Background
On April 1, 2011 a company issued zero coupon Nonconvertible debentures (NCDs) of INR 100 payable on 31 March, 2021 at a premium amount of INR 116 which provides an 8% IRR to the holder of the instrument. At the time of issuance of the NCDs, Companies Act, 1956 (1956 Act) applied. At current date, the provisions of the Companies Act, 2013 (2013 Act) have become applicable to the company.
The Company is covered under phase 1 of Ind AS roadmap notified under the Companies (Indian Accounting Standards) Rules, 2015 (as amended) and needs to start applying Ind AS from financial year beginning on or after 1 April 2016 with comparatives for the year ended 31 March 2016. Its date of transition to Ind AS will be 1 April 2015.
Section 78 of the 1956 Act ‘Application of premiums received on issue of securities’ states as below: “
(2) The securities premium account may, notwithstanding anything in s/s. (1), be applied by the company:
(a) In paying up unissued securities of the company to be issued to members of the company as fully paid bonus securities;
(b) In writing off the preliminary expenses of the company;
(c) In writing off the expenses of, or commission paid or discount allowed on, any issue of securities or debentures of the company; or
(d) In providing for the premium payable on the redemption of any redeemable preference securities or of any debentures of the company.”
Position taken by the Company under Indian GAAP For all periods including upto financial year ended 31 March 2016, the company is preparing its financial statements in accordance with Indian GAAP. With regard to Indian GAAP, the Companies (Accounting Standards) Rules, 2006, state as below:
“Accounting Standards, which are prescribed, are intended to be in conformity with the provisions of applicable laws. However, if due to subsequent amendments in the law, a particular accounting standard is found to be not in conformity with such law, the provisions of the said law will prevail and the financial statements shall be prepared in conformity with such law.”
The Company adjusted the entire premium payable on redemption i.e. INR 116 against the securities premium, in the year of issuance of NCDs, i.e. in year ended 31 March 2012. A corresponding premium liability of INR 116 was created.
From 1 April 2014, section 78 of the 1956 Act has been replaced by section 52 of the 2013 Act. Section 52 states as below: “
(2) Notwithstanding anything contained in s/s. (1), the securities premium account may be applied by the company—
(a) Towards the issue of unissued shares of the company to the members of the company as fully paid bonus shares;
(b) In writing off the preliminary expenses of the company;
(c) In writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company
(d) In providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company; or
(e) For the purchase of its own shares or other securities u/s. 68.
(3) The securities premium account may, notwithstanding anything contained in subsections (1) and (2), be applied by such class of companies, as may be prescribed and whose financial statement comply with the accounting standards prescribed for such class of companies u/s. 133,—
(a) In paying up unissued equity shares of the company to be issued to members of the company as fully paid bonus shares; or
(b) In writing off the expenses of or the commission paid or discount allowed on any issue of equity shares of the company; or
(c) For the purchase of its own shares or other securities u/s. 68.”
Based on the above, under the 2013 Act, on a go forward basis, Ind AS companies cannot charge debenture redemption premium against securities premium account. However, the word ‘and’ in section 52(3) also highlighted above lends itself to another technical argument. One could read the provision as restricting the use of securities premium only when two conditions are fulfilled, ie, (a) the class of companies are prescribed and (b) that class of companies are those that comply with accounting standards under section 133. Since no class of companies are yet notified u/s. 52(3), the restriction on use of securities premium will not apply.
Query under Ind AS
Under Ind AS 109 Financial Instruments, NCD liability is measured at amortised cost. The application of this principle implies that premium liability is accrued over the life of NCDs using the amortized cost method under effective interest method and debiting profit and Loss (P&L). In accordance with Ind AS 101 First Time Adoption of Ind AS, an entity is required to apply Ind AS retrospectively while preparing its first Ind AS financial statements except for cases where Ind AS 101 provides specific exemptions/ exceptions. Ind AS 101 does not contain any exemption/ exception with regard to the application of effective interest rate accounting for financial assets or liabilities.
