Clause 41 Makeover!

To achieve consistency with the new company law, remove ambiguities resulting from piecemeal changes, create a standard reporting format for finance companies, reduce compliance and quality disclosures- its with these objectives in mind, that SEBI has proposed several changes to Clause 41 of the listing Agreement. Clause 41 lays down the framework for financial reporting by listed companies. Payaswini Upadhyay gets experts to examine the Top 3 changes suggested by SEBI's discussion paper

The first and perhaps the most important change SEBI has proposed is the need for half yearly consolidated accounts. Currently companies have to prepare consolidated accounts only at the end of the fiscal. Now SEBI suggest that  if the revenue, total assets, total liabilities, profit or loss varies by 20% more in the consolidated results compared to standalone statements, listed companies will have to prepare consolidated results half yearly. Dolphy D'Souza
Partner, Ernst & Young
"I think it's a very important first step by SEBI to make consolidated financial statements mandatory- eventually for all quarters but it's a first step to do it half yearly. Essentially, standalone accounts are meaningless because very often you have profits in standalone accounts but you have losses in consolidated accounts because most of those losses reside in subsidiaries or take an example of infrastructure companies – standalone accounts of an infrastructure company is pretty meaningless because most of the operations are conducted through subsidiaries."
The second important change proposed by SEBI relates to material foreign subsidiaries and joint ventures. SEBI is now proposing that audited results should constitute at least 80% of the consolidated turnover, networth, profit or loss. Jamil Khatri
Head- Accounting Advisory Services, KPMG
"Today the guidelines around this are unclear and therefore many auditors take a view that if you have a subsidiary which is not mandatorily subject to an audit by an auditor, the results of those subsidiaries and operations are incorporated into the consolidated results based on management certification. Now in certain cases, that could be material and therefore what SEBI is saying that look, if those operations are material such that numbers that have been subject to an audit or a review are not at least 80% - then again investors are better served by making sure that at least 80% is subject to an audit or a review." Dolphy D'Souza
Partner, Ernst & Young
"I think all companies that have very significant foreign subsidiaries will eventually have to ensure that those foreign subsidiaries are reviewed and audited. So there will be a significant impact on those companies who never audited their foreign subsidiaries- particularly in the case of foreign subsidiaries that reside in tax havens where as per those jurisdictions where you don't require a review or audit. So it would affect a few companies but it would affect them significantly.
The third important proposal could spell change for companies like Wipro, Infosys, TCS, Bharti who have been reporting their results as per International Financial Reporting Standards. The existing framework of Clause 41 allowed listed companies to report consolidated financials as per IFRS. But now SEBI is proposing that all listed companies prepare consolidated results as per Indian GAAP. Jamil Khatri
Head- Accounting Advisory Services, KPMG
"There are two ways to look at this – one is, given that we haven't got momentum under IFRS is India, SEBI wants to make sure that everyone is consistently following a framework which is a notified Indian standard. The second way to look at this is there is move to move closer to Ind-AS- which is the Indian version of IFRS- sometime in the near future and if that indeed happens, then SEBI is encouraging or requiring companies to follow the Indian version of IFRS rather than the global version of IFRS." Dolphy D'Souza
Partner, Ernst & Young
"I think the whole proposal is probably driven by the fact that under the Indian Companies Act- the proposed new Companies Act- there won't be IFRS as per IASB but there would be IFRS as per adopted by the Indian authorities. And so all these companies which were reporting quarterly IFRS accounts, those were under the IFRS as per ISB. So this move is to probably make all these companies report results consistent with what other companies in India would be doing in future which is to report consolidated accounts based not on ISB IFRS but India IFRS so to say."
Those were the top 3! Add to them mandatory disclosure of book value of equity shares, submitting cash flows half yearly in addition to statement of assets and liabilities and disclosure of discontinued operations to help investors predict future growth of the company- you can send your feedback to SEBI on all these up to September 13th. In Mumbai, Payaswini Upadhyay