A. Facts of the Case
1. A company was incorporated under the Companies Act, 1956
in May 1994 by the Reserve Bank of India (RBI). The company
was established by the RBI with the objective of developing an
active and efficient debt market. The company is registered as a
non-banking finance company under section 45 IA of the Reserve
Bank of India Act, 1934. After the company’s formation, the RBI
introduced the scheme of ‘Primary Dealers’ in the Government
securities market. The company, along with the Discount and
Finance House of India Ltd., now SBIDFHI Ltd., was one of the
first companies to receive accreditation as a primary dealer in
India.
2. The RBI held an equity stake of 50.18 per cent in the company
with other public sector banks and financial institutions holding the
remaining stake. As a part of its policy, the RBI divested its entire
stake in the company in two stages – in the years 1997 and 2002.
3. The company is an active participant in the wholesale debt
market along with banks and financial institutions. As a primary
dealer in the government securities market, it is actively involved
in underwriting and bidding at each auction of government
securities, subscribing to the auctioned securities and selling the
acquired securities in the wholesale debt market. The company
also deals in corporate bonds, money market instruments like,
commercial paper, certificates of deposit and also equity shares
and equity derivatives.
4. The company deals in purchase and sale of securities.
Securities include the following:
(i) Government securities
(ii) Financial Institutions’ and other bonds
(iii) Equity shares
(iv) Units of mutual funds
(v) Treasury bills
(vi) Commercial papers
(vii) Certificates of deposit (CODs)
(viii) Pass through certificates (PTCs)
The querist has stated that all these securities bought are treated
as stock-in-trade. The inventory thereof is disclosed as ‘Securities
held as Stock–in–trade’ under the head ‘Current Assets’ in the
balance sheet.
5. The querist has further stated that the basic sources of income
are discount and interest/dividend income on securities and profit/
loss on trading in securities. The income is disclosed in the profit
and loss account as follows:
“Discount Income
Interest Income
Dividend Income
Trading Profit on Securities”
Further break-up of discount income and trading profit on
securities is disclosed in the schedules to the profit and loss account
as follows:
(a) Discount Income earned on Treasury bills/Commercial
papers/CODs/PTCs
Sales XXXXX
Add: Stock on hand as at the end of the year
XXXXX XXXXX
Less:
(i) Purchases XXXXX
(ii) Stock on hand as at the beginning of the year XXXXX XXXXX
Discount earned on … XXXXX
(b) Trading profit/loss on Government securities, Financial
Institutions’ & other bonds, equity shares and units of
mutual funds:
Sales XXXXX
Add: Stock on hand as at the
end of the year XXXXX XXXXX
Less : (i) Purchases XXXXX
(ii) Stock on hand as at
the beginning of the
year XXXXX XXXXX
Trading Profit/Loss on... XXXXX
(The stock is net of provision for decline in value of securities)
6. According to the querist, the Reserve Bank of India, unlike for
banks, has not issued any guidelines for disclosures in the financial
statements of the NBFCs. The company under these circumstances
draws its financial statements under the provisions of the
Companies Act, 1956 and as per Schedule VI.
7. The Comptroller and Auditor General of India (C&AG) has
objected to the aforesaid disclosure of income on the following
counts: Para 3 of Part II of Schedule VI to the Companies Act, 1956
requires a separate disclosure of certain items of income and
expenditure including the amount of turnover and purchases
in profit and loss account of the company. Para 3(i)(a) of Part
II defines ‘Turnover’ as
“The turnover, that is, the aggregate
amount for which sales are effected by the company”. Part II
further requires that in case of trading company, the Profit
and Loss Account should also disclose under separate heads
the purchase made, opening and closing stock, giving break
up of each class of goods traded in by the company and
indicating the quantity thereof. In the opinion of the C&AG the
correct method of disclosure would be to show the amount of
sales and purchases separately in the Profit and Loss Account
and provide further details in the schedules.
8. The company contends that the disclosures made in the
financial statements satisfy all the requirements of the Companies
Act, 1956 for the following reasons:
(a) Provisos to sub-sections (1) & (2) of section 211 of the
Companies Act, 1956, which provides for the form and
contents of balance sheet and profit and loss account,
give exemption from the disclosure provisions to certain
class of companies where the form of balance sheet has
been specified in any other statute. The examples of
such class of companies are banks, electricity generation
companies, insurance companies, etc. Since the
disclosures under Schedule VI are devised to cover
manufacturing companies, trading companies (trading in
manufactured goods) and service companies, the
aforesaid exemption was given especially to the finance
companies, i.e., banks and insurance companies. The
regulator, the RBI, in the case of the NBFCs has not
issued any format for the balance sheet and profit and
loss account and hence, the company has followed the
format as per Schedule VI. Hence, the disclosure
requirements for manufacturing and trading companies
should not be followed, as such disclosures will give a
misleading picture with respect to the affairs of the
company.