The amortized cost under Ind AS on transition date at 1 April 2015 will be INR 136 (original cost of INR 100 and premium accrued of INR 36). On a go forward basis also premium will be accrued at an IRR of 8% and the same will be charged to the P&L a/c.
Whether the Company needs to reverse premium payable on redemption of NC Ds previously charged to the securities premium INR 80 (INR 116 – INR 36). Consequently, will the debenture premium of INR 80 be charged to future Ind AS P&L using the effective interest method?
Author’s Response
The author makes the following key arguments to support non-reversal of premium payable on redemption of NCDs previously charged to securities premium:
1. With regard to Ind AS, the Companies (Indian Accounting Standards) Rules, 2015 states as follow: “Indian Accounting Standards, which are specified, are intended to be in conformity with the provisions of applicable laws. However, if due to subsequent amendments in the law, a particular Indian Accounting Standard is found to be not in conformity with such law, the provisions of the said law shall prevail and the financial statements shall be prepared in conformity with such law.”
In light of the underlined wordings, the intention of Ind AS rules should not be construed as requiring reversals of actions done in accordance with the applicable laws.
2. Ind ASs have been notified under the Companies (Indian Accounting Standards) Rules, 2015, which is a subordinate legislation. It cannot override provisions of the main legislation. The action of the company in debiting its securities premium account in the relevant financial year was in accordance with the provision of section 78 of the 1956 Act. As per section 6 of the General Clause (GC) Act, the repeal of an enactment will not affect anything validly done under the repealed enactment. Hence, to the extent that any acts are validly done under any repealed provision of the 1956 Act, such action will not be affected upon corresponding provision of the 2013 Act becoming applicable. Therefore the application of the 2013 Act does not impact position taken in the past.
3. While section 78 of the 1956 Act allows premium on redemption to be adjusted against the Securities Premium, it does not prescribe the timing of such adjustment. Hence, it is permissible to make upfront adjustment for the premium at any time during the tenure of the debentures. The Company adjusted the entire debenture premium of INR 116 against the securities premium account in year ended 31 March 2012 is in accordance with the law and completely justified.
4. The financial statements for the year ended 31 March 2012 were approved by the shareholders. On the basis of the shareholders’ approval and the extant law, the securities premium was utilised. Section 78 of the 1956 Act/ section 52 of the 2013 Act contain specific requirement concerning creation as well as utilisation of the securities premium. Once the company has charged premium payable on redemption, it effectively tantamount to utilisation of the securities premium. One may argue that once utilised, in accordance with the extant provisions of the main law the premium cannot be brought back to life merely because of an accounting requirement contained in a subordinate legislation.
5. The 2013 Act only recognizes premium received on shares as balances that may be credited to securities premium account. In the present case the securities premium account has already been reduced by the full debenture premium amount. Therefore credit back to the securities premium account pursuant to any reversal is not permitted under the 2013 Act.
6. As discussed earlier in the article one view is that debenture redemption premium can be adjusted against securities premium account in accordance with section 52(3) because no notification as required u/s. 52(3) has yet been issued. If this interpretation is taken, then Ind AS companies will be allowed to use securities premium account to adjust debenture premium till such time a notification is issued by the MCA.
Conclusion
The transition from Indian GAAP to Ind AS will not impact actions previously taken by the company under other provisions of the Act (section 78 of the 1956 Act in this case). The Company can carry forward the Indian GAAP accounting (done in accordance with a law) in Ind AS financial statements. The Company need not reverse premium payable on redemption of NCDs previously charged to the securities premium INR 80 (INR 116 – INR 36). Consequently, the debenture premium of INR 80 will not be charged to future Ind AS P&L. The Company should make appropriate disclosures as required by the applicable Ind AS and governing laws in the financial statements.
It may be noted that the author’s view in this article is not consistent with the clarifications provided by the Ind AS Transition Facilitation Group (ITFG). However, it may be noted that the views of the ITFG are not those of the ICAI and are not binding on the members of ICAI.
