CA Journal June 2024
CA Journal June 2024
CA Journal June 2024
al MS
ion
Internat
M
E D ay
27 June
2024
The Chartered Accountant
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Editorial
THE CHARTERED ACCOUNTANT
Nurturing Dreams:
The development of the MSME sector is pivotal for
realizing the vision of Aatmanirbhar Bharat, fostering rural
economic growth, promoting employment generation,
and alleviating poverty. The Institute of Chartered
The Significance of MSMEs in India Accountants of India plays a pivotal role in the
development of MSMEs through its multifaceted
contributions. The ICAI’s members and firms are
M
SMEs are the backbone of India’s economy, supporting the MSMEs across the breath of the country in
embodying aspirations realized through their financial management, compliances matter,
dedicated effort. Supported by government adopting best practices in improving their competitiveness
initiatives, MSMEs contribute significantly to and taking benefit on various Govt. schemes to position
employment and economic growth. Additionally, India as manufacturing hub on global landscape.
ICAI plays a vital role in their development by offering In this context, the support provided by ICAI is
financial guidance and advocacy. Together, these indispensable. ICAI’s involvement in supporting the
collaborative efforts have led to exponential growth development of MSME sector encompasses various
in MSME-related exports and employment dimensions. During the last few years ICAI has been
opportunities, underscoring their importance in actively engaging with MSMEs and related stakeholders
realizing the vision of Aatmanirbhar Bharat, fostering through various initiatives like MSME Yatra, MSME SETU
rural economic growth, and promoting inclusivity and etc. Moreover, ICAI plays a pivotal role in capacity building
prosperity. The significance of MSMEs transcends within the MSME sector by organizing training programs,
mere economic considerations, representing dreams workshops, and seminars tailored to the specific needs of
nurtured through relentless effort and fervour. MSMEs. These initiatives empower entrepreneurs and
Throughout India’s history, entrepreneurship and professionals associated with MSMEs with the necessary
MSMEs have been integral to the nation’s progress. skills and knowledge to thrive in a competitive business
As MSMEs continue to thrive, they not only strengthen environment. Furthermore, ICAI actively advocates for
India’s economy but also contribute to creating a policy reforms and initiatives that promote the growth and
more inclusive and prosperous society for all, thus sustainability of MSMEs. By engaging with policymakers
highlighting their enduring importance. and government agencies, ICAI contributes to the
The Indian government acknowledges the pivotal role formulation of conducive regulatory frameworks and
of MSMEs and consistently endeavours to encourage initiatives aimed at fostering the MSME sector’s
them through legislative measures, regulations, and development. In addition to advocacy and capacity
subsidies. Various schemes have been instituted to building, ICAI provides a platform for networking and
fortify the MSME sector. Notably, initiatives such as the collaboration among MSMEs, chartered accountants, and
Prime Minister’s Employment Generation Programme other stakeholders, facilitating knowledge sharing and
(PMEGP) and endeavours by the Khadi and Village partnerships that drive innovation and growth.
Industries Commission (KVIC) play a significant role in The accounting profession has a deep reach and connects
fostering employment opportunities and backing to the MSME sector as Practitioners are the trusted
small-scale entrepreneurs nationwide. MSMEs financial advisor of MSMEs providing a variety of services
contribute to the economy through multifaceted including project financing, working capital management,
avenues. According to data sourced from the Data asset management, export promotions advice, budgetary
Dissemination Portal of the Directorate General of forecasts, financial modelling, preparing standard
Commercial Intelligence and Statistics (DGCIS), operating procedures, assessing the design and operative
MSME-related product exports accounted for 45.83% effectiveness of internal controls besides regular
of All India Exports during the period up to November accounting, auditing and taxation services. It is perhaps
2023 in the fiscal year 2023-24. Such exports play a for this reason; the profession understands the pulse of
crucial role in bolstering India’s foreign currency the sector and can provide an able ecosystem for the
reserves, thereby fortifying the strength of the Indian development of MSMEs in India. ICAI’s concerted efforts
currency in the foreseeable future. The data in supporting MSMEs underscore its significance in
underscores a surge in both the number of supported catalysing their development and fostering a conducive
units and the employment opportunities generated, ecosystem for their sustained growth.
underscoring the positive impact of these programs.
Understanding the significance of MSMEs in driving
economic growth and employment generation is
-Editorial Board ICAI:
pivotal, accentuating the government’s unwavering
Partner in Nation Building
commitment to nurturing this vital sector.
VOICE
1439
EDITORIAL
Nurturing Dreams:
The Significance of MSMEs in India
1445
IN THIS ISSUE...
ICAI IN ACTION
MEMBERS
1548
JUNE 2024
OPINION
1555 CLASSIFIEDS
UPDATES
1540 LIFESTYLE
1556
JOU R NAL OF TH E I N STITUTE OF CHARTE R E D ACCOU NTANTS OF I N D IA
27 June
2024
FEATURE
1449
THEME
Local to Global: Empowering
MSMEs with Open Network for Digital Commerce
– CA. Mukesh Mohan Gupta
THEME
1454 The Dual Approach: Combining Financial Acumen and
2024-49: The Golden Period of Profession
Non-Financial Excellence for MSME Growth
– CA. Gauri Methi
THEME
1459 Unlocking India’s Economic Potential:
Overcoming the Credit Access Barrier for MSMEs
– CA. Parth P Jani
THEME
1463 Revenue Rebound: Understanding
MSME Payment Recovery Mechanism
– CA. Manoj Lamba
THEME
1468 MSME: A Roadmap for Developed India by 2047
– CA. Shreya Chawla
THEME
1474 Empowering the Practice Profession:
Capacity building through diverse initiatives
– CA. (Dr.) Rohit Ruwatia & CA. Umesh Sharma
1477
DIRECT TAX
International Tax & Transfer Pricing
aspects of Deemed Dividend u/s 2(22)(e)
– CA. Kinjesh Thakkar
Contents
THE CHARTERED ACCOUNTANT
Editor-In-Chief
JOINT EDITOR CA. CHARANJOT SINGH NANDA
Joint Editor
MEMBERS CA. VISHAL DOSHI
CA. MANGESH PANDURANG KINARE
CA. PRITI SAVLA
CA. ANIKET SUNIL TALATI
CA. RAJENDRA KUMAR P
1482
INDIRECT TAX CA. SRIPRIYA KUMAR
India to impose Custom Duty on Electronic CA. (DR.) DEBASHIS MITRA
Transmissions: An Analysis CA. ABHAY CHHAJED
– CA. Anil Sharma CA. (DR.) ANUJ GOYAL
1488
CORPORATE LAW CA. KEMISHA SONI
Significant Beneficial Owner – A move to CA. (DR.) RAJ CHAWLA
pierce Corporate Veil CA. HANS RAJ CHUGH
– CS Shivam Singhal CA. (DR.) SANJEEV KUMAR SINGHAL
DR. P. C. JAIN
1496
TECHNOLOGY CA. M. DEVARAJA REDDY
Processing of personal data with due consent CA. BHARAT RATTAN
of the Data Principal under DPDPA 2023 CA. ABHISHEK NAGORI
– CA. Rakesh Awasthi CA. NILESH BHUPATRAI VASA
CA. JITENDRA KUMAR AGARWAL
TECHNOLOGY
1501 Digital Forensic Investigations - Demystified
CA. HARI KRISHNA AGRAWAL
CA. ABBAS AMIRUDDIN GULAMHUSAINWALA
for Accountants
CA. ANISH MOHAN THACKER
– CA. Vinay Nayak
CA. PANKAJ KUMAR MISHRA
1508
FINANCIAL MARKET CA. UMESH KUMAR VARMA
Unveiling the Influence of Investment Horizon
ICAI EDITORIAL TEAM: KUNAL SHARMA, SECRETARY, EDITORIAL BOARD
on Portfolio Performance - A Study on DR. NEETU SINGH, ASSISTANT SECRETARY
Portfolio of Information Technology Stocks MS. SHIKHA SHARMA BHARDWAJ,
– Gangadhara B & Dr. Bheemanagouda SR. EXECUTIVE OFFICER
FINANCIAL MARKET THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
1515 Role of Technological Advancements in ICAI Bhawan, Post Box No.7100, Indraprastha Marg,
Improving Efficiency and Effectiveness New Delhi-110002, Tel: +91 (11) 39893989.
