLP www.rnm.in PUBLICATION VOL NO 128 RNM MONTHLY, SEPTEMBER'19
EDITORIAL TEAM R N MARWAH & CO. LLP
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AUDIT & ASSURANCE
TAX & REGULATORYNkdckjksj k j vcjjvjasvjjjjavjvn
CORPORATE & Welcome Readers, LEGAL Dear Readers,
CORPORATE The month of September 2019 has been a blockbuster month! The Modi Government proactively FINANCE announced major tax cuts thru an Ordinance to give a fillip to the economy just ahead of a US trip targeting FDI investments into India. I hope the readers may have received our separate RNM Alert Special on the same. Since then, the CBDT has issued a clarification on MAT credit and Set off of losses for companies opting for concessional rate of tax. The RBI has also now got into the action announcing a 25 bps cut on the Repo Rate and Reverse Repo rate to provide Content: borrowers cheaper loans during the festival season. But as the Chinese philosophy says, the Yin WELCOME and Yang come together. With the PMC Bank scam which has embroiled a leading Real Estate Message by our group of Mumbai, market sentiment has again been beaten down with some going as far as Managing partner questioning the stability of the financial system. In the recent past, banking sector has been going
03 DIRECT TAX through a rough time in India with increased bad loans requiring write offs. One awaits the Direct tax case laws action on the part of the Regulators to improve the checks and balances in the system to ensure
10 INDIRECT TAX such frauds do not remain hidden for so long. Team RNM does hope that the errant officers are Goods & Services tax brought to book swiftly and the Damocles sword does not fall on the auditors alone who signed cases off the books. In the National Spot Exchange Ltd scam, the auditors have now been arrested to
15 CORPORATE add to the woes of the Big 4 who continue to be in the news for the wrong reasons. LEGAL Law updates Amongst the slew of financial affairs, an inspiring event also broke this past month with
19 CORPORATE Olympic sprinter Allyson Felix from USA breaking the record of Usain Bolt. This feat being all FINANCE the more special after giving birth only 10 months ago. Going into the festival season, such Transactions stories of human endurance give hope to everyone to keep trying their best at achieving their 22 INTERNAL AUDIT goals. Risk based governance We would also like to take this opportunity of wishing all our esteemed Readers a happy 36 STATUTORY AUDIT Dussehra and a prosperous Diwali!! May each one of you overcome the evil influence in your Changes in Ind AS lives to attain peace and joy.
46 TAX DIARY Mark Calendar For RNM Alert Editorial Team U.N. Marwah Managing Partner
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DIRECT TAX
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Charge of Income-tax 2. Section 4: Where assessee-company, incorporated for development and operation of multipurpose port terminal, raised certain share capital in form of foreign inward remittance, in view of fact that said project got delayed due to various reasons beyond assessee's control and, thus, assessee had to keep (Image credits freepik.com) unutilised funds in banks in form of
FDRs, interest income earned on said DIRECT TAX CASE LAWS deposits being in nature of capital receipt, was not liable to tax Karanja Terminal & Logistics (P.)Ltd. Judicial Precedents under various vs. DCIT [2019] 109 taxmann.com 105 (Mumbai - Trib.) sections of Income Tax Act, 1961 (Act)
Profits from Business 3. Section 9: Where assessee a foreign Deemed Dividend company, had primarily earned 1. Section 2(22)e: Repayment of loan or revenue from sale of designs and advance, which gets deemed, on receipt, drawings to Indian customers, since on account of legal fiction, as a designs and drawings were used by distribution of profit and, thus, as Indian customers for internal income in hands of payee shareholder, business purposes for setting up of is of no consequence. their plants and not for any G.G. Oils & Fats (P.)Ltd. v. DCIT [2019] 109 commercial exploitation, designs taxmann.com 18 (Amritsar - Trib.) and drawings sold by assessee tantamounted to use of copyrighted
article rather than use of a copyright PCIT v. VembuVaidyanathan [2019] 108 and was, therefore, business income. taxmann.com 339 (Supreme Court) Outotec (Finland) Oy vs. DCIT [2019] 109 taxmann.com 69 (Kolkata - Trib.) 8. Section 55A: No reference can be made u/s 55A in order to value the 4. Section 28: Where Assessee cost of acquisition of property as on Company developed shopping malls 01.04.1981 at a figure lesser than the and business centres on properties value declared by the assessee, while owned by it and let out same by computing the long term capital providing host of gains. services/facilities/amenities in said Smt. BhudeviKishanraoGorantyal vs. malls/business centres, income ITO 2019 (3) TMI 1630 - ITAT Pune derived therefrom was business income. Income from Other Sources DCIT vs. ATC Realtors (P.)Ltd. [2019] 9. Section 56(2): Provision of section 108 taxmann.com 383 (Guwahati - 56(2)(vii)(c) not applicable on bonus Trib.) shares received from company. DCIT vs. Smt. MamtaBhandari[2019] 5. Section 28: Loss claimed by 108 taxmann.com 207 (Delhi - Trib.) devaluing book value of shares couldn't be allowed as deduction. Unexplained Cash Credits Twenty First Century Management 10. Section 68: Additions under section Services Ltd. v. ITO [2019] 108 68 justified if assessee received share taxmann.com 586 (SC) capital from 5 paper Cos. maintained by single person. 6. Section 40A(9): No sec. 40A(9) NDR Promoters (P.) Ltd. vs. PCIT disallowance on sum contributed to [2019] 109 taxmann.com 53 (SC) trusts created for health care of retired employees. Transfer Pricing PCIT v. State Bank of India[2019] 109 11. Section 92C: No transfer pricing taxmann.com 11 (Bombay High Court) adjustments on delay in receipt from AEs if similar delay was there in case Capital Gains of unrelated parties also. 7. Section 54: Date of allotment of flat Aricent Technologies (Holdings) Ltd. vs. by DDA would be date of purchase DCIT [2019] 109 taxmann.com 47 (Delhi for computing capital gain tax. - Trib.)
12. Section 92C: TNMM is most Tax Deducted at Source appropriate method for 15. Section 194A: Where branches of benchmarking international bank were spread over many transactions of payment of FTS. districts, Assessing Officer (TDS) of CWT India (P.) Ltd. vs. ACIT [2019] 109 district, where in Head Office was taxmann.com 182 (Mumbai - Trib.) situated, had no jurisdiction in respect of branches spread over Search and Seizure other districts. 13. Section 132: Where in course of CIT vs. Karnataka VikasGrameen Bank search carried out in case of one 'A', [2019] 108 taxmann.com 493 (Karnataka certain incriminating material was High Court) found relating to assessee on basis of which addition was made to Stay of Demand assessee's taxable income, in view of 16. Section 220(6): By relying upon fact that document was neither Instructions/OMF dated 29-2-2016 written by 'A' nor she was aware of and Circular dated 31-7-2017, content, nor she was aware who had assessee cannot contend as a matter written document, it could be of right that under all circumstances, concluded that said document did Department cannot recover more not belong to assessee and same than 20 per cent of tax demand when could not be used as incriminating first appeal is pending before first material on basis of which impugned appellate authority addition could be made to assessee's PCIT v. BidarNirmiti Kendra [2019] 109 income. taxmann.com 46 (Karnataka High Court) ACIT vs. Dr. RanjanPai [2019] 109 taxmann.com 90 (Bangalore - Trib.) Modes of Recovery Assessment 17. Section 226: Where assessee was 14. Section 143(2): Where notice under holding joint saving bank account section 143(2) was served to assessee with her husband, tax officer could on address which was none of not issue notice to bank for marking addresses as specified in rule 127(2) said bank account for lien towards of 1962 Rules, assessment order arrears of tax liability of her passed on basis of such invalid husband, without issuing a notice to notice deserved to be set aside. her under section 226. ITO v. Ajay Raj [2019] 108 taxmann.com 543 (Delhi - Trib.)
