FREQUENTLY ASKED QUESTIONS UNDER FEMA

I. Foreign Investments

Q 1: How can an Indian company receive foreign investment?

Answer: The routes under which foreign investment can be made is as under:

1. Automatic Route: Foreign Investment is allowed under the automatic route without prior approval of the Government or the Reserve Bank of India, in all activities/ sectors as specified in the Annex B of Schedule 1 to Notification No. FEMA 20.
2. Government Route: Foreign investment in activities not covered under the automatic route requires prior approval of the Government which are considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, Ministry of Finance. Application can be made in Form FC-IL, which can be downloaded from http://www.dipp.gov.in. Plain paper applications carrying all relevant details are also accepted. No fee is payable.

Q 2: What are the instruments for receiving foreign investment in an Indian company?

Answer: An Indian Company can receive foreign investment by issue of

1. Equity shares issued in accordance with the provisions of the Companies Act, 2013;
2. Fully and mandatorily convertible preference shares, and fully and mandatorily convertible debentures. The price/ conversion formula of convertible instruments should be determined upfront at the time of issue of the instruments and should not in any case be lower than the fair value worked out, at the time of issuance of such instruments, in accordance with FEMA 20
3. Partly paid equity shares and warrants issued by an Indian company in accordance with the provision of the Companies Act, 2013 and the SEBI guidelines, as applicable, The pricing and receipt of balance consideration shall be as stipulated in terms of A.P.(DIR Series) Circular No.3 dated July 14, 2014 as modified from time to time.

The above shall be known as “FDI compliant instruments” and can contain an optionality clause subject to a minimum lock-in period of one year or as prescribed for the specific sector, whichever is higher, but without any option or right to exit at an assured price.

Non-convertible/ optionally convertible/ partially convertible preference shares issued as on and up to April 30, 2007 and optionally convertible/ partially convertible debentures issued up to June 7, 2007 till their original maturity are reckoned to be FDI compliant instruments. Non-convertible/ optionally convertible/ partially convertible preference shares issued after April 30, 2007 and optionally convertible/ partially convertible debentures issued after June 7, 2007 shall be treated as debt and shall require conforming to External Commercial Borrowings guidelines regulated under Foreign Exchange Management (Borrowing and Lending in Foreign Exchange Regulations), 2000, as amended from time to time.

Q 3: Whether extension of compulsorily convertible preference shares (CCPS) or compulsorily convertible debentures (CCDs) requires RBI approval?

Answer: Tenor of convertible instruments will be guided by the instructions framed under the Companies Act, 2013 and the rules framed thereunder. However, the investee company should ensure that the price/ conversion formula of convertible capital instruments is determined upfront at the time of issue of the instruments. The price at the time of conversion should not in any case be lower than the fair value worked out, at the time of issuance of such instruments, in accordance with the extant FEMA regulations.

Q 4: What is a convertible Note?

Answer: A Convertible Note is an instrument issued by a start-up company evidencing receipt of money initially as debt, which is repayable at the option of the holder, or which is convertible into such number of equity shares of such startup company, within a period not exceeding five years from the date of issue of the convertible note, upon occurrence of specified events as per the other terms and conditions agreed to and indicated in the instrument.

Q 5: Who can invest in a convertible Note and what are the instructions in this regard?

Answer: A person resident outside India (other than an individual who is citizen of Pakistan or Bangladesh or an entity which is registered/ incorporated in Pakistan or Bangladesh), may purchase convertible notes issued by an Indian start-up company for an amount of twenty five lakh rupees or more in a single tranche. A start-up company engaged in a sector where foreign investment requires Government approval may issue convertible notes to a non-resident only with approval of the Government. The amount of consideration should be received by inward remittance through banking channels or by debit to the NRE/ FCNR (B)/ Escrow account maintained by the person concerned.

Q 6: What are the modes of payment allowed for receiving Foreign Direct Investment in an Indian company?

Answer: An Indian company issuing shares/ convertible debentures to a person resident outside India shall receive the amount of consideration by:

1. inward remittance through normal banking channels;
2. debit to NRE/ FCNR (B) account of a person concerned maintained with an AD Category I bank;
3. debit to non-interest bearing Escrow account in Indian Rupees in India which is opened with the approval from AD Category – I bank and is maintained with the AD Category I bank on behalf of residents and non-residents towards payment of share purchase consideration;
4. conversion of royalty/ lump sum/ technical know-how fee due for payment or conversion of ECB;
5. conversion of pre-incorporation/ pre-operative expenses incurred by the a non-resident entity up to a limit of five percent of its capital or USD 500,000 whichever is less;
6. conversion of import payables/ pre incorporation expenses/ can be treated as consideration for issue of shares with the approval of FIPB;
7. against any other funds payable to a person resident outside India, the remittance of which does not require the prior approval of the Reserve Bank or the Government of India: and
8. Swap of capital instruments, provided where the Indian investee company is engaged in a Government route sector, prior Government approval shall be required

If the shares or convertible debentures are not issued within 180 days from the date of receipt of the inward remittance or date of debit to NRE/ FCNR (B)/ Escrow account, the amount shall be refunded. Further, Reserve Bank may on an application made to it and for sufficient reasons permit an Indian Company to refund/ allot shares for the amount of consideration received towards issue of security if such amount is outstanding beyond the period of 180 days from the date of receipt.

Q 7: Which are the sectors where foreign investment is prohibited?

Answer: Foreign investment is prohibited in the following sectors:

1. Lottery Business including Government / private lottery, online lotteries, etc.
2. Gambling and Betting including casinos etc.
3. Chit funds
4. Nidhi company
5. Trading in Transferable Development Rights (TDRs)
6. Real Estate Business or Construction of Farm Houses
7. Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes
8. Activities / sectors not open to private sector investment e.g. (I) Atomic energy and (II) Railway operations (other than permitted activities mentioned in entry 18 of Annex B).

Note: Foreign technology collaboration in any form including licensing for franchise, trademark, brand name, management contract is also prohibited for Lottery Business and Gambling and Betting activities.

Q 8: What are the guidelines for transfer of existing shares from non-residents to residents or residents to non-residents?

Answer: The term ‘transfer’ is defined under FEMA, 1999 as "sale, purchase, acquisition, mortgage, pledge, gift, loan or any other form of transfer of right, possession or lien” {Section 2 (ze) of FEMA, 1999}.

The following share transfers are allowed without the prior approval of the Reserve Bank of India subject to the conditions laid down in FEMA 20:

1. Transfer by way of sale or gift between a person resident outside India (not being a NRI or an OCB) and any person resident outside India;
   
   Prior Government approval shall be obtained for any transfer in case the company is engaged in a sector which requires Government approval.
2. Transfer of shares by way of sale or gift by a NRI to any NRI;
   
   Prior Government approval shall be obtained for any transfer in case the company is engaged in a sector which requires Government approval
3. Transfer by way of gift by a person resident outside India to a resident;
4. Transfer by way of sale on a recognized stock exchange by a person resident outside India;
5. Transfer by way of sale or gift by a resident to a person outside India subject to conditions prescribed in Regulation 10 of FEMA 20;

Q 9: What if the transfer of shares from resident to non-resident does not fall under the above category?

