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A. Facts of the Case
1. A company is a flagship subsidiary company of another company M/s. XYZ Limited for its energy vertical activities. The company has diversified interest in energy segment both in India and overseas, like liquid fuel, thermal, hydro, stake in coal mines, etc. The company is also having various business plans/strategies to diversify further into segments like transmission, etc. To this end, the company made bids for various transmission bids announced by the Government of India through its various body corporates.
2. In order to qualify as a successful bidder for any transmission/power projects etc., all bidders have to fulfill various financial and technical criteria as per the requirements of the respective bid documents. Among others, some common financial criteria are to meet the minimum requirement of Internal Resource Generation (IRG) and net worth of the bidder either solely or in combination of consortium members as per the conditions of the bid documents.
3. In one of the recent tariff-based competitive bids announced by ABC Transmission Projects Company Ltd. (a wholly owned subsidiary of ABC Limited) to establish transmission lines, the company submitted its bid. As per its ‘Request For Qualification’ (RFQ) Document, a bidder needs to fulfill the financial requirements as defined under its clause 2.1.3 which is reproduced below:
“2.1.3.1 The Bidder must fulfill following financial requirements:
A. Internal Resource Generation:
Internal Resource Generation should be equal to atleast Rs. 145.6 crore or equivalent USD (calculated as per provisions in Clause 3.1.3.1) computed as three times of the maximum of the internal resource generated in a financial year, based on unconsolidated audited annual accounts (refer to Note below) and any other documents related to business operations of any of the last three (3) financial years immediately preceding the last date of submission of Response to RFQ.
B. Net worth:
Net worth should be equal to at least Rs. 208 crore or equivalent USD (calculated as per provisions in Clause 3.1.3.1) computed as the Net worth based on unconsolidated annual accounts (refer to Note below) of any of the last three (3) financial years immediately preceding the last date of submission of Response to RFQ.
Note: Audited consolidated annual accounts of the Bidder may be used for the purpose of financial criteria provided the Bidder has atleast 26% equity in each company whose accounts are merged in the audited consolidated accounts and provided further that the financial capability of such companies (of which accounts are being merged in the consolidated accounts) shall not be considered again for the purpose of evaluation of the Response to RFQ. Bidders shall furnish documentary evidence duly certified by Managing Director / Chief Executive Officer, being a full time director on the Board of the company /Manager of the company and the Statutory Auditor in support of their financial capability as defined in Clause 2.1.3 of this RFQ.”
As per the querist, the parameters for both Internal Resource Generation and Net worth have been defined in clause 2.1.3.2 of above-referred RFQ document. The same has been reproduced below:
“2.1.3.2 Above financial parameters shall be computed in the following manner by the Bidder:
A. Internal Resource generation
= Profit After Tax (PAT)
Add: Depreciation and Amortisation
Add: Decrease in Net Current Assets (excluding cash)
Add : Any other non-cash expenditure (including deferred tax)
Subtract Scheduled loan repayments and increase in net current assets (excluding cash)
(Emphasis supplied by the querist.)
Provided, when an existing loan has been repaid through the proceeds of a new loan, then to the extent the proceeds of the new loan have been used to repay the existing loan, such repayment of existing loan shall not be considered for the purposes of computation of Internal Resource Generation.
B. Net worth
= Equity share capital
Add: Reserves
Subtract: Revaluation Reserves
Subtract: Intangible Assets
Subtract: Miscellaneous expenditures to the extent not written off and carried forward losses.”
Accordingly, to arrive at IRG (Internal Resource Generation), net current assets need to be calculated. The ‘Net Current Assets’ is determined as under :
Total Current Assets – Total Current Liabilities.
4. The querist has stated that the term ‘current liabilities’, as per paragraph 3.35 of the Guidance Note on Terms Used in Financial Statements, issued by the Institute of Chartered Accountants of India (ICAI), refers to those liabilities (including loans, deposits and overdraft) which fall due for payment in a relatively short period, normally not more than twelve months. From the above definition, according to the querist, it is clear that all liabilities (including short-term loans, working capital facilities, bills discounting, etc.) which fall due for payment within twelve months would form part of the current liabilities.
5. The querist has further stated that Schedule VI2 to the Companies Act, 1956, does not follow this criterion strictly in respect of disclosure of all current liabilities under one head, i.e., ‘Current Liabilities’. As per the requirements of Schedule VI to the Companies Act, 1956, in the view of the querist, all working capital facilities, bills discounting facilities and short-term loans need to be classified under secured loans/ unsecured loans even though the above are in the nature of current liabilities as per the above-mentioned Guidance Note issued by the ICAI.
