Accounting Standard (AS-7 and 102) and Budget Highlight

New year new amendments

Different group of people celebrate different dates as New Year. Professionals like us may not celebrate but consider April 1st as our real New Year, the beginning of Accounting Year. As like every New Year, we have a list of amendments and enactments on this April 1st. In this edition, we are going to see one of such amendment that is coming to effect from the first day of April. It is about the new amendments in Companies (Indian Accounting Standards) (Amendment) Rules, 2017. And a brief of Budget 2017 Highlights

As usual, the Legal terms and News Bites related to notifications by MCA, SEBI, RBI and IT Department follows the articles.

Saranya Deivasigamani,
CEO

Amendment in Accounting standards

The MCA has notified the Companies (Indian Accounting Standards) (Amendment) Rules, 2017, making amendments in ‘Ind AS 102 on Share-based Payment’ and ‘Ind AS 7 on Statement of Cash Flows’ applicable w.e.f. 1st April, 2017. The following companies shall comply with the Indian Accounting Standards (Ind AS) for the accounting periods beginning on or after 1st April, 2017, with the comparatives for the periods ending on 31st March, 2017, or thereafter, namely:-

Companies whose equity or debt securities are listed or are in the process of being listed on any stock exchange in India or outside India and having net worth of less than ₹. 500 crore;
Companies other than those covered in clause (ii) of sub- rule (1) and sub clause (a) of clause (iii) of sub-rule (1), that is, unlisted companies having net worth of ₹. 250 crore or more but less than ₹. 500 crore .
Holding, subsidiary, joint venture or associate companies of companies covered under sub-clause (a) of clause (iii) of sub- rule (1) and sub-clause (b) of clause (iii) of sub- rule (1), as the case may be: ( in other words of the above companies)

Thus, unlisted companies having net worth less than ₹. 250 crore will not be covered in any of above phases. They will be covered as and when their net worth crosses the thresholds prescribed above.

Indian company which is a subsidiary, associate, joint venture and other similar entities of a foreign company shall prepare its financial statements in accordance with the Ind AS either voluntarily or mandatorily if it meets the criteria as specified in sub-rule (1). All share-based payment transactions even if entity can’t identify specifically some or all services received, including:

Equity settled share-based payment transactions.
Cash settled share-based payment transactions.
As per terms of arrangement of receiving goods or services, the entity or supplier can settle transaction in cash or equity shares.

A grant of equity instruments might be conditional upon satisfying specified vesting conditions. Vesting conditions, other than market conditions, shall not be taken into account when estimating the fair value of the shares or share options at the measurement date, Instead, vesting conditions, other than market conditions, shall be taken into account by adjusting the number of equity instruments included in the measurement of the transaction amount so that, ultimately, the amount recognised for goods or services received as consideration for the equity instruments granted shall be based on the number of equity instruments that eventually vest. Hence, on a cumulative basis, no amount is recognised for goods or services received if the equity instruments granted do not vest because of failure to satisfy a vesting condition, other than a market condition.

For cash-settled share-based payment transactions, the entity shall measure the goods or services acquired and the liability incurred at the fair value of the liability. Until the liability is settled, the entity shall re-measure the fair value of the liability at the end of each reporting period and at the date of settlement, with any changes in fair value recognised in profit or loss for the period.

An entity shall provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arisng from cash flows and non-cash changes. An entity shall disclose the following changes in liabilities arising from financing activities:

Changes from financing cash flows;
Changes arising from obtaining or losing control of subsidiaries or other businesses;
The effect of changes in foreign exchange rates;
Changes in fair values.

Liabilities arising from financing activities are liabilities for which cash flows were, or future cash flows will be, classified in the statement of cash flows as cash flows from financing activities. One way to fulfill the disclosure requirement is by providing reconcilliation between the opening and closing balances in the balance sheet for liabilities. Where an entity discloses such reconcilliation, it shall provide sufficient information to enable users of the financial statements to link items included in the reconcilliation to the balance sheet and the statement of cash flows.

Thus, from April 2017 Ind AS shall apply to all listed companies irrespective of their net whereas the unlisted companies shall be required to comply with Ind AS only if their net worth is equal to or exceeding ₹.250 crore.

BUDGET HIGHLIGHTS

FINANCIAL SECTOR

Foreign Investment Promotion Board to be abolished in 2017-18 and further liberalisation of FDI policy is under consideration.
An expert committee will be constituted to study and promote creation of an operational and legal framework to integrate spot market and derivatives market in the agricultural sector, for commodities trading. e- NAM to be an integral part of the framework.
Bill relating to curtail the menace of illicit deposit schemes will be introduced.
A mechanism to streamline institutional arrangements for resolution of disputes in infrastructure related construction contracts, PPP and public utility contracts will be introduced as an amendment to the Arbitration and Conciliation Act 1996.
A Computer Emergency Response Team for Financial Sector (CERT-Fin) will be established.