Answer: The cases have to be approved by Government of India or the Reserve Bank

(a) Transfer of Shares by Resident which requires Government approval

(1) Transfer of shares of companies engaged in sector falling under the Government Route.

(2) Transfer of shares resulting in foreign investments in the Indian company, breaching the sectoral cap applicable.

(b) Transfer of shares requiring prior permission of the Reserve Bank

(1) A person resident in India, who intends to transfer any security, by way of gift to a person resident outside India, has to obtain prior approval from the Reserve Bank.

(2) Any other case not covered by General Permission.

Q 10: What is the method of payment and remittance/ credit of sale proceeds in case of transfer of shares between resident and non-resident?

Answer:

1. The sale consideration in respect of the shares purchased by a person resident outside India shall be remitted to India through normal banking channels.
2. In case the buyer is a Foreign Institutional Investor (FII) / Foreign Portfolio Investor (FPI), payment can be made by debit to its Special Non-Resident Rupee Account.
3. In case the buyer is an NRI, the payment shall be remitted to India through normal banking channel or by way of debit to his NRE/FCNR (B) accounts. If the shares are acquired on non-repatriation basis by NRI, the consideration can also be paid by debit to his NRO account.
4. The sale proceeds of shares (net of taxes) sold by a person resident outside India) may be remitted outside India.
5. In case of FII/ FPI the sale proceeds may be credited to its special Non-Resident Rupee Account.
6. In case of NRI, if the shares sold were held on repatriation basis, the sale proceeds (net of taxes) may be credited to his NRE/ FCNR (B) accounts and if the shares sold were held on non-repatriation basis, the sale proceeds should be credited only to his NRO account subject to payment of taxes.
7. The sale proceeds of shares (net of taxes) sold by an erstwhile OCB may be remitted outside India directly if the shares were held on repatriation basis and if the shares sold were held on non-repatriation basis, the sale proceeds may be credited to its NRO (Current) Account subject to payment of taxes, except in the case of erstwhile OCBs whose accounts have been blocked by Reserve Bank.

Q 11: Are the investments and profits earned in India repatriable?

Answer: All foreign investments are repatriable (net of applicable taxes) except in cases where the investment is made or held on non-repatriation basis or where the sectoral condition specifically mentions non-repatriation.

Further, dividends/ profits (net of applicable taxes), on foreign investments, being current income can be remitted outside India through an Authorised Dealer bank.

Q 12: What are the guidelines on issue and valuation of shares in case of existing companies?

Answer: The pricing shall be as per the following guidelines:

(1) The price of shares issued by an Indian company or transferred from a person resident in India to a person resident outside India shall not be less than:

1. the price worked out in accordance with the relevant SEBI guidelines in case of a listed Indian company;
2. the valuation of capital instruments done as per any internationally accepted pricing methodology for valuation on an arm’s length basis duly certified by a Chartered Accountant or a SEBI registered Merchant Banker, in case of an unlisted Indian Company.

Note: in case of convertible capital instruments, the price/conversion formula of the instrument should be determined upfront at the time of issue of the instrument. The price at the time of conversion should not in any case be lower than the fair value worked out, at the time of issuance of such instruments, in accordance with the extant FEMA regulations.

(2) The price of shares transferred by a person resident outside India to a person resident in India shall not exceed:

1. the price worked out in accordance with the relevant SEBI guidelines in case of a listed Indian company;
2. the valuation of capital instruments done as per any internationally accepted pricing methodology for valuation on an arm’s length basis duly certified by a Chartered Accountant or a SEBI registered Merchant Banker, in case of an unlisted Indian Company.

Note: The guiding principle would be that the person resident outside India is not guaranteed any assured exit price at the time of making such investment/ agreement and shall exit at the price prevailing at the time of exit.

(3) In case of swap of shares, subject to the condition that irrespective of the amount, valuation involved in the swap arrangement will have to be made by a Merchant Banker registered with SEBI or an Investment Banker outside India registered with the appropriate regulatory authority in the host country.

(4) Where shares in an Indian company are issued to a person resident outside India in compliance with the provisions of the Companies Act, 2013, by way of subscription to Memorandum of Association, such investments shall be made at face value subject to entry route and sectoral caps.

These pricing guidelines shall not be applicable for investment by a person resident outside India on non-repatriation basis.

Q 13: What are the other modes of issues of shares for which general permission is available?

Answer: FDI compliant instruments, as applicable can be issued by Indian companies as follows:

1. ESOP
2. Sweat Equity
3. Bonus
4. Rights
5. Swap of Shares
6. On merger/ de-merger/ amalgamation etc of Indian companies
7. Against any other funds payable to a person resident outside India, the remittance of which does not require the prior approval of the Reserve Bank or the Government of India.

Q 14: Can a foreigner set up a partnership/ proprietorship concern in India?

Answer: Only NRIs are allowed to set up partnership/ proprietorship concerns in India on non-repatriation basis.

Q 15: Can a foreign investor invest in Rights shares issued by an Indian company at a discount?

Answer: There are no restrictions under FEMA for investment in Rights shares issued at a discount by an Indian company, provided the rights shares so issued are being offered at the same price to residents and non-residents. The offer on right basis to the persons resident outside India shall be:

1. in the case of shares of a company listed on a recognized stock exchange in India, at a price as determined by the company; and
2. in the case of shares of a company not listed on a recognized stock exchange in India, at a price which is not less than the price at which the offer on right basis is made to resident shareholders.

Q 16: Can an AD bank allow pledge of shares of an Indian company held by non-resident investor in favour of an Indian bank or an overseas bank or NBFC?

Answer: Yes, the same has been allowed vide the instructions and subject to compliance with the terms and conditions as mentioned in the AP (Dir. Series) Circular No 57 dated May 2, 2011 and A.P. (DIR Series) Circular No.141 dated June 6, 2014.

Q 17: Is a non-resident permitted to acquire shares on stock exchange?

Answer: The following persons can acquire FDI compliant instruments on the stock exchanges:

1. FPIs and FIIs registered with SEBI
2. NRIs
3. A non-resident, other than portfolio investor, is eligible to acquire shares on stock exchange through a registered broker subject to the condition that the non-resident investor has already acquired and continues to hold the control in accordance with SEBI (Substantial Acquisition of Shares and Takeover) Regulations i.e. he has complied with the minimum stake requirement under SEBI Regulations as per instructions contained in AP (DIR Series) Circular No. 38 dated September 6, 2013.

Q 18: What will be the modes of payment for non-residents permitted to acquire shares on stock exchange?

Answer: Non-Residents permitted to acquire shares under the scheme can use following modes for payment of shares:

1. by way of inward remittance through normal banking channels, or
2. by way of debit to the NRE/ FCNR account of the person concerned maintained with an authorised dealer/ bank;
3. by debit to non-interest bearing Escrow account (in Indian Rupees) maintained in India with the AD bank in accordance with Foreign Exchange Management (Deposit) Regulations, 2000;
4. the consideration amount may also be paid out of the dividend payable by Indian investee company, in which the said non-resident holds control, provided the right to receive dividend is established and the dividend amount has been credited to specially designated non-interest bearing rupee account for acquisition of shares on the floor of stock exchange.