of Stock Market Trading: An Analytical E-mail: eboard@icai.in, Website: www.icai.org
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ACCOUNTING & VALUATION ICAI RESERVES THE RIGHT TO REJECT ADVERTISEMENTS.
Disguised Intellectual Capital in Luxury Printed and published by Jai Kumar Batra on behalf of
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1558
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ACCOUNTANT are those of the authors and do not necessarily reflect those of
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The government recognizes the importance of MSMEs Supporting Small and Medium Practitioners, the institute
in India’s growth and has introduced various schemes ICAI enters into various agreements to provide resources
to boost their competitiveness, such as the PM Mudra to firms in terms of Practice Management Software, Audit
Yojana, Prime Minister’s Employment Generation Tools, other software, and financial services products. The
Scheme (PMEGP), Credit Guarantee for Micro and Institute has brought Digital Competency Maturity Model
Small Enterprises (CGTMSE), PM Vishwakarma (DCMM) for Firms to support their digital transformation.
Scheme, and schemes by KVIC. Similarly reforms Further in the direction to capacity building of our SMPs
like Section 43B(h) of the Income Tax Act for prompt and to build large and global Indian accounting firms the
payments and labor reforms strengthen MSMEs and institute has formed a Committee for Aggregation of
initiatives like GeM and ONDC are providing greater CA Firms which has undertaken formulation/updation
market access. of guidelines for undertaking constructive reforms in this
direction.
Empowering MSMEs: The Crucial Role of
Chartered Accountants SMPs Enabling Tax Compliance
If we talk of the latest trends today the MSMEs in India In developing a nation’s economy, taxation plays a
are presenting a vibrant picture. It is imperative that as pivotal role and our Small & Medium Practitioners
professionals we harness this favourable environment across the country are playing a critical role in
and bring out the best. In this regard, our profession improving tax compliance and collection by educating,
with its multifarious skills, strategic mindset, business creating awareness and supporting MSMEs about tax
acumen and technological exposure is well versed to literacy and related compliances. With collective will
support MSMEs as a total business solution provider and reforms the overall tax collection has increased
in building strong financial reporting system which will 2.4x times to 16.63 lakh Crores from 6.96 lakh crores
enable to meet compliances obligations, mitigate risk from 2014-15 to 2022-23.
and better access to finances. Further during the period Corporate tax receipt has
Similarly, supporting MSMEs in digital transformation shown receding trend from 62% in 2014-15 to 50% in
and technology adoption with our expertise in 2022-23 while at the same time personal tax receipts
exploring technology for data-driven insights and has increased its contribution from 38% to 50% in total
efficient client management. An important aspect is income tax collection respectively. Another interesting
to work with all stakeholders to support on ground anecdote is the almost 2.3x rise in number of filing of
implementation of schemes with effective policy individual returns (6.97 Crore) as against vis-à-vis filing
making leading to value creation. of Corporate Income returns (10.27 lakhs) in the last
decade since 2013-14.
ICAI & MSMEs: Partnership for The evident changes especially the increasing
Economic Development participation of individuals in filing returns is due to the
Recognizing the vital role of MSMEs, the Institute has friendly reforms and awareness being created amongst
introduced various initiatives to support and empower the youth & MSMEs by the ICAI through Tax Clinics,
them. The ICAI’s Committee of MSME and Start-up Financial & Tax Literacy drives. For the development
conducts capacity-building activities, including the of nation it’s crucial to develop a balanced tax regime
MSME Yatra across 80 Indian cities, recognized by the that rewards honest taxpayers, fosters economic
Asia Book of Records. This initiative offers mentoring, growth and societal development.
counselling, and personalized support on foreign In pursuit of a Viksit Bharat, I envision a future where our
trade, enabling MSMEs to enter global markets and MSMEs and members work together at the forefront
increase exports. The ICAI MSME Sahayog program of technological innovation and sustainable practices.
provides professionals with valuable insights to Embracing digital transformation and sustainability is
enhance MSME portfolios. Furthermore, the ICAI has crucial as we advance towards a New India.
signed MoUs with institutions in Tamil Nadu, Kerala,
and Odisha to bolster MSME capacity-building. Important Updates
Certificate courses equip Chartered Accountants with
skills for professional services in the MSME sector. Supreme Court Verdict on Tax Audit
Limit under Section 44AB of Income
In India the profession is primarily Small and Medium
Practitioner (SMP) oriented with almost 72.6% Tax Act,1961
(70,037) being proprietary firm & sole practitioners The Hon’ble Supreme Court of India delivered a
and further deep diving upto firms with five members significant judgment on May 17, 2024 in the case
(24,361) the ratio is almost 97.8% in total 96,425 firms. related to Tax audit limit under Section 44AB of Income
These SMPs having presence in almost every part of Tax Act,1961 imposed by ICAI through its guidelines,
the Country are working across India empowering The Hon’ble Supreme Court upheld ICAI’s powers and
the MSMEs in true essence to turn their dream and competency to issue the said guidelines, affirming
aspirations into realities. These SMPs are the trusted them as reasonable restrictions in public interest which
advisor of MSMEs. is permissible under Article 19(6) of the Constitution.
The Court declared that these restrictions do not building was laid on May 22, 2024. Also, the Council
infringe on the right to carry on profession under Article has notified its 176th Branch in Tonk, Rajasthan.
