Query No. 47

Subject:           

Whether capital contributions received from consumers by an electricity

company can be considered as a part of net worth.1

A. Facts of the Case

1. A company is the sole distributor of electricity in the city of Kolkata and  its  neighbouring areas.  It  has  17  lakh  consumers,  an  asset  base  of over Rs. 5000 crore, annual turnover of Rs. 1700 crore and a strength of about 15000 employees. Its shares are listed in the Calcutta, Bombay and National Stock Exchanges in India and also in the London Stock Exchange.

2. The  company  has  been  accepting  deposits  from  the  public  since 1981. Current outstanding deposit is around Rs. 135 crore and the number of deposit holders is around 1 lakh. As per the querist, the company has an impeccable record of servicing the deposit holders.

3. The  querist  has  stated  that  as  per  Rule  3(2)  of  the  Companies (Acceptance of Deposits) Rules, 1975, the company can accept deposits from the public up to a limit of 25% of the aggregate of the paid up share capital and free reserves of the company and further deposits from the shareholders upto  10% of  such aggregate.  According to  the querist,  so far the company has been accepting deposits within the statutory limits.

4. Rule 2(d) of the Companies (Acceptance of Deposits) Rules, 1975, defines ‘free reserves’ as below:

“(d)  “free  reserves”  includes  the  balance  in  the  share  premium account,  capital  and  debenture  redemption  reserve  and  any other reserves shown or published in the balance sheet of the company and created by appropriation out of the profits of the company,  but  does  not  include  the  balance  in  any  reserve created, ––

         (i)         for repayment of any future liability or for depreciation in assets or for bad debts;

         (ii)        by the revaluation of any assets of the company.”

5. The querist has referred to clarification no. 3/5/84-CL-X  dated 5^th December,  1984,  issued  by  the  Department  of  Company  Affairs, Government of India, which provides as follows:

“…..the  subsidy  received  under  the  Central  Government  Outright Grant  and  Subsidy  Scheme  can  be  treated  as  “Free  Reserve”  as defined  in  rule  2(d)  of  the  Companies  (Acceptance  of  Deposits) Rules, 1975, if all the following conditions are fulfilled:

         (i)         the subsidy under the ‘Central Government Outright Grant or Subsidy Scheme, 1971’ is received in cash;

         (ii)        the subsidy is utilised for the purpose for which it is received; and

         (iii)       the period of 5 years from the commencement of production has  lapsed  and  the  subsidy  has  not  become  recoverable                       in terms of the conditions of the grant.”

6. The querist has contended that the aforesaid subsidy has been allowed to  be  treated  as  free  reserve  though  it  is  neither  an  owned  fund  nor created  by  an  appropriation  out  of  profits.  As  per  the  querist,  the government  itself  recognises  the  need  to  be  flexible  and  to  take  into account the nature of a particular item for determining whether such an item may be treated as a part of free reserves or not.

7. The  querist  has  stated  that  in  accordance  with  the  provisions  of section  21(2)  of  the  Indian  Electricity  Act,  1910,  the  company  has formulated  ‘Conditions  of  Supply’  with  the  sanction  of  the  State Government  in  order  to  regulate  its  relations  with  persons  who  are  or intend  to  become  its  consumers.  Clause  4(b)  of  the  said  Conditions authorises the company to require the consumers to pay necessary cost for  supply-line  and  related  equipment  before  supply  is  given  to  such consumers.  Similar  provision  is  also  laid  down  in  para  (b)  of  the  first proviso  to  clause  VI (1)  of  the  Schedule  to  the  Indian  Electricity  Act,1910. The querist has further stated that such contribution is not refundable to  the  consumer  even  after  he  ceases  to  be  the  consumer  and  as  per clause 4(d) of the ‘Conditions of Supply’, the underlying assets continue to be the licensee’s property even after supply to the consumer concerned is withdrawn by the licensee. The querist has stated that the Application Book for a new connection contains the prospective consumer’s declaration to abide by the ‘Conditions of Supply’ or any amendment thereto.

