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Key Highlights Of The Applicability Of CARO 2020

by InCorp Advisory

Reading Time: 8 minutes

CARO 2020 is an amended audit report format for statutory audits of Companies covered under the Companies Act, 2013. CARO 2020 now includes additional reporting obligations after consultations with the National Financial Reporting Authority (NFRA).  

The goal of CARO 2020 is to improve the overall quality of audit reporting. In this article, we discuss the additional requirements that need to be maintained by the management for finalization of financial statements for the FY 2021-22, the companies falling under CARO applicability and so on.

An Overview of CARO 2020

The aim of CARO 2020 Order is to enhance the overall quality of reporting by the company auditors. This Order is an advancement to strengthen the corporate governance framework. These changes are imperative and tighten the Auditor’s reporting requirements. 

Therefore, the company’s management must be aware of additional details the Auditor requires to sign off on the reporting framework.

What Is The Applicability Of CARO 2020?

Implementation of CARO 2020 has been deferred for FY 2021-2022 owing to COVID-19 contingencies. All companies that were covered by CARO 2016 are subject to the order. As a result, the order applies to all firms except the following:

  • One person company.
  • Insurance organisations.
  • Banking organisations.
  • Small organisations (Companies with a paid-up capital of less than or equal to Rs 50 lakh and a latest reported turnover of less than or equal to Rs 2 crore are eligible).
  • Companies that are registered as charitable organisations.

The following private companies are also exempt from CARO 2020 applicability:

  • Whose gross receipts or revenue (including revenue from discontinued operations) in the financial year is less than or equivalent to Rs 10 crore;
  • Whose paid-up share capital plus reserves as of the balance sheet date is less than or equal to Rs 1 crore (i.e., usually at the end of the FY);
  • Not a public company’s holding or subsidiary; and
  • At any point during the fiscal year, whose borrowings are less than or equivalent to Rs 1 crore.

Now, Let Us Look At The Additional Requirements That Need To Be Maintained By The Management As Per CARO 2020 For Finalization Of Financial Statements Of FY 2021-22.