19(1)(g) of the Constitution. The key conclusions from
the judgement are the Court validated Clause 6.0, ICAI Examination
Chapter VI of the Guidelines dated August 8, 2008 In an heartening development, the Board of Studies
issued by the ICAI, which restricts the number of tax of ICAI launched the ICAI Digital Learning Campus
audits a CA can undertake. Though the guidelines are Portal, featuring Self-Paced Online Modules (SPOM)
valid, the Court specified they are deemed not to be on May 7, 2024. This important initiative provides
given effect till 01.04.2024. flexible, enriched learning for Final Course students
without any additional fees. It includes progress
The Hon’ble Supreme Court in the matter opined that
tracking, proctored learning, and mandatory tests. The
“There are many concepts and processes in the present
exams under the scheme have started from May 25,
taxation regime that rest, almost completely, on the
2024 which are being conducted on daily basis.
vigilance of Chartered Accountants and auditors. The
very concept of self-assessment carries with it the For Intermediate and Final course students who
requirement of good faith practices. The most recent have just completed their exams in May, wish them
tax reforms seek to achieve transparent taxation by all the best for their results. It is time to recoup your
“Honouring the Honest taxpayer.” The success of energies for the next phase of your preparations. In
such initiatives depends, to a very large extent, on the May Examination, around 116,282 students applied
vigilance demonstrated by Chartered Accountants.” for the CA Final and 206,410 students applied for
the Intermediate exams. Additionally, 483 members
“It is in this context that we stress on the significance
also registered for the PQC (Diploma in International
of the role played by Chartered Accountants. They can
Taxation Exam exclusively for CA members). These
serve as effective catalysts in securing this circle of trust
exams were conducted smoothly at 591 centres
between the taxpayer and the tax administration. This
spread across 290 cities in India and 8 cities Abroad.
is because a large proportion of the taxpayers in India
I extend my heartfelt gratitude to all stakeholders for
seek advice of Chartered Accountants to understand
their support in ensuring the seamless administration
the rules of the road. The integrity and standards of
of these exams both domestically and internationally.
Chartered Accountants determine the efficiency in the
functioning of the nation’s taxation system.” I am thrilled to share that the historic decision to
introduce triannual examinations for the Intermediate
The judgment highlighted ICAI’s role in regulating
and Foundation levels by ICAI is now set to be
the CA profession, emphasizing the importance for
implemented from September 12, 2024. We believe
high professional ethics and quality service, which are
this strategic move will greatly benefit our students and
crucial for effective tax administration. It highlighted
contribute positively to your academic journey.
the critical role of CAs in upholding corporate
governance standards, ensuring the reliability of Disciplinary Cases
financial statements, and supporting market stability.
The ICAI is steadfastly committed to augment the
The Supreme Court accentuated that the regulatory oversight of the profession. During the
independence and integrity of CAs are vital for the year till now 31 meetings of Board of Disciplinary
success of initiatives like transparent taxation and & Disciplinary Committee were held, wherein 158
stakeholders’ interest. PFOs considered, 41 hearings concluded, and 115
punishments were awarded. The details in this regard
Start Up Sphere - 2024 is published in regulatory update page of this journal.
As India rises to become the third largest Startup
ecosystem globally, recognizing Startup’s significance New Government
in India’s growth story, ICAI supports startups with As the festival of democracy concludes, and the
resources, mentorship, and a nurturing environment. new government will take over. The ICAI will work
Following last year’s successful Startup Sphere in in tandem with the new government to steer India’s
Mumbai, ICAI will be hosting the second edition on the path of growth and development by fostering
from June 27-29, 2024, in Bengaluru. The event transparency, accountability, and inclusive governance
aspires to connect entrepreneurs and investors nurturing economic progress and prosperity.
for collaborations and investments, while ICAI will
also offer guidance on regulatory compliance and
financial management.
ICAI in Action
THE CHARTERED ACCOUNTANT
Golden Jubilee of Income Tax Appellate Press Conference – ICAI Startup Sphere 2024
Tribunal (ITAT) Bar Association, Odisha CA. Ranjeet Kumar Agarwal, President, ICAI interacted
with Media Personnel on May 23, 2024, during the
Press Meet organized for Curtain Raiser of ICAI’s
Startup Sphere 2024 to be held from June 27-29,
2024 at Bengaluru. along with ICAI Central Council
Members. The aim of ICAI Startup Sphere 2024 is
to raise awareness, foster idea generation, facilitate
capacity building and offer support for the growth of
India’s startup ecosystem.
ICAI in Action
THE CHARTERED ACCOUNTANT
Launch of “AI in ICAI” website and Global Live Networking Summit on Accelerating &
Webcast on AI Transforming profession to be Maximizing Practice
Future Ready Organisation
CA. Ranjeet
Kumar Agarwal,
President, ICAI
& CA. Charanjot
Singh Nanda, Vice-
President, ICAI
along with Central
Council Members, CA. Ranjeet Kumar Agarwal, President, ICAI &
ICAI shared their CA. Charanjot Singh Nanda, Vice-President, ICAI
vision for “AI in along with Central Council Members, CIRC & Branch
ICAI” at Global Live Management Committee Members shared their
Webcast held on May 19, 2024. The website of the thoughts with Member Fraternity at Networking
Committee “AI in ICAI” was also launched during the Summit on Accelerating & Maximizing Practice
Webcast. The session was viewed live by more than organised at Udaipur on May 24, 2024.
14,000 viewers.
National Conference on Share Market, Pune
Hackathon on Innovate Challenge in AI for ICAI
Employees
CA. Ranjeet
Kumar Agarwal,
President, ICAI
& CA. Charanjot
Singh Nanda, Vice-
President, ICAI
along with Central
Council Members, CA. Charanjot Singh Nanda, Vice-President, ICAI
ICAI & panelists along with Central Council Members, addressed the
addressed the ICAI Member Fraternity at the National Conference on
employees and Share Market organized on May 18, 2024, at Pune.
appreciated ICAI
employees for their Career Counsellors Empowerment Meet &
enthusiastic participation in “Hackathon on Innovate Seminar on Stock Market
Challenge in AI” organized on May 24, 2024.
ICAI in Action
THE CHARTERED ACCOUNTANT
Members shared his thoughts at Career Counsellors for Students. Also, present were ICAI Central Council
Empowerment Meet & Seminar on Stock Market during Members and WIRC & Branch Management Committee
visit to Amritsar on April 29, 2024. Members.
ICAI in Action
THE CHARTERED ACCOUNTANT
CA. Charanjot
Singh Nanda, Vice-
President, ICAI
along with CA. Atul
Kumar Gupta, Past
President, ICAI and
CA. Ranjeet Kumar Agarwal, President, ICAI and Central Council
CA. Charanjot Singh Nanda, Vice-President, ICAI Members, NIRC &
along with Central Council Members, ICAI shared their Branch Managing Committee Members addressed
words of wisdom with the Member Fraternity at the the Member Fraternity at the Interactive Meetings
Interactive Meetings organized at Sangrur & Patiala on organized at Gurugram & Rewari on May 11, 2024.
May 5, 2024.
Theme
THE CHARTERED ACCOUNTANT
T
he MSME sector comprises investment in equipment in case
nearly 63 million enterprises, of service sector. There were
which contribute more than different criteria for manufacturing
30 per cent to India’s GDP, 45 per and service sector enterprises. The
cent to manufacturing output, 40 MSMEs were required to get them
per cent to exports, and provides registered under Udyog Aadhar.
employment to over 113 million
people, as per Annual Report However, the definition of MSME
of Ministry of Micro Small and was changed with effect from
Medium Enterprises way back in July 01, 2020 and currently the
2017-18. classification is based on the
composite criteria of investment in
Still the sector face many challenges,
plant and machinery and turnover
some of which are timely and
of the enterprise. The criteria is now
adequate finance at reasonable
common for both manufacturing
rate from formal sector, technology
adoption, regulatory compliances, and service sector enterprises. The
lack of innovation, non-awareness new registration for MSMEs is now
of various government schemes, known as Udyam registration, which
delayed payment from customers, is available online, free of cost.
skilled manpower, market access
Later on, the retail and wholesale
and many more.
trades were also allowed to register
Earlier only Manufacturing and themselves as MSME and to get
Service sectors were covered their Udyam registration with effect
under the definition of MSME. The from July 2021. The benefit to
classification was based on the retail and wholesale trader MSMEs
investment in plant and machinery is restricted to the Priority Sector
for manufacturing sector and Lending.