Q 19: What are the instructions for transfer of shares against deferred payment?

Answer: In case of transfer of shares between a resident buyer and a non-resident seller or vice-versa, not more than twenty five per cent of the total consideration can be paid by the buyer on a deferred basis within a period not exceeding eighteen months from the date of the transfer agreement. The amount deferred can also be either in the form of an indemnity or an Escrow. In all cases the pricing guidelines should be complied with.

Q 20: What is the concept of downstream investment and Indirect Foreign Investment?

Answer: Downstream investment is investment by one Indian company in another Indian company. If the investor company is not owned and not controlled by resident Indian citizens or owned or controlled by persons resident outside India then such investment shall be “Indirect Foreign Investment” for the investee company.

Q 21: What will be the composition of ‘direct foreign investment’?

Answer: The concept ‘direct foreign investment’ means foreign investment received by an Indian company from a person resident outside India in terms of Schedules 1, 2, 2A, 3, 6, 8 and 10 of the Notification No. FEMA.20/2000-RB dated May 3, 2000, as amended from time to time.

Q 22: Whether an Indian company (owned and controlled by non-residents) investing in non-FDI compliant instruments issued by another Indian company will be considered as Indirect Foreign Investment for the investee company?

Answer: This investment shall not be considered as indirect foreign investment for the investee company.

Q 23: Since the instructions were issued by RBI in 2013 for the period commencing from February 13, 2009, what is the status of investment made prior to the issue of the instructions?

Answer: Downstream investment made in accordance with the guidelines in existence prior to February 13, 2009 would not require any modification to conform to these regulations. All other investments, after the said date, would come under the ambit of these regulations. Downstream investments made between February 13, 2009 and June 21, 2013 which is not in conformity with these regulations should have been intimated to the Reserve Bank by October 3, 2013 for treating such cases as compliant with these regulations.

II. Foreign Portfolio Investment

Q 24: What are the regulations regarding Portfolio Investments by registered Foreign Portfolio Investors (FPIs)?

Answer: Investment by FPI registered in accordance with SEBI guidelines including deemed RFPI [erstwhile FII) is permitted. Investment by individual FPIs should be less than 10 per cent of the paid up capital of the Indian company on a fully diluted basis. The aggregate investment by FPIs should not exceed 24 per cent of the paid up capital of an Indian Company on a fully diluted basis. The aggregate limit of 24 percent can be increased by the Indian company concerned up to the sectoral cap/ statutory ceiling, as applicable, with the approval of its Board of Directors and its General Body through a resolution and a special resolution, respectively.

Q 25: What are the regulations regarding Portfolio Investments by NRIs?

Answer: Non- Resident Indian (NRIs) can purchase or sell FDI compliant instruments of Indian companies on the Stock Exchanges under the Portfolio Investment Scheme. For this purpose, the NRI has to apply to a designated branch of a bank, which deals in Portfolio Investment. All sale/ purchase transactions are to be routed through the designated branch.

An NRI can purchase shares up to 5 per cent of the paid up capital of an Indian company on a fully diluted basis. All NRIs taken together cannot purchase more than 10 per cent of the paid up value of the company. The aggregate limit of 10 percent can be increased by the Indian company concerned up to 24 percent, with the approval of its Board of Directors and its General Body through a resolution and a special resolution, respectively.

III. Investment in other securities

Q 26: Can persons resident outside India invest in Government Securities/ Treasury bills/ corporate debt/ other securities?

Answer: Foreign Portfolio Investors (FPIs), Non-Resident Indians (NRIs), Foreign Central Banks, Multilateral Development Bank, Long term investors like Sovereign Wealth Funds (SWFs), Multilateral Agencies, Endowment Funds, Insurance Funds, Pension Funds which are registered with SEBI Long Term Investors may invest in other securities as specified in Schedule 5 to Notification No FEMA 20.

IV. Foreign Venture Capital Investment

Q 27: Where can a Foreign Venture Capital Investor (FVCI) invest?

Answer: A SEBI registered Foreign Venture Capital Investor may purchase

1. securities, issued by an Indian company engaged in any sector mentioned at the answer to question 28 and whose securities are not listed on a recognised stock exchange at the time of issue of the said securities;
2. securities issued by a start-up, irrespective of the sector in which it is engaged;
3. units of a Venture Capital Fund (VCF) or of a Category I Alternative Investment Fund (Cat-I AIF) or units of a scheme or of a fund set up by a VCF or by a Cat-I AIF, subject to the terms and conditions as may be laid down by the Reserve Bank.

Q 28: How can an FVCI make the investment?

Answer: An FVCI may

1. purchase the securities/ instruments mentioned above either from the issuer of these securities/ instruments or from any person holding these securities/ instruments;
2. invest in securities on a recognized stock exchange subject to the provisions of the SEBI (FVCI) Regulations, 2000, as amended from time to time;
3. acquire, by purchase or otherwise, from, or transfer, by sale or otherwise, to, any person resident in or outside India, any security/ instrument it is allowed to invest in, at a price that is mutually acceptable to the buyer and the seller/ issuer; and
4. receive the proceeds of the liquidation of VCFs or of Cat-I AIFs or of schemes/ funds set up by the VCFs or Cat-I AIFs.

Q 29: Which are sectors in which a Foreign Venture Capital Investor is allowed to invest?

Answer: An FVCI can invest in an Indian company engaged in

1. Biotechnology
2. IT related to hardware and software development
3. Nanotechnology
4. Seed research and development
5. Research and development of new chemical entities in pharmaceutical sector
6. Dairy industry
7. Poultry industry
8. Production of bio-fuels
9. Hotel-cum-convention centres with seating capacity of more than three thousand.
10. Infrastructure sector.

Q 30: How can the FVCI make payment for the investment?

Answer: The amount of consideration for all investment by an FVCI has to be made through inward remittance from abroad through banking channels or out of funds held in a foreign currency account and/ or a Special Non-Resident Rupee (SNRR) account maintained by the FVCI with an AD bank in India. The foreign currency account and SNRR account shall be used only and exclusively for transactions under the relevant Schedule.

Q 31: How can the sale/ maturity proceeds taken by the FVCI?

Answer: The sale/ maturity proceeds (net of taxes) of the securities may be remitted outside India or credited to the foreign currency account or a Special Non-resident Rupee Account of the FVCI maintained.

V. Investment in Investment Vehicle

Q 32: What is an investment vehicle?

Answer: Investment Vehicle is an entity registered and regulated under relevant regulations framed by SEBI or any other authority designated for the purpose and shall include Real Estate Investment Trusts (REITs) governed by the SEBI (REITs) Regulations, 2014, Infrastructure Investment Trusts (InvIts) governed by the SEBI (InvIts) Regulations, 2014 and Alternative Investment Funds (AIFs) governed by the SEBI (AIFs) Regulations, 2012.