8. As per the querist, in addition to the above contribution, a deposit termed as ‘Security Deposit’ is also required to be made by the consumers in  terms  of  clause  12  of  the  ‘Conditions  of  Supply’.  According  to  the querist, the security deposit, being interest bearing and refundable, is not considered for computation of deposit limits. The relevant provisions of clause 12 are reproduced below:

“The  Licensee  may  require  any  consumer  to  enter  into  a  written contract, and to deposit security, which shall be sufficient to cover the amount of three months estimated bill, at the prevailing rates for the payment of any sum due to the Licensee.”

9. As per the audited balance sheet as on 31.3.2000, the company had a balance of Rs. 137 crore on account of the contribution from consumers and year-wise balances of such contribution as per the company’s balance sheet are as below:

Year ended      Consumers’ Capital      Year end balance

                     Contribution Recd.      

                       (Rs. crore)        (Rs. crore)

31.3.1996        8.70                 81.55

31.3.1997        6.78                 88.34

31.3.1998        9.91                 98.25

31.3.1999        10.43               108.68

31.3.2000        27.99               136.67

10. The contributions from consumers have been considered as a part of ‘Other Capital’ in the model form of accounts prescribed in Annexure V to the Indian Electricity Rules, 1956. Accordingly, as per the querist, the above  contributions  are  shown  by  the  company  under  the  head  ‘Other funds’ in the balance sheet. The querist has further stated that some other licensees  have  been  showing  these  contributions  as  a  part  of  ‘Capital Reserves’ in their balance sheets so as to treat the contributions as part of their net worth.

11. The  querist  has  stated  that  the  company’s  lenders  have  all  along been considering the above contributions from consumers as a part of the company’s equity.

B. Queries

12. The querist has sought the opinion of the Expert Advisory Committee on the following issues:

        (a)        Whether the capital contribution from consumers may be treated as a part of its net worth.

        (b)        Whether such contribution may be considered for computation of  deposit  limits  in  accordance  with  the  provisions  of                       the Companies (Acceptance of Deposits) Rules, 1975.

C. Points considered by the Committee

13. The  Committee  notes  that  the  querist  has  raised  two  issues,  viz., consideration of capital contribution from consumers for the purpose of computation  of  net  worth  and  for  computation  of  deposit  limits  in accordance with the Companies (Acceptance of Deposits) Rules, 1975. As regards net worth, the opinion of the Committee is based on accounting considerations since the querist has not raised this issue in any specific context.

14. The Committee notes that the term ‘Net Assets’, as an alternative term to ‘Net Worth’ has been defined in the ‘Guidance Note on Terms Used  in  Financial  Statements’,  issued  by  the  Institute  of  Chartered Accountants of India, as follows:

“Net Assets The excess of the book value of assets (other than fictitious assets) of  an  enterprise  over  its  liabilities.  This  is  also  referred  to  as  net worth or shareholders’ funds.”

The Committee is of the view that, alternatively, the term ‘net worth’ /‘net assets’ can be defined as the excess of paid up capital and reserves (both capital and revenue) over fictitious assets of the company.

15. The Committee notes from the facts of the case that the contribution received from a consumer is not refundable to the consumer even after he ceases to be the consumer and the underlying assets continue to be the property of the company even after supply of electricity to the consumer concerned is withdrawn by the company. The Committee is, accordingly,of  the  view  that  the  amount  of  contribution  received  from  consumers should be considered as a part of net worth.

16. As  regards  the  second  issue,  i.e.,  whether  the  contribution  from consumers  may  be  considered  for  computation  of  deposit  limits  in accordance with the provisions of the Companies (Acceptance of Deposits) Rules, 1975, the Committee refrains from expressing its opinion keeping in  view  rule  2  of  the  Advisory  Service  Rules  which  prohibits  the Committee from expressing opinions on queries involving interpretation of law.

D. Opinion

17.  On the basis of the above, the Committee is of the following opinion on the issues raised in paragraph 12 above:

        (a)        Capital contribution from consumers constitutes a part of net worth.

        (b)   Refer to paragraph 16 above.

1Opinion finalised by the Committee on 18.12.2001.