Companies Act: Additional Disclosures On Cryptocurrency, Regulatory Actions Introduced
A bitcoin logo in the window of a bitcoin automated teller machine (ATM) kiosk in Barcelona, Spain. (Photographer: Angel Garcia/Bloomberg)

Companies Act: Additional Disclosures On Cryptocurrency, Regulatory Actions Introduced

The Ministry of Corporate Affairs has directed companies to disclose their investments in crypto or virtual currency, along with the source of funds and profit or loss earned through such transactions.

Companies must also make additional disclosures on corporate social responsibility, promoter shareholding and Benami property transactions, among others.

This has been introduced through an amendment in Schedule III of the Companies Act, 2013 that prescribes the format of balance sheet that must be prepared by almost all companies, unless they fall into a specific category for which a different format is prescribed.

To be clear, some of the proposed changes already applied for a class of listed entities via Securities and Exchange Board of India regulations. But now, the requirement has been extended to almost all companies, including private firms.

In a move to curb frauds, the government has also directed companies to use only those accounting software platforms April 1 onwards, which provide a feature of recording transaction-wise audit trail and logging facility for each change that’s made in the books of accounts.

The changes introduced in Schedule III are welcome and will have far implications for improving transparency in financial statements, Amarjit Chopra, senior partner at the audit firm GSA & Associates, told BloombergQuint. Businesses, however, may find these to be a bit difficult from the perspective of ease of doing business, he said.

Probably the advantages of transparency and objectivity far outweigh the disadvantages that it may carry. Some of the clauses in the amendment were already there in the companies auditors order where the auditor was supposed to report certain matters. Those figures will now be provided by the management and will have to be verified by auditors before their final comment.
Amarjit Chopra, Senior Partner, GSA & Associates

Here are the key changes...

Disclosures On Crypto Currency

India recently proposed a bill that may prohibit all private cryptocurrencies and provide for an official digital currency that will be issued by the Reserve Bank of India. The bill is yet to be made public. At the same time, the government has signaled its readiness to provide existing investors a transition period to exit their holdings.

Against this backdrop, the government has now asked companies preparing their financial statements after April 1 to disclose details of crypto or virtual currency held by them in the following manner:

  • Confirm whether it has traded or invested in crypto or virtual currency during the financial year.
  • If the answer is affirmative, companies must disclose profit or loss on such transactions, along with the amount of currency held on the reporting date.
  • And lastly, details of deposits or advances received from any person for trading or investing in such currency must be separately mentioned.

Commenting on this change, Avimukt Dar, partner at Indus Law, said in an emailed statement that the reporting exercise can be a prelude to possible investigations and penalties as there is no clarity yet from the government. Companies have some time as financial statements for the year ending March 2021 will be prepared and audited prior to reporting, he said. However, the precise policy posture of the government of what to do with so the called private virtual currencies is still not clear, he said.

Companies which have subsidiaries abroad and which hold or have traded in such instrument will also be required to report such transactions, Sandeep Shah, managing partner at NA Shah Associates, told BloombergQuint.

Companies which have exchanged currencies against purchase of goods and services and if there was a gain or loss as a result of handing over the currencies against the consideration must report the details separately. Further the gains/losses cannot be netted off against the value of goods or services.
Sandeep Shah, Managing Partner, NA Shah Associates

How The Crypto World Views These Changes

Indian firms dealing in cryptocurrency trades have welcomed the change and said they are compliant with investor verification norms. Some are even reading the development as positive for cryptocurrencies.

Monark Modi, founder and CEO of Bitex, a crypto currency exchange, said in an emailed statement that the change is a positive sign from the government to accept cryptocurrencies as an investment asset. In light of recent speculation around banning, allowing cryptocurrencies to be a part of accounting practices will put investors at ease as they no longer have to be worried regarding taxation, he said.

Zebpay’s Vikram Rangala said the changes are welcome. The amendment is a great step towards the kind of regulations that we were calling for, he said. Zebpay has been self-regulating along these lines since 2014 and has always encouraged KYC-verified members to comply with the tax laws, he said.

Key Financial Performance Ratios And Regulatory Details

The Schedule III amendment also requires companies to make additional disclosures on key financial performance ratios and regulatory information. This is with an intent to share a clearer picture of company’s financial health and compliance with stakeholders. The additional disclosures that companies must make include:

  • Details of proceedings initiated against the company for holding any Benami property.
  • Compliance with any approved scheme of arrangement.
  • Date of declaration as willful defaulter and details of default.
  • Relationship of a reporting entity with a struck-off company.
  • Status of compliance with restriction on number of layers that a company is allowed.

Companies preparing their balance sheet after April 1 must also disclose additional financial performance ratios, along with the existing ones in order to give a better picture of their operational performance to investors.

Now, companies will disclose ratios on:

  • Debt-equity, debt service coverage, return on equity.
  • Current ratio, investor turnover, trade receivables, trade payables.
  • Net capital turnover, net profit, return on capital and return on investment.

Chopra said while the new additions are welcome, the information sought to be obtained through them can also be accomplished through a fewer number of ratios. But this will surely benefit investors and the public at large, he said.

The amendment will become effective after approval of the Parliament.

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