Disclosure requirements necessary for Immovable PropertyDisclosure requirements necessary for Immovable Property:
  • Details of all the immovable property held in the company’s name in the financial statements along with its holding period. 
  • Details of all the immovable property held in the name of the Promoter, director or any relatives or the company’s employee along with its holding period should be disclosed in the financial statements.
  • Details of the immovable property, along with title documents and necessary resolutions which have been mortgaged with the banks/financial institutions for any loans raised by the company.
  • Details of those immovable properties are disclosed in the financial statement but not held in the name of the company and its holding period and with the reason for non-holding in Company name.
  • If any property is held in the capacity of the lessee, duly executed lease agreements are in favour of the lessee Company.
  • Details any proceedings initiated or pending against the company for holding Benami properties.
Relevant disclosures for forming an opinion on Intangible property classified under Other Property PlantRelevant disclosures for forming an opinion on Intangible property classified under Other Property Plant & Equipment
  • Documentary records showing full particulars such as: 
    • Quantitative details, carrying value, and situation of the property, plant & equipment.
    • Carrying Value of Intangible Property Rights.
    • Any impairment tests performed or required to be performed
  • If an asset (including intangible rights) is revalued, valuation report from registered valuer with detailed justification.
Operational BenefitsDisclosure requirements necessary for Inventory:
  • Details of the coverage and procedure of the physical verification of the inventory adopted by management, frequency of physical stock verification.
  • Stock details shall be maintained in each class of inventory with a break-up of value and quantity and shall be accessible to auditors for reporting.
  • Further, the details of working capital loans borrowed from the banks/financial institutions for an amount more than INR 5 Crore. In such a case, any quarterly disclosures made to the banks about the loan shall be made available to Auditors for comparison with stock records as per books of accounts.
  • Details regarding any levy of interest, temporary overdrawing, or excess withdrawals, which has caused the sanctioned limit to exceed INR 5 Crores, must also be available.
Disclosure requirements for any loans granted or renewed by the CompanyDisclosure requirements for any loans granted or renewed by the Company:
  • The Management shall adhere on a real time basis to procedural requirements and maintain signed copies of Board/ shareholder meeting resolution as per criteria laid down under Section 186 of the Companies Act,2013. Further, all transactions shall be at Arm’s length, and adequate disclosure shall be made before the Auditor for the sake of compliance to this clause. 
  • Documentary evidence is required to support any loans or advances that were due during the year and have been renewed or extended and any new loans granted to settle the overdues of existing loans.
  • Special disclosure shall be made in financial statements regarding granting loans either repayable on demand or without stipulation regarding terms or period of repayment and the aggregate amount of such loans.
  • Special disclosure shall be made for transactions with the promoters or related parties in compliance with the provision of Section 185 of the Companies Act,2013.
Details to be recorded by management with respect to DepositsDetails to be recorded by management with respect to Deposits:
  • A list of amounts received in the course of the business or for the business along with the Form DPT-3 must be made available to the auditor, It will help the auditor to assess if such amounts have assumed the nature of deposits as per the Companies (Acceptance of Deposits) Rules. 
  • “Deemed deposits” shall also be reported under CARO 2020 along with the deposits accepted as per the directives of the Reserve Bank of India and in compliance of Section 73 to 76 of the Companies Act and its rules, irrespective of the fact whether the same is reported in DPT-3.
  • Details of any order passed by NCLT or RBI or any other tribunal for the contraventions of Section 73 to Section 76 must also be disclosed.
Undisclosed transactions under the Income Tax Act,1961Undisclosed transactions under the Income Tax Act,1961:
  • Any Assessment order taxing any transactions not recorded in the books of account but have been surrendered or disclosed as income during the year in the tax assessments under the Income Tax Act, 1961. The Auditor is duty bound to report undisclosed assessed income in CARO,2020.
  • Such Assessment may arise mainly on account of Survey, Search and Seizure provision attracted under Income Tax Act, Surrender or disclosure under Laws related to Benami Properties or Black Money provisions.
  • It is in the imperative interest of the Management to disclose all the tax filings, assessment orders where an addition is made on the undisclosed income by the Assessing Officer. Any communication between the management and the Income Tax Department, where Management has defended the claim of undisclosed income should also be disclosed.
Default in repayment to Banks, Financial Institutions, or any other lenderDetails of Default in repayment to Banks, Financial Institutions, or any other lender:
  • The scope of Auditor has been widened to report defaults in repayment by the Company borrower to ‘any lender’ and not just the financial institution, Bank, Government, or dues to debenture holders. Even a one day delay in repayment of loan/ interest will be considered as “Default”. If any default exists for any part of the year, the Auditor shall report the same.
  • All the communications with the Lenders such as – sanction terms, agreements with creation of charges, repayment schedule, evidence showing end use of money, balance confirmation with lenders, any reminder letters and other legal correspondence towards default in repayment shall be produced before the Auditor.
  • Any application rescheduling/restructuring of loan proposals submitted to the financial lender under negotiation shall also be available to the auditor to form an opinion.
Details of Fraud committed on the CompanyDetails of Fraud committed on the Company:
  • The Company must have a Whistle-blower policy in place, and any complaints received must be addressed, and the same should be provided to the Auditors for further assessment.
  • Details of any legal action taken against the accused, along with the legal correspondence if any, must also be provided.
Details of Internal Audit System and ReportsDetails of Internal Audit System and Reports:
  • The System Operating Procedures (SOPs) and internal audit checkpoints must commensurate the nature & size of the business.
  • The Statutory Auditor must be provided with the scope of Internal Audit, Internal audit reports, Internal Auditor’s approach to derive his findings and management’s approach to resolve such loopholes (if any).
  • The minutes of the meeting of the Board of Directors and Audit committee after consideration of the internal audit report, if any shall be examined by the auditor.
Operational BenefitsDetails related to Financial Activities conducted without valid Certificate of Registration (CoR):
  • Management shall assess Financial Income to Total Operating income and Financial Assets to total assets at regular intervals. If the ratio exceeds 50% for both the indicators, registration with the Reserve Bank of India (RBI) is necessary u/sec. 45(IA) of the Reserve Bank of India Act,1934.
  • Details about Financial and lease transactions with other group entities without a valid Certificate of Registration (CoR) must be reported to the Auditor.
  • Whether the company is a Core Investment Company (CIC) as defined in the regulations made by the RBI, if so, whether it continues to fulfill the criteria of a CIC, and in case the company is an exempted or unregistered CIC, whether it continues to fulfil such criteria.
  • Whether the Group has more than one CIC as part of the Group, if yes, indicates the number of CICs which are part of the Group.
Disclosure of Cash losses incurred by the companyDisclosure of Cash losses incurred by the company:
  • The Management shall prepare the Cash flow statement showing cash flow from operating activities, investing activities, and financing activities.
  • If the company has incurred any cash losses in the financial year and/or in the immediately preceding financial year, the same shall be reported.
  • The Management shall identify the cause for such cash losses and take relevant actions to mitigate such losses in the future.
  • These assessments backed by support shall be made available to the Auditor.
Details of Reasons for Resignation of past auditorDetails of Reasons for Resignation of past auditor:
  • Whether there has been any resignation of the statutory auditors during the year citing grounds of objections, concerns raised during his audit, the chain of communication shall be made available to the current Auditor apart from mere ‘No Objection’ Letter from the previous Auditor. 
  • The manner in which such issues are addressed and resolved by the management shall be disclosed to the current Auditor.
Details of Financial analysis of company at the date of balance sheetDetails of Financial analysis of company at the date of balance sheet:
  • The management shall provide the financial ratios, aging analysis, expected dates of realization of financial assets and payment of financial liabilities along with the Board of Directors’ action plan to mitigate financial risks.
  • The auditor shall assess the action plan of action designed by the Management and monitor the procedures performed to mitigate the risk associated with meeting its liabilities to opine on the going concern status of the company.
Details related to Transfer of unspent CSR amount to specified fundDetails related to Transfer of unspent CSR amount to specified fund:
  • In case of an unspent amount relating to ‘other than ongoing projects’, such amount must be transferred to a fund specified in Schedule VII to the Companies Act within six months of the expiry of the financial year i.e., 30th September each year. 
  • Minutes of the CSR Committee meetings, if any and their action plan pursuant to the CSR policy shall also be assessed by the Auditor.
Other material informationOther material information to be provided under CARO applicability:
  • Details related to intimation about Qualification or Adverse Audit report of Companies should be included in the Consolidated Financial Statements.
  • Internal Audit report shall be issued regarding applicability Sec 138 of Companies Act 2013. However, the auditor is also required to report on the internal controls where Section 138 is not applicable. In such cases, the Management must place SOPs, Checklists, and Control points commensurate with their businesses’ nature and size.
  • The going concern assumption must be backed by positive financial ratios and a road map for the future. The Whistleblower policy must be designed, and its efficiency and effectiveness must strengthen the internal control.
  • These additional requirements must be put together and standardized before March 2022.