(b) Even otherwise, the disclosures contemplated in Schedule
VI are to be made out as to clearly disclose the result of
the working of the company during the period covered
by the financial statements. To disclose the entire
purchase and sale of securities made during the year
would show an incorrect picture. In the case of
manufacturing companies and trading companies dealing
in goods, the disclosure of each class of goods is
necessary as the top line gives a true picture and impact
on the profitability. In case of a primary dealer, such a
disclosure will bloat the top line and will not disclose the
true affairs of the company.
(c) Further, the disclosure requirements of the trading
company are not applicable to the company. The C&AG’s
contention that paragraph 3(ii)(b) of Part II of Schedule
VI to the Companies Act, 1956 is applicable to the
company is incorrect, as the company is not trading in
any kind of goods. Sub-clauses (a), (c) and (d) of
paragraph 3 are also not applicable as (a) is for
manufacturing, (c) is for companies rendering or supplying
services and (d) for composite activities mentioned in
(a), (b) and (c). Naturally, the company falls within the
purview of paragraph 3(ii)(e) relating to other companies.
The clause requires disclosure of the gross income
derived under different heads. The company is disclosing
the gross income accordingly as referred under paragraph
5 above.
9. The C & AG has requested the company to seek an opinion
from the Institute of Chartered Accountants of India on the aforesaid
issue.
B. Query
10. Under the light of the aforesaid facts, the querist has sought
the opinion of the Expert Advisory Committee on the following
issues:
(a) Whether the disclosure made by the querist of sales and
purchases under the schedules of gross income is in line
with the requirements of Schedule VI to the Companies
Act, 1956.
(b) If the answer to the query under (a) above is in the
negative, then whether the company has to disclose the
quantities of securities bought and sold during the year
as per the requirements of paragraph 3(ii) of Part II of
Schedule VI to the Companies Act, 1956.
C. Points considered by the Committee
11. The Committee notes that the basic issues raised in the query
relate to whether or not the sales and purchases of securities
made by the company are covered under paragraph 3(ii) of Part II
of Schedule VI to the Companies Act, 1956 and, accordingly,
whether the company is required to disclose quantities of securities
purchased and sold during the year in the profit and loss account
or schedules of income, as the case may be. The Committee has,
accordingly, answered only these issues and has not touched
upon any other issue arising from the Facts of the Case, such as,
transactions entered into for the purpose of speculation.
12. The Committee notes that section 211(2) of the Companies
Act, 1956 states as follows:
“211(2) Every profit and loss account of a company shall give
a true and fair view of the profit or loss of the company for the
financial year and shall, subject as aforesaid, comply with the
requirements of Part II of Schedule VI, so far as they are
applicable thereto:
Provided that nothing contained in this sub-section shall apply
to any insurance or banking company or any company engaged
in the generation or supply of electricity, or to any other class
of company for which a form of profit and loss account has
been specified in or under the Act governing such class of
company.”
From the above, the Committee is of the view that since there is
no specific form of profit and loss account specified for NBFCs,
the company in the present case has to comply with the
requirements of Part II of Schedule VI.
13. The Committee further notes paragraph 3(ii)(b) of Part II of
Schedule VI to the Companies Act, 1956, which states as follows:
“3. The profit and loss account shall set out the various
items relating to the income and expenditure of the company
arranged under the most convenient heads; and in particular,
shall disclose the following information in respect of the period
covered by the account:
…
(ii) (b) In the case of trading companies, the purchases
made and the opening and closing stocks, giving
break-up in respect of each class of goods traded
in by the company and indicating the quantities
thereof.”
14. The Committee is of the view that in the general commercial
parlance, ‘trading’ means buying and selling of goods and since
the company is actively involved in the sale and purchase of
securities and it itself considers the securities as ‘stock-in-trade’,
the company is a trading company.
15. The Committee further notes the definition of ‘goods’ as defined
in section 2(7) of the Sale of Goods Act, 1930 which states as
follows:
“(7) “goods’’ means every kind of moveable property other
than actionable claims and money; and includes stock and
shares, growing crops, grass, and things attached to or forming
part of the land which are agreed to be severed before sale or
under the contract of sale”.
On the basis of the above, the Committee is of the view that since
the securities are covered within the definition of the term ‘goods’,
the requirements as to profit and loss account applicable to trading
companies would also be applicable to the company.
D. Opinion
16. On the basis of the above, the Committee is of the following
opinion on the issues raised in paragraph 10 above:
(a) No, the disclosure made by the querist of sales and
purchases under the schedules of gross income is not in
line with the requirements of Schedule VI to the
Companies Act, 1956.
(b) The company should disclose the quantities of securities
bought and sold during the year as per the requirements
of paragraph 3(ii)(b) of Part II of Schedule VI to the
Companies Act, 1956.
1Opinion finalised by the Committee on 9.8.2007.
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