Theme
THE CHARTERED ACCOUNTANT
The data of Udyam Registrations including Udyam Assist Platform as on May 16, 2024 is as under:
The above data shows that more than 98% MSMEs are working as Micro enterprises, which are doing their
businesses in traditional manner.
India is on the growth path and is set to e-commerce. This lack of expertise hinders
become a $5 trillion economy by 2025. their ability to set up and manage
India has already reached at the 5th online stores, use digital marketing
largest economy. Out of the $5 tools, and analyze data.
trillion, $1 trillion will come from MSMEs face
agriculture and allied activities,
$1 trillion from manufacturing
difficulties in accessing High Cost of Technology
the necessary
MSMEs face difficulties in
and $3 trillion from services. accessing the necessary
Thus 80% of the GDP will
come from Manufacturing and technology due technology due to high
costs and rapid technological
Service Sector. We also have to high costs and advancements. Even the
rapid technological
an aggressive target to be the initial cost of setting up an
3rd largest economy by 2027. e-commerce presence can be
MSMEs will play very important advancements. prohibitive.
role in achieving this goal. It will
not be possible to achieve this target
Cybersecurity
with the traditional ways of businesses.
E-commerce is a disruptive force for Cybersecurity is another critical issue.
unleashing the potential of MSMEs in India. Most of the Micro enterprises are not prepared
to defend themselves from cyber-attacks. This
Currently only a small fraction of the MSME enterprises vulnerability discourages MSMEs from engaging in
engage in e-commerce due to various barriers, which eCommerce.
may be categories under the following areas:
Transaction Costs
Technological Barriers High transaction fees charged by large eCommerce
Most of the MSMEs operating under Micro sector, lack platforms reduce profit margins of MSMEs. MSMEs
of digital skills, being a major challenge in adopting are concerned about high transaction costs on these
Theme
THE CHARTERED ACCOUNTANT
delivery services. The MSMEs decentralized network that With the onboarding through
feel that even after getting allows seamless interaction ONDC platform the MSMEs
the orders through their
eCommerce website, it will between buyers and sellers can be benefitted in the
following ways:
be very cumbersome to deliver across different
the goods in a timely and safe platforms. Simplified Access to Digital
manner at reasonable cost.
Markets
Warehousing and Inventory ONDC’s open network architecture
allows MSMEs to access multiple digital
Management marketplaces without being tied to a single platform.
Effective warehousing is essential for timely delivery. This interoperability reduces the cost and complexity
Most of the MSMEs struggle with warehousing and of managing different e-commerce channels, enabling
inventory management due to inadequate resources MSMEs to reach a broader audience with minimal effort.
and technology.
Theme
THE CHARTERED ACCOUNTANT
Theme
THE CHARTERED ACCOUNTANT
Conclusion
The Open Network for Digital Commerce represents
a transformative opportunity for MSMEs in India. By
breaking down barriers and providing equitable access
to digital markets, ONDC can help small businesses
scale their operations from local to global levels.
The network’s focus on interoperability, inclusivity,
standardization, and decentralization creates a more
competitive and fair marketplace, fostering innovation
and economic growth.
The Future of MSMEs with ONDC This initiative will not only facilitate the rapid adoption of
e-commerce by MSMEs, but also boost and strengthen
The future of MSMEs in India looks promising with the the growth of startups in India. By facilitating scalable
advent of ONDC. By providing a more level playing and cost-effective e-commerce through the open
field, ONDC can help MSMEs overcome traditional protocol, ONDC will empower MSMEs and startups to
barriers and compete effectively in the global grow collaboratively.
marketplace. The network’s focus on interoperability,
inclusivity, standardization, and decentralization aligns
with the needs of small businesses, enabling them to
leverage digital technologies to their advantage.
Theme
THE CHARTERED ACCOUNTANT
M
icro, Small, and Medium The benefits of these improvements
Enterprises (MSMEs) are manifold. Financially sound
need to overcome MSMEs are more attractive to
these challenges and break all investors and lenders, which
barriers to achieve success. They can lead to increased capital for
must focus on improving both expansion and innovation. Strong
their financial and non-financial non-financial performance, such
metrics to differentiate themselves as excellent customer service and
from competitors and become innovative offerings, can lead to
preferred providers of products higher customer retention, positive
and services. By enhancing their word-of-mouth, and a stronger
financial health, MSMEs can gain market presence. Altogether,
better access to funding, reduce these enhancements help MSMEs
operational risks, and achieve stand out in a competitive market,
sustainable growth. Improved ensuring long-term success and
financial parameters might include growth.
maintaining healthy cash flows,
optimizing cost structures, and Shifting the Lens: From
achieving strong credit ratings.
Profits to Potential
On the non-financial side, MSMEs Instead of asking “why” prepare
should strive to enhance customer financial statements, MSMEs
satisfaction, innovate in their product should be asking “why not?”
or service offerings, and implement Why not leverage these reports
effective marketing strategies. This as a powerful tool for growth,
could involve investing in employee transparency, and strategic
training, adopting new technologies, decision-making? This shift
ensuring high-quality standards, and in mindset unlocks a world of
building a strong brand reputation. possibilities.
Theme
THE CHARTERED ACCOUNTANT
Financial reporting for MSMEs can feel like a chore - a with accounting standards AS 26 and Ind AS 38
yearly hurdle to jump through. But what if it was more? intangible assets ensures consistent treatment of
What if the seemingly dry numbers held the key to research and development (R&D) expenditures. This
unlocking a brighter future for your business? allows investors to compare R&D investments across
different technology-driven MSMEs, providing a
The challenge goes beyond simply producing annual clearer picture of innovation potential and future
accounts. The real question lies in the accuracy and the growth prospects.
immense potential these reports hold. Many MSMEs
view financial reporting as a mere formality, a way to Lenders: Lenders heavily rely on the information
calculate profits or fulfill tax obligations. This limited presented in financial statements to gauge the credit
perspective overlooks the treasure trove of information risk associated with extending loans or credit to a
hidden within. company. When a company provides thorough and
appropriate disclosure, accompanied by sensitivity
Demystifying the Stakeholder Web: A Deep analysis as prescribed by Ind AS, it offers a substantial
level of assurance and confidence to lenders. This
Dive into MSME Financial Reporting with transparency allows lenders to better understand the
Compliance in Mind potential impact of various economic scenarios on
Financial reporting for MSMEs is no longer a one-size- the company’s financial health, thereby aiding in their
fits-all exercise. It’s a strategic conversation with a diverse decision-making process regarding the extension of
group of stakeholders, each with distinct information credit.
needs. Let’s delve deeper into this stakeholder web, Regulators: Compliance with standards like AS 12
exploring how adherence to various accounting and Ind AS 22 not only provides regulators with
standards impacts data readability, comparability, and crucial information regarding the applicable income
ultimately, stakeholder trust: tax rate and effective income tax rate but also
ensures transparency in financial reporting. However,
Owners / Entrepreneurs: Effective financial
extending beyond tax regulations, other regulatory
reporting is invaluable for business owners and
bodies, particularly concerned with related-party
entrepreneurs, providing accurate data essential for
transactions, necessitate comprehensive disclosures.
informed decision-making and strategic planning.