Conclusion

The amendment of CARO 2020 has brought in major changes, leading to a stringent and vigilant approach to the Auditor’s quality of reporting. Paramount importance has been given to the efficiency and effectiveness of Internal Controls, going concern assumption, whistleblower policies, and risk mitigating strategies adopted by management.

“Cost of Non-compliance is more than Cost of Compliance” – This holds true for New India, as the Indian economy continues to promote transparency by implementing additional Governance measures.

How Can InCorp Help You?

At Incorp, we have a dedicated team of professionals and experts, skilled in assurance services to guide and assist you through the entire CARO 2020 applicability process. We are here to guide you and ensure peace of mind from setting up your India company to staying compliant with various regulations effectively and efficiently.

FAQs on CARO 2020 Applicability

Need help in complying with rules and regulations of CARO 2020?

Get in touch with us right away!

Note On One-Time Restructuring Of Loans

by InCorp Advisory

Reading Time: 6 minutes

Real Estate is one of the major sectors which has been deeply impacted by the COVID-19 pandemic and the consequent lockdown to contain it. The sector which was already seeing a lull period got hit by a ‘perfect storm’ of Coronavirus. If your company is seeing liquidity issues and cash flow mismatches and you are looking for an able advisor to help your company navigate through these stormy waters through a one-time restructuring, your search ends at InCorp.

Impact of COVID-19 on Businesses

The economic impact of the COVID-19 pandemic has created significant stress on the liquidity and overall financial position of businesses, especially those which have a borrowing from banks, NBFCs and other financial institutions. The cashflow mismatches created to the subdued business activity over the last six months and the possibility of the same not recovering in the immediate future would lead to increasing rate of defaults by even otherwise viable and sustainable businesses. 

The moratorium provided over the last six months, viz the period covering the lockdown phase in the country comes to an end in the current month and there was a need for addressing the issue of cashflow mismatch by a more sustainable and long term solution.

Need for a one-time restructuring scheme

There was a long-standing demand from the industry for RBI to announce a One-Time Restructuring of the loans to give much needed relief, clarity and long-term sustainable support to the businesses. The RBI announced a framework to permit restructuring of the stressed accounts of ‘eligible borrowers’ without the account being classified as a Non-Performing Asset (NPA)

This blog post highlights everything you need to know about a restructuring of loans; the eligibility criteria, the provisions involved and much more.

What-does-restructuring-mean-for-any-loan

Who is an eligible borrower for one-time restructuring under this framework?

The following eligibility criteria must be satisfied to be an eligible borrower for loan restructuring under this framework:

  • The borrower is under stress on account of COVID-19
  • The borrower account is classified as ‘Standard’, but not in default for more than 30 days with any lending institution as on 1st March 2020. Further, the accounts should continue to remain standard till the date of invocation
  • Further,
    1. In case of a single lender:
      • The borrower and lending institution have agreed to proceed with a resolution plan under this framework not later than December 31, 2020
    1. In case of multiple lenders having exposure to the borrower:
      • Lending institutions representing 75% by value of the total outstanding credit facilities (fund based as well non-fund based), and not less than 60% by number agree to invoke the resolution under this framework
      • Resolution under this framework may be invoked on or before 31st December 2020 and must be implemented within 180 days from the date of invocation
      • The resolution process is implemented when an ICA is signed by all lending institutions within 30 days from the date of invocation
      • In case lending institutions representing not less than 75% by value of the total outstanding credit facilities (fund based as well non-fund based) and not less than 60% by number, do not sign the ICA within 30 days from the invocation, the invocation will be treated as lapsed. In respect of such borrowers, the resolution process cannot be invoked again under this framework

Who are specifically excluded (not eligible borrowers) from this framework?

The RBI Curricular states that the following borrowers / loans are specifically excluded from the one-time restructuring framework:

  • MSME borrowers whose aggregate exposure to lending institutions cumulatively does not exceed Rs. 25 Crore as on 1st March 2020
  • Farm Loans
  • Loans to NBFCs, HFCs, Insurers and other financial service providers
  • Loans to Primary Agricultural Credit Societies (PACS), Farmers’ Service Societies (FSS) and Large-sized Adivasi Multi-Purpose Societies (LAMPS) for on-lending to agriculture
  • Loans to Central and State Governments; Local Government bodies
  • Exposures of Housing Finance Companies

What about stressed MSME accounts having borrowings up to Rs. 25 Crore?