EASE OF DOING BUSINESS

Scope of domestic transfer pricing restricted to only if one of the entities involved in related party transaction enjoys specified profit-linked deduction.
Threshold limit for audit of business entities who opt for presumptive income scheme increased to ₹. 2 crores. Similarly, the threshold for maintenance of books for individuals and HUF increased to turnover of ₹. 25 lakhs or income of ₹. 2.5 lakhs.
Foreign Portfolio Investor (FPI) Category I & II exempted from indirect transfer provision. Indirect transfer provision shall not apply in case of redemption of shares or interests outside India as a result of or arising out of redemption or sale of investment in India which is chargeable to tax in India.
Commission payable to individual insurance agents exempt from the requirement of TDS subject to their filing a self-declaration that their income is below taxable limit.
Under scheme for presumptive taxation for professionals with receipt upto ₹. 50 lakhs p.a. advance tax can be paid in one instalment instead of four.
Time period for revising a tax return is being reduced to 12 months from completion of financial year, at par with the time period for filing of return.
Also the time for completion of scrutiny assessments is being compressed further to 18 months for Assessment Year 2018-19 and further to 12 months for Assessment Year 2019-20 and thereafter.

INCOME-TAX

Existing rate of taxation for individual assesses between incomes of ₹. 2.5 lakhs to ₹. 5 lakhs reduced to 5% from the present rate of 10%.
Surcharge of 10% of tax payable on categories of individuals whose annual taxable income is between ₹.50 lakhs and ₹. 1 crore.
Simple one-page form to be filed as Income Tax Return for the category of individuals having taxable income upto ₹. 5 lakhs other than business income.
Appeal to all citizens of India to contribute to Nation Building by making a small payment of 5% tax if their income is falling in the lowest slab of ₹. 2.5 to ₹. 5 lakhs.

GOODS AND SERVICES TAX

The GST Council has finalised its recommendations on almost all the issues based on consensus on the basis of 9 meetings held.
Preparation of IT system for GST is also on schedule.
The extensive reach-out efforts to trade and industry for GST will start from 1st April, 2017 to make them aware of the new taxation system.

LEGAL TERM

Inter Vivos

[Latin: Between the living] Refers to a gift or other non-sale transfer between living parties. This is in contrast to a will, where the transfer takes effect upon one party’s death.

MCA Updates

MCA notifies sections of Insolvency and Bankruptcy Code, 2016 will come into effect from 1st April, 2017.

SEBI Updates

SEBI (Payment of Fees And Mode Of Payment) (Amendment) Regulations, 2017.

RBI Updates

RBI announces draft guidelines of Simplified Hedging Facility for Residents and Non-Residents.
The limits for investment by FPIs in Govt securities were last increased in terms of Medium Term Framework (MTF).

Income Tax Updates

Amendment to Section 269ST for ‘No Penalty on Cash Withdrawals above Rs. 2 Lakhs from Banks.
Income-tax (6th Amendment), Rules, 2017 notified to amend Rule 19AB and Format of Report of Form No. 10DA, applicable w.e.f. 1 Apr. 2017.
Income-tax (5th Amendment) Rules, 2017 applicable w.e.f. 1 Apr. 2017 notified and Rule 5G inserted reg. Option Form (Form No. 3CFA) for taxation of income from patent under section 115BBF.
Govt. notifies tax exemption for certain specified incomes of SERB u/s 10(46) during FY 2013-14 to 2017-18.

First case law discussion

First Case Law Discussion

In our January 2017 newsletter you might have seen in detail about Insolvency and Bankruptcy Code, 2016 and its impact on professions like CA and CS (if you missed get it here http://www.zappyconsults.com/january-2017). This month, we are here with a recent case law which is the first case filed against the code filed in NCLT in India. This is also our first case law discussion in ZappyNews.

Our usual Legal terms and News Bites related to notifications by MCA, SEBI, RBI and IT Department follows the article.

Saranya Deivasigamani,
CEO

CASE LAW ON IBC, 2016

Pursuant to notification of the provisions relating to insolvency resolution and liquidation process under the Insolvency and Bankruptcy Code, 2016 (Code), several applications have been made to the National Company Law Tribunal (NCLT) since mid‑ December by creditors and corporate debtors themselves. Keeping up with the tight timelines under the Code, the judicial response has been swift and the NCLT has begun reviewing and admitting applications in line with the provisions of the Code.

The Ministry of Corporate Affairs, by way of Notification no. S.O. 3594(E) dated 30 November 2016, has notified 1 December 2016 as the date for commencement and enforcement of certain core sections of the Insolvency and Bankruptcy Code, 2016 (“the Code”), as listed below –

clause (a) to clause (d) of section 2 (except with regard to voluntary liquidation or bankruptcy);
section 4 to section 32 [both inclusive];
section 60 to section 77 [both inclusive];
section 198;
section 231;
section 236 to section 238 [both inclusive]; and
clause (a) to clause (f) of sub-section (2) of section 239.