Mrs. BeenaMuralidhar vs. Tax Recovery Other Important Direct Tax Updates Officer [2019] 109 taxmann.com 133 (Karnataka High Court) 20. CBDT has extended the last date for linking of Aadhaar with PAN from Jurisdictional High Court September 30, 2019 to December 31,
18. Section 260A: Where assessee was 2019. regularly assessed to tax at CBDT Notification No. 75 of 2019 Hyderabad, mere fact that it had registered office at Mumbai, would 21. Credit for TDS deducted under not give jurisdiction to Mumbai section 194N shall be given to the High Court to entertain assessee's person from whose account tax has writ petition challenging validity of been deducted. Such credit shall be reassessment notice issued by allowed in the same year in which Assessing Officer, Hyderabad deduction is made. HSBC Holdings PLC vs. DCIT [2019] CBDT Notification No. 74 of 2019 108 taxmann.com 489 (Bombay High
Court) 22. CBDT has issued corrigendum to the
Taxation Laws (Ordinance), 2019 in Penalty order to correct typographical errors. 19. Section 271(1)(c): Penalty under Word ‘Section 115BAB’ used in the section 271(1)(c) cannot be regarded newly inserted proviso to section as ultra vires of Constitution insofar 115BA(4) shall be read as ‘Section as imposing of penalty on amounts 115BAA’. determined pursuant to Convention CBDT Corrigenda dated 26-09-2019 for Avoidance of Double Taxation
between Union of India and other 23. CBDT has prescribed compressive Sovereign Countries which is guidelines for conducing assessment enforced in Indian territory by proceedings through ‘E- proceeding’ section 90 and Rules made facility during Financial Year 2019- thereunder. Toyota Kirloskar Motor (P.) Ltd. vs. 20. Assessment framed under Union of India[2019] 109 taxmann.com sections 153A, 153C, 144 & 147 shall 137 (Karnataka High Court) not be mandatorily carried out through e-proceedings. Further, the
board has also prescribed situations
where personal hearing/attendance
may take place during e-proceeding.
CBDT Circular No. 27 of 2019 27. CBDT has notified that provisions of section 194N shall not be applicable 24. CBDT has issued third set of to the commission agent or trader, clarifications on certain issues operating under Agriculture relating to filing of ITR Forms 5, 6 & Produce Market Committee 7. The clarification is issued in (APMC). Such persons are required continuance to the previous circulars to intimate the banking company or no. 18 & 19 of 2019 dated, 08-08-2019 co-operative society or post office his & 27-08-2019. account number through which he CBDT Circular No. 26 of 2019 wishes to withdraw cash in excess of rupees one crore in the previous year 25. CBDT has set timelines for handling along with his Permanent Account grievances of Start-ups. It has been Number (PAN). directed that in case of any CBDT Notification No70 of 2019 grievance, the preliminary Action Taken Report is to be submitted 28. An Ordinance to amend the Income- within one working day and final tax Act, 1961 and the Finance (No. 2) Action Taken Report in this regard is Act, 2019 has been notified by the to be submitted within 3 working Ministry of Law and Justice. days. Taxation Laws (Amendment) CBDT Letter F.No. 173/149/2019-Ita- Ordinance, 2019 I, Dated 23-9-2019 29. Govt. slashes corporate tax rates 26. CBDT has notified new depreciation from 30% to 22% for domestic rate of 30% on motor cars (other than companies. Further, MAT rate has those used in a business of running also been reduced to 15%. them on hire) & 45% on Motor buses, PIB Press Release, dated 20-9-2019 motor lorries and motor taxis used in a business of running them on hire. 30. CBDT has notified that no tax shall Such vehicles should have been be deducted at source under section acquired on or after 23-08-2019 but 194N on cash withdrawals by Cash before 01-04-2020 and are put to use Replenishment Agencies (CRA’s) before the 01-04-2020. and franchise agents of White label CBDT Notification No69 of 2019 ATMs maintaining a separate bank account from which cash is
withdrawal for the purpose of cases for assessment year 2019-20. relishing cash in ATMs. “Wholesale trading” means an CBDT Notification No68 of 2019 international transaction or specified domestic transaction of trading in 31. CBDT notifies norms for making goods, which fulfills certain reference to Approving Panel under conditions GAAR provisions. CBDT Notification No64 of 2019 CBDT Notification No67 of 2019 36. CBDT has notified E-assessment 32. CBDT reiterates that the monetary Scheme, 2019. A National e- limits fixed for filing appeals before assessment Centre may be set-up by ITAT/HC and SC shall not apply in the Board to facilitate the conduct of case of assessees claiming bogus e-assessment proceedings in a LTCG/STCL through penny stocks. centralized manner. Office Memorandum F.No. CBDT Notification No62 of 2019 279/Misc./M-93/2018-Itj(Pt.), Dated 16-9-2019 37. ‘289' notified as Cost Inflation Index for FY 2019-20 33. CBDT waives off lock-in period of 3 CBDT Notification No63 of 2019 years on investment made by NR in bonds of Infrastructure Debt Fund. 38. In order to ensure that only CBDT Notification No66 of 2019 deserving cases get prosecuted, the CBDT has relaxed criteria for 34. CBDT has notified the Assistant launching prosecution in respect of Commissioner of Income-tax (e- certain offences. In case of non- Verification), having headquarter at payment of TDS/TCS is Rs. 25 lakhs Delhi, to act as prescribed Income- or below and delay in deposit is less tax Authority for the purpose of than 60 days, cases shall not be issue of notice under section 143(2) processed for prosecution. Further, during the financial year in case of failure to furnish ITR, prior commencing on 01-04-2018. approval of collegium of two CBDT Notification No65 of 2019 CCIT/DGIT rank officer is required where amount of tax evaded exceeds 35. CBDT has notified that the tolerance Rs. 25 lakhs. range of 1 per cent for wholesale CBDT Circular No. 24 of 2019 trading and 3 per cent in all other
39. A taxpayer seeking compounding of 42. CBDT has issued guideline for offence is required to file application manual selection of returns for within 12 months from the end of the complete scrutiny during the month in which prosecution financial year 2019-20. complaint has been filed in the court Letter F.No. 225/169/2019/ITA-II, of law. As a onetime measure, the dated 5-9-2019 CBDT has clarified that application filed before the competent authority 43. CBDT has entered into 26 Advance on or before 31-12-2019 shall be Pricing Agreements (APAs) in the deemed to be filed in time. first 5 months of the current financial CBDT Circular No. 25 of 2019 year (i.e., April to August, 2019). With the signing of these APAs, the 40. Monetary limits for filing total number of APAs entered into departmental appeals not applicable by the CBDT as of now stand at 297, in case of organized tax-evasion. which includes 32 BAPAs. CBDT Circular No. 23 of 2019 CBDT Press Release, Dated 4-9-2019
41. CBDT revises forms to apply for 44. CBDT issues a consolidated circular grant of Sec. 80G approval & for assessment of start-ups for better exemption u/s 10(23C). clarification. CBDT Notification No60 of 2019 CBDT Circular No. 22 of 2019
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INDIRECT TAX
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i. SAC Code.996311 and covered under several clauses of Si No.7 of the Rate Notification, or ii. SAC Code.998552 as arranging reservations for accomodations services for domestic accommodation, accommodation abroad etc.
iii. If not elsewhere, under SAC.9997
(Image credits freepik.com)
Authority held that it should be classifiable underSAC 998552, taxable Advance Ruling West Bengal, Ruling-1 under Si No.23(iii) of the Rate Notification, and Applicant is eligible to claim the ITC as admissible under Issue: the law. Classification of activity for merely arranging the client’s accommodation in hotel by tour operator.
Findings: Applicant seeks clarification, that whether the activity shall be classified under:
Notifications
Notification Particular in relation to Existing Law Amendment through No Supply Notification 43/2019, Manufacturers of Aerated Could opt for Excluded from the CGST waters Composition purview of Composition Scheme Scheme. 25/2019, Granting of alcoholic liquor Amounts to supply Excluded from definition CGST-Rate licenseby State Governments & liable to GST of supply for consideration 22/2019 Renting of Motor Vehicle Recipient of supply CGST-Rate by a person (other than liable to pay tax under body corporate) paying RCM tax @5% on renting of motor vehicle and availing credit only of input service in the same line to any body corporate Tax payable by located in the taxable supplier territory Person who borrows the Services of lending of securities under the securities under Securities Scheme through an Lending Scheme, 1997 approved intermediary (“Scheme”) of Securities of SEBI under RCM. andExchange Board of India (“SEBI”), as amended. 23/2019, Transfer of development Liability to pay tax The Notification should CGST-Rate rights on or after 1st April shall arise at the not be applicable from 2019to builder/land time when the said April 01, 2019. developer against developer/builder construction service transfers possession or the right in the constructed complex to the person supplying the development rights
24/2019, In reference to cement RCM was payable Now, the RCM is CGST-Rate purchased for construction of on cement purchases applicable irrespective of property (ref. to Notification beyond specified limit as per latter No. 7/2019 CGST (Rate) limit from notification unregistered buyer
Circulars
Circular No Particular in relation Existing Law Clarification through to Supply Circular 112/31/2019- Withdrawal of Post sale Discount augment Rescinded the earlier GST Circular to sales volume- To be circular due to No.105/24/2019-GST, added to customers apprehensions in relating to post-sales turnover, though he may previous circular. discounts. claim ITC. Where supply of goods is not permitted to be reduced from value of supply by supplier- issue commercial/ financial credit note- dealer will not be required to reverse the ITC if he has readily paid the tax on such post-sale discount 111/30/2019 Procedure to claim Procedure to apply for – GST refund in FORM GST refund appeal on partial RFD-01 subsequent to approval of the scheme favorable order in appeal or any other forum
Changes in Rates/Exemptions:
S. No. Particulars Existing Rates New Rates
1. Hotel and accommodation Tariff: o
2. . Outdoor catering services other than 18% 5% (without ITC) in premises having daily tariff of unit of accommodation of Rs. 18% (With ITC) 7500/-. 18% (With ITC) . Catering in premise with daily tariff of unit of accommodation is Rs. 7501/- and above
3. Job Work Services: o in relation to diamonds 5% 1.5% o Machine Job work i.e. 18% 12% engineering industry o In relation to bus body building 18% 18% o Other Job Work 18% 18%
4. Services provided by an intermediary to a Respective GST NIL supplier of goods or recipient of goods when Rate both the supplier and recipient are located outside the taxable territory.