These MSMEs (whose cumulative exposure to banks & NBFCs including fund base and Non-Fund Based does not exceed Rs. 25 Crore as on 31st March 2020) were already covered under an earlier announced scheme under restructuring of loans vide circular dated 11th February 2020.

In view of the continued need to support the viable MSME entities on account of the fallout of Covid19, the RBI has decided to extend the scheme under the aforementioned circular whereby restructuring of the borrower account may now have to be implemented by 31st March 2021. However, the following conditions should be met:

  • The MSME should have been classified as ‘standard asset’ as on 1st March 2020 and
  • It should have obtained GST registration, unless it is exempt from obtaining the GST registration
  • All other conditions under circular dated 11th February 2020 would be applicable

Are there any other requirements / compliances / approvals required for one-time loan restructuring?

In addition to the conditions set out to be an eligible borrower the following additional conditions are to be met in case of exposures above specific thresholds:

  • In respect of accounts where the aggregate exposure at the time of invocation of the resolution process is Rs. 100 Crore and above, an independent credit evaluation (ICE) by any one credit rating agency (CRA) authorized by the Reserve Bank needs to be obtained
  • In respect of loan accounts where the aggregate exposure of the lending institutions at the time of invocation of the resolution process is Rs. 1,500 Crore and above, an Expert Committee shall vet the resolution plans to be implemented under this window
  • Further each lending institution shall frame its own Board approved policies pertaining to implementation of viable resolution plans for eligible borrowers under this framework

Will the account be treated as NPA due to the one-time restructuring?

The account will continue to be classified as standard and will not be downgraded to NPA so long as the conditions and repayments as outlined in the resolution plan approved under the framework are complied with. Hence there is no classification of NPA just because of the restructuring. This is a key relief provided under this framework.

How does the one-time restructuring impact the Financial Institutions?

The loan restructuring impacts the loans impacts the profitability, & thereby the capital adequacy ratios leading to reducing capacity to raise further funds, of the Financial Institutions since they are required to create a provision for the restructured loans. The provision required as follows:

  • In case of personal loans – 10% of the residual loan or provisions held as per the extant IRAC norms immediately before implementation, whichever is higher
  • For other loans where the lending institution has signed ICA within 30 days of invocation – 10% of the total debt or provisions held as per the extant IRAC norms immediately before implementation, whichever is higher
  • For other loans where the lending institution has not signed ICA within 30 days of invocation – 20% of the debt on their books as on this date (carrying debt), or the provisions required as per extant IRAC norms, whichever is higher

When can this provision be reversed?

The financial institution may reverse the provisions as follows:

For the Institutions who have signed the ICA within 30 days of invocation:

    • One half of the provision upon the borrower paying at least 20% of the residual debt without slipping into NPA post implementation of the plan
    • Balance upon the borrower paying another 10% of the residual debt without slipping into NPA subsequently

For the Institutions who did not sign the ICA within 30 days of invocation:

    • One half of the provision upon the borrower paying at least 20% of the carrying debt
    • Balance upon the borrower paying another 10% of the carrying debt

What happens if the borrower defaults even after one-time restructuring?

All loans, other than the personal loans which are restructured under this framework, shall be subject to a monitoring period viz the period starting from the date of implementation of the resolution plan. This monitoring shall continue till the borrower pays 10% of the residual debt, subject to a minimum of one year from the commencement of the first payment of interest or principal (whichever is later) on the credit facility with the longest period of moratorium.

During the continuance of the monitoring period, if there is any default by the borrower with any of the signatories to the ICA, a review period of 30 days will be triggered. The borrower cannot default with any of the signatories to the ICA at the end of the Review Period.

If the borrower defaults, then the asset classification of the borrower with all lending institutions, including those who did not sign the ICA, shall be downgraded to NPA from the date of implementation of the resolution plan or the date from which the borrower had been classified as NPA before implementation of the plan, whichever is earlier.

How can InCorp help you?

Our team of experienced Investment Bankers & Resolution Professionals acting together as a single unit, provide a complete perspective to the lenders and stakeholders. We have raised over Rs. 2,200. Crs in the past 5 years and have also been involved in successful resolution of a real estate company having a loan of over Rs. 2,500 Crs. We are also currently assisting a few other real estate companies to resolve the liquidity issues faced by them.

We can help you in understanding the key nuances of debt restructuring and understanding of the one-time loan restructuring scheme. They can help you in exploring different options available to resolve the financial position of your business, evaluating the best course of action for your debt and also planning the execution of the entire restructuring process end-to-end.

Get your restructuring plan in action today!