This involves shedding light on the financial
By delivering a clear picture of revenues, expenses,
interactions between the MSME (Micro, Small, and
profits, and cash flows, it enables effective resource
Medium Enterprises) and its associated entities.
allocation, identifies trends, and sets realistic
Achieving compliance with standards such as AS 18
goals. Financial reports highlight potential issues,
and Ind AS 24 becomes imperative in this regard,
facilitating risk management and mitigating financial
as they govern the disclosure requirements for
threats. They enhance credibility with investors and
related-party transactions, offering insights into the
lenders, improving access to capital and securing
intricacies of financial dealings within the MSME’s
financing. Additionally, detailed reports improve
network of affiliations.
operational efficiency by pinpointing cost-saving
opportunities and profitable areas. Ensuring Industry Associations and Chambers of Commerce:
regulatory compliance, they help avoid legal issues Comprehensive financial reporting is crucial for
and simplify audits, while fostering transparency and industry associations and chambers of commerce as
trust with stakeholders. it provides accurate data that helps establish industry
benchmarks and best practices, enabling businesses
Employees: MSME financial reports should go beyond
to compare and improve their performance. This
bottom-line figures. Compliance with employee
data is essential for informed advocacy and policy-
benefit accounting standards, for example AS 15 and
making, allowing associations to effectively represent
Ind AS 19 , mandates specific disclosures regarding
their members’ interests and develop supportive
pension plan contributions, and stock option plans.
policies. Additionally, reliable financial reporting
This transparency allows employees to understand
facilitates the conduct of economic impact studies,
the company’s commitment to their well-being and
demonstrating the industry’s value and contributions
financial security. Furthermore, standardised reporting
to the broader economy, thus promoting its
across MSMEs using the same accounting principles
significance to stakeholders and policymakers.
enables employees to compare benefits packages
offered by different employers, creating a more level While employees, investors, lenders and regulators
playing field in the job market. form the core stakeholder group, MSMEs should
also consider a wider ecosystem such as Value chain
Investors: For savvy investors, financial reporting
partners, Customers, Community etc.
goes beyond basic profitability metrics. Compliance
Theme
THE CHARTERED ACCOUNTANT
By tailoring financial reports to address stakeholder fostering transparency, accountability, and sustainable
needs and adhering to relevant accounting standards, business practices. While currently mandatory for large-
MSMEs unlock a world of benefits. Data becomes cap companies, BRSR has far-reaching implications for the
more readable as stakeholders can readily interpret entire business ecosystem, including MSMEs.
information presented in a consistent manner.
Comparability across MSMEs increases, allowing Although the BRSR framework is currently applicable to
stakeholders to make informed decisions based on large-cap companies, its impact extends to the MSMEs
reliable and standardized data. Ultimately, robust that are part of these companies’ supply chains. Large
financial reporting, underpinned by compliance, fosters corporations are increasingly expected to ensure that
trust with all stakeholders, positioning MSMEs for their value chain partners comply with ESG standards.
sustainable growth and success. Consequently, MSMEs, as integral partners in these
value chains, are incentivized to adopt sustainable
Beyond Numbers: Integrating Non-Financial practices to maintain and enhance their business
relationships with larger firms.
Strategies for MSME Success in India
In recent years, sustainability has become a crucial India’s commitment to integrating reporting practices
component of global development. The Government is also evident through its early adoption of integrated
of India has taken significant strides to address reporting (IR). Integrated reporting combines financial
environmental concerns through a variety of initiatives, and non-financial data, offering a holistic view of a
both on national and international platforms. A company’s performance. Large-cap companies adopting
prominent example of these efforts is the ‘Make in IR provide comprehensive insights into how they create
India’ campaign, which includes the ‘Zero Defect Zero value over time, considering financial, human, intellectual,
Effect’ initiative. This initiative is particularly noteworthy natural, and social capitals. As these companies embed
for its dual focus on economic growth and sustainability, IR practices, they influence their MSME partners to align
aiming to foster development that is both inclusive and with similar standards, fostering a culture of sustainability
environmentally responsible. across the entire value chain.
46
the MSMEs in India. According to the report, the
Sustainability Perception Index for MSMEs in India
Sustainability Perception
is 46. The Sustainability Perception Index is the first Index for MSMEs in India is
Index, which measures perception across the three
dimensions of sustainability (willingness, awareness, 61
and implementation).
Theme
THE CHARTERED ACCOUNTANT
Theme
THE CHARTERED ACCOUNTANT
SMP’s: Turning Financial and Non-Financial goals aligned with their values, industry standards,
Reporting from Compliance to Competitive and stakeholder expectations. Additionally, SMPs
can assist in implementing tracking mechanisms to
Advantage monitor progress towards these targets, offering
Forward-thinking small and medium practitioners can ongoing advice and adjustments as needed to
guide MSMEs with expert financial insights, technology ensure continuous improvement and accountability
integration, and regulatory compliance. By leveraging their in ESG performance. Through this collaborative
expertise, SMPs help MSMEs navigate challenges and adopt approach, SMPs empower MSMEs to integrate
sustainable practices, facilitating growth and resilience in a sustainable practices into their operations and drive
dynamic market landscape. long-term value creation.
1. Risk Assessment Revolution: CAs can move beyond 5. Collaboration: SMPs play a pivotal role in facilitating
generic checklists and delve into risk assessments. transparent communication channels with client
This involves a deep dive into each MSME’s industry, management, particularly when navigating intricate
size, and operating environment. By identifying high- accounting matters. Their expertise enables them
risk areas prone to potential misstatements, SMP’s to delve into complex accounting issues, breaking
them down into understandable components for
should design targeted substantive audit procedures
client stakeholders. This open dialogue not only
that maximize efficiency and effectiveness.
fosters trust but also ensures that clients grasp
2. Data Analytics: Powering Deeper Insights: Modern the nuances of their financial situation, fostering
SMP’s needs to be tech-savvy. Leveraging data informed decision-making.
analytics tools to dissect financial data, uncovering
Moreover, SMPs embrace a collaborative ethos,
anomalies and hidden trends that traditional
recognizing that no single practitioner possesses all-
methods might miss. These insights can be crucial in
encompassing expertise. When faced with specialized
detecting potential fraud or errors, leading to more or particularly challenging scenarios, SMPs readily
robust and reliable financial statements. engage with other SMPs or subject matter specialists.
3. Standardisation with Stakeholder Specificity: SMPs This collaborative approach expands their knowledge
minimally should ensure adherence to relevant reservoir, providing access to diverse perspectives and
technical standard. However, they go a step experiences. By tapping into this collective wisdom,
further, tailoring disclosures to cater to the specific SMPs enhance their capacity to tackle multifaceted
information needs. client challenges effectively.
4. Setting ESG Targets: SMPs can play a crucial role in By embracing these practices, SMPs can transform
helping MSMEs set their ESG (Environmental, Social, financial and non-financial reporting for MSMEs.
and Governance) targets by providing tailored It becomes more than just a compliance exercise;
guidance and support. Firstly, SMPs can conduct it becomes a strategic tool for building trust with
comprehensive ESG assessments to identify areas stakeholders, improving access to capital, and
of strength and improvement within the business. ultimately, positioning MSMEs for sustainable growth
Based on this analysis, they can collaborate with and competitive advantage. Imagine MSMEs leveraging
MSMEs to establish realistic and measurable ESG their financial reports to showcase their strengths, attract
investors, and secure loans with confidence. This is the
future that forward-thinking Chartered Accountants are
actively shaping.