Q 33: Who can invest in an investment vehicle and what is the manner of investment?

Answer:

1. Any person resident outside India may invest in units of Investment Vehicles subject to the conditions laid down in Schedule 11 to Notification No FEMA 20.
2. A person resident outside India who has acquired or purchased units of an investment vehicle may sell or transfer in any manner or redeem the units as per regulations framed by SEBI or directions issued by the Reserve Bank.
3. Units may be issued against swap of capital instruments of a Special Purpose Vehicle (SPV) proposed to be acquired by such Investment Vehicle.
4. The consideration for such investment shall be made by an inward remittance through banking channels or swap of shares of a Special Purpose Vehicle or out of funds held in NRE or FCNR (B) account maintained by the investor, if eligible to maintain the same.
5. The sale/ maturity proceeds (net of taxes) of the units may be remitted outside India or may be credited to the NRE or FCNR (B) account, as the case may be.

Q 34: What are the provisions with regard to Downstream investment for an investment vehicle?

Answer:

1. Investment made by an Investment Vehicle into an Indian company or an LLP will be indirect foreign investment for the investee company or the LLP, as the case may be, if either the Sponsor or the Manager or the Investment Manager (i) is not owned and not controlled by resident Indian citizens or (ii) is owned or controlled by persons resident outside India. The extent of investment by persons resident outside India in the corpus of the Investment Vehicle will not be a factor to determine as to whether downstream investment of the Investment Vehicle concerned is indirect foreign investment or not.
2. An Alternative Investment Fund Category III with foreign investment shall make portfolio investment in only those securities or instruments in which an FPI is allowed to invest under the Act, rules or regulations made thereunder.

VI. Reporting Requirements

Q 35: What are the various reporting formalities for foreign investments?

Answer: The reporting requirements are laid down in the Master Direction on Reporting under Foreign Exchange Management Act, 1999.

Republished the information published by the authority

Ravi Bhushan Kumar

9990339200

cs.ravibhushan@gmail.com

My Last Chairman Speach

Dear Members & Students,

I would like to thank all of you for giving me the opportunity for being a member of the Management Committee of your Chapter. The Committee has shown confidence in me and bestowed me with the responsibility of the Chairman of Noida Chapter of ICSI on 19th Day of January, 2016,
An year has flown by and one part of a very challenging and illuminating experience is coming to an end, one that I will treasure for the rest of my life.
It's not always been easy sitting in this chair but the best challenges always have their ups as well as downs. I've enjoyed every minute that I've been here working as the Chairman of Noida Chapter.
This is the last communication from my side as a Chairman of the Chapter. In this communication, I wish to apprise you with the activities of the Chapter for the year 2016. At the outset  your Chapter has conducted around 60 events during the year, the glimpses are as follows:

1.Management Skills Orientation Programme (MSOP):
The Management Skills Orientation Programme being one the most important Programme of the Company Secretary Course. As it is the last training programme before becoming the members of the Esteemed Institute. Your Chapter conducted 9 Management Skills Orientation Program me during the year 2016 and made 417 Members from the Chapter. 9 MSOP's in a year an indicator of very good performance, as it has been increased from the    past few years.

2.Academic Programme:
The Institute, under the new training structure, has announced a new compulsory training Programme for the students of the Executive Programme i.e. 15 Days academic Programme. Your Chapter conducted the Programme i.e. 15 Days academic Programme accommodating and providing training to 76 students.

3.Professional Development Programmes (PDP)/Seminar:
Professional Development Programmes are a source of learning for the students and Members. Undoubtedly the students and Members are the life line of the Institute. Your Chapter has conducted near to 15 Professional Development Programme and educated near to 258 students through the Professional Development Programmes and educated 524 Members through the Learning Programmes.  The Chapter has also conducted 8 Classroom Series educating many Members of the Institute.

4.Meeting of Chapter with various Authorities & Ministries:
Branding & recognition is an important aspect of working of the institute. The chapter during the year met various officials of the Ministry and put forward many suggestions which have been appraised by the Officials. Your Chapter has also held meeting with various Ministries i.e. Ministry of Finance, Ministry of Information Technology, Department of Commercial Taxes of Government of Uttar Pradesh, and many more authorities.

5. Carrier Awareness Programme:
The chapter also was keen towards increasing the students of the Institute. In this regard, the chapter organised 12 carrier awareness programme and counseled many students, who came to the Chapter also.

6.Company Secretaries Benevolent Fund (CSBF):
The Chapter has also put its hard efforts for increasing the Members of Company Secretaries Benevolent Fund. Chairman of your chapter and office bearers of the Institute have gone to meet individual members for apprising and collecting forms & cheques for the Noble Cause the "Company Secretary Benevolent Fund"

7. E-Library:
The Chapter during the year has also started the E-Library for the members and the students of the Institute. So that needy members and students will not require searching here and there and coming at the Chapter for the search of their queries.

8.Oral Coaching Classes:
The need of the Coaching is fundamental for any educational Institution. Despite of the limited resources the Chapter has taught near to 50 Students in its Oral Coaching Classes for Executive Programme and Foundation Programme. The students are increasing Day by Day and the Chapter's performance has been increased considerably.

9.Association with other Bodies/Authorities:
Working with the support and association is the need of today. The Chapter has associated with many organizations including Noida Management Association, The Institute of Cost Accountants of India, Indraprastha Chamber of Commerce of Industries, ISMA, CFO's 4 SME etc.

10.Social Activities:
Your chapter has also conducted various Programmes for the Participation in the social activities. The Chapter has organised Van Mahotsav, Alumni Meet and New Year Celebration, Moot Court, PCS Day, Samadhan Diwas, Swacchhta Pakhwada etc.
the chapter has also maintained good relations with Media and Police authorities and they have also supported the Chapter at every Step.

11.Placement for members & Students:
The Basic need of the Profession is providing suitable jobs for the Members and training for the students. In this regard, the Chapter has conducted 4 Campus Placements, in which more than 20 Companies came and near to 150 Member took part. The chapter has also conducted Campus Placement for trainees. Your Chapter has also devised a System for forwarding the resumes to the Employers and acting as link between the Employer and Prospective Employees.

I've overseen a period of controlled growth and I'm really happy to be leaving the Noida Chapter in its current situation, although I'm well aware that it is the efforts of all the board members and their teams that got us here.
Thank you and Au Revoir.

CS Ravi Bhushan Kumar
Chairman
cs.ravibhushan@gmail.com
9990339200

A letter to Sri Arvind Kejriwal

An Open letter
To
Shri Arvind Kejriwal
The Chief Minister
NCT of Delhi

By a Citizen

Sir,

I was very excited to see your comment on dicision of PM Modi to ban 500 and 1000 notes from circulation. Finally your comment came and I was surprised to see the logic used by you while criticising the move of our PM.
I was expecting that you would appreciate this move
Of Demonetization of Currency as a tools to control black money and corruption  because your very entry into Politics was for supporting any small move to reduce Black money and Corruption and after all, this was indeed a very big and bold move but once again you run booldrozer on my expectation.
to explain the probable Logic behind issuing New 2000 Rupee Note instead of 1000 Rupee Note I would like to bring to your knowledge the following Points.