Talk to our Investment Bankers

Start-up listing – Opportunity to Organic Growth

by InCorp Advisory

Reading Time: 4 minutes

Bombay Stock Exchange Limited (herein referred to as “BSE”) has set up the BSE Start-up Platform as per rules and regulations laid down by the Securities and Exchange Board of India (herein referred to as “SEBI”). BSE Start-up Platform offers an entrepreneur, an Investor friendly environment, which enables the listing of Small and Medium Enterprises (herein referred to as “SMEs”) from the unorganized sector scattered throughout India into a regulated and organized sector. As on date, the market statistics are as under:

Number of companies Listed on BSE Start-ups till Date 4
Market capital of companies Listed on BSE Start-ups till Date (INR in Crores.) 65.38
Total Amount of Money Raised till Date (INR in Crores.) 19.00

Source: www.startupsbse.com

Sectoral Analysis:

Market Cap

Salient Features of ‘BSE Start-up Platform’ listing:

Salient Feature

Applicability:

The company registered under companies Act,2013 should have been in existence for at-least a period of two years on date of filing the draft prospectus with BSE.
and
The “Startup companies” seeking to be listed on the BSE Start-up Platform should be in the sector of IT, ITeS, Bio-Technology and Life Science, 3D Painting, Space Technology, E-Commerce, Hi-tech Defence, Drones, Nano Technologies, Artificial Intelligence, Big Data, Augmented/Virtual Reality, E-gaming, Exoskeleton, Robotics, Holographic Technology, Genetic Engineering, Variable Computer Inside Body Computer Technology and other High-tech Industries.
and
The company should be registered as a Start-up with MSME/DIPP Or If not registered as such, the company’s paid-up capital shall be a minimum of INR 1 crore.

Financial Criteria:

  • The net worth should be positive.
  • Preferably, there should be investment by QIB Investors [as defined under SEBI ICDR Regulations, 2009]/Angel Investors/Accredited Investors for a minimum period of 2 years at the time of filing of a draft prospectus with BSE.
  • In case company is not registered as a start-up with MSME / DIPP, the company’s paid-up capital should be minimum INR 1 crore.
  • The post-issue paid-up capital of the company [face value] shall not be more than INR 25 crores.

Other Requirements:

  • It is mandatory for a company to have a website.
  • It is mandatory for the company to facilitate trading in Demat securities and enter into an agreement with both the depositories.
  • There should not be any change in the promoters of the company in preceding one year from the date of filing the application with BSE for listing under the Start-up segment.

Disclosures:

A certificate from the Applicant company I Promoting companies stating the following:

  • The company has not been referred to National company Law Tribunal [NCLT] under Insolvency and Bankruptcy Code,
  • There is no winding-up petition against the company that has been accepted by the National company Law Tribunal [NCLT].
  • None of the Promoters / Directors of the company has been debarred by any regulatory agency/ies.

Compliance on BSE Start-up Platform:

Preparation for IPO:

IPO is one of the means of financing and an important method to raise funds for any corporate aspiring for sustained growth. It is thus important that every company is aware of the requirements and the kind of preparation required before entering the capital market.

An overview of the process of IPO and activities are listed below:

preparation for IPO-min.png

Migration from BSE Start-up Platform to the Mainboard:

  • companies seeking migration to Main Board of BSE should satisfy the eligibility criteria.
  • It is mandatory for the company to be listed and traded on the BSE Start-ups Platform for a  minimum period of two years and then they can migrate to the Main Board as per the guidelines specified by SEBI vide their circular dated l5th May 2010 and as per the procedures laid down in the ICDR guidelines Chapter X.

Key Comparison between BSE Start-up IPO listing and BSE SME IPO listing:

Particulars BSE Startup IPO listing BSE SME IPO listing
Applicability The company incorporated under companies Act,2013 The company incorporated under companies Act,1956 or existing Partnership/LLP converted to company under companies Act, 2013
Pre-IPO paid-up capital threshold INR 1 Crore INR 3 Crores
Track record At least 2 years At least 3 years
Funding criteria for applicability Investment by QIB Investors
| Angel Investors |Accredited   Investors for a minimum period of 2 years at the time of filing of a draft prospectus with BSE		 Funded by way of loan/equity by Banks or Financial Institutions or Central or State Government or its undertaking, or

Its Group company should have been listed for at least two years either on the Main Board or SME Board of the Nationwide Exchange.
Cap on Cash Accruals (Earnings before Interest and Depreciation) No limit Positive
Disclosure condition as regards Promoters/Directors for bringing transparency and Integrity amongst management None of the Promoters /Directors of the company has been debarred by any regulatory agency/ies No specific Condition
Specific condition for Migration to Mainboard the minimum period of two years on BSE Start-up Platform paid-up capital of more than 10 Crores + Market Capitalisation should be minimum INR 25 Crores

Other Income tax concessions to Start-ups:

How can Incorp India help you?

At InCorp India, we are committed to delivering quality in assurance, tax, and advisory services. We have curated an MSME suite to provide various benefits for MSMEs. Our combined dedicated team of Corporate Advisory, Valuation, Investment Banking, and Taxation experts can help you plan and prepare for IPO, conceptualizing the process, pre and post-issue compliance, and provide the ease for filing the required compliances. We can assist you not only in terms of compliance but also to evaluate the eligibility of listing, valuation principle specific to business by evaluating cost-benefit analysis. If you are interested in knowing the benefits available to MSMEs and Startups and related assistance, you can write to us on ‘info@incorpadvisory.in’.

Need assistance to plan an IPO?

Contact us!

