Expert Advisory Committee

1.36 Query:

Disclosure of installed capacity as per clause 4C of Part II of Schedule VI.

1. A public sector company is engaged in Iron Ore mining having various mechanised iron ore mines in the country.

2. In mines, after blasting, run of mine (ROM) is obtained and the same is processed through crushing plant and screening plant for obtaining different sizes of ores like lump ore, fine ore etc. Upto the year 1989-90, the company only marketed the lump ore and the other product, i.e., fine ore remained unused by the company. But subsequently the company started marketing of lump ore, fine ore and calibrated ore also.

3. The installed capacity was shown by the company in terms of the lump ore upto 1989-90 as per the Detailed Project Report. However keeping in view the marketing of three products, i.e., lump ore, fine ore and calibrated lump ore, the company from the year 1990-91 decided that the installed capacity of the iron ore mines of the company should not be reflected in lump ore only in the balance sheet as the company’s product range included lumps, fines and calibrated lump ore. Therefore, the company included the following note in the schedule to Profit and Loss Account:

“Installed capacity is not ascertainable due to change in Iron Ore product mix now being obtained from the mines from that contemplated in the Detailed Project Report.”

4. The Government audit observed as follows:

“Though upto the year 1989-90 the company had been indicating the installed capacity, the same was dispensed with from the subsequent year on the plea that the same was not ascertainable due to change in product mix now being obtained from the mines from that contemplated in the DPR. As the company is producing one major item, viz., iron ore (both lumps and fines) before and after 1989-90 through the facilities created, installed and updated, the stand taken by the company lacks adequate justification. Further, non-indication of installed capacity violated the provisions of clause 4C of Part II of Schedule VI of the Companies Act, 1956.”

5.The querist has referred the following issues for the opinion of the Expert Advisory Committee:

(a) Whether clause 4C of Part II of Schedule VI to the Companies Act, 1956, is applicable to the company as it covers only manufacturing companies and not mining companies.

(b) Whether the company is required to disclose installed capacity on the basis of mining of run of mine (ROM) or processed ore, i.e., lump, fines and calibrated lump ore which are saleable finished goods.

Opinion March 7, 1995

1.The Committee notes that clause 4(c) of Part II of Schedule VI to the Companies Act, 1956, requires, inter alia, the following disclosures:

“In the case of manufacturing companies, the profit and loss account shall also contain, by way of a note in respect of each class of goods manufactured, detailed quantitative information in regard to the following namely:

(a) the licensed capacity (where licence is in force);

(b) the installed capacity; and

2. The Committee notes paragraphs no. 17.2 and 17.4 of ‘Statement on Amendments to Schedule VI to the Companies Act 1956’ issued by the Institute of Chartered Accountants of India, which state as below:

“17.2 A manufacturing activity cannot be defined exhaustively or comprehensively. However, broad lines of guidance may be provided. In general terms, it may be said that a manufacturing activity involves the conversion of articles from one form to another by physical labour, or mechanical aid or both. A manufacturing activity has to be distinguished from a trading activity on the one hand, and a service operation on the other. In a large majority of cases, it may not be difficult to distinguish a manufacturing activity by its various characteristics……”

“17.4 Broadly, four different types of activity may need to be considered when discussing the scope and extent of the term “manufacturing activity”: -

(a) an activity which involves the conversion of articles from one form to another by physical labour or mechanical aid, or both;

(b) processing operations, particularly in the case of chemical industries, foods processing industries, etc.;

(d) industrial operations which result in the creation of energy or the transfer of invisible services, e.g., electricity undertaking and other public utility concerns, mining industries, etc.”

3. On the basis of the above and from the facts of the query since the company is processing the run-of-mine obtained from iron ore mines through crushing and screening plant for getting saleable products, the company can be considered to be performing a manufacturing activity.

4. The Committee is of the view that the installed capacity should be disclosed as per the license in respect of the products covered by a license. Where no license is required to be obtained in respect of the manufactured products, the Committee notes para 16.10 of the aforesaid Statement, which is reproduced below:

“16.10 Occasionally, a problem may arise with regard to the disclosure of the installed capacity in a case where a company has no industrial license because none is needed. The question which would then arise is with reference to the classification of the goods to be furnished for the purpose of disclosing the installed capacity. In a case where no manufacturing license is involved, the installed capacity cannot be classified by reference to the goods specified in the industrial license. In such a case, it is suggested that any other reasonable basis of classification should be adopted and once adopted, it should be applied uniformly and consistently unless there are good reasons for initiating a change in the classification.”

5. The Committee is accordingly of the following opinion in respect of the issues raised by the querist in para 5 of the query:

(a) The disclosure requirements of clause 4(c) of Part II of Schedule VI of the Companies Act, 1956 are applicable to the company.

(b) Disclosure of installed capacity in respect of lumps, fine ore and calibrated lump ore should be on the basis as described in para 4 above.

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