Point 1

As you have stated in your Video that it took full 2 days for you to understand the various aspects of the Scheme and even after consultation with various Experts , you could not basically understand the Logic of why 2000 Rupee Notes were released instead of 1000 Rupee Note, on the basis of concept of demonetisation which I read in class 12th economics I would like to make an attempt to tender my best possible logic ( Please enlighten me if I am wrong somewhere) as follows:

Sir, let us Simply take 2 Scenarios to understand the funda !

Scenario A : If as per your suggestion ,  Rs. 2000 Note are not issued but only New Rs. 1000 Notes are issued.

Lets say , for example Mr. X has Rs. 1,00,000/- black money in 100 Old Notes of Rs. 1000 each.

Mr. X divides those Rs. 1,00,000/- into 10 Equal Bundles, each comprising of 10 Old Notes of Rs. 1000 each and puts each Stack on a Table.
On Day 1 , in the morning Mr. X would deposit the first Bundle i.e. 10 Old Notes of Rs. 1000 valued at Rs. 10,000 into the bank and on same Day 1 in the Evening he would withdraw 10 New Notes of Rs. 1000 again valued at Rs. 10,000 and put it in the Locker in his house.

Now the real Game starts.
On Day 2 : Morning , Mr. X would deposit the second bundle of 10 Old Notes of Rs. 1000 valued at Rs. 10,000 kept on the Table. However in his books of accounts submitted to Income Tax Department, he will show that he has deposited the same 10 New Notes which was withdrawn on Day 1 : Evening ( which is actually still lying in the Locker of House )

On Day 2 : Evening , Mr. X would again withdraw 10 New Notes of Rs. 1000 valued at Rs. 10,000/- and keep the same in Locker . So at the end of Day 2, Mr. X has Rs. 80,000 on Table in Old Notes and Rs. 20,000/- in New Notes in Locker.

Now Day 3 will come in next week as limit of Rs. 20000 per week.

The same exercise shall continue till Day 10 and by the end of Day 10, Mr. X shall have no Old Notes and Rs. 1,00,000 in 100 New 1000 Rupee Note in the Locker.

However, to the Income Tax Department, Mr. X has shown that he was having only Rs. 10,000/- as black money initially ( i.e. one bundle of 10 Notes of Rs. 1000 ) and he has rotated the same Rs. 10,000/- by depositing it into Bank account in the morning and withdrawing it in the evening and again redepositing the same on next day and so on.

Thus, Mr. X has paid tax only on initial Rs. 10,000 whereas he has managed to convert all his Black money of Rs. 1,00,000 into new Notes.
This Modus operandi is called Peak theory i.e. theory of rotation of same money which is accepted by most of the High Courts and Tribunals.  Revenue is also helpless to catch Mr. X because the above scenario can also occur in genuine cases where you withdraw money from bank to purchase something and then when you think that no good deal is available, you may again deposit the same money into your bank account and are not required to pay tax again.

Scenario B :  Watch what happens when PM issues New 2000 Rupee Note instead of 1000….!
Mr. X deposits first bundle of 10 Old Notes lying on Table in the Bank on Day 1 : Morning and then he withdraws 5 New Notes of Rs. 2000 on Day 1: Evening and keeps it in locker.
Now on Day 2 : Morning when he goes to deposit second bundle of 10 Old Notes of Rs. 1000 each and wrongly shows the Income Tax Department that he has redeposited the same money which was withdrawn on Day 1:Evening – Bingo !!!

He is caught red handed !! because the Bank slip on Day 2 submitted to bank shows deposition of 10 Notes of Rs. 1000 each whereas the Govt knows that Mr. X could never have withdrawn on Day 1 any note of Rs. 1000 because they were never Printed !!!!
Now Isn’t it really a Master Stroke by Mr. Narendra Modi, the beloved Prime Minister of our country ?!

Sir, you have stated in the Video that if Someone gives you the logic of issuing New notes of Rs. 2000 instead of Rs. 1000, you will Salute the PM and support him in his endeavour. I hope this explanations finds you in good health and I am waiting for the support in full sense.

Even if the above explanation is not completely true, we should rely on and respect the PM of our country who is elected through clear democratic majority.

Further, the fact that when someone is holding the new Rs. 2000 Rupee Note , he is phychologicaly getting a sense of freshness that the country is in the growth phase. Messages are being circulated not to write anything on New Notes. Imagine if the Govternment would have never issued new higher denominations notes with inflation and growth we would still be dealing with Annas and Pavlis!!

Sir, the above example also gives you an explanation as to why the withdrawal limit is kept so low because the above modus operandi can still be done with Rs. 500 note however, the incentive would be less because Mr. X cannot withdraw more than Rs. 10000/- in a day and even if he withdraws Rs. 10,000/-, there is every possibility that Banks shall give Mr. X,  2000 Rupee note. So Mr. X cannot follow the above modus operandi.

And believe me Sir, each and every condition in the Notification is seen to take care of the problems likely to be faced by Citizens and at the same time making sure that such Sophisticated theories are not resorted to by Black money hoarders, but questioning everything in the name of Freedom of Expression may create Panic situations or bring out Loopholes and hamper the success of reforms.

Point 2

Sir, you have again criticised and stated in the Video that printing Rs. 2000 rupee note will help to increase Corruption because Stacking those Rs. 2000 Rupee Notes would require lesser Space as compared to Stacking Rs. 1000 Notes.

In this regard, I would like to ask that Sir, have you come across any case where the “Babus” have not taken any bribe and done work honestly because they had a small Bag which could not be fitted with Rs 1000 Notes ?!

Or have you come across any Businessman who has declared unaccounted money solely because there was no space to keep those Rs. 1000 Notes !!

Point 3

As stated in the Video by you, it is true that inspite of PM efforts, there shall be dubious commission agents and unaccounted Investment in gold through jewellers, but as far as I remember when the jewellers were on strike for 45 days when our PM levied excise duty on gold in month of April 2016, it was you who supported their strike. It shows that whenever some changes are suggested to regulate a particular Market, AAP opposes them and then now you nag that the Gold market is unregulated.

Infact I believe that the PM had a full blue print for the development of our country right from Day 1 of his being elected if I recall my last 3 years as a Professional.

Firstly they asked for all the bank account number in your Return of Income

Then they linked your PAN with Aadhar

They linked all the subsidies, pension and other benefits directly to your bank account through Direct Benefit Transfer Scheme.

Then they gave opportunity to all the common men to open an account with bank through Jan Dhan Yojna
Government has linked MCA Portal with Income tax, one window solution for all registration of corporate affairs, linking of PAN and DIN.

They entered into revised treaty with most of the countries in which unaccounted money goes through HAWALA e.g. Mauritius and thus the route of Black Money coming from Mauritius which everyone knew is stopped.

They passed few strict laws to overcome the evil of black money such as Benami Transaction Act and Foreign Black Money Act

They levied Excise duty on Gold.

