Query No. 22

Subject:

Preparation of consolidated financial statements by a government

company and audit thereof.1

A. Facts of the Case

1. A public sector corporation has been incorporated under the Companies Act, 1956, with the main objective of managing the affairs of sick textile undertakings taken over by the Government with a view to augment the production and distribution of different varieties of cloth and yarn so as to serve the interests of the general public. It was also proposed to rehabilitate and modernise these mills after takeover by Government and make them economically viable. The present authorised capital of the company is Rs. 600 crore and paid up capital is Rs. 540.13 crore as on 31.12.2003.

2. The company has nine subsidiary companies scattered all over India.It holds about 99% shares in the subsidiaries and the balance is held by certain governments of the state where the mills are situated. The total shares in the company are held by the Central Government. The company has offered, on private placement basis, to the Government of India, guaranteed redeemable non-convertible OTS tax free bonds in the nature of debentures of Rs. 1,00,000/- each, aggregating Rs. 248.69 crore and taxable bonds in the nature of debentures of Rs. 1,00,000/- each, aggregating Rs. 1661.45 crore in various series. All the above bonds have been listed with the Stock Exchange, Mumbai (BSE) during 2003-04.

3. The querist has stated that section 211 of the Companies Act, 1956, provides that every profit and loss account and balance sheet of a company shall comply with the Accounting Standards. According to the querist, since the Act presently deals only with financial statements of individual entities, the Standard on consolidated accounts, i.e., Accounting Standard (AS) 21, ‘Consolidated Financial Statements’, is not mandatory under that Act.

4. The querist has further stated that AS 21 lays down principles and procedures for preparation of consolidated financial statements which are presented by a parent (also known as the ‘holding enterprise’) to provide financial information about the economic activities of its group. However, according to the querist, the Securities and Exchange Board of India (SEBI) requires all listed companies to prepare consolidated accounts each year in accordance with AS 21 and publish it in the annual report. AS 21 has come into effect in respect of accounting periods commencing on or after 1.4.2001. As per the SEBI Guidelines, a listed company means a public company which has any of its securities listed on any recognised stock exchange. ‘Securities’ means securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956. According to the querist, as per the said Act, ‘Securities’ include – shares, scrips, stocks, bonds and debentures etc.

B . Query

5. Since the company has issued bonds by private placement which have been listed, but its shares are unlisted, the querist has sought the opinion of the Expert Advisory Committee of the Institute of Chartered Accountant of India on the following issues:

(i) Whether the company will be treated as a ‘listed company’ and has to prepare and present consolidated financial statements.

 

(ii) If yes,

 

(a) whether the consolidated financial statements have to be audited. If so,

 

(i) whether the consolidated financial statements have to be audited and reported only by the statutory auditors of the company appointed by the Comptroller and Auditor General of India (C&AG); or

 

(ii) by any firm of chartered accountants.

 

(b) whether government audit under section 619 of the Companies Act, 1956, is required.

C. Points considered by the Committee

6. The Committee notes that section 2(h) of the Securities Contracts (Regulation) Act, 1956, defines the term ‘securities’ so as to include, interalia,

"(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate".

 

7. The Committee notes from the above that the definition of the term ‘securities’ includes bonds and debentures irrespective of how the same have been issued, i.e., whether by private placement or through offer to public at large. Since the bonds (whether taxable or tax-free) of the company are listed on the BSE, the company is a listed company and, accordingly, as per the requirements of SEBI, through the Listing Agreement with the Stock Exchange, the company is required to prepare and present consolidated financial statements as per AS 21.

8. As regards the audit of consolidated financial statements is concerned, the Committee notes Clause 32 of the Listing Agreement of BSE which, inter alia, states as follows:

"The company will mandatorily publish Consolidated Financial Statements in its Annual Report in addition to the individual financial statements. The company will have to get its Consolidated Financial Statements audited by the statutory auditors of the company and file the same with the Stock Exchange."

 

9. The Committee also notes that section 619 of the Companies Act, 1956, requires, inter alia, as below:

"(1) In the case of a Government company, the following provisions shall apply, notwithstanding anything contained in sections 224 to 233.

 

(2) The auditor of a Government company shall be appointed or re- appointed by the Comptroller and Auditor-General of India:

 

Provided that the limits specified in sub-sections (1B) and (1C) of section 224 shall apply in relation to the appointment or re-appointment of an auditor under this sub-section.

 

(3) The Comptroller and Auditor General of India shall have power –

(a) to direct the manner in which the company’s accounts shall be audited by the auditor appointed in pursuance of sub-section (2) and to give such auditor instructions in regard to any matter relating to the performance of his functions as such;

 

(b) to conduct a supplementary or test audit of the company’s accounts by such person or persons as he may authorise in this behalf; and for the purposes of such audit, to require information or additional information to be furnished to any person or persons, so authorised, on such matters, by such person or persons, and in such form, as the Comptroller and Auditor-General may, by general or special order, direct.

 

(4) The auditor aforesaid shall submit a copy of his audit report to the Comptroller and Auditor General of India who shall have the right to comment upon, or supplement, the audit report in such manner as he may think fit."

 

10. The Committee further notes that the requirements of section 619 are in the context of the ‘company’s accounts’. The Committee also notes that according to the requirements of section 210 of the Companies Act, 1956, at present, the company’s accounts comprise its profit and loss account and the balance sheet, which are required to be audited under section 227 of the Act. The Act, thus, does not require preparation and presentation of the consolidated financial statements and audit thereof. Thus, in the view of the Committee, the consolidated financial statements do not form part of the ‘company’s accounts’ within the scheme of the Companies Act, 1956. In view of this, the Committee feels that, at present, section 619 does not apply to the consolidated financial statements since the consolidated financial statements are required to be prepared under the Listing Agreement which does not stipulate an audit corresponding to audit under section 619 of the Companies Act, 1956.

D. Opinion

11. On the basis of the above, the Committee is of the following opinion on the issues raised in paragraph 5 above:

(i) The company will be treated as a ‘listed company’ and will have to prepare and present consolidated financial statements.

 

(ii) (a) The consolidated financial statements are required to be audited by the statutory auditors of the company appointed by the C&AG.

 

(b) By strict legal interpretation, the requirements of section 619 do not apply to the consolidated financial statements.

1 Opinion finalised by the Committee on 27.12.2004