The provisions pertain to the corporate insolvency resolution process envisaged under the Code.

In this article we are going to see about Innoventive Industries, the company that lost a case under the Insolvency and Bankruptcy Code has moved the Bombay High Court questioning the constitutional validity of the law that allows banks to liquidate assets of a company whose debts are not recast within 180 days. ICICI Bank (the Applicant company) had filed a case at the National Company Law Tribunal (NCLT), the first under the new law, to initiate corporate insolvency resolution process on Innoventive Industries.

Innoventive Industries Ltd (the Respondent company) a Pune-based iron and steel product manufacturer, is struggling to survive. Its share price is languishing at about one-fifth of its listing price, its liabilities have skyrocketed, so has its loss. Before entering the capital markets, Innoventive had total revenues of .425.2 crore. Today, its annual loss is more than that. The company’s misfortune has left several investors, including institutional investors, who were lured by the ‘growth story’ of Innoventive. Hence the company which came out with an IPO three years ago and generated lots of interest among the institutional investors, lost around .400 crore (80%) of net worth over the last year, its liabilities increased significantly and opted for CDR plans. Financial institutions are waiting to recover debts from Innoventive. Shareholders, who invested in the IPO have already lost value, as Innoventive has been hitting lower circuits and is now trading around .16 on BSE. The Exchange too has now shifted the Innoventive scrip to ‘T’ group (Trade-to-trade) as a surveillance measure.

The Applicant company namely ICICI Bank Ltd. mentioned this Company Petition on 22.12.2016 stating that the Corporate Debtor namely Innoventive Industries Ltd. availed .240,74,57,388 as Term Loan facility, .221,80,00,000 as Working Capital facility, and $7 million as External Commercial Borrowing facility, but when the Respondent company later defaulted in making payments, this applicant says the default occurred on 30.11.2016 for .212,22,10,737 towards RTL facility, .27,50,05,661 towards Working Capital facility and .211,47,58,969 towards External Commercial Borrowing facility. Since the aforesaid facilities have not been recalled, the total outstanding amount payable by this corporate debtor is .21,019,177,034 as on November 30, 2016 and the Corporate Debtor is liable to pay the outstanding amount together with interest cost, expenses and other moneys which shall accrue on the contractual rate.

ICICI’s application has been filed under Section 7(1) of the Code, which enables a ‘financial creditor’ either by itself or jointly with other financial creditors to initiate the corporate insolvency resolution process. As the first of its kind case filed under the Code, this is expected to serve as a primer for the suits that follow.

ICICI Bank v/s Innoventive Industries Limited

As a first of its kind, the NCLT (Mumbai) has, on 17 January 2017, passed an order in the matter of ICICI Bank Limited v/s Innoventive Industries Limited (Innoventive Order) inter alia admitting the application under the Code filed by ICICI Bank for initiating the corporate insolvency resolution process (CIR Process). An application was filed by ICICI Bank stating that the corporate debtor i.e. Innoventive Industries Limited (Innoventive) had availed a term loan facility, a working capital facility and an external commercial borrowing and had defaulted in repayment of these amounts. Accordingly, they sought initiation of the CIR Process under provisions of the Code.

Innoventive contended that it had been declared as a ‘relief undertaking’ under the Maharashtra Relief Undertaking (Special Provisions) Act, 1958 (MRU Act) and consequently, the existing proceedings against it stand suspended until 21 July 2017. Further, the contention was also supplemented with an argument that the MRU Act has a non-obstante clause which empowers the State Government to suspend any remedy for enforcement in relation to any right or liability accrued prior to an entity being declared as a relief undertaking.

The NCLT rejected the aforesaid argument and passed an order accepting the application and declaring moratorium, observing as under:

Section 238 of the Code also contains a non-obstante clause similar to the MRU Act, which states that the provisions of the Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law. Since the Code is subsequent to the MRU Act, the non-obstante clause under Section 238 of the Code prevails.
The suspension of liability under the MRU Code is inconsistent with the ability of a creditor to initiate the CIR Process under the Code and therefore, the overriding powers under Section 238 of the Code shall render the suspension under MRU act inoperative.
Declaration of moratorium keeps business as usual for employees without affecting their interest and therefore a declaration of moratorium would not be in conflict with the objective of the MRU Act (which is to prevent unemployment of the existing employees of a relief undertaking).

This is the first case in India filed under the Insolvency and Bankruptcy Code, 2016, and it will provide a primer on how the new law will help tackle the banking system’s nearly .6.7 trillion of bad loans. The banks are hoping that the new law will enable them to expedite recovery and revive companies within a reasonable timeframe. The code is expected to empower the judicial system to handle corporate defaults and winding-up petitions. The NCLT would be the adjudicating authority on these matters and function under strict deadlines prescribed by the code.