6. Specified goods for petroleum operations - 5% undertaken under Hydrocarbon Exploration Licensing Policy (HELP)
7. Goods, falling under chapter 86 of tariff like 5% 12% railway wagons, coaches, rolling stock (without refund of accumulated ITC).
8. Compensation cess on caffeinated Beverages 18% 28%+12%
9. Polypropylene/Polyethylene Woven and 5%,12%, 12% Non- Woven Bags and sacks, whether or not 18% laminated, of a kind used for packing of goods
11. Motor vehicles with engine capacity of 1500 9% 9% cc in case of diesel or 1200 cc in case of petrol/ CNG/ LPGand length not exceeding 4000mm used for persons with orthopedic physical disability
(earlier the blanket rate of 9% was applicable on use of car for such purpose on approval from respective authority)
12. Precious stones(other than diamonds) and 3% 0.25% semi-precious stones, whether or not worked orgraded but not strung, mounted or set; ungraded precious stones
GST Calendar – October’2019
Due Date Due Date relates to Who needs to do the Late Fee compliance October11, 2019 GSTR-1 for the month Taxpayers having turnover NIL of September 2019 of more than 1.5 crore
October13, 2019 GSTR-6 for the month Input Service Distributor Rs. 50/- per of September2019 day October20, 2019 Due date of GSTR-3B All registered Tax Payers Rs. 50/- per for the month of day September2019 Occtober20, 2019 Due date of GSTR-5 Non-resident Taxable Person Rs. 200/- for the month of per day September2019 October 30, 2019 Due date of CMP-08 Taxpayers Registered under Rs. 200/- Composition Scheme per day
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includes ‘corresponding new bank’ as defined in section 2(d) of the Banking Companies (Acquisition and Transfer of Undertakings) Act, and section 2(b) of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 and ‘subsidiary bank’ as defined in section 2(k) of the State Bank of India (Subsidiary Bank) Act, 1959. In Rule 11, another new provision added to provide
(Image credits freepik.com) that where the disposal of disciplinary proceedings does not take place within the defined period, the Division shall COMPANY LAW UPDATES record the reasons for not disposing of the show-cause notice within the said National Financial Reporting period, and the chairperson, may, after Authority (Amendment) Rules, 2019 taking into account the reasons so The Ministry of Corporate Affairs recorded, extend the aforesaid period by (MCA), has notified the National such additional period not exceeding Financial Reporting Authority ninety days as he may consider (Amendment) Rules, 2019. The necessary and the chairperson may, if he amendment includes notification of the thinks fit, grant the said extension of the eForm in which the auditor shall file the period more than once. An Auditor has annual return with NFRA. The due date to provide a statement of the quality for filing such eForm has also been control policies and procedures of the changed to 30th November of every Auditor for its auditing practice during year instead of 30th April as prescribed the reporting period while filing the earlier. Further, for the purpose of Rule Form NFRA - 2. 3 (1)(c), an explanation has been added [Source: MCA notificationno. G.S.R 636(E) dated 05.09.2019] for “banking company” which
Constitution of Company Law for filing e-form No. BEN-2 has been Committee extended upto 31.12.2019 without Government constitutes Company Law payment of additional fee and thereafter Committee for examining and making fee and additional fee shall be payable. recommendations on various provisions Consequent to the extension in the date and issues pertaining to implementation of filing of e-Form BEN-2, the date of of the Companies Act. filing of Form BEN-1 may be construed In line with the Government's objective accordingly. of promoting Ease of Living in the [Source: MCA General Circular No. 10/2019 dated 24.09.2019] country by providing Ease of Doing
Business to law abiding corporates, Extension of Due Date for filing of fostering improved corporate DIR 3 KYC till 14th October 2019 compliance for stakeholders at large and MCA has extended the due date of filing also to address emerging issues having DIR 3 KYC for directors till 14th October impact on the working of corporates in 2019. For the financial year ended on the country, it has been decided to 31st March, 2019, no fee shall be payable constitute a Company Law Committee in respect of e-form DIR-3 KYC or DIR-3 for examining and making KYC-WEB through web service till 14th recommendations to the Government on October, 2019. various provisions and issues pertaining [Source: MCA notification dated 30.09.2019] to implementation of the Companies Act,2013 and the Limited Liability Partnership Act, 2008. [Source: MCA Order dated 18.09.2019] IBBI
Relaxation of additional fees and Statutory Repositories under extension of last date of filing of Form Regulation 21(2)(c)(ii) of the BEN-2 and BEN-1 Insolvency and Bankruptcy Board of The Ministry of Corporate Affairs on India (Information Utilities) account of several representations Regulations, 2017 received by it regarding extension of the IBBI has issued a circular (addressed to last date for filing of e-Form BEN-2 National E-Governance Services without additional fees for certain new Limited) on Statutory Repositories aspects which require further under Regulation 21(2)(c)(ii) of the examination and clarification. The Insolvency and Bankruptcy Board of matter was examined and the time limit India (Information Utilities)
Regulations, 2017. That Regulations Valuation required under the empowers IBBI to notify any other provisions of Companies Act, 2013 and statutory repository for the said the Insolvency and Bankruptcy Code, provision. For the purposes of 2016 regulation 21(2)(c)(ii) of the said Rule 10 of the Companies (Registered Regulations, the Board hereby approves Valuers and Valuation) Rules, 2017 MCA 21 database of the Ministry of (Rules) read with section 247 of the Corporate Affairs and the Central Companies Act, 2013 (Act) require that a Registry of Securitisation Asset registered valuer shall conduct Reconstruction and Security Interest of valuations required under the Act. India (CERSAI) registry as repositories. Circular No. IBBI/RV/019/2018 dated This Circular is issued in exercise of the 17th October, 2018 of IBBI mandates powers vested under section 196 of the that the valuations required under the Insolvency and Bankruptcy Code, 2016. Code or any of the regulations made [Source: IBBI Circular No. IBBI/IU/025/2019 thereunder shall be conducted by a dated 07.09.2019] registered valuer.
