[The following post is contributed by Esha Chakraborty of Vinod Kothari & Co. She can be contacted at email@example.com]
The financial year (F.Y.) 2014-15 seems overwhelming for India Inc. as it faces the daunting task of meeting regulatory time-lines on the implementation of several new provisions introduced under the Companies Act, 2013 (the ‘Act, 2013’). The requirement of ‘Uniform Financial Year’ for all Indian companies is one such provision.
Provisions under Act, 2013
Section 2(41) of Act, 2013 defines ‘financial year’ as –
‘the period ending on the 31st day of March every year, and where it has been incorporated on or after the first day of January of a year, the period ending on the 31st day of March of the following year, in respect whereof financial statement of the company or corporate body is made up’
Essentially, the clause has mandated all existing Indian companies to align their financial year from the commencement of this clause, i.e. from September 12, 2013. However, a transition time limit of two years has been allowed.
Delving further, the requirement of maintenance of books of account, preparation, adoption and filing of financial statements and documents required to be annexed thereto (Auditors’ Report and the Board's Report) have also been brought into effect from April 1, 2014. Considering the practicalities, the Ministry of Corporate Affairs through General Circular No. 08/2014 dated April 4, 2014, came forth with a further clarification that for the relevant financial year, 2014-15, all such companies having accounting year commencing earlier than April 1, 2014, may prepare their financial statements in accordance with the erstwhile Act, 1956 and then convert to an uniform financial year (April-March) in the forthcoming accounting year in accordance with the Act, 2013.
However, Section 2(41) does grant a carve-out for a holding or subsidiary of a foreign company to follow a different financial year for its accounts consolidation purpose. These companies may follow an alternate accounting period as ‘financial year’. But, it is to be noted that even this grant is not automatic, but rather it is subject to specific approval of the National Company Law Tribunal (NCLT).
Impact on India Inc.
An earlier publication, ‘Understanding Companies Act, 2013, put across, in detail, the underlying implementation concerns with regard to the above provision. The requirement of uniformity in financial year would gravely hit the Foreign Owned & Controlled Companies (‘FOCCs’), if they are not granted the eligible exemption. By its very name, FOCC means an Indian company, which is not owned and/or controlled by resident entity/ies. It is essential for such companies to follow the calendar year/other accounting period to consolidate the accounts with their foreign parent.
As per recent surveys, all the major FOCCs in India have July-June or Jan-Dec as accounting years. The obvious ambiguity continues on compliance with the provisions of Section 2(41) read with the afore-stated MCA Circular. Even with the exemption being enforced, such companies are left with no other option but to wait until the constitution of NCLT.
Evidently, the question arises before the management as to how such a company will prepare its financials for the broken period (i.e., from end of this current F.Y. upto March 31, 2015) or why it should not be allowed to continue the relevant F.Y. till March 31, 2015, if they cannot avail the exemption clause.
Ministry Notification – way ahead
On November 3, 2014, MCA vide a notification has amended the Company Law Board (Fees on Applications and Petitions) Amendment Rules, 2014, wherein the CLB can now take up applications for allowing companies to opt for any period other than April-March as financial year.
Therefore, it seems for the FOCCs that although in the current financial year they may follow the earlier accounting norms, in order to continue with different accounting period effective from F.Y. 15-16, such companies should apply for the requisite order of CLB, way before March 31, 2015.
- Esha Chakraborty
 Read the entire text at http://www.mca.gov.in/Ministry/pdf/General_Circular_8_2014.pdf