Debt Management During Covid-19

by InCorp Advisory

Reading Time: 3 minutes

The impact of COVID-19 has hit the entire world including the major economies like the European Union and the US. The fallout of this will surely have a major impact on the Indian economy. During this crucial COVID-19 phase, it is evident that many business activities have come to a halt in accordance with the added precautionary measures. While this has greatly impacted many industries and our daily lives, we would like to assure you that this pandemic will be tackled better and we will emerge stronger.

While taking care of our family’s health and safety is important to all of us, it is just as important to us at InCorp to take care of your company’s financial health and business interests. We are dedicated to help you to reassess your business operations with a view to not just survive through these trying times but to seize the opportunity to flourish and also tap into the remedies available as the government unveils more soon.

What can one expect on the restart of businesses post lockdown?

COVID-19 (Coronavirus) is having an unprecedented and devastating impact on businesses. Travel restrictions, disrupted supply chains, subdued demand and labor issues have unsettled the businesses.

It will lead to the following-

  • Lesser Demand and Supply
  • Employee lay-offs
  • Default and/or renegotiation of contracts
  • Liquidity issues thereby severely impacting cash flows
  • Delays in servicing of Debt
  • Working capital finance being blocked and new finance being difficult 

What are the impacts of this on businesses?

Most businesses (particularly MSMEs) are vulnerable whenever normal economic activity ceases, despite governmental interventions to limit economic upset.

Several business entities would be grappling with –

  • Declining profitability
  • Poor/negative cash position
  • Delays in receivable liquidation
  • Falling DP position and blocking of working capital limit
  • Difficulty in meeting term debt EMI obligation
  • Increased scrutiny by lenders

How should one tackle this situation?

A proper financial plan is a prerequisite in this time of crisis. As we navigate these complexities together we can assist you in preparing and executing a robust plan which will take care of your cash flows freeing your mind to concentrate on your business. We have formed a specific team of expert advisors who would devise a custom plan for your business after studying the specific challenges facing your business.

What if one was already having an overdue EMI prior to the lockdown?

An interesting scenario arises in case of the already stressed accounts which were overdue prior to the lockdown. The otherwise available 90 day period before being classified as NPA by the financial institution has shrunk as the lockdown has prevented the economic activity and thereby the generation of funds to honor the repayment obligations. The RBI has clarified that the lockdown period would be excluded in the calculation of 90 days period for the calculation of the NPA.

How can Incorp help you?

We have started a series of emails whereby regular updated information/announcements and analysis thereof along with financial implications of the lockdown & COVID-19 on the business and strategies for the mitigation of these challenges are being shared.

Further Incorp can assist you in debt management as follows-

Financial Distress Assessment:

Assessment of Financial Distress

  • Health check-up of the business by reviewing the financial position and the key financial indicators as at 31st March 2020
  • Scrutinize the current working capital limits utilized
  • Assess the current drawing power available, if any, based on the current guidelines of the banks
  • Advise on the strategy for the way ahead

Planning, Forecasting and Budgeting the Cash Flow:

Planning Forecasting Budgeting Cash Flow

  • Identifying key forecast assumptions and preparation of robust cash flows for the next 2 quarters
  • Understand the actual business position and its cash inflows, assess the available headroom and budget the peak deficit cash flow
  • Advice on the strategy to raise funds to meet the deficit in the cash flow
  • Syndication of temporary/ad-hoc working capital limits from the existing bankers
  • Assisting in regular cash flow tracking and reporting the deviations and advice on a further course of action due to the deviation

Debt Restructuring:

Debt Restructuring

  • Identify flexibility with existing lenders.
  • Assist in the re-negotiation with the lenders for restructuring the debt using up to date knowledge of relief announced by RBI.
  • Explore additional financial options to refinance the existing debt using our expertise on Bank loan syndications.

Recovery and Future Preparedness:

Debt Recovery

  • Strategy and advice on various modes available under law for the collection of funds stuck up in receivables
  • Analyze the key risks of the business and possible steps to mitigate the risk factors going forward.

Get reliable and easy business legal access.

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What Is The Applicability Of Legal Entity Identifier Or LEI Code?

by InCorp Advisory

Reading Time: 5 minutes

The Legal Entity Identifier (LEI) code has been conceived as a key measure to improve the quality and accuracy of financial data systems for better risk management post the Global Financial Crisis. 

The LEI code or LEI number is a 20-character unique identity code assigned to entities who indulge in financial transactions. In respect of the applicability of LEI, the Reserve Bank of India (RBI) has issued various notifications from time to time to cover entities that will have to comply with the LEI registration requirement.

Since most of you will have questions regarding the applicability and procedure for registration for LEI code, we thought it would be appropriate to put them down in FAQ format.

FAQs Surrounding Legal Entity Identifier(LEI) Code

1. What is LEI Code/Number?

LEI Code or Legal Entity Identifier is a 20-character unique identity code assigned to entities who are parties to financial transactions. Globally, it helps in labeling an entity with an Identity number that has entered into financing transactions and is registered with multiple agencies having varied registration numbers.

2. How does LEI code work?

LEI code is designed to enable the identification and linking of parties to financial transactions in order to manage counterparty risk. The goal is to improve the measuring and monitoring of systemic risk and support more cost-effective compliance with regulatory reporting requirements.

