Query No. 26

Subject:           

Disclosure of unutilised monies raised from promoters.1

A. Facts of the Case

1. A  public  sector  company was incorporated  on  16.4.1999  by three promoter companies. During the financial year 1999-2000, it raised Rs. 6 crore as equity capital from its three promoter companies.

2. While carrying out the audit of the annual accounts of the company for  the  financial  year  1999-2000  under  section  619  of  the  Companies Act, 1956, the C&AG commented as below:

“An amount of Rs. 6 crore, which was raised through share capital and kept in term deposits, should have been separately disclosed in the Balance Sheet as per the provisions contained in Schedule VI to the Companies Act, 1956.”

3. The company replied to the C&AG’s comments as below:

“The  amount  was  received  from  promoters  through  allotment  of shares and not through public issue and was, therefore, not disclosed separately.”

B. Query

4. The querist has sought the opinion of the Expert Advisory Committee as to whether the company is required to disclose in its annual accounts, the  utilisation  of  the  money  raised  by  it  through  equity  issue  from  its three promoters.

C. Points considered by the Committee

5. The Committee notes that Schedule VI to the Companies Act, 1956,requires disclosure under the head ‘Investments’ in the following manner:

“INVESTMENTS:

Showing nature of investments and mode of valuation, for example cost or market value and distinguishing between –

....

(5) Balance of unutilised monies raised by issue.”

The  instructions  in  this  regard  contained  in  the  Schedule  provide  as follows:

“All unutilised monies out of the issue must be separately disclosed in the balance sheet of the company indicating the form in which such unutilised funds have been invested.”

The Committee further notes that in Schedule VI under the head ‘Current Assets’, sub-head ‘Bank balances’, although there is no requirement of a separate classification, the instructions under the sub-head are the same as that for the head ‘Investments’ reproduced above.

6. The Committee notes that the words used in Schedule VI are “monies raised  by  issue”  and  “monies  out  of  the  issue”  and  no  distinction  has been  made  between  monies  raised  by  issue  of  shares  to  the  public  at large through public issue and monies raised by issue of shares, by way of  allotment  to  the  promoters.  The  Committee  is,  accordingly,  of  the view  that  the  above  requirements  apply  to  both  issue  of  shares  to  the public at large through public issue and issue of shares to the promoters by private placement. The Committee is also of the view that ‘allotment’ of shares can not be construed to be different from the ‘issue’ of shares. The  Committee  is,  therefore,  of  the  view  that  the  company  should separately disclose all the unutilised monies out of the equity issue to its promoter  companies  in  its  balance  sheet  under  the  head  ‘Investments’ and/or under ‘Bank balances’, as appropriate, indicating the form in which such unutilised funds have been invested.

D. Opinion

7.  On the basis of the above, the Committee is of the opinion that the company should separately disclose all the unutilised monies out of the equity  issue  to  its  promoters  in  its  balance  sheet  under  the  head ‘Investments’  and/or  under  ‘Bank  balances’,  as  appropriate,  indicating the form in which such unutilised funds have been invested.

1Opinion finalised by the Committee on 5.7.2001.