They also made TCS compulsory for Cash transactions above 2 lakhs.

They withdrew lakhs of pending income tax and service tax litigations where Common men had won at Appeal level and Department had gone further.

They also entered into information exchange agreement with such countries.

Then they gave last opportunity to all black money hoarders through Income Declaration Scheme, 2016

Now they have a Scheme for Dispute Resolution Panel again to reduce Litigation till December 2016.

Now the masterstroke, that they have banned Rs. 500 &  Rs. 1000 denominations.

Not only the destination of this whole process is commendable but even the journey or the chronology of these events is interesting which explains the ultimate destination and who knows , may be the journey is still not over and the ultimate destination may still be the Swiss Account holders!!

Point 4

Further, you have stated in your Video that penalty would be levied at the rate of 200%. The said statement has created a panic and people have stated discounting their own hard earned cash.

Being in Income tax Department in the past , you ought to know that as per the present Income Tax Act,1961 penalty is never levied on Cash deposits but on “concealed income”. Hence when the common men is depositing Cash in hand which is duly accounted or out of his past savings and even out of unaccounted current years income whose return is yet to be filed, there shall not be any penalty if there is no mismatch between returned income and assessed income. Even the Government Officials in their statement used the words “underreporting” or “mismatch”. To understand the definition of  “underreporting”, Sir please refer Section 270A of the Income Tax Act or go through the following article:

NO PENALTY ON HIGH DENOMINATIONS NOTES DEPOSITED INTO BANK IF SUCH AMOUNT IS DECLARED IN RETURN OF INCOME BY PAYING APPROPRIATE TAX

Instead you could have encouraged the citizens to pay appropriate Tax.

Point 5

Nowhere in the Video have you stated anything relating to Fake currency or Counterfeit Notes because you know that the issue of Existing Fake Currency is solved foolproof.

Which situation would be better ?

Scenario A:

A Labourer standing in queue to exchange Notes from bank for a Short term.

Scenario B :

A Labourer working hard whole day to get a Fake Note at the end of the day?!

The issue of Terrorrist Funding is also tackled but you chose to remain silent on the same.

You have stated that Modiji should have infused Rs 100 Note from before and it would have been you only to have said in this video that “Arre ATM se do din pehle se hi Sirf Rs. 100 ki Note bahar aa rahi thi toh sab ko pata tha , yek koi Secret nahi tha”

Conclusion

Now Sir,  if I am to believe that you really don’t understand these simple concepts even after consulting with Experts for 2 days as already described by you, I am deeply saddened because the common men believe that you are an IITian and have spent considerable time in Income Tax Department also.

Contrary to the same, If I am to believe that you already know the benefits of demonetization which I first learnt in my class 12th in economics and the concept of Peak Theory which is described by me above and which I learnt with my very limited experience while pursuing my profession of company secretary. then I am more saddened and feel AAP Party as more dangerous because I believe that above any religion, politics or reservations in any caste or creed, it will always be education which shall uplift the common men and it is the common men who have elevated you to a position where you are looked by millions as their Idol and it is your duty to educate them and spread knowledge and not keep them in ignorance to preserve your vote bank.

Jai Hind.

Ravi Bhushan Kumar
Company Secretary
9990339200

Case Study on CSR under Companies Act 2013

Case Study of CSR Provision of Companies Act 2013

Section 135 of the Companies Act, 2013 and Rules in this regard have been notified and shall be applicable w.e.f  01.04.2014.

Section 135 (1) provides that every company having net worth of Rs. 500 crore or more or turnover of Rs. 1000 crore or more or net profit of Rs. 5 crore or more during any financial year shall constitute a CSR Committee. Section 135 (5) further provides that the Company shall ensure to spend 2% of the average net profits of the Company made during the three immediately preceding financial year. The Explanation to this subsection provides that the average net profit shall be calculated in accordance with the provisions of section 198 of the Companies Act, 2013.

The CSR Rules defines Net Profit as under:

 “Net Profit” means the net profit of a Company as per its financial statement prepared in accordance with the applicable provisions of the Companies Act, 2013, but shall not include the following, namely:

1. Any profit arising from any overseas branch or branches of the Company, whether operated as a separate company or otherwise, and
2. Any dividend received from other companies in India, which are covered under and complying with the provisions of section 135 of the Companies Act, 2013;

 Provided that net profit in respect of a financial year for which the relevant financial statements were prepared in accordance with the provisions of the Companies Act, 1956, (1 of 1956) shall not be required to be re-calculated in accordance with the provisions of the Companies Act, 2013.

 However section 198(4)(l)provides as follows:

“the excess of expenditure over income, which had arisen in computing the net profits in accordance with this section in any year which begins at or after the commencement of this Act, in so far as such excess has not been deducted in any subsequent year preceding the year in respect of which the net profits have to be ascertained;”

Interpretation of the above strictly provides to deduct the loss which occurred at or after the commencement of the Companies Act, 2013 viz. financial year starting on or after 1st April, 2014. However, pursuant to provisions of Section 135 of the Act, the Company have to spent at least two percent of the average net profits of the Company made during the three immediately preceding financial years, which we assumes for CSR spending in the financial year 2014-15 the Company has to work out average net profits for the financial years 2011-12, 2012-13 and 2013-14.

 It seems that there prevails some ambiguity in the section itself as it provides  for set off of only those losses that occur only after the commencement of the Companies Act, 2013 and not earlier ones, whereas at the same time the profits to be considered is of immediately preceding three financial years. In all fairness, profits and losses, both, for the preceding three years and accumulated losses of earlier years should be considered for arriving at the average Net Profit as we feel that profits and losses are part and parcel of any business and one cannot discriminate between the same.

 The said clause is debatable in the absence of any clarification or circular from Ministry in the matter….and considering the Rule of Equality the law shall be interpreted on “Just and Equal Principle”…

 In view of above, we require your detail opinion on the following supported with the relevant provisions/extracts of Companies Act, 1956 or Companies Act, 2013 or Rules made thereunder and explanations:

 Query 1: The financial statements of ABC Ltd, for preceding 3 financial years i.e. 2011-12, 2012-13 and 2013-14 were prepared under Companies Act, 1956.  has profit in 2011-12 and 2012-13 and loss in 2013-14. How the average net profit will be calculated?

 Query 2: Do accumulated losses of past years be allowed to be deducted for recalculation of profit under the provisions of section 198 (4)(l) of Companies Act, 2013? If yes, How? Any period upto which  can carry forward its accumulated losses for recalculation of profit to ascertain CSR expenditure?

1. ANALYSIS

A.1       The expression ‘net profit’ is important in two ways in the context and applicability of Section 135 of the Act.

 Firstly, it is one of the criteria to determine whether companyis covered by section 135(1) so as to attract CSR provisions.

 Section 135 (1) is reiterated as follows:

“Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during any financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.”

 Secondly, for determining the quantum of CSR spends is stipulated as a percentage of “average net profits” as provided in Section 135 (5) of the Act.

