A Stringent insolvency law is on the cards. The government is proposing to redefine industrial sickness. In the existing act, sickness is defined as the erosion of net worth for three consecutive years, for companies which have been in existence for five years. Under the proposed definition, the net worth erosion criteria is being brought down to 50 per cent instead of cent per cent, while default has also been included in the definition of sickness. Also, a company which has failed to pay a debt exceeding Rs 1 lakh would also be considered sick. The aim of these modifications is to detect sickness before it occurs and attempt revival. The underlying principle here is that under the existing Act, revival has failed because it has been attempted after the company has gone sick. The government attempted to introduce both these principles in the ‘97 amendments to SICA, but those amendments failed to go through in Parliament. The department of company affairs in its draft bill circulated to various ministries sometime ago had not considered the inclusion of default in the definition of sickness, but this had now been done in the final Bill. This Bill is now set to be taken to the Cabinet for approval and subsequent introduction. Considering that this Bill is being finalised in a more liberal atmosphere, when easy exit to the lenders is not being frowned upon, it has several unique features. In this Bill, employees have been placed on par with secured lenders. Under the existing Act, the secured lenders — government and then FIs, in that order — have the first lien, followed by depositors. Additionally, the new Bill proposes to encourage voluntary winding up of small companies. Only companies with a minimum capital of Rs 10 lakh would be required to submit winding-up petitions. A revival fund, paid for by companies — 0.1 per cent of turnover — would be set up for revival, rehabilitation and preservation/protection of the assets of companies. The winding up would be completed in within a two-year time-frame. Professionals would be appointed as liquidators. The administrative order procedure prevalent in UK would be adopted to expedite winding up. The main advantage of these changes according to the government is that the time taken to wind up companies would be drastically reduced from 20-25 years now to a two-year time period. Stripping of assets of sick companies would be avoided. The multiplicity of litigation before multiple courts would be reduced with since the jurisdiction of BIFR and the high courts would be subsumed under the new companies court called the National Company Law Tribunal.

Consolidated financial statement (CFS) of corporate entities would have to recognize the effect of investment made by entities or groups in associates with effect form the next financial year. An exposure draft issued by the Institute of Chartered Accountants of India (ICAI) on “Accounting for investments in associates in consolidated financial statement” recommends that the effect of the investment on the group’s financial position and operating result would have to be reflected in the CPS. The exposure draft describes an “associate” as an enterprise in which the investing company has significant influence, and that which is neither a subsidiary or a joint venture of the investing entity. Significant influence, according to the draft, is the power to participate in the financial and/or operating policy decisions of the invest without control over those policies.The exposure draft issued here late Monday said that the investment should be accounted for under the equity method. Under the equity method of accounting, investment are required to be initially recorded at cost as reserve arising at the time of acquisition. The carrying amount is increased or decreased to recognise the investee after the date of acquisition. The exposure draft contends that as the investor has significant influence over the associate, the group has a measure of responsibility for the associate’s performance and, as a result the return on its investment. The investor accounts for this stewardship by extending the scope of its CFS to include its share of results of such an associate and so provides an analysis of earnings and investments. The application of the equity method in CFS would therefore provide more informative reporting of the net assets and net income of the investor. The idea is to give a true and fair value of the investment made by a company/group, ICAI sources said. The scope of the exposure draft would be limited to the preparation and presentation of consolidated financial statements only, it does not deal with accounting for such investment in preparation and presentation of the investor. The exposure draft further said that significant influence may be gained by share ownership statute or agreement. For the purpose of share ownership. If an investor holds 20 per cent or more of the voting power of the investee, if is presumed that the investor has significant influence. The 20 per cent of the voting power could be held directly by the investing company or indirectly through its substantial or majority ownership by another investor does not necessarily preclude an investor form having significant influence. The exposure draft goes on to say that significant influence by an investor would be evidenced through in representation on the board of directors or equivalent governing body of the invest participation in the policy making process Material transaction between the investor and the invest and interchange of managerial personnel and piovision of essential technical information. The ICAI draft exempts investment made for very sort periods and cases where associate operate under severe long-term restriction that impairs its ability method evaluation. The draft also requires disclosure of the list of associates the proportion of ownership interest and proportion of voting power held in the CFS. More over the investor’s share of the profits or losses if such investment are required to be disclosed separately in the consolidated statement of profit and loss. Source : The Economic Times Dated : May 2, 2001

A Guidance note issued by the Institute of Chartered Accountants of India (ICAI) on accounting treatment for Equity Index Futures requires disclosures of total number contracts entered into and gross number of units of equity index futures traded in the balance sheets of those entering into such futures contract. Persons or entities entering into such contracts, referred, to as a client in the trading parlance, would also be required to disclose the amount of bank guarantee, book value and market value of securities lodged for all outstanding contracts at the year end if initial margin money had been paid in form of bank guarantee or by way of lodging securities. The ICAI is currently working on a comprehensive accounting Standard covering various types of financial instruments includuig equity index futures. This guidance note is an interim measure to ensure certain norms are followed for accounting for gains or losses arising out of trading in equity index futures.The guidance note would be withdrawn once the accounting standard is introduced. The client would also be required to make disclosure of number of equity index futures that have not been settled, number of units of equity index futures pertaining to those contracts and daily settlement price as of the balance sheet date. Source : The Economic Times Dated : April 27, 2001

Capital gains treatment for Esops has been restored for unlisted companies in the amendments to the Finance Bill 2001, passed by the Parliament last week. Budget 2000 had shifted from perquisites to the capital gains approach for Esops. But Finance Bill 2001 had limited its scope to listed companies by specifying that the new tax treatment would be subject to the guidelines issued by the Securities and Exchange Board of India. Since Sebi regulates only listed companies, the budget amendments had created a furore, as they created an impression that the new Esop treatment would not be available to start-ups. Amendments to the Finance Bill 2001 last week have, however, corrected this anomaly. According to the amendments, the new tax treatment would be available to ``any Employees’ Stock Option Plan or Scheme of the company offered to such employees in accordance with the guidelines issued in this behalf by the Central government.’’ According to revenue department officials, the amendments will ensure that the new tax treatment is available to all companies, irrespective of whether they are listed or not. ``When we notify the guidelines, it will be specified that the unlisted companies are also eligible,’’ officials said. Following the introduction of the Finance Bill 2001, IT and other cutting-edge technology companies had represented to the government that they need Esops far more than the old economy companies to retain staff. They had pointed out that Esops were far more important for start-ups to attract and retain talent and to compensate the employees for the risk. It is on the basis of these representations that the amendments have been made. The income tax treatment for Esops has taken nearly three years to fine-tune. Originally, the Income Tax Act provided that Esops were to be treated as perquisites. This meant that they were taxed at the point of acquisition. Cash-strapped employees refused to participate in such Esop plans. The managements argued that such a tax treatment defeated the spirit of Esops. The revenue department shifted from perquisites to capital gains approach last year, but in budget 2001, it limited the scope of the new tax treatment to companies falling under Sebi’s purview. The main idea was to regulate Esops through Sebi, but that created an anomaly, which is now being corrected through the amendments made last week. Source : The Economic Times Dated : May 1, 2001