A list of the provisions of the Act and the Code under which valuations are required to be conducted by a registered valuer are as under:
Valuation required under the Companies Act, 2013
Sl. No. Section/Rules Particulars 1 Section 62(1)(c) of the Companies Act, 2013 Further issue of share capital read with Rule 13(1) of the Companies (Share Capital and Debentures) Rules, 2014 2 Section 177(4)(vi) of the Companies Act, 2013 Terms of reference of Audit Committee 3 Section 192(1) and 192(2) of the Companies Restriction on non-cash Act, 2013 transactions involving directors 4 Section 230(2)(c)(v) and Section 230(3) of Power to compromise or make Companies Act, 2013 arrangements with creditors and members 5 Section 232 (2)(d) and Section 232 (3)(h)(B) of Merger and amalgamation of the Companies Act, 2013 companies 6 Section 236(2) of the Companies Act, 2013 Purchase of minority shareholding 7 Section 247(1) of the Companies Act, 2013 Valuation by Registered Valuers 8 Section 281(1)(a) of the Companies Act, 2013 Submission of report by Company
Liquidator 9 Rule 2(c)(ix) of the Companies (Acceptance of Exclusions from deposits. Deposit) Rules, 2014 10 Rule 6(1) of the Companies (Acceptance of Creation of security Deposit) Rules, 2014 11 Rule 8(6), (7), (9) and (12) of the Companies Issue of sweat equity shares (Share Capital and Debentures) Rules, 2014 12 Rule 16(1)(c) of the Companies (Share Capital Provision of money by company and Debentures) Rules, 2014 for purchase of its own shares by employees or by trustees, for the benefit of employees 13 Rule 12(5) of the Companies (Prospectus and Return of allotment Allotment of Securities) Rules, 2014
Provisions under the Insolvency and Bankruptcy Code, 2016 and the Regulations
Sl. No. Section/Regulations/Rules Particulars 1 Section 59(3)(b)(ii) of the Insolvency and Voluntary liquidation of corporate Bankruptcy Code, 2016 persons 2 Section 46(2) of the Insolvency and Relevant period for avoidable Bankruptcy Code, 2016 transactions 3 Regulation 27 read with regulation 35 of the 1) Appointment of registered IBBI(Insolvency Resolution Process for valuers; 2) Fair value and Corporate Persons) Regulations, 2016 liquidation value 4 Regulation 35 of the IBBI(Liquidation Valuation of assets intended to be Process) Regulations, 2016 sold 5 Regulation 3(1)(b)(ii) of the IBBI (Voluntary Initiation of liquidation Liquidation Process) Regulations, 2017 6 Regulation 26 of the IBBI(Fast Track Appointment of registered valuer Insolvency Resolution Process for Corporate Persons) Regulations, 2017 7 Regulation 34 of the IBBI (Fast Track Fair value and liquidation value Insolvency Resolution Process for Corporate Persons) Regulations, 2017 [Source: IBBI Circular No. IBBI/RVO/026/2019 dated 16.09.2019]
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in India, two sources told Reuters, in a move that will see the U.S. carmaker end most of its independent operations in the country. The two companies have for months been structuring the deal to create a new entity in which Ford will hold a 49% stake, while Indian rival Mahindra will own 51%. [Source: VC Circle, 25th September, 2019]
Reliance- controlled Haptik acquires conversational commerce startup Haptik Inc., an artificial intelligence- MERGERS & ACQUITIONS based conversational platform controlled by Reliance Industries Ltd, Private equity firm Helix invests in has acquired Buzzo.ai, a Mumbai-based dental clinic chain Dentzz conversational commerce platform, Private equity firm Helix Investments according to media reports.The deal was has acquired a stake in dental services valued at $3-4 million. [Source: VC Circle, 08TH August, 2018] brand Dentzz, operated by SJ
Healthcare Pvt. Ltd, through a Asian Paints sells Berger Paints secondary transaction. Singapore to Aussie asset manager [Source: VC Circle, 19thSeptember, 2019] Asian Paints Ltd on Tuesday said that it Ford close to JV deal with Mahindra & is selling its entire stake in Berger Paints Mahindra in India Singapore Pte. ltd to Aussie asset Ford Motor Co (F.N) and Mahindra & manager Omega Property Investments Mahindra (MAHM.NS) are likely to sign Pty. Ltd, Australia.Asian Paints will sell a deal next week to form a joint venture the Singaporean arm of Berger via Asian
Paints International Pvt. Ltd for S$4 a Series B round of funding.Venture million. capital firm Sequoia India led the [Source: VC Circle, 17th September, 2019] funding round, Darwinbox said in a tweet. London Stock Exchange rejects Hong [Source: VC Circle, 26th September, 2019] Kong's $39 bn takeover offer London Stock Exchange has rejected Prop-tech firm Square Yards raises $20 Hong Kong Exchange’s $39 billion mn from BCCL, Japanese investor takeover offer, opting to stick with its Square Yards Consulting Pvt. Ltd, a planned purchase of data and analytics tech-enabled real estate brokerage group Refinitiv. platform, said on Thursday it has raised [Source: VC Circle, 13th September, 2019] $20 million (Rs 142.2 crore) from a clutch of investors including media house Bennett Coleman & Co Limited VENTURE CAPITAL (BCCL).Japanese real estate investment companyGenkai Capital also invested, BinnyBansal, Flipkart CEO Kalyan Square Yards said in a statement. Krishnamurthy bet on TerraView [Source: VC Circle, 19th September, 2019] TerraView, a software-as-a-service- based image processing startup, has Fintech startups Upstox, Groww lead raised Rs 5.8 crore (about $824,000 at startup funding deals this week current exchange rates) in a Series A Online stock broking company Upstox funding round from a clutch of raised $25 million from Tiger Global to investors.The investors included top the list of startups that received Flipkart co-founder BinnyBansal and venture capital funding this week. This chief executive officer Kalyan was followed by Groww's Series B Krishnamurthy, multiple media reports funding round led by Ribbit Capital. said. [Source: VC Circle, 20th September, 2019] [Source: VC Circle, 27th September, 2019] Vertex Ventures raises $290 mn fund Sequoia leads $15 mn funding round for India, Southeast Asia bets in SaaS startup Darwinbox Singapore-based Vertex Venture Darwinbox Digital Solutions Pvt. Ltd, Holdings, the first main backer of an enterprise human resources Southeast Asia’s ride-hailing giant Grab, managementplatform, said on Thursday has added a new $290 million venture it has raised $15million (Rs 106 crore) in capital fund targeting investments in
high-growth technology firms, a senior current exchange rate) from Foundation company official said. Holdings and Symphony International [Source: VC Circle, 12thSeptember, 2019] Holdings Ltd. [Source: VC Circle, 18TH September, 2019]
PRIVATE EQUITY Saudi Aramco lures sovereign funds GIC, ADIA to hit $2 trillion IPO
valuation Advent raises $2 bn debut technology private equity fund State-owned Saudi Aramco has U.S. private equity firm Advent approached Abu Dhabi Investment International said on Wednesday it has Authority (ADIA), Singapore's GIC and completed fundraising for its first other sovereign wealth funds to invest technology fund after six months, with in the domestic leg of the oil giant's total investor commitments reaching its listing at it seeks to achieve a $2 trillion cap of $2 billion. [Source: VC Circle, 28TH September, 2019] valuation. TH [Source: VC Circle, 26 September, 2019]
Foundation Holdings leads investment PE firm Affirma Capital invests in IT in eye-care firm ASG Hospital company Prodapt Solutions UAE-based family investment office Affirma Capital, a private equity firm Foundation Holdings has led a funding spun out of Standard Chartered Private round in ASG Hospital Pvt. Ltd, the Equity earlier this year, has invested in transaction bumping up the number of information technology company fundraisings inIndia’s eye-care sector to Prodapt Solutions Pvt. Ltd. five deals. ASG Hospital said it has [Source: VC Circle, 9TH September, 2019] raised Rs 308 crore ($43 million at
Page 22 INTERNAL AUDIT
R N MARWAH & CO LLP W: www.rnm.in E: [email protected] T: 011 - 43192000
In our experience, effective boards have risk management practices, strategies, processes, and approaches that: • Encompass the entire business • Address the full spectrum of risks • Place significant weight on both probability and vulnerability • Consider not just single events, but the interaction of multiple risks • Make strategic decisions that arise from risk-informed processes (Image credits freepik.com)
When taken together, these criteria add up to a board that is Risk Intelligent. Risk based governance Therefore, these are the standards we used when identifying state-of-the-art Effective risk governance is more an art board practices. than science. No clear-cut formula or
blueprint exists for Risk Intelligent This article is intended to provide food for governance, yet boards seem to thought and work as a catalyst for focused recognize when they are upholding action, with the caveat that Risk Intelligent their responsibilities and performing governance is not a one-size-fits-all their role well. The challenge is - how approach to be adopted by every can effective risk governance practices organization or within each industry. The be recognized by those outside the examples and case studies provided are not organization? universally applicable solutions. Rather, they offer a close-up look at how boards can --- Inspired by study paper submitted by Steve Alognaand Maureen Bujno, USA in 2013 put Risk Intelligent governance into practice.