3. Which financial transactions fall under LEI Applicability?

Currently, all applicants transacting in Over-the-Counter (OTC) Derivative Markets, Large Corporate Borrowers and participants of Non-Derivative Markets, who fulfill the eligibility criteria are covered under the applicability of LEI code.

4. Which borrowers, under the Large Corporate Borrowers notification issued by RBI, have a LEI number requirement?

All entities having total fund-based and non-fund based exposure of Rs. 5 crore and above are termed as Large Corporate Borrowers. However, currently, LEI code is applicable only for entities having total exposure above Rs. 50 crores.

5. Which all transactions are covered under Non-Derivative Market notification issued by RBI for LEI code applicability?

All participants, other than individuals (including non-resident entities), undertaking transactions in markets regulated by RBI viz,

  • Government Securities markets or
  • Money markets (markets for the issue of any instrument with a maturity of one year or less) or
  • Non-derivative forex markets (transactions that settle on or before the spot date) i.e. cash, tom and spot transactions.

are covered under RBI’s notification for LEI code applicability for non-derivative market participants.

6. Who should apply for LEI code?

Following companies cannot apply for the Scheme:
Any entity registered in India needs to apply for Legal Entity Identifier (LEI) code from time to time. The list of entities eligible to apply for LEI codes are Sole Proprietorships, Limited Liability Partnerships, Partnership Firms, Trusts, Private Limited Companies, Public Limited Companies, Government Companies, One Person Company, Insurance Companies, Housing Finance Companies, Non-Banking Finance Companies, Non-Profit making Companies, Special Purpose Vehicles – Trusts, Special Purpose Vehicles – Companies, SPV – Partnership Firms, SPV – Co-operative Societies or Multistate Co-operative Societies Mutual Fund, Mutual Funds-Sub Scheme, Alternative Investment Fund (AIF), AIF- Sub Scheme, Nationalised Banks, Scheduled Urban Cooperative Bank, Banking Companies – Others, Stand Alone Primary Dealers, Public Financial Institutions, Unlimited Companies, Cooperative Societies or Multistate Cooperative Societies, Government Organizations, Companies Limited by Guarantee, etc. Individuals acting in their natural capacity are currently outside the scope of applicability of LEI Code.

7. What is the deadline to apply for the LEI Code?

The last date for application by entities dealing in the OTC market, large corporate borrowers and participants dealing in non-derivative markets having net worth above Rs. 2,000 million has already lapsed. Thus, all the above participants will have to compulsorily apply for LEI code to have all future transactions. The deadline for application of LEI code by participants dealing in non-derivative markets having net worth below Rs. 2,000 million was 31st March 2020 which is now extended to 30th September 2020 vide RBI notification dated 27th March 2020.

8. What are the consequences for non-application?

Entities dealing in OTC derivative markets will not be eligible to transact without a valid Legal Entity Identifier or LEI number. Borrowers who do not obtain LEI code will not be granted renewal/enhancement of credit facilities. 

Entities dealing in non-derivative markets transaction will not be able to undertake transactions in financial markets after the due date, either as an issuer or as an investor or as a seller/buyer. Transactions undertaken through the recognized stock exchanges are outside the purview of the LEI requirement.

9. Do all non-derivative forex transactions require Legal Entity Identifier (LEI) code?

In the case of non-derivative forex transactions, all inter-bank transactions will require LEI code. Non-derivative forex client transactions will require LEI code only for transactions involving an amount equivalent to or exceeding USD 10,00,000/- or other equivalent currencies.

10. Do Non-resident entities fall under LEI code applicability as well?

Non-resident entities undertaking financial transactions in the relevant markets will also require LEI code. Entities that are not legal entities in their country of incorporation (e.g., funds operated by a non-resident parent/management company that are each registered as an FPI) can use the LEI code of their parent/management company.

11. What is the validity of the Legal Entity Identifier (LEI) code?

The validity of Legal Entity Identifier (LEI) Code is for a period of one year from the date of issuance or last renewal.

12. What is Legal Entity Identifier India Limited (LEIL)?

Legal Entity Identifier India Limited (CIN- U74900MH2015PLC268921) is a Wholly Owned Subsidiary of The Clearing Corporation of India Ltd. and it acts as a Local Operating Unit (LOU) for issuing globally compatible Legal Entity Identifiers (LEIs) in India.

13. What is the basic registration process for application for LEI code?

An entity can fulfil LEI registration requirement by complying with the following:

  • Creating an account on www.ccilindia-lei.co.in website
  • Submission of basic details.
  • Getting an email confirmation for validation of the account created.
  • Submission of documents, information, and payment of application fees.
  • Verification of documents by Legal Entity Identifier India Limited team.
  • Allotment of LEI Code / Rejection of application in case of inappropriate application.

14. What are the documents required for Legal Entity Identifier(LEI) code application?

List of documents required to be submitted can be searched on www.ccilindia-lei.co.in website under Download – Legal Doc Download tab. List of documents required are:

  • Certificate of Incorporation/Registration Certificate
  • PAN Card
  • Undertaking-cum-Indemnity as per the format specified by LEIL
  • Audited Financial Statements
  • Board Resolution as per the format specified by LEIL or a certified true copy of the general board resolution or general power of attorney will be accepted if the legal entity commits to submit a fresh board resolution in the format as prescribed by LEIL when the next Board Meeting is held subsequently.
  • Power of Attorney as per the format specified by LEIL in case of any further delegation by officials mentioned in Board Resolution.
  • Audited financials of Immediate Parent and Ultimate Parent Entity or Auditor’s Certificate as per the format specified by LEIL in case of an immediate parent and ultimate parent entity.