References
Ministry of MSME, Government of India
Skill Development and Entrepreneurship Ministry,
Government of India
Confederation of Indian Industry (CII) Report
Theme
THE CHARTERED ACCOUNTANT
I
ndia’s Micro, Small, and Medium In essence, India’s MSME
Enterprises (MSME) sector sector embodies the spirit of
stands as a formidable force in entrepreneurship and serves as a
the nation’s economic landscape, catalyst for inclusive growth and
comprising nearly 63 million socio-economic development.
enterprises. As the nation sets its As the nation navigates the
sights on the future, the MSME complexities of a rapidly evolving
sector is poised for significant global economy, nurturing and
expansion, with a projected growth empowering MSMEs will remain
rate of 2.5% Compound Annual
paramount, ensuring that they
Growth Rate (CAGR), paving the
continue to thrive and contribute
way for an imminent milestone of
meaningfully to India’s journey
75 million enterprises.
towards prosperity and resilience.
The significance of the MSME
sector is understood by its Enhancing Financial
substantial contribution to India’s Access for Indian MSMEs to
Gross Domestic Product (GDP),
accounting for approximately 30% Accelerate Economic Growth
of the nation’s economic output. Micro, Small, and Medium
Moreover, the sector serves as a vital Enterprises (MSMEs) are the
engine of employment generation, backbone of India’s economy,
providing livelihoods to nearly 191 contributing significantly to
million individuals, making it the its growth and employment
second-largest employer in the generation. However, despite their
country after the agriculture sector. crucial role, MSMEs encounter
Furthermore, the MSME sector substantial challenges in accessing
plays a pivotal role in India’s the necessary financing to fuel
export ecosystem, facilitating the their operations and expansion. As
achievement of nearly 46% of per the report of IFC world bank
the nation’s total exports. MSMEs in November, 2018, the credit
serve as ambassadors for Indian gap confronting MSMEs stands
craftsmanship, driving economic at a staggering INR 25.8 trillion,
growth for the nation’s export posing a formidable barrier to their
competitiveness. development and sustainability.
Theme
THE CHARTERED ACCOUNTANT
Recent statistics shed light on the staggering efforts from policymakers, financial
gap between the financing needs of institutions, and industry stakeholders.
MSMEs and the availability of formal Streamlining credit access,
credit supply. While formal credit The significance simplifying regulatory frameworks,
channels address only INR 10.9 and fostering an enabling
trillion worth of MSME financing of the MSME sector environment for MSME growth
needs, the overall finance is understood by its is imperative to unleash the full
demand by MSMEs stands at
a daunting INR 69.3 trillion.
substantial contribution potential of these enterprises.
Theme
THE CHARTERED ACCOUNTANT
on a comprehensive evaluation of business and credit enhancement, and market access facilitation. These
risks, thereby expanding the pool of credit-worthy schemes are designed to address the diverse needs
borrowers and fostering inclusive growth. and challenges faced by MSMEs, thereby empowering
them to contribute more effectively to India’s economic
Through automation, banks and financial institutions progress. Through these concerted efforts, the
expedite various stages of the lending process, from government is not only fostering entrepreneurship but
application submission to document verification also promoting inclusive growth and socio-economic
and approval, significantly reducing turnaround development across various sectors and regions of the
times and enhancing customer satisfaction. The nation. Following ae the major schemes introduced
seamless integration of technology not only enhances by the government for fostering economic benefit to
operational efficiency but also enables swift decision- MSMEs and strengthening Credit gap.
making, enabling MSMEs to seize timely opportunities
and fuel their expansion aspirations. Prime Minister’s Employment Generation
Access to finance is undeniably a critical function for Programme (PMEGP)
businesses, serving as the lifeblood of economic growth The Credit Link Subsidy Program provides vital assistance
and development. Smooth and efficient credit access to both manufacturing and service enterprises, offering
not only stimulates business activity but also propels up to INR 25 Lakhs for manufacturing ventures and
the nation towards higher GDP growth trajectories. By INR 10 Lakhs for service sectors, depending on the
democratizing access to credit for MSMEs, we unlock Project Cost. The program extends benefits based on
the immense potential latent within this vibrant sector, the location of the enterprise, with urban units eligible
nurturing a thriving ecosystem of entrepreneurship and for subsidies of up to 15% and rural units receiving
innovation. 25% of the project cost. In the fiscal year 2023-24, the
government supported 65,324 enterprises through this
In this era of rapid technological advancement, the program, leading to the creation of job opportunities
right tech platform becomes the cornerstone of for 5,22,592 individuals. This initiative has been
MSME empowerment. Fintech companies leverage instrumental in stimulating employment growth.
technological innovations to deliver superior loan MSMEs can apply for this scheme through following
sourcing, faster onboarding processes, efficient loan portal https://www.kviconline.gov.in/pmegpeportal/
servicing, and reduced customer delinquencies, thereby pmegphome/index.jsp.
amplifying their contribution to India’s economic
resurgence. Through strategic collaborations and CGTMSE (Credit Guarantee Scheme for
investments in technology infrastructure, stakeholders
can foster an environment conducive to MSME growth,
Micro and Small Enterprises)
paving the way for a more inclusive and resilient Ministry of Micro, Small and Medium Enterprises and
economic future. Small Industries Development Bank of India (SIDBI)
jointly established a Trust named Credit Guarantee
Government Initiatives – Unlocking Fund Trust for Micro and Small Enterprises (CGTMSE)
in order to implement Credit Guarantee Scheme
Opportunities for Growth for Micro and Small Enterprises. The
The Government of India has corpus of CGTMSE is contributed by
implemented a range of schemes with Government of India and SIDBI.
the specific aim of enhancing the As India aspires to 75% of the loan amount to the
growth and resilience of Micro,
Small, and Medium Enterprises become a $5 trillion bank is guaranteed by the Trust
Fund. The objective of this
(MSMEs). These initiatives economy, MSMEs are initiative is to fortify the credit
play a crucial role in driving poised to play a catalytic delivery mechanism, enabling
economic development and
role in realizing this
seamless access to credit for
job creation throughout the the Micro and Small Enterprise
country. By providing targeted vision, with export sector, with no requirement
assistance to MSMEs, the projections reaching for collateral or third-party
government seeks to create guarantees, for amounts up to
a conducive environment for US$ 1 trillion INR 5 Crore. During the fiscal year
their expansion and sustainability. by 2028. 2023-24, the government extended
Some of the key initiatives include guarantees on behalf of Micro and
financial support, access to credit, Small industries, totalling INR 1,35,668
skill development programs, infrastructure crores, benefiting 11,02,548 enterprises.