 Section 135 (5) reiterated as follows:

“The Board of every company referred to in sub-section (1), shall ensure that the company spends, in every financial year, at least two per cent. of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy:

 Explanation.—For the purposes of this section “average net profit” shall be calculated in accordance with the provisions of section 198.”

 The above can be conceptualized in two ways:

1) The Calculation of “Net profits” for deciding the criteria

2) The Calculation of “Average Net profit” for deciding the quantum

• CALCULATION OF NET PROFITS

 The term ‘net profit’ is not defined by section 135 or by any other provision of the Act. But the same has been provided in the Companies Social Responsibility Policy Rules, 2014.

According to Rule 2(1)(f)of the CSR Rules, “Net Profit” means the net profit of a Company as per its financial statement prepared in accordance with the applicable provisions of the Companies Act, 2013, but shall not include the following, namely:

1. Any profit arising from any overseas branch or branches of the Company, whether operated as a separate company or otherwise, and
2. Any dividend received from other companies in India, which are covered under and complying with the provisions of section 135 of the Companies Act, 2013;

Provided that net profit in respect of a financial year for which the relevant financial statements were prepared in accordance with the provisions of the Companies Act, 1956, (1 of 1956) shall not be required to be re-calculated in accordance with the provisions of the Companies Act, 2013.

It is inferred from the above that for calculation of Net profits for a particular Year out of any of the three preceding financial years, for deciding the criteria of applicability of CSR Provisions in the first case, the net Profits shall be taken as it is calculated in the relevant financial year whether under the Act or the previous Act.

 For Instance if we are taking Net Profits of Financial Year 2012-2013,  for which Financial Statements were prepared as per Previous Act, than it is not required to re calculate the Net Profits in financial Statements of Financial Year 2012-2013 by making changes as per Schedule II and other provisions of new Act.

• CALCULATION OF AVERAGE NET PROFITS

 ‘Average net profit’ shall be calculated as per section 198 of the Act.

 Thus, it appears that, average net profits will have to be calculated as under:

• Take net profit as per its financial statements prepared in accordance with the applicable provisions of the Act/of the previous Act. [As per Rule 2(1)(f) of CSR Rules]

• Exclude the following from net profits:

• any profit arising from any overseas branch or branches of the company, whether operated as a separate company or otherwise;
  and
• any dividend received from other companies in India, which are covered under and complying with provisions of section 135 of the Act.

[As per Rule 2(1)(f) of CSR Rules]

• Make adjustments required by section 198 [As per explanation to Section 135 (5)]

• Calculate net profit for each of the preceding three financial years as per (a) to (c) above, aggregate them and divide by 3.

 In other words we can say Average Net Profit is the “Average of Adjusted Net Profits” of preceding 3 Financial Years, whereby adjustment means debits and credits as provided by the Act.

 The proviso of Rule 2(1)(f) of the CSR Rules specifically eliminate the requirement of recalculation of Net profits as per new Act.

Does it mean that recalculation of “adjusted net profits” is not required as per new Act or it says recalculation of “net profits” is not required as per new Act?

 As per our view, the proviso eliminates the requirement of recalculation of net profits for the purpose of A.1.1 and A.1.2.a. In other words the net profit before any adjustments shall be taken as it is as calculated in the financial statements of relevant period as per then prevailing Act.

A.2       Now the Question arises whether net profits of past years for which accounts were prepared in accordance with the previous Act should be adjusted in accordance with section 198 of the Act or should they be adjusted in accordance with corresponding section 349 of the Previous Act?

 If we look at the literal interpretation of section 135(5) of the Act, it seems that the Adjusted Net profit of each preceding Financial Year shall be calculated as per section 198 of the Act.

 Our view is as follows on the basis of following contentions:

1. Section 198 of the Act is exact corresponding section of Section 349 of the previous Act.

 If we look into the content of the referred sections, we will find that section 198 of the Act is corresponding provision of section 349 of the previous Act without any major variations in the content.

 For Instance,

While calculating adjusted Net profit for Financial Year 2012-2013, then we have to make debits and credits exactly in accordance with section 198 of the Act. Accordingly while making debits of Section 198(4) (k) also, Depreciation would be required to re calculate as per the provisions of section 123 and schedule II of the Act, which is not compatible neither intended by legislators.

 Section 198(4) (k) of the Act reiterated as follows for reference:

“(k) Depreciation to the extent specified in section 123;”

 There is drastic change in the calculation pattern of Depreciation in the Act as compares to previous Act. We believe that this is not the purpose and intention of legislator to re calculate the depreciation of financial years prior to commencement of this Act to give effect to the explanation of section 135 (5) of the Act.

 Similarly section 198 (4) (j) of the Act permitting deduction of outgoings inclusive of contributions made under section 181 of the Act, whereas the said section is applicable only after 01st April 2014.  Now, if we are calculating the profits for financial year 2012-2013, as in above instance, than would we take the deduction of all outgoings in accordance with section 181? Absolutely not but the corresponding section 293(1)(e) of the previous Act have to be followed as provided in section 349(4) (j) of the previous Act.

 Hence the applicability of section 198 is only for the calculation of adjusted net profits of the financial years commencing on or after the commencement of the Act and have no relevancy for calculating Adjusted net profit of the Financial Years prior to commencement of the Act. Accordingly corresponding provision of previous Act, that is section 349 should be followed for the prior period.

 (b)       Principle of Reasonable Construction

 While interpretation of law, if the literal interpretation is absurd or unclear, than we may look into Reasonable construction of law. One may understand the Intention of law and reason behind making that law.

 In our view the Intention of law makers behind giving explanation to 135(5) of the Act is to clarify that the referred net profits in section 135(5) shall be “adjusted Net profits” of the Company. After enactment of the Act, the only effective provision for adjustments (debits and credits) in the Act is S. 198 of the Act, therefore there is a reference of the same in the explanation.

But for the purpose of adjustments in the net profits of financial statements before the commencement of Act, the corresponding section was 349 of previous Act which rule out the adjustments (debits and credits) to be made.

Hence the corresponding section 349 of the previous Act should be taken for the Adjustments (debits and credits) in the Net profits of the financial Statements for the period prior to commencement of the Act.

A.3       The next question arise, What will be the implication of section 198(4)(l) for the purposes of losses ascertained in the financial year 2013-2014 or accumulated Losses at the end of  financial year 2013-2014.

 Section 198(4)(l) reiterated as follows:

(l) the excess of expenditure over income, which had arisen in computing the net profits in accordance with this section in any year which begins at or after the commencement of this Act, in so far as such excess has not been deducted in any subsequent year preceding the year in respect of which the net profits have to be ascertained;

Once again, the literal interpretation ignores the deduction of Adjusted Net loss of the financial years prior to commencement of the Act. 

“Adjusted Net loss” here means the loss aroused while computing net profits in accordance with section 198 of the Act/349 of the previous Act as the case may be.

 As per our view, as elaborated above, Adjustments in Net profits for financial Year prior to commencement of the Act should be made as per section 349 of the previous Act and for the financial Years after the commencement of the Act the adjustments should be made as per section 198 of the Act.

