Analysis of Amendment to Schedule III to Companies Act, 2013

The Ministry of Corporate Affairs, Government of India, issued notifications dated 24^th March, 2021 to amend Schedule III to the Companies Act, 2013 (hereinafter referred to as ‘the Act’); Companies (Accounts) Rules, 2014 and Companies (Audit and Auditors) Rule, 2014 to enhance the disclosures required to be made by the Company in its Financial Statements, Board Report and Audit Report. The aforementioned notifications shall come in effect from the 1^st day of April, 2021.

The Ministry, specifically vide amendments notified in Schedule III to the Act, required all Companies to provide specific disclosures regarding the detailed shareholding of the promoters, loans and advances extended to the promoters, directors, KMPs etc. of the Company, details of proceedings under the Benami Transactions (Prohibition) Act, 1988 any many more to ensure closer vigilance upon the Companies in India. The Amendment also requires companies to expressly disclose the financial ratios such as Current Ratio, Debt-Equity Ratio, Debt Service Coverage Ratio, Return on Investment etc. for the period under review for which the Financial Statements are drawn up.

Brief Background:

Section 129(1) of the Companies Act, 2013 sets forth as follows:

“The Financial Statements shall give a true and fair view of the state of affairs of the Company or companies, comply with the accounting standards notified under section133 and shall be in the form or forms as may be provided for different class or classes of companies in Schedule III”

The second proviso to such Section specifically mentions that, nothing in this sub-section shall apply to any insurance or banking company or any company engaged in the generation or supply of electricity, or to any other class of company for which form of financial statement has been specified in or under the Act governing such class of company.

Section 129(4) of the Act sets forth as follows:

“The provisions of this Act applicable to the preparation, adoption and audit of the financial statements of a holding company shall, mutatis mutandis, apply to the consolidated financial statements referred to in sub-section (3).”

Section 129(7) of the Act reads the penalty provision to such section as follows:

“If a company contravenes the provisions of this section, the managing director, the whole-time director in charge of finance, the Chief Financial Officer or any other person charged by the Board with the duty of complying with the requirements of this section and in the absence of any of the officers mentioned above, all the directors shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both.”

Brief on amendments to Schedule III to the Act (for Companies whose financial statements are required to comply with the Accounting Standards):

1. Rounding Off: For the purpose of rounding off the figures appearing in the Financial Statements the total income of the Company shall be considered as the basis.

Total Income	Rounding Off
Less than 100 Crore Rupees	To the nearest hundreds, thousands, lakhs or millions or decimals thereof
100 Crore Rupees or more	To the nearest lakhs, millions or crores, or decimals thereof

2. Note on Share Capital:

The note on Share Capital in the Financial Statements shall mention details of the Shareholding of the Promotes along with changes, if any, during the Financial Year under review w.e.f. 1^st April, 2021. The format of such disclosure shall be as follows:

Shares held by promotes at the end of the Year				% Change during the Year
S. No.	Promoter’s Name	No. of Shares	% of total shares
Total

*Promoter here means promoter as defined in Section 2(69) of the Companies Act, 2013.

** Details shall be given separately for each class of shares

*** percentage change shall be computed with respect to the number at the beginning of the year or if issued during the year for the first time then with respect to the date of issue.

3. Reclassification of Current Maturities of Long-Term Borrowings:

As per the Amendment Current Maturities of Long-Term Borrowings during the Financial Year are required to be disclosed separately under the head ‘Short Term Borrowings’ instead of ‘Other Current Liabilities’.

4. Note on Trade Payable:

The note on Trade Payables due for payment by the Company shall consist of an ageing schedule as follows:

Trade Payables ageing schedule:

(Amount in Rs.)

Particulars	Outstanding for following periods from due date of payment				Total
	Less than 1 yr.	1-2 yrs.	2-3 yrs.	More than 3 yrs.
(i) MSME
(ii) Others
(iii) Disputed dues- MSME
(iv) Disputed dues- Others

If no due date of payment is specified, the date of the transaction shall be considered for the purpose of this disclosure

Unbilled dues shall be disclosed separately by the Company.

Implication:

 This disclosure has a material impact specifically on the pending/prospective litigations under Section 9 of the Insolvency and Bankruptcy Code, 2016. As is well settled by the Supreme Court of India in Mobilox Innovations Private Limited v. Kirusa Software Private Limited and in view of the provisions of Section 9(5)(ii)(d) of the Insolvency and Bankruptcy Code, 2016 (IBC) an application under Section 9 for initiating Corporate Insolvency Resolution Process (CIRP) by an operational creditor cannot be admitted if the debt in respect of which such application is filed is disputed i.e., there exists a dispute in respect of the quality or any other matter of the goods or service provided.