Theme
THE CHARTERED ACCOUNTANT
Conclusion
The article highlights the pivotal role of Micro, Small,
and Medium Enterprises (MSMEs) in India’s economic
landscape. These enterprises serve as the backbone of
the economy, driving growth and providing significant
employment opportunities. However, despite their
crucial contribution, MSMEs face formidable challenges,
Enterprises meeting the eligibility criteria may approach
particularly in accessing the necessary financing for
banks / financial institutions, and select Regional Rural
their operations and expansion. The credit gap remains
Banks which are eligible under the scheme through
a pressing concern, hindering the development and
following portal www.dcmsme.gov.in
sustainability of MSMEs. Additionally, issues such as
formalization hurdles, limited capital for first-generation
Interest Subsidy Eligibility Certificate entrepreneurs, scalability constraints, labour shortages,
The Interest Subsidy Eligibility Certificate (ISEC) and regulatory ambiguities further impede their growth
Scheme serves as a crucial funding mechanism for the trajectory.
khadi program administered by khadi institutions. Its
primary objective is to facilitate funding from banking Addressing these challenges requires concerted
institutions to bridge the gap between the actual efforts from policymakers, financial institutions, and
fund requirements and the availability of funds from industry stakeholders to streamline credit access,
budgetary sources. Through the ISEC Scheme, khadi simplify regulatory frameworks, and create an enabling
institutions gain access to working capital credit at a environment for MSME growth. Leveraging technology
concessional interest rate of 4% per annum, tailored to emerges as a promising solution to bridge the credit gap
their specific needs. The Central Government, via KVIC, and empower MSMEs with greater access to financial
covers the difference between the actual lending rate resources. Ultimately, democratizing access to credit
and 4%, ensuring favourable terms for lending banks. for MSMEs is essential for fostering entrepreneurship,
driving innovation, and propelling India towards a more
PM Vishwakarma Scheme inclusive and resilient economic future.
A Central Sector Scheme has been allocated The Indian government offers extensive benefits to
a budgetary outlay of INR. 13,000 crores for MSMEs, yet there’s a pressing need to ensure wider
implementation spanning from 2023-24 to 2027- awareness and accessibility among enterprises.
28. This scheme is designed to offer comprehensive Despite the array of support mechanisms, many
support, including credit assistance, to artisans and organizations remain unaware of these advantages.
craftspeople engaged in 18 trades, characterized by Bridging this gap between benefits and awareness
manual labour and tool usage. is critical to maximizing the potential impact of
government initiatives on MSMEs.
Trade Receivable Discounting System
(TReDS) References
TReDS provides a swift and cost-effective financing WWW.IBEF.org
solution for MSME Suppliers. It simplifies the
PIB posted on February 5, 2024. Niti Ayog, MSME
financing process for trade receivables from corporate
Census Info. IFC, World Bank https://msme.gov.in/
entities, government departments, and public-sector
undertakings (PSUs) by leveraging electronic platforms
accessible to multiple financiers. Through these
platforms, MSME sellers can secure funds against
Author may be reached at
approved invoices within just 48 hours. Moreover, eboard@icai.in
MSMEs are not bound to a single bank; they can select
Theme
THE CHARTERED ACCOUNTANT
S
ection 15 of the MSMED Section 17 eloborates Recovery of
Act mandates that a buyer is amount due from buyer. For any
required to make payments goods supplied or services rendered
for goods or services procured by the supplier, the buyer shall
from an MSME supplier within 45 be liable to pay the amount with
days from the date of acceptance interest thereon as provided under
or deemed acceptance of the section 16. For this the MSMED
goods or services. In case of a Act establishes the MSEFC both
delay in payment, the buyer is at state levels and district levels to
liable to pay compound interest facilitate the resolution of disputes
along with the principal amount regarding delayed payments to
to the supplier. This interest rate is MSMEs. The MSEFC is empowered
three times the bank rate notified to conduct conciliation proceedings
by the Reserve Bank of India. between the parties and facilitate
This provision acts as a deterrent the settlement of disputes. This
against delayed payments and provision promotes out-of-court
encourages buyers to settle dues settlements and expedites the
promptly. recovery process.
Theme
THE CHARTERED ACCOUNTANT
The Act empowers the MSEFC to issue an Award to the members shall be such as may be prescribed by the
buyer for the recovery of the due amount along with State Government.
interest. This Award acts as an order from a MSEFC
Section 22: Requirement to specify unpaid amount with
and enables the MSME supplier to recover the dues
interest in the annual statement of accounts: Section
through legal means.
22 mandates that any buyer who is required to get their
The Act grants the MSME supplier the right to appeal annual accounts audited under any prevailing law must
against the decision of the MSEFC within 45 days from include specific details in their annual statement of
the date of receipt of the order. The appeal is to be filed accounts regarding payments due to MSME suppliers.
before the designated court, which has the authority This section is crucial for enhancing transparency and
to either confirm, modify, or set aside the order of the accountability in business transactions. The information
MSEFC. to be furnished includes:
Section 20 of MSMED Act 2006 talks about Principal amount and interest due: The buyer must
Establishment of Micro and Small Enterprises specify the principal amount and the interest
Facilitation Council. The State due thereon, separately, that remain
Government shall, by notification, unpaid to any MSME supplier as at the
establish one or more Micro and end of each accounting year.
Small
Councils,
Enterprises
at such
Facilitation
places,
The Act grants the Interest paid and payments
made: The buyer must disclose
exercising such jurisdiction MSME supplier the the amount of interest paid
and for such areas, as may be
specified in the notification.
right to appeal against under Section 16 of the Act,
Theme
THE CHARTERED ACCOUNTANT
This provision ensures that the provisions of the opportunities and contributing to economic growth. It
MSMED Act take precedence over any other law or also fosters innovation and entrepreneurship, driving
regulation that may conflict with it. It strengthens the competitiveness in the market.
legal framework for ensuring timely payment to MSMEs
and provides clarity regarding the applicability of the Challenges and Suggestions
Act’s provisions.
Despite the robust framework provided by the Micro,
Small, and Medium Enterprises Development (MSMED)
Implications and Benefits Act, there are significant challenges in the effective
The payment recovery mechanism under Sections 15 implementation of the payment recovery mechanism
to 24 of the MSMED Act has several implications and for MSMEs. One of the most pressing issues is
benefits for MSMEs, buyers, and the economy at large. the widespread lack of awareness among MSMEs
regarding their rights under the Act and the procedures
For MSMEs, this mechanism provides a legal framework
available for recovering overdue payments. This lack
to ensure timely payment for their goods or services.
of knowledge leaves many small business owners
Timely payments enhance the cash flow of MSMEs,
uncertain about how to proceed when faced with
enabling them to meet their operational expenses, invest
in growth, and sustain their businesses. It also reduces delayed payments, thereby undermining the efficacy of
the dependency of MSMEs on expensive borrowings to the legal protections intended to support them.
meet their working capital requirements.
A major deterrent for MSMEs is the fear
For buyers, complying with the of jeopardizing valuable business
provisions of the Act fosters a healthy relationships by initiating legal
relationship with MSME suppliers. proceedings against defaulters.
Timely payments build trust Section 22 mandates Many small business owners
are hesitant to pursue legal
and reliability, encouraging that any buyer who is action due to concerns that it
MSMEs to continue supplying
goods or services. Moreover,
required to get their annual might alienate key clients or
avoiding legal disputes and accounts audited under any partners, which could lead
penalties saves the buyers prevailing law must include to a loss of future business
from unnecessary financial and specific details in their opportunities. Additionally,
reputational losses. annual statement of accounts the complexity and perceived
From an economic perspective, regarding payments due to daunting nature of the legal
process further discourage
the MSME sector plays a MSME suppliers. MSMEs from seeking the recourse
crucial role in the growth and they are entitled to. The intricate
development of the economy. legal jargon, procedural formalities,
Timely payment to MSMEs boosts their and potential costs involved can be
confidence and encourages them to expand overwhelming, especially for enterprises with
their businesses, thereby creating more employment limited resources and legal expertise.