Action Needed by Board Toward Risk six distinct actions that can help enable a Based Governance: Risk Intelligent governance approach: Events of the past – including the 1. Define the board’s risk oversight role collapses of high-profile companies, 2. Foster a Risk Intelligent culture economic volatility, and growing 3. Understand and approve an regulations and guidelines – have appropriate risk appetite placed boards under greater scrutiny 4. Help management incorporate from regulators, shareholders, the strategic risk thinking into strategy media, and analysts. Such scrutiny has 5. Assess the “maturity” of the risk led to rising expectations for improved governance process governance and risk management. 6. Make sure the organization discloses the risk story to stakeholders. What can the board do to meet these expectations, be better aligned with As risk is intrinsic to the conduct of business and marketplace trends, and business, it is an essential consideration help the organization achieve its goals? in every decision and activity. It is up to What is the board’s role in helping to set each board to decide what lessons it can the tone and in overseeing a risk glean and apply from these action management program that embeds items—and from the state-of-the-art appropriate risk management examples provided—in the execution of procedures—encompassing both value its responsibilities. protection and value creation—into all of the organization’s business pursuits? We are taking up these areas in And how can directors work toward following sections: treating risk management not as a separate or standalone issue, but as an 1. Defining of the Board’s Risk integral component of everything the Oversight Role board considers? An effective risk oversight process helps In short, how can the board become Risk the board determine that the Intelligent? organization has a system in place for identifying, evaluating, prioritizing, Based on RNM’s work with boards in managing, and adapting to critical risks. their risk governance efforts, there are This process begins with a distinct demarcation of the board’s roles and
responsibilities, which includes assuring committees— provided that it is that management defines the risk understood that risk oversight is governance infrastructure, positions risk broader than a single committee and as a priority for the organization, and that the entire board is ultimately initiates risk management accountable. Regardless of the communications and activities. A board committee designated, roles and can encourage and support the responsibilities should be appropriately evolution of the company’s risk documented in the committee charter. program to encompass an enterprise- wide risk framework that establishes Board members are responsible for goals, roles, activities, metrics, and overseeing and continually monitoring desired results. the overall risk management process. As part of this role, the board: The board’s risk oversight role can be • Oversees the organization’s broken down into specific components. processes for identifying, reporting, Risk governance includes making sure and managing risks that the appropriate committees are • Stays up to date on the company’s involved in the oversight of risk vulnerabilities, risk culture, risk processes under their jurisdiction, that appetite, and risk tolerances the oversight of critical risks is allocated • Achieves an integrated view of the to those committees as appropriate, and organization’s risk management that the full board engages in a robust process and activities for discussions dialogue about critical risks. with the executive team • Maintains committee charters that Components of the board’s risk outline roles and responsibilities oversight role • Risk governance structure Individual boards will, of course, need • Oversight and monitoring of risk to be composed of members who management processes possess the appropriate skills and • Collaboration with the CEO and experience in order to carry out these executive team to understand and responsibilities. oversee critical risks
Although risk management processes
should be established and owned by Some aspects of risk oversight management, the board oversees these responsibility can be delegated to board
processes and plays a significant risk management frameworks that can advisory role in identifying leading provide a helpful starting point. In practices, ensuring that processes both addition, industry-specific frameworks protect the business’s assets and create have been modeled by regulators, such value and opportunity. Furthermore, as the National Association of Mutual having appropriate mechanisms in place Insurance Companies (NAMIC) and the allows for information flow and Federal Reserve Board. discussion of the most critical risks with the full board. Recommendations Effective risk oversight begins with a In addition, board members should be solid—and mutual—understanding of satisfied that, regardless of the process, the board’s responsibilities, including the CEO takes ultimate responsibility those of management. This process may for risk management and that specific be further improved when boards: risks and activities are assigned to • Work with management to map risk appropriate members of the oversight responsibilities to specific management team. board committees • Create mechanisms for board Also, when conducting customary committees to collaborate on risk- board activities, such as touring facilities related activities through cross- or engaging in “deep dive” sessions membership, regular joint meetings, with business unit leadership, the board or the sharing of meeting materials can enhance understanding not only of or minutes operations, but also of associated risks. • Insist on clear, periodic reports on risk-related activities, including If the organization lacks an enterprise- trends and assumptions, and avoid wide risk framework that offers clear information overload by reviewing direction and guidance, the board the quality, quantity, and nature of should call upon management to risk information received from develop one that encompasses management appropriate board oversight processes. • Periodically refresh all board Several organizations, such as COSO, committee charters so that each the Treasury Board of Canada appropriately describes its role in Secretariat, and the Institute of risk oversight International Finance, have developed
• Keep informed of all committee A Risk Intelligent culture has the activities in order to execute their following characteristics: role as overseer of their committees • Risk accountabilities and through robust committee reports at responsibilities are clearly board meetings; provision of understood and defined agendas, materials, and minutes to • Appropriate policies and practices, full board; or other mechanisms including formal processes to • Oversee significant, strategic and communicate, escalate, and report enterprise-wide risks issues and risks are in place • It encourages employees to challenge 2. Foster a Risk Intelligent culture the organization should they have A Risk Intelligent culture2 reflects concerns employees’ general awareness of, as • It has a code of conduct that well as attitudes and behaviors toward, promotes the values and beliefs of risk. It is a key indicator of how risk is the company, and that people managed within an organization, and understand and follow how widely the organization’s risk • It is supported by education and management policies and practices have awareness, providing employees been adopted. Embedded in day-to-day with appropriate skill sets, practices, a Risk Intelligent culture knowledge, and other risk covers all areas and activities and is competencies influenced by an organization’s • Risk considerations are woven into incentives, management systems, and performance evaluations, and an behavioral norms. It helps an established incentive structure organization achieve its mission and promotes and rewards Risk strategic objectives; it is communicated Intelligent behavior and decisions by leadership; and it promotes strong risk management, transparency, and Many companies are increasingly accountability. Such a culture also helps focused on how a Risk Intelligent employees understand how their actions culture is defined—and then, once and decisions fit within the defined, how it is measured. organization’s risk profile and Quantitative risk culture metrics, if approach. appropriate to the organization, should be included in regular risk reports to the board and management. Those metrics
might also be supplemented with key leading and lagging organizational cultural indicators.
Board of Directors
Human Resources Audit and Finance Public Policy Committee on and Compensation Committee Committee Directors' Affairs Committee
Health, Safety Executive Finance/Reserve and Retention Succession Reporting Environmental Planning
Corporate Compliance and Compensation Governance Operational Ethics Programs Policies and Procedures
Cybersecurity Other Regulatory
Political
Recommendations • Establish “safe/free” zones for those What can boards do to help cultivate a reporting potential issues, problems, Risk Intelligent culture? or concerns • Provide the right “tone at the top” to • Build an environment in which promote ownership, accountability, employees are comfortable transparency, and collaboration, and challenging others, including reinforce expectations for authority figures, and the people performance with integrity in all of who are being challenged respond its dealings with management positively • Encourage management to create repeatable processes to assess and
continuously improve the risk Risk Intelligent companies establish the culture of the organization amount of risk they are willing to take • Reward people who focus on regarding acquisitions, market managing and mitigating risk by expansion, and other strategic decisions aligning incentive, reward, and and initiatives. Generally speaking, performance systems with a focus on companies have a higher appetite for risk, compliance, and controls rewarded risks (e.g., new product • Support management in its development) and a lower appetite for commitment to enhance the risk unrewarded risks (e.g., operational culture through appropriate failures). Once the risk appetite is allocations in resources and funding, defined (usually by management) and focused risk management training approved by the board, management programs, and distribution of risk then communicates it throughout the culture surveys and survey results. organization
3. Understand and approve an Management should continually appropriate risk appetite monitor the company’s risk exposures, In some industries, the concept of risk evaluate actual risk exposure levels appetite is more quantitative; in others, against the stated risk appetite, adjust it is more qualitative. Whether dealing risk tolerances and policies as necessary, with hard metrics or softer guidelines, and report on this process to the board. determining the level and types of risks This allows board members to an organization is willing to take is a determine opportunities for rewarded difficult task—yet one that is critical to risk-taking strategies or ascertain business success. Therefore, evaluating, whether the organization is taking on challenging, and approving appropriate too much risk. It is important to risk appetite levels are key remember that risk appetite levels are responsibilities of the board. In addition, meant to be a guide—not a hard and risk appetite is an important mechanism fast rule. Because the organization will for connecting the organization’s risk not have accurate and quantifiable program to its strategy. So the board numbers for every risk it faces, there should apply the company’s risk will always be some level of ambiguity appetite to its major decisions. for setting risk exposure levels. The board should be advised and provide guidance when business decisions have
the potential to exceed, or come close to the organization and the exceeding, acceptable risk levels. Board marketplace members should be satisfied that senior • Consider advanced methods for executives understand and reconcile defining risk appetite in both various views of risk within the qualitative and quantitative ways organization. • Review “look back” analysis to determine how closely the The approach for approving a risk organization has followed approved appetite should be iterative, in order to risk appetites in making business keep pace with the organization’s ability decisions to measure risk levels, competitive • Participate in scenario analysis to pressures, regulator input, and other better understand response plans changes in the marketplace. Finally, should underlying assumptions while it may not be practical to precisely prove to be flawed and business measure risk appetite levels, they can be decisions exceed the risk appetite considered in terms of trade-offs or from • Align management incentives with a benchmarking perspective. risk appetite and do not encourage risk-taking outside of acceptable Recommendations boundaries In Risk Intelligent organizations, risk appetite is applied when signing off on new business strategy, undertaking a 4. Help management incorporate major acquisition, or any other strategic risk thinking into strategy important decisions. Boards can become One of the board’s primary roles is more effective in reviewing and advising management on the approving risk appetite levels—and in development of a strategy that aligns helping the organization apply risk with the mission of the organization, as appetite to strategic decisions when well as the short- and long-term vision they: of stakeholders. At the heart of all • Provide escalation guidance when strategic issues competing for the business decisions may exceed the board’s attention is the risk—that is, the approved risk appetite potential for loss or diminished • Work with management to create an opportunity for gain—that the strategy iterative risk appetite approach to poses to the organization’s priorities. keep pace with changes within both
Determining whether the organization’s can broaden the role of risk programs to strategic direction has been include strategic risks to allow it to “see appropriately challenged, vetted, and around the corner”—understanding optimized is a responsibility that lies potential external disruptions as well as squarely with the board. This newly created risks. responsibility is as much about focusing on the risks that limit a chosen strategy Recommendations from being successful in the near term Boards can determine if strategic risks as it is about being aware of new risks are identified and addressed in its created by the strategy. Disruptors that current strategic planning when they: could fundamentally alter an • Consider whether it provides “active organization’s ability to compete must oversight” in developing the strategy also be taken into account. Together, • Regularly engage on strategic these considerations help shape how objectives as well as strategic risks well the management team’s portfolio of • Confirm that key strategic risk strategic options can deal with an ever- indicators are developed and changing and increasingly monitored to alert decision makers unpredictable world. to potential changes • Assess potential new strategic risks The board provides important on an ongoing basis leadership in the strategic planning • Consider contingencies should the process by asking management the right organization’s risk profile change questions, fostering an open dialogue, • Encourage strategic flexibility by and considering alternative scenarios. fully understanding the drivers of Ongoing, proactive oversight by the strategic risk, as well as the factors board can add significant value by that may require a company to bringing a more expansive perspective change course to respond to risks on potential strategic risks—losses as and opportunities well as diminished opportunities.