In case any operational creditor of the Company files an application under Section 9 of the IBC to initiate CIRP upon the Company and the Company submits before the Hon’ble Adjudicating Authority that the debt of the Creditor was in dispute, the Financial Statements of the Company as available in the public domain must be scrutinized first to ensure that such debt is classified as a disputed trade payable in the notes to accounts of the Financial Statements of the Company.

Further, this disclosure also requires to mention the time period for which such debt is due which shall also help assess the point of Limitation in accordance with the provisions of the Limitation Act, 1963 for such proceeding under the Insolvency and Bankruptcy Code, 2016.

Hence, this amendment is material for litigation purpose.   

5. Reclassification of Security Deposits:

Security Deposits maintained with the Company shall be reclassified as ‘Other Non- Current Assets’ instead of ‘Long term loans and advances.’

6. Note on Property, Plant and Equipment:

The note on Property, Plant and Equipment (earlier Tangible Assets) shall additionally disclose the amount of change due to revaluation (if the change is 10% or more in the aggregate of the net carrying value of each class of Property, Plant and Equipment).

7. Note on Intangible Assets:

The note on Intangible Assets shall additionally disclose the amount of change due to revaluation (if the change is 10% or more in the aggregate of the net carrying value of each class of intangible assets).

8. Note on Long-Term Trade Receivables:

The note on Long-Term Trade Receivables in Other non-current assets due for payment by the Company shall consist of an ageing schedule as follows:

Trade Receivables Ageing schedule:

(Amount in Rs.)

Particulars	Outstanding for following periods from due date of payment					Total
	Less than 6 months	6 months- 1 year	1-2 yrs.	2-3 yrs.	More than 3 yrs.
(i)  Undisputed Trade receivables- considered good
(ii)  Undisputed Trade Receivables- Considered Doubtful
(iii) Disputed Trade Receivables considered good
(iv) Disputed Trade Receivables considered doubtful

If no due date of payment is specified, the date of the transaction shall be considered for the purpose of this disclosure

Unbilled dues shall be disclosed separately by the Company.

9. Note on Trade Receivables:

The note on Trade Receivables due to be received by the Company in the Balance Sheet shall consist of an ageing schedule as aforementioned.

10. Disclosure on utilization of borrowings:

Where the Company has not used the borrowings from banks and financial institutions for the purpose for which it was taken at the Balance Sheet date, the Company shall disclose the details of where they have been used.

11. Additional Information required to be disclosed:

• The Company shall provide the details of the immovable property (other than properties where the Company is the lessee and the lease agreements are duly executed in favour of the lessee) whose title deeds are not held in the name of the Company in the prescribed format. If such immovable property is jointly held with others, details are required to be given to the extent of the Company’s share;
• If the Company has revalued its property, plant and equipment, the Company shall disclose as to whether the revaluation is based on the valuation by a registered valuer.
• Disclosures regarding the Loans or Advances in the nature of loans granted to promoters, directors, KMPs and the related parties (as per the definition mentioned in Companies Act, 2013) either severally or jointly with any other person, that are repayable on demand or without specifying any terms or period of repayment;

Type of Borrower	Amount of loan or advance in the nature of loan outstanding	% to the total Loans and Advances in the nature of loans
Promoters
Directors
KMPs
Related Parties

• Disclosure regarding Capital-work-in Progress (Capital WIP) ageing schedule and the Capital WIP whose completion is overdue or has exceeded its cost compared to its original plan;
• Disclosure regarding Intangible assets under development ageing schedule and Intangible asset under development whose completion is overdue or has exceeded its cost compared to its original plan;
• Disclosure regarding the name of the Company being declared as a wilful defaulter by any bank or financial institutions or other lenders;
• Details of Benami Property held: Disclosure regarding the proceedings have been initiated or pending against the Company for holding any Benami property under the Benami Transactions (Prohibition) Act, 1988 (45 of 1988) and the Rules made thereunder;
• Where the Company has borrowings from banks or financial institutions on the basis of security of current assets, it shall disclose whether quarterly returns or statements of current assets filed by the Company with banks or financial institutions are in agreement with the books of accounts and if not, a summary of reconciliation and reasons of material discrepancies, if any to be adequately disclosed;
• Disclosure regarding the relationship of the Company with a company which is Struck off under Section 248 of the Companies Act, 2013 or Section 530 of Companies Act, 1956.
• Disclosure of Ratios: The Company shall disclose the following ratios Current Ratio, Debt-Equity Ratio, Debt Service Coverage Ratio, Return on Equity Ratio, Inventory turnover ratio, Trade Receivables turnover ratio, trade payables turnover ratio, Net capital turnover ratio, Net profit ratio, return on capital employed, Return on Investment;

12. Disclosure of Circuitous Financial Transactions:

Circuitous financial transactions involving money lent or invested by or into the Company for the ultimate benefit of another entity are categorized into two types of transactions by the amendment, each attracting separate disclosures.