It is to be noted that, there is no need to submit the documents physically if all the documents are submitted online and payment is made successfully online.

Documents required for Legal Entity Identifier(LEI) code application

15. What are the registration charges for acquiring a LEI number?

A basic charge of Rs. 5,900/- (inclusive of GST) is required to be paid at the time of application of LEI code which can be paid via Internet Banking/Credit Card/Debit Card/ Demand Draft payable at Mumbai.

16. How Long Does it Take to Get the LEI Code issued after submitting the application?

After submission of all the documents online or receipt of all physical documents at LEIL office (in case if all documents are not submitted online) and payment of application fees, LEIL generally issues LEI code within 3 to 5 working days.

17. How can InCorp Advisory assist you?

We at InCorp have studied in detail the procedure for obtaining LEI code and built a team of experts. So, we can assist you in obtaining Legal Entity Identifier (LEI) code by taking care of all your LEI registration requirements. Get in touch with our team for any further queries.

Need a consultation with an expert?

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FAQs On Companies Fresh Start Scheme

by InCorp Advisory

Reading Time: 3 minutes

1. What is Companies Fresh Start Scheme 2020 about?

Companies Fresh Start Scheme 2020 is a scheme introduced by the Ministry of Corporate Affairs to provide relief to law-abiding companies and LLPs in the wake of COVID-19. This is the very first kind of opportunity extended by MCA to both Companies and LLPs to make good any filing related defaults, irrespective of the duration of defaults, and make a fresh start as a fully compliant entity. Fresh Start scheme and modified LLP Settlement Scheme incentivize compliance and reduce compliance burden during the unprecedented public health situation caused by COVID-19.

2. What is the USP of the Companies Fresh Start Scheme?

The USP of the scheme is a one-time waiver of additional filing fees for delayed filings by the companies with the Registrar of Companies.

3. When did Companies Fresh Start Scheme start?

The scheme shall commence from 1st April 2020.

4. Due date of the Companies Fresh Start Scheme?

All the companies can take benefit from the Scheme up to 31st December 2020.

5. Applicability of the Scheme?

This scheme is applicable to all the Companies i.e both Private and Public companies and it also includes the Company which is marked as “ACTIVE non-compliant” due to non-filing of Active Company Tagging Identities and Verification (ACTIVE) E-form INC-22A.

6. Companies not covered under the Scheme?

Following companies cannot apply for the Scheme:

  • Companies against which action for final notice for striking of the name u/s 248 of the Act has already been initiated by the designated authority (However, these companies can apply for revival and then can take the benefits of the Scheme);
  • Companies that have already applied for the action of striking off the name of the Company from the Register of Companies;
  • Companies which have amalgamated under a Scheme of arrangement or compromise under the Act;
  • Companies that have already applied for obtaining dormant status u/s 455 of the CA,2013 before the Scheme;
  • Vanishing companies;
  • Companies that have appealed against any prosecution launched for imposing penalties (Provided that if the company withdraws the appeal, they can avail the benefits of the Scheme post-withdrawal of appeal).

7. Forms that are covered under the scheme?

All the forms that are subjected to additional fees under Section 403 of Companies Act,2013 i.e all the forms whether event-based or annual based and INC-22A.

8. Forms that are not covered under the Scheme?

Following are the forms that are excluded under the Scheme:

  1. FORM SH-7
  2. FORM CHG-1
  3. FORM CHG-4
  4. FORM CHG-8
  5. FORM CHG-9

The above-mentioned forms are for an increase in share capital and charge related forms.

9. What shall be the filing fees and additional fees on filing belated documents under this Scheme?

The defaulting companies may themselves avail the scheme by filing documents that may not have been filed on payment of only normal fees as prevailing on the date of filing.

10. What is the extension of the Scheme for DIN and DPIN holders?

The scheme is not just applicable to Companies but it is also extended to the person holding DIN wherein holders of DINs marked as ‘Deactivated’ due to non-filing of DIR-3KYC/DIR-3 KYC-Web can also regularise the same by filling the form without paying any additional Non Compliance fees of INR 5000.

11. What are the Benefits of the Companies Fresh Start Scheme?

  • Condonation of all Additional fee for filing of Belated documents;
  • Granting of Immunity from the Prosecution;
  • Granting of Immunity from the Proceedings for imposing penalty;
  • ROC shall withdrawal all proceedings of adjudication of penalties u/s 454.

How can InCorp Advisory assist you in this Scheme?

Our specialized team assists companies and LLPs with the list of compliances to be completed with the procedure for the same under this Scheme. InCorp shall guide you end to end through the process of making your company/LLP compliant.

For assistance on the Companies Fresh Start Scheme and LLP Settlement Scheme, do get in touch with us at info@incorpadvisory.in.

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