Equipped with a dose of healthy 5. Assess the “maturity” of the risk skepticism, the board can also help keep governance process planning grounded in today’s market An organization’s risk management realities while challenging myopic capabilities, along with the board’s risk views of the future. Finally, the board governance processes, may be assessed
according to their “maturity”—that is, • Are risk identification, analysis of where they reside on a curve that keyassumptions, and scenario progresses toward Risk Intelligence. planning considered in the strategic From ad hoc practices to formal and planning process? embedded processes, and various stages • Is the board getting the necessary in between, there is no definitive information on these and similar threshold that all organizations should issues in a timely and accurate achieve. But there is a level of maturity manner? that is right for each organization, and it The answers to these questions can be a depends on how capable that valuable guide for measuring an organization needs to be in order to organization's effectiveness in providing manage its risk profile. Regular Risk Intelligent governance. assessments can help organizations determine their current maturity level, Most boards have processes for self- the level they aspire to reach, and assessment of the board and board whether the board is getting the amount committee skills and competencies. Far of information it needs to fulfill its role. too often, however, the assessment considers risk knowledge in broad The key to effective assessments? terms, such as “risk management Asking thoughtful questions to establish experience.” To enhance the ability of the current state and then assessing the the board to oversee critical risk areas, risk governance process to help boards should consider expanding the management identify, prioritize, and assessment criteria to be more specific to implement improvements. the strategic-, operational-, financial-, and compliance-related risks facing the For example: company. • How frequently is the board informed on risk management An important area for questioning is issues? how management monitors and • Are specific risks mapped to board identifies emerging risks. How robust committees and processes? are the reports on key risk indicators? Is • Which board committees are there agreement on when management responsible for various aspects of should take action? What tools (e.g., risk risk governance? sensing, risk modeling, scenario planning) are used to monitor the risks
on an ongoing basis? Also, how can the appropriate summary of trends and board get reassurance that the reports it changes since the last time the material receives about known and emerging was presented? Are the key take-aways risk exposures and opportunities are and specific actions to be taken clear to reliable? the directors?
Finally, a critical area that is often A process for management and the overlooked is the assessment of the appropriate members of the board to information provided to the board and periodically review the information in a board committees. Is it concise yet facilitated session may be an efficient comprehensive? Is the level of detail way to accomplish improvements. appropriate and reasonable? Are key risk reports accompanied by an
Initial Fragmented Top-down Integrated Risk Intelligent •Ad hoc/chaotic •Risk defined •Common risk •Coordinated risk •Risk discussion •Depends differently at assessment, management embedded in primarily on different levels of program activities across strategic individual the organization statement, policy silos planning, capital heroics, •Risk managed in •Enterprise-wide •Risk appetite fully allocation, capabilities, and silos, and risk integrated risk defined product verbal wisdom interactions assessments •Enterprise-wide development, identified in •Communication risk monitoring, etc. limited manner of top strategic measuring,and •Risk sensing and •Limited risks to the board reporting early warning risk alignment of risk •Executive/steerin •Technology- indicators used to strategies g committee enabled •Linkage to •Disparate •Knowledge processes performance monitoring and sharing across •Contingency measures and reporting risk functions plans and incentives functions •Awareness escalation •Risk activities procedures modeling/scenari os •Dedicated team •Risk to manage risk management •Industry training benchmarking used regularly
Recommendations enterprise risk management (ERM) Effective risk governance calls for a program regular assessment of the maturity of the organization’s process. A simple 6. Disclosing Risk Story to maturity model, shown in above figure, Stakeholders can help organizations gauge where Global best practices require companies they are today, as well as set plans for to explain how the board administers its the future. Here are some additional risk oversight responsibilities and how considerations for assessing the the board works with management on maturity of a risk governance process: risk-related activities. But why should • Assess the skills and knowledge of Risk Intelligent organizations stop the board on a level that provides there? The practices intend to provide enough granularity to identify greater visibility and insight into competency “gaps” in key strategic, governance areas. Yet these rules also operational, financial and present organizations with the compliance risk areas opportunity to highlight the quality of • Implement an ongoing development their board oversight practices through plan to enhance competencies disclosures above and beyond through recruitment, education, and boilerplate requirements. Therefore, the the use of outside advisors (when higher the quality of information appropriate) regarding the board’s role in risk • Periodically review the overall oversight, management’s risk quality, quantity, and usability of management processes, and how a risk-related information provided to company embeds risk monitoring into the board all that it does, the better. • Utilize a risk-based approach for the development of meeting agendas There is no intention to dictate the and materials so that adequate time governance infrastructure or processes is devoted to the most important to implement. Rather, they simply ask risks companies to report on established • Encourage management to include processes. So, when it comes to the board and relevant risk disclosure, there are no right answers. governance processes in its periodic As a result, the disclosures vary assessment of the company’s significantly from company to company.
By enhancing risk oversight disclosures, • Offer greater insight into board companies may be able to improve their processes on risk and other matters attractiveness to long-term stakeholders. • Encourage plain-English disclosures Therefore, it may be to the or supplement risk disclosures with organization’s benefit to give better quantitative analysis and graphic insights as to the risk governance and presentations management processes in place, how • Evaluate risk factor disclosures so the board is involved in overseeing that they are current, specific, those processes, what risk factors have concise, and relevant been identified, how those risks are tied to the information the board receives, if Conclusion the board has a role with regard to risk The trends and forces that impact appetite, and so on. business—along with the attendant risks—can change in a heartbeat. That’s The board may find it useful to why the role of the Risk Intelligent periodically analyze the company’s risk board is so important. Board members’ disclosures to those of peer combined breadth of perspective, depth organizations. Are there risks that of experience, and knowledge of the others seem to be concerned about that enterprise can lend valuable support to have not been adequately considered by risk management efforts and help the the company? organization both create and protect value. Recommendations Risk-related disclosures in proxy By having a solid yet forward-looking statements can provide insight into a foundation in place—beginning with company’s risk oversight and risk risk oversight and including risk management practices. Organizations culture, risk appetite, maturity can more effectively disclose their risk assessments, alignment of risk and story to stakeholders when they: strategy, and disclosure—boards can: • Provide visibility into how the • Determine that the organization has process actually works, including the an appropriate system in place for roles of the board and its identifying, evaluating, prioritizing, committees, in addition to discussing managing, and adapting to critical the structure of risk oversight risks
• Satisfy themselves that consideration • Help make the organization more of risk is embedded in the attractive to stakeholders by company’s day-to-day practices and providing greater visibility and decisions insight to into risk governance areas • Oversee management’s establishment of parameters with We hope many of the insights and respect to the level and types of risk examples that we have provided can be the organization is willing to take applied to your own boards and • Advise management on the organizations as you guide your development of a strategy that aligns organization toward Risk Intelligence. with the mission of the organization and confirm that management is Team RNM can provide support of considering strategic risks professionals in achieving the desired • Consider areas of excellence and results. development opportunities in the organization’s risk management process, highlighting those that may need attention
Page 36 STATUTORY AUDIT
R N MARWAH & CO LLP W: www.rnm.in E: [email protected] T: 011 - 43192000
Ltd. there stands a rent equalization liability. However, from 1st April, 2019, the new Ind AS on leases Ind AS 116, Leases is effective.