I. Where the Company has advanced or lent or invested funds to any person or entity (including foreign entities) with an understanding, whether recorded in writing or otherwise that the intermediary shall directly or indirectly lend or invest in other persons or entities as identified by the Company or provide guarantee or security on behalf of such persons or entities (hereinafter referred to as ‘Ultimate Beneficiaries’).

Disclosures required to be made in such case:

1. Date and amount of fund advanced or loaned or invested in intermediaries with complete details of such intermediary;

2. Date and amount of fund further advanced or loaned or invested by such Intermediaries to other intermediaries or Ultimate Beneficiaries alongwith complete details of the ultimate beneficiaries

3. Date and amount of guarantee, security or the like provided to or on behalf of the Ultimate Beneficiaries

4. Declaration that relevant provisions of the Foreign Exchange Management Act, 1999 (42 of 1999) and Companies Act have been complied with for such transactions and the transactions are not violative of the Prevention of Money-Laundering Act, 2002 (15 of 2003).

II. Where the Company has received any fund from any person or entities (Funding Party) with an understanding, whether recorded in writing or otherwise that the Company shall directly or indirectly lend or invest in other persons or entities as identified by the Funding Party or provide guarantee or security on behalf of such persons or entities (hereinafter referred to as ‘Ultimate Beneficiaries’).

Disclosures required to be made in such case:

1. Date and amount of fund received from Funding parties with complete details of each funding party;

2. Date and amount of fund further advanced or loaned or invested by other Intermediaries or Ultimate Beneficiaries alongwith the complete details of the other intermediaries or ultimate beneficiaries

3. Date and amount of guarantee, security or the like provided to or on behalf of the Ultimate Beneficiaries

4. Declaration that relevant provisions of the Foreign Exchange Management Act, 1999 (42 of 1999) and Companies Act have been complied with for such transactions and the transactions are not violative of the Prevention of Money-Laundering Act, 2002 (15 of 2003).

Profit and Loss Account Items:

1. Undisclosed Income (Reconciliation of Income Tax and Companies Act):

The Company shall give details of any transaction not recorded in the books of accounts that has been surrendered or disclosed as income during the year in the tax assessments under the Income Tax Act, 1961, unless there is immunity for disclosure under any scheme and also shall state whether the previously unrecorded income and related assets have been properly recorded in the books of account during the year.

2. CSR Disclosure

Where the company covered under section 135 of the Companies Act, the following shall be disclosed with regard to CSR activities: –

(a) amount required to be spent by the company during the year,

(b) amount of expenditure incurred,

(c) shortfall at the end of the year,

(d) total of previous years shortfall,

(e) reason for shortfall,

(f) nature of CSR activities,

(g) details of related party transactions, e.g., contribution to a trust controlled by the company in relation to CSR expenditure as per relevant Accounting Standard,

(h) where a provision is made with respect to a liability incurred by entering into a contractual obligation, the movements in the provision during the year should be shown separately.

3. Details of Crypto Currency or Virtual Currency:

Where the Company has traded or invested in Crypto currency or Virtual Currency during the financial year, the following shall be disclosed: –

(a) profit or loss on transactions involving Crypto currency or Virtual Currency

(b) amount of currency held as at the reporting date,

(c) deposits or advances from any person for the purpose of trading or investing in Crypto Currency/ virtual currency.

This amendment has mandated several disclosures required to be made in the Financial Statements of the Company which shall have a material impact on all the stakeholders of the Company and shall enable the Government to ensure closer vigilance on the financial transaction of the Company.

RELEVANT NOTIFICATIONS

Title	Notification No.	Date
Amendment to Schedule III of Companies Act 2013 wef 01.04.2021	G.S.R. 207(E)	24/03/2021
MCA broaden scope of reporting by Auditors in Audit report	G.S.R. 206(E)	24/03/2021
Companies mandates to use software with audit trail of each transaction	G.S.R. 205(E)	24/03/2021