 Then again, how the Net Losses calculated as per section 349 of the previous Act for the financial year 2013-2014 and the accumulated adjusted Net losses as on 31st March 2014, for which deduction has not been claimed, should be treated. Whether these loss are deductible while calculating adjusted Net profit for Financial Year 2014-2015 under section 198(4)(l)?

 Lets have an example for elaboration:

 Situation A- Calculation of Average Net Profits for CSR Spends in FY 2014-2015

• The calculation would be as follows:

 (Net profit of FY 2011-2012) + (Net profit of FY 2012-2013) + (Net profit of FY 2013-2014)

“Net profits are Net profits after adjustments of section 349 of previous Act”

• Let’s assume the following figures

Financial Year	Net profits	Net Profit/Losses after adjustment of section 349	Net Profit/Losses after adjustment of section 198	Accumulated Adjusted Net loss at the end of financial year
2010-2011	100	90	--	0
2011-2012	100	(20)	--	(20)
2012-2013	100	80*	--	(20)
2013-2014	100	(5)**	--	(5)

*Losses of Rs. 20 aroused in FY 2011-12 after adjustments are eligible for deduction in next year, but was not claimed as deduction, under S. 349(4) (l), while making adjustments in Net profits of FY 2012-2013.

 **Accumulated losses of Rs. 20/- as on 31st March 2013 has been deducted under S. 349(4)(l) while making adjustments in Net profits of FY 2013-2014.

• Therefore the calculation would be :

[(-20)+(80)+(-5)] / 3

 Situation B- calculation of Average Net Profits for CSR Spends in FY 2015-2016

• The calculation would be as follows:

 (Net profit of FY 2012-2013) + (Net profit of FY 2013-2014)+(Net profit of FY 2014-2015)

                                Divided by 3

“Net profits are Net profits after adjustments of section 349 of previous Act and Section 198 of the Act as the case may be”

• Let’s assume the following figures

Financial Year	Net profits	Net Profit/Losses after adjustment of section 349	Net Profit/Losses after adjustment of section 198	Accumulated Adjusted Net loss at the end of financial year
2010-2011	100	90	--	0
2011-2012	100	(20)	--	(20)
2012-2013	100	80	--	0
2013-2014	100	(5)	--	(5)
2014-2015	100	--	(10)*	(5+10)

*While Calculating Profit for FY 2014-2015 after adjustments under section 198, the deduction will be made under section 198(4)(l) which provides as follows:

the excess of expenditure over income, which had arisen in computing the net profits in accordance with this section in any year which begins at or after the commencement of this Act in so far as such excess has not been deducted in any subsequent year preceding the year in respect of which the net profits have to be ascertained.

• As per above only such losses which have aroused after the commencement of new Act (i.e after 1.04.2014) and preceding the year for which profits are being calculated (i.e before FY 2014-2015) shall be eligible for deduction.
• As 2014-2015 is the first Financial Year after the commencement of new Act therefore at the point of calculation of Adjusted Net profits for FY 2014-2015 no losses are eligible for deduction.

• The losses of FY 2013-2014 that is of Rs. 5 are not eligible for deduction as these losses has not been ascertained after the commencement of new Act.

• Therefore the calculation for CSR Spends would be :

[(80)+(-5)+(-10)] / 3

 Situation C- calculation of Average Net Profits for CSR Spends in FY 2016-2017

• The calculation would be as follows:

 (Net profit of FY 2013-2014)+ (Net profit of FY 2014-2015)+ (Net profit of FY 2015-2016)

                                              and divided by 3

“Net profits are Net profits after adjustments of section 349 of previous Act and Section 198 of the Act as the case may be

• Let’s assume the following figures

Financial Year	Net profits	Net Profit/Losses after adjustment of section 349	Net Profit/Losses after adjustment of section 198	Accumulated Adjusted Net loss at the end of financial year
2010-2011	100	90	--	0
2011-2012	100	(20)	--	(20)
2012-2013	100	80	--	0
2013-2014	100	(5)	--	(5)
2014-2015	100	--	(10)	(5+10)
2015-2016	100	--	90*	(5)

*In furtherance of Situation B, Rs.10 are the only losses which remained unsatisfied after commencement of New Act (i.e after 1.04.2014) and before the year for which profits are being ascertained (i.e before FY 2015-2016). Therefore Rs. 10 has been deducted U/S 198(4)(l) while computing adjusted Net profits of FY 2015-2016.

• Therefore the calculation for CSR Spends would be :

[ (-5)+(-10)+(90)] / 3

The contradiction is we can set off all losses since 1956 till 31st March 2013 and from 1stApril 2014 till the provision will be in effect, but we cannot set off the loss from 1st April 2013 till 31st March 2014.

Now looking at the commercial viability, we believe that Law nowhere intends to make difference between the treatments of adjusted Net losses incurred in Financial Year 2013-2014 as compared to Adjusted Net losses of other financial Years.

In our view, this is not logical. The effect of this clause in determining the net profits of any year for the purpose of calculating CSR spends shall be that, not only expenses incurred during that year but also any excess of expenditure over the income of any previous years remaining unsatisfied out of the income of those years should also be deducted, and only the balance income/loss, if any remaining after all such deduction should be the sum on which the average and then said percentage should be calculated.

CONCLUSION

No doubts, MCA needs to clarify the things to get an exact and proper literal interpretation but till such clarification comes in light, we may interpret with principal of reasonable construction and pith and substance rule.

We are at opinion, CSR is a philanthropic activity and charity shall not be on the cost of capital of the Company. Therefore the law makers intended to take out average of such Net profits, after adjustments as provided by the Act, so that actual trading profits could be calculated and CSR could be an expense on actual earned profits of the corporate.

Section 198 of the Act is exactly corresponding to section 349 of previous act with few minor changes. We believe that intention behind the Legislator is not to do changes in the items of debits and credits to ascertain the actual trading Net profits as per Companies Act. Therefore the Net profits should be calculated on the basis of then applicable provisions.

The words “on or after the commencement of the Act” in clause 135(4)(l) cannot change the basic intention of law, that is to deduct ‘excess of expenditure over income’ or we can say ‘trading losses’ of all the previous years, before the net profits are determined for calculating the quantum of CSR spends.

Query 1: The financial statements of , for preceding 3 financial years i.e. 2011-12, 2012-13 and 2013-14 were prepared under Companies Act, 1956.  has profit in 2011-12 and 2012-13 and loss in 2013-14. How the average net profit will be calculated? How much amount to be incurred by  on CSR expenditure during FY 2014-15?

A-The Average Net Profits Should be calculated as provided under para A.1.2 above

Query 2: Do accumulated losses of past years be allowed to be deducted for recalculation of profit under the provisions of section 198 (4)(l) of Companies Act, 2013?  If yes, How? Any period upto which  can carry forward its accumulated losses for recalculation of profit to ascertain CSR expenditure?

A-As per our view, Yes, accumulated losses calculated as per section 198 of the Act / 349 of the previous Act could be deducted till completely set off.

CS Ravi Bhushan Kumar

9990339200

SR & Associates|Company Secretaries

C-55, Sector 8, Noida, UP, India 201307