How the rent equalization liability should be treated on transition to Ind AS 116?
Answer According to para C5 of Ind AS 116, on (Image credits freepik.com) first-time application of this Standard, the effects of change in accounting
treatment of existing lease agreements Ind AS 116 Transition: Either should be provided either: restate comparatives or recognize
cumulative effect by (a) retrospectively to each prior retrospective application reporting period presented together
with current year's financial statements Query by applying the provisions of Ind AS An Ind AS compliant company, say A 8, Accounting Policies, Changes in Ltd. took an office building on lease at a Accounting Estimates and Errors; or time when old lease standard, Ind AS (b) retrospectively by adjusting the 17 Leases, was applicable. The lease, at cumulative effects at the time of initial the inception, was classified as application of Ind AS 116 with retained operating lease and accordingly lease earnings, or any other appropriate rentals were recognized as expense on a component of equity straight-line basis over the lease term in Retrospective application by restating accordance. Consequently, in the financial statements of prior periods balance sheet as at 31st March, 2019 of A presented
In this case, the financial information other appropriate head of equity. Both, related to existing leases as disclosed in the lease liability and right of use asset the financial statements of prior periods shall be determined in accordance presented along with current year's normal provisions of Ind AS 116. The financial statements, shall be restated as following journal entry may be passed: per accounting principles of Ind AS 116. The cumulative effect shall also be given Right-of-use asset Dr. to opening balance of each affected Rent equalization liability Dr. component of equity (generally retained Retained earnings/other appropriate Dr/Cr. earnings) for the earliest prior period component (balancing figure) presented. The restatement is done To Lease liability assuming the new Ind AS 116 had always been applied for existing leases. However, if determination of Furthermore, the financial statements of cumulative effect or/and period-specific 2018-19 shall also be restated at the time effects are impracticable then Ind AS 116 of presentation of financial statements of shall be applied retrospectively to each current year, i.e., 2019-20. prior reporting period presented to the If the retrospective effects are material extent determination of effects is then a third balance sheet as at 1 April, practicable. 2018 shall also be presented together with current year's financial statements. In the given case, assuming there is no In such case, the lease liability and right impracticability of determination of of use asset shall be recorded in this cumulative effect or period-specific balance sheet and then financial effects, A Ltd., being a lessee, should statements of 2018-19 shall be restated. recognise the lease liability and related right of use asset at the beginning of the Retrospective application by recognizing cumulative effects at the preceding period, i.e., on 1st April, 2018 time of initial application of Ind AS 116 as if Ind AS 116 had always been Where a lessee company decides to applied from the beginning of the lease. apply the provision of Ind AS 116 Any difference between the right of use retrospectively by recognizing asset together with the amount of lease cumulative effects at the time of initial rent equalization liability and the application of this Standard in retained amount of lease liability shall be earnings or any other appropriate head adjusted with retained earnings or any
of equity, the company shall recognise a When the lessee chooses first method to lease liability and a right of use asset in measure right of use asset, the respect of a lease at the date of initial difference between the value of right of application of Ind AS 116. The lease use asset together with rent equalization liability shall be measured at the present liability and the amount of lease liability value of the remaining lease payments would be recorded in retained earnings discounted using the lessee's or any other appropriate head of equity. incremental borrowing rate at the date When the lessee chooses second way to of initial application of Ind AS 116. measure right of use asset, the rent equalization liability would be treated The right of use asset at the date of as accrued lease payments and, hence, initial application of Ind AS 116 is same should be deducted from the measured by any of the following two value of lease liability at the date of ways: initial application of Ind AS 116. In this 1. It can be measured at its carrying the following journal entry may be amount as if Ind AS 116 had been passed: applied since inception of the lease. The lessee's incremental borrowing Right of use asset (balancing figure) Dr.
rate at the date of initial application Rent equalization liability Dr. shall be used for this purpose; or To Lease liability
2. It can be measured at the amount Relevant extracts equal to the lease liability as Para C5 of Ind AS 116: A lessee shall measured above and further apply this Standard to its leases either: adjusted by prepaid or accrued lease
payments relating to that lease (a) retrospectively to each prior already recorded in the balance sheet reporting period presented applying Ind immediately before the date of initial AS 8, Accounting Policies, Changes in application. Accounting Estimates and Errors; or
(b) retrospectively with the cumulative Additionally, the right of use asset so effect of initially applying the Standard measured should be checked for recognised at the date of initial impairment under Ind AS application in accordance with 36, Impairment of Assets. paragraphs C7-C13
discounted using the lessee's Para C7 of Ind AS 116: If a lessee elects incremental borrowing rate at the to apply this Standard in accordance date of initial application; or with paragraph C5(b), the lessee shall not restate comparative information. (ii) an amount equal to the lease Instead, the lessee shall recognise the liability, adjusted by the amount of cumulative effect of initially applying any prepaid or accrued lease this Standard as an adjustment to the payments relating to that lease opening balance of retained earnings (or recognised in the balance sheet other component of equity, as immediately before the date of appropriate) at the date of initial initial application. application. (c) apply Ind AS 36, Impairment of Assets, to right-of-use assets at the date Para C8 of Ind AS 116: If a lessee elects of initial application, unless the lessee to apply this Standard in accordance applies the practical expedient in with paragraph C5(b), the lessee shall: paragraph C10(b).