6. The querist has stated that the company, based on the above-mentioned Guidance Note issued by the ICAI, has calculated total current liabilities by adding the working capital facility and bill discounting disclosed under the schedule ‘Secured Loans’. On the basis of the current liabilities, determined in the aforesaid manner, the company determined the net current assets by deducting total current liabilities from total current assets. Such net current assets have been considered for calculation of IRG. Accordingly, the company has taken certificate of IRG from the statutory auditor.
7. As per the querist, ABC Ltd., however, is of the view that the net current assets should be the same figures as appearing in the financials/balance sheet. Accordingly, short term loan, working capital facilities and bills discounting shown under the head, ‘Secured Loans’ (as per the disclosure requirements of Schedule VI to the Companies Act, 1956) in the balance sheet will not form part of current liabilities and, accordingly, will not be taken into account while calculating net current assets for the purpose of determination of IRG .
B. Query
8. The querist has sought the opinion of the Expert Advisory Committee as to whether, in all cases, the calculation of net current assets has been done correctly by the company by including working capital facility, cash credit facility, short-term loans and bill discounting facilities (which are payable within a period of one year) as part of current liabilities irrespective of the fact that the above being in the nature of current liabilities are not being shown under the head ‘Current Liabilities’ and are being disclosed separately in the balance sheet as per the requirements of Schedule VI to the Companies Act, 1956.
C. Points considered by the Committee
9. The Committee notes from the Facts of the Case that the basic issue raised in the query pertains to determination of current liabilities, i.e., what items should be considered as current liabilities for bidding purposes. However, the Committee has considered the query keeping in view only the general accounting principles involved and not specifically for the purpose of the calculation of net current assets for ascertainment of IRG. In the view of the Committee, it is possible for an entity to specify the calculation of current liabilities in a different way depending on the objective which is expected to be served, e.g., for bidding purposes. However, in the absence of any such specified manner of computation, ordinarily the computations for accounting purposes may be applicable. Accordingly, the Committee has not examined any other issue that may arise from the Facts of the Case, such as, appropriateness or otherwise of the disclosure of working capital facilities, cash credit facilities and bills discounting facilities, etc. under the head secured loans/unsecured loans, or the items that may/may not be included under the head ‘current liabilities’, etc., for disclosure in the balance sheet as per the requirements of Schedule VI to the Companies Act, 1956.
10. The Committee notes the definition of the term ‘Current Liability’ as contained in the Guidance Note on the Terms Used in Financial Statements, issued by the Institute of Chartered Accountants of India, as below:
“3.35 Current Liabilit
Liability including loans, deposits and bank overdraft which falls due for payment in a relatively short period, normally not more than twelve months.”
The Committee notes from the above that the definition of the term ‘current liability’ includes all liabilities, including those which are of the nature of loans, deposits, etc., which are payable within a period of twelve months. In the view of the Committee, it implies that the basis for determining a liability as ‘current liability’ as per the Guidance Note is the timing of its payment/repayment irrespective of its disclosure as ‘secured’ or ‘unsecured’ liability, including loans, as per the requirements of Schedule VI to the Companies Act, 1956.
11. The Committee further notes that in Schedule VI, Part I – ‘Form of Balance Sheet’, on the liabilities side of the balance sheet under the head ‘Unsecured Loans’, there is an item ‘short-term loans and advances’ for which a note (d) has been given in the ‘General Instructions for Preparation of Balance Sheet’ at the end of the Form, which provides as follows:
“(d) Short-term loans will include those which are due for not more than one year as at the date of the balance sheet.”
From the above, it is clear that as per the requirements of Schedule VI, the primary bifurcation of liabilities is on the basis of whether the liabilities are secured or unsecured rather than on the basis of current or non-current liabilities. Thus, as per Schedule VI, a liability which is of the nature of loans and advances will be disclosed under the head ‘Secured Loans’ or ‘Unsecured Loans’ even if it is a current liability. Accordingly, the Committee is of the view that all liabilities including loans, whether secured or unsecured, payable within a time period of twelve months should be considered for calculating ‘current liabilities’ irrespective of the fact that the same are not being shown under the head ‘current liabilities’ in the balance sheet as per the requirements of Schedule VI to the Companies Act, 1956.
D. Opinion
12. On the basis of paragraphs 10 and 11 above and subject to paragraph 9 above, the Committee is of the opinion that the working capital facilities, cash credit facilities, short term loans and bill discounting facilities, whether secured or unsecured, which are payable within a period of one year should be considered as current liabilities, irrespective of the fact that the same are not being shown under the head ‘Current Liabilities’ in the balance sheet as per the requirements of Schedule VI to the Companies Act, 1956.
1Opinion finalised by the Committee on 24.08.2009
2Schedule VI has since been revised. Revised Schedule VI came into force for the Balance Sheet and Profit and Loss Account for the financial year commencing on or after 01.04.2011. |