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Expert Advisory Committee
ICAI-Expert Advisory Committee
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Query No. 12

Subject: 

Computation of net worth in case of non-refundable share application money pending allotment.1

A. Facts of the Case

 

1.An unlisted closely held/family owned public company (hereinafter referred to as ‘the company’) wishes to calculate its net worth as on 31st March, 2010.

 

2.The querist has stated that the net worth would comprise (a) paid-up capital (b) reserves and surplus.

 

3.The company has also received share application money from its directors and existing shareholders which is not refundable, as per the terms of the agreement for issue of shares.

 

4.The company has allotted shares to the shareholders after 31st March, 2010, i.e., in September, 2010 but before filing of income tax return in October, 2010.

 

B. Query

 

5.The querist is required to issue a certificate in respect of net worth of the company as on 31st March, 2010. Accordingly, the querist has sought the opinion of the Expert Advisory

 

Committee (EAC) on the following issues

 

(i)Should share application money received be included in the calculation of net worth?

or

 

(ii) Should a hyper-technical view be taken that merely because shares have not been allotted, this should not be included as part of the net worth?

C .Points considered by the Committee

6. The Committee notes that the basic issue raised in the query relates to whether share application money pending allotment which is non-refundable should be included in the computation of net worth as on 31st March, 2010. The Committee has, therefore, answered only this issue and has not examined any other issue that may arise from the Facts of the Case, such as, disclosure of share application money received, legal formalities to be complied with for allotment, etc. At the outset, the Committee wishes to point out that it has not considered the query for any specific purpose.  In the view of the Committee, it is possible for an authority to specify the calculation of net worth in a different way depending on the objective which is expected to be served, e.g., for bidding purposes.    

 

7. The Committee notes the definition of the terms ‘net worth’ and ‘paid-up capital’ as defined in the Companies Act, 1956, which are reproduced below:

 

“(29A) "net worth" means the sum total of the paid-up capital and free reserves after deducting the provisions or expenses as may be prescribed.

Explanation. - For the purposes of this clause, "free reserves" means all reserves created out of the profits and share premium account but does not include reserves created out of revaluation of assets, write back of depreciation provisions and amalgamation ;”

 

“(32) "paid-up capital" or "capital paid-up" includes capital credited as paid-up ;”

 

From the above, the Committee is of the view that even though the ‘Explanation’ to the definition of net worth does not specifically exclude share application money pending allotment from the free reserves, the same cannot be considered as free reserves, since it is not created out of the profits of the company. Similarly, the same cannot also be treated as paid-up capital as that is not credited as paid-up capital till 31st March, 2010. Accordingly, considering the facts and circumstances of the extant case, the Committee is of the view that share application money although non-refundable cannot be included in the calculation of net worth as on 31st March, 2010.

 

D. Opinion

8.On the basis of the above, the Committee is of the opinion that share application money pending allotment cannot be included in the calculation of net worth as on 31st March, 2010 as discussed in paragraph 7 above.

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1Opinion finalised by the Committee on 24.5.2012.