(a) recognise a lease liability at the date Para 22 of Ind AS 8: Subject to of initial application for leases paragraph 23, when a change in previously classified as an operating accounting policy is applied lease applying Ind AS 17. The lessee retrospectively in accordance with shall measure that lease liability at the paragraph 19(a) or (b), the entity shall present value of the remaining lease adjust the opening balance of each payments, discounted using the lessee's affected component of equity for the incremental borrowing rate at the date earliest prior period presented and the of initial application. other comparative amounts disclosed (b) recognise a right-of-use asset at the for each prior period presented as if the date of initial application for leases new accounting policy had always been previously classified as an operating applied. lease applying Ind AS 17. The lessee shallchoose, on a lease-by-lease basis, to Para 23 of Ind AS 23: When measure that right-of-use asset at either: retrospective application is required by (i) its carrying amount as if the paragraph 19(a) or (b), a change in Standard had been applied since the accounting policy shall be applied commencement date, but retrospectively except to the extent that
it is impracticable to determine either About the period-specific effects or the The Guidance Note provides guidance cumulative effect of the change. on different practical issues with a view Reference to make the accounting for depreciation - Issue 2 of Ind AS Technical Facilitation uniform throughout various companies Group (ITFG) Clarification Bulletin 21 and industries. Such issues include:
1. Shift from rates driven depreciation Time to finalise balance sheet, to useful lives driven; have a look at depreciation rules 2. Residual value of PPE; 3. Depreciation on Continuous Process Introduction Plant (CPP) In financial statements, depreciation is 4. Multiple shift depreciation; accounted for and disclosed in 5. Unit of Production Method of accordance with principles of AS Depreciation; 10, Property, Plant and Equipment. But it 6. Depreciation as per written-down is measured using the useful lives of value method; items of property, plant and equipment 7. Component Accounting; (hereinafter referred to as "PPE") as 8. Depreciation on low value PPE; specified in Schedule II to the 9. Transitional provisions Companies Act, 2013 using the methods as allowed by AS 10. However, a useful Shift from rates driven Depreciation to life that is more or less than specified Useful Lives driven one can also be used provided there is Earlier, the depreciation had been sufficient evidence. determined on the basis of depreciation To provide guidance on certain rates specified under schedule XIV to significant issues that may arise at the the Companies Act, 1956. However, the time of accounting for depreciation, the Companies Act, 2013 shifted the basis of Institute of Chartered Accountants of depreciation determination from rates to India has issued "Guidance Note on useful lives of PPE. Schedule II to the Accounting for Depreciation in Companies Act, 2013 defines useful life Companies in the context of Schedule II of an asset as the period over which it is to the Companies Act, 2013" (hereafter expected to be available for use by a referred to as "Guidance Note". company, or the number of units
expected to be produced from the asset Depreciation on Continuous Process by the entity. Plant A continuous process plant is a plant Every company is required to depreciate which is required and so designed to its PPE over the useful lives specified in operate for 24 hours a day. Such type of the schedule II. However, such PPE may plants incur huge losses in the form of be depreciated over a useful life spoilage of materials-in-process, energy different from what is specified in loss, when they do not run. However, it schedule II by disclosing the justification is possible that due to lack of demand, for the same supported by technical regular maintenance, etc. such plant evidence, in the financial statements. In may be shut down for some time. But, it such case, the company needs to assess does not change the nature of useful lives separately in accordance continuous process plant. So, for with requirements of AS 10. classification as continuous process plant, its actual use for 24 hours in a day Residual Value of PPE is not necessary. Its inherent technical As per AS 10, residual value of PPE is nature of the plant to operate for 24 the estimated amount that a company hours a day, is determining factor. would currently obtain from disposal of PPE, after deducting the estimated cost A continuous process plant shall be of disposal, if the PPE was already of depreciated over its useful life of 25 the age and in the condition expected at years as specified in schedule II. It may the end of its useful life. also be depreciated over any other useful life as assessed by the company. Schedule II provides that the residual value of PPE shall not be more than 5% Multiple Shift Depreciation of its original cost. However, a company Schedule XIV to the Companies Act, may use a residual value different from 1956 specified the depreciation rates for this limit (i.e., more or less than 5% of double and triple shift separately. On original cost of the PPE). In such case, the other hand, schedule II to the the company shall disclose the Companies Act, 2013 specified the differential amount and justification for useful lives of PPE based on their single using different useful life in the financial shift use and not on double or triple statements. shift working. So, schedule II provides that the amount of depreciation shall be
increased by 50% and 100% for that [(Cost or opening carrying amount of period in which PPE are being used for the PPE / Total number of units double and triple shift, respectively. expected to be obtained from use of the PPE) * Number of units actually Such provision shall apply only when produced during the current period] the company uses useful life as specified in schedule II or the company estimated A company should apply this method useful life separately on the basis of when the number of units that can be single shift use of PPE. obtained from use of a PPE is the major limiting factor rather than time. Before estimating the useful life of an asset at the beginning of year or at the Depreciation as per Written-down time of acquisition, a company should Value Method determine whether the asset will be If a company uses Straight Line Method used for double or triple shift on regular of depreciation then depreciation per basis or on random basis. If it is on annum is measured by dividing the cost regular basis, the useful life of the asset or carrying amount of the shall be estimated considering its use in PPE less residual value, if any, by the extra shift basis whereas if it is on useful life of the PPE. However, in case random basis, the useful life shall be of Written-down Value (WDV) method, estimated considering the use of the a new depreciation rate is calculated asset on single shift basis. using the following formula:
Unit of Production Method of R = {1 - (s/c) ^ (1/n)} * 100 Depreciation According to the provisions of AS 10, R = Rate of depreciation (%) depreciation may be charged on the s = Scrap or residual value basis of Unit of Production (UOP) c = Cost or written down value of the method. Under this method, PPE depreciation is measured on the basis of n = Useful life or remaining useful life of number of units expected to be obtained the PPE (in years) from use of PPE. So, following formula The depreciation rate so determined is can be applied: further applied to the cost or written down value of the PPE to arrive at the
depreciation to be charged to statement of a PPE separately. For this purpose, of profit and loss. the company needs cost of these significant components. The following Example: At the beginning of current criteria can be used to determine the year, a company purchased a plant for cost in the order given below: Rs. 23,63,919. The residual would be Rs. 2,50,000 and its useful life as estimated 1. Cost break-up as provided by the by the company is 11 years. Company seller or vendor of the PPE; has adopted written-down value 2. Cost break-up determined by method for charging depreciation. technical expert; Calculate depreciation for current year. 3. Fair values of components; or Rate of = {1 - (residual value / cost of 4. Current replacement cost of depreciation the asset) ^ (1 / useful life)} * component of the related PPE and 100 applying the same on the historical = {1 - (2,50,000/ 23,63,919) ^ cost of the PPE (1/11)} * 100 At the time of replacement of the = 18.47% separately recorded component, its
Depreciation for = Rs. 23,63,919 * 18.47% carrying amount shall be derecognized current year and the cost of the fresh component
= Rs. 4,36,615.80 shall be recognised and depreciated separately over its useful life.
Component Accounting Depreciation on Low Value PPE Each significant part of a PPE shall be Under schedule XIV to the Companies recognised and depreciated separately Act, 1956, the items of assets whose from other parts. A part of a PPE is actual cost does not exceed Rs. 5,000 considered as significant if its cost is were required to depreciate full in the significant to total cost of the PPE year of acquisition itself. But, there is no or/and if its useful life is different from such requirement under schedule II to the useful life of the remaining part of the Companies Act, 2013. However, a that PPE. This requirement is known as company may have an accounting 'component accounting'. policies to fully depreciate a PPE in the
1st year, whose cost is not material So, component accounting requires a according to the nature of business of company to identify, recognise and the company. depreciate each significant component
Further, para 32 of AS 20 states that for calculation of diluted earnings per AS 20: Consider share warrants share, the weighted average number of as potential equity shares while equity shares used for calculation of calculating Diluted EPS basic earnings per share shall further be increased by the weighted average
Query number of equity shares which would A company, say C Ltd. has equity share be issued on the conversion of all warrants in the books outstanding as at dilutive potential equity shares. 31st March. However, in the financial Accordingly, in the given case, C Ltd. statements, it has presented basic and should have considered equity share diluted earnings per share at the same warrants for the purpose of calculation amount. It indicates that C Ltd. has not of diluted earnings per share. considered share warrants for Relevant extracts calculation of diluted earnings per Para 4.4 of AS 20: A potential equity share. share is a financial instrument or other
contract that entitles, or may entitle, its Whether share warrants should have holder to equity shares. been considered for the purpose of calculation of diluted earnings per Para 4.5 of AS 20: Share warrants or share? options are financial instruments that
Answer give the holder the right to acquire Para 4.5 of AS 20, Earnings Per equity shares. Share defines share warrants as financial instruments that give the holder a right Para 32 of AS 20: For the purpose of to acquire equity shares of issuer calculating diluted earnings per share, company of such share warrants. the number of equity shares should be Further, as per para 4.4 of AS 20, the aggregate of the weighted average potential equity share is a financial number of equity shares calculated in instrument or other contract that entitles accordance with paragraphs 15 and 22, its holder to equity share of the issuer. and the weighted average number of Accordingly, share warrants shall be equity shares which would be issued on treated as potential equity shares. the conversion of all the dilutive potential equity shares into equity
shares. Dilutive potential equity shares employee-employer relationship. These should be deemed to have been are applied to all types of employee- converted into equity shares at the employer relationships, whether it is full beginning of the period or, if issued time employee, part-time employee, later, the date of the issue of the permanent, casual or temporary potential equity shares. employee. Reference Para 7.1 of AS 15, Employee - Topic 2 of 'Observations on AS 20' of Benefits states that employee benefits February, 2018 edition of "Study on include all forms of consideration given Compliance of Financial Reporting by an entity in exchange for services Requirements" issued by ICAI rendered by an employee to its employer.
AS 15: Expense borne by subsi of In the given case, the employees of H holding co. for employees Ltd. (holding co.) gives services to S Ltd. seconded is an employee benefit (subsidiary company) on secondment basis. Their salaries are also borne by S expense Ltd. The mechanism is that a debit note
is raised by H Ltd which is paid by S Query Ltd. The nature of such expense pertains A company, say S Ltd. has more than to employee benefit expense. 100 employees. All these employees are Accordingly, the expense borne by S on payroll of its holding company, say Ltd. is in the nature of employee benefit H Ltd. At present, these employees are expense. on a project carried out at S Ltd. For the services rendered by employees of H Relevant extracts Ltd., H Ltd. has sent a debit note and Para 7.1 of AS 15: Employee benefits are the same expense is shown by S Ltd. as all forms of consideration given by an employee benefit expense. enterprise in exchange for service Whether the accounting treatment of rendered by employees. salaries in this case is correct as per Reference accounting principles? - Topic 15 of 'Observations on AS 15' of
February, 2018 edition of "Study on Answer Compliance of Financial Reporting The provisions of AS 15, Employee Requirements" issued by ICAI. Benefits are applied not only to a formal
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