More recently, on 16 January 2015, the MCA issued another amendment that provides that the requirements in respect of consolidation of financial statements shall not apply to a company having subsidiary or subsidiaries incorporated outside India only for the financial year commencing on or after 1 April 2014.
The amendment also aims to address the other of the aforesaid situations that is expected to result in implementation challenges. While it appears that the intention of this amendment is to provide a temporary relief, like the MCA earlier did in case of companies with no subsidiaries but only associates and joint ventures.
Apparently it seems that all unlisted companies with a foreign subsidiary are exempt from preparing consolidated financial statements for the financial year 2014-15. However, on a plain reading, it is not completely clear whether the exemption is available if a company has at least one foreign subsidiary along with Indian subsidiaries, or will be available if a company has only foreign subsidiaries but no Indian subsidiaries.
However, if it is the former case, this amendment can also be abused by creating an non operational subsidiary, say in Nepal or Sri Lanka, to avail this exemption. Nevertheless, the exemption seems to be only a transitional relaxation and can only benefit a company for so long.
While the amendments do not specify this but it appears that the use of the words ‘subsidiary or subsidiaries incorporated outside India’ in the amendment also refers and includes foreign associates and joint ventures following the explanation in section 129(3) of the Act.
That said, all unlisted companies required to prepare consolidated financial statements should start the process as early as possible. This will include evaluating their ability at present to generate and gather necessary information, the availability of financial information following the Indian accounting standards, alignment of policies of the investees to the parent company, additional resources in terms of accounting software and staff, increased scope of the engagement for the company’s auditors—and some of these requirements may require significant time and cost especially in case of large and mid-sized unlisted companies.
(Author is AGM-Finance & Accounts with Jaguar Overseas Limited)