Theme
THE CHARTERED ACCOUNTANT
To address these multifaceted challenges, it is crucial enhance the effectiveness of these alternative
to undertake comprehensive measures aimed at mechanisms.
empowering MSMEs. First and foremost, creating
widespread awareness about the rights and provisions By taking these steps, we can create an environment
under the MSMED Act is essential. Government where MSMEs are not only aware of their rights but
agencies, industry associations, and financial also feel confident and equipped to enforce them.
institutions must collaborate to organize extensive Empowering MSMEs in this manner will not only
awareness campaigns. These campaigns should focus improve the payment recovery process but also
on educating MSMEs about the specific provisions contribute to the overall health and sustainability
of the Act, the mechanisms available for payment of the MSME sector, fostering a more vibrant and
recovery, and the benefits of pursuing their legal rights. resilient economy.
Such initiatives could include workshops, seminars,
While the payment recovery mechanism under the
online resources, and informational brochures tailored
MSMED Act provides critical protections for MSMEs,
to the needs of small business owners.
it is not without potential drawbacks. One significant
Furthermore, providing guidance and support to downside is the risk that buyers, especially those
MSMEs throughout the payment recovery process is concerned about the stringent payment timelines and
vital. This can be achieved by establishing dedicated penalties for delays, may shift their business to medium
helpdesks or support centers that offer step-by- and large enterprises to avoid these obligations. This
step assistance to MSMEs seeking to file claims. shift can disadvantage MSMEs, depriving them of
Simplifying the procedure for filing applications valuable business opportunities and exacerbating the
and resolving disputes can significantly lower the challenges they face in competing with larger firms.
barriers to accessing justice. Streamlined processes,
To overcome this issue, it is essential to strike a
user-friendly online portals, and clear, concise
balance between protecting MSMEs and maintaining
documentation requirements can make it easier for
their competitiveness in the market. One approach
MSMEs to navigate the legal system.
is to foster a collaborative and transparent business
In addition, alternative dispute resolution mechanisms environment where the benefits of working with
such as mediation and arbitration should be promoted MSMEs are clearly communicated to buyers.
as viable options for MSMEs. These methods can offer Highlighting the innovative potential, agility, and
quicker, cost-effective solutions that help preserve cost-effectiveness of MSMEs can help persuade
business relationships while ensuring that dues are buyers to continue their engagements with smaller
recovered. Training programs for legal professionals suppliers despite the stringent payment conditions.
and arbitrators specializing in MSME disputes can
Additionally, introducing flexible payment
arrangements and phased compliance plans could
mitigate the concerns of buyers. For instance,
providing incentives for early payments or offering
flexible credit terms that are mutually agreed
upon can encourage buyers to adhere to payment
schedules without feeling overly constrained by the
Act’s provisions.
Theme
THE CHARTERED ACCOUNTANT
Theme
THE CHARTERED ACCOUNTANT
T
he Ministry of Micro, Small, economic fabric. Under the aegis
and Medium Enterprises of the Ministry of MSMEs, initiatives
(MSMEs) in India serves are crafted and implemented to
as a beacon illuminating the nurture this vital sector, fostering an
significance of this sector through ecosystem conducive to growth and
compelling statistics. With a sustainability.
staggering count of over 63
million registered MSMEs, their Challenges for the MSMEs
impact is palpable across the
MSMEs face a multitude of
nation’s economic landscape.
challenges that hinder their growth
Their collective contribution,
and sustainability. One significant
amounting to approximately 29%
obstacle is limited access to finance,
of the GDP, underscores their
as traditional banking systems often
pivotal role in driving economic
perceive them as high-risk ventures,
growth and development. Beyond
resulting in stringent lending terms.
mere numbers, these enterprises
Additionally, many MSMEs struggle
serve as engines of employment,
with technological adoption due
providing livelihoods to over 110
to a lack of infrastructure and
million individuals.
expertise, which prevents them
From traditional textile mills from competing effectively on a
preserving age-old craftsmanship global scale. Moreover, navigating
to cutting-edge IT startups through complex regulatory
spearheading innovation, the frameworks and compliance
MSME sector reflects the diversity burdens adds further strain to
and dynamism inherent in India’s their operations, impeding their
entrepreneurial spirit. These ability to expand. Furthermore, the
enterprises embody resilience, restricted access to larger markets
adaptability, and the relentless constrains the scalability of MSMEs,
pursuit of excellence, forming limiting their potential growth
the very backbone of the nation’s opportunities. Lastly, the shortage
Theme
THE CHARTERED ACCOUNTANT
of adequately skilled labour tailored to the financial literacy can empower them to
specific needs of MSMEs exacerbates make informed financial decisions
these challenges, making it difficult and effectively manage their
for them to innovate and thrive resources. Government and non-
in a competitive landscape. Promoting alternative governmental organizations can
Addressing these obstacles is
crucial for fostering the growth
financing models such collaborate to offer workshops
and training programs to
and resilience of MSMEs in the as peer-to-peer lending, enhance financial literacy levels
modern economy. venture capital, and within the MSME community.
Theme
THE CHARTERED ACCOUNTANT
Infrastructure Development
Infrastructure forms the backbone of economic
development, providing the necessary support for
businesses to thrive. Investment in infrastructure
projects, especially in rural and semi-urban areas
where many MSMEs are located, is crucial. Improved
transportation, power, and telecommunications can
reduce logistical costs and improve connectivity,
enabling MSMEs to access larger markets and Regulatory Reforms and Ease of Doing
resources.
Business
The Government of India has launched initiatives India has undergone a remarkable transformation in its
like AMRUT and PMGSY to enhance infrastructure ease of doing business landscape, transitioning from its
for MSMEs. AMRUT focuses on improving urban 142nd position in 2014 to a notable 63rd in 2020, as per
infrastructure, such as water supply, sewerage, drainage, the World Bank’s Doing Business Report. This upward
transport, and green spaces, reducing operational trajectory signifies the concerted efforts undertaken
costs and boosting productivity for MSMEs. PMGSY to streamline regulatory frameworks and foster a more
aims to improve rural road connectivity, increasing business-friendly environment. However, the journey
market access and economic opportunities for rural towards creating an optimal ecosystem for MSMEs is
MSMEs. Despite these efforts, continued investments ongoing, necessitating a deeper focus on key areas
in digital infrastructure, energy supply, logistics, skill such as contract enforcement, property registration,
development, and financial services are essential to and insolvency resolution.
support the sustained growth of MSMEs.
Enhancing contract enforcement
mechanisms can instil confidence
among MSMEs, ensuring timely
payments and dispute resolution.
Simplifying property registration
procedures can facilitate smoother
access to credit, vital for MSMEs’
growth and expansion plans.
Additionally, refining insolvency
resolution processes is crucial for
mitigating risks associated with
business failures, providing a
safety net for entrepreneurs to take
calculated risks. By augmenting
regulatory frameworks and bolstering
the ease of doing business, MSMEs
can navigate the bureaucratic maze
with greater ease, enabling them to
allocate resources more efficiently
towards innovation, job creation,
and economic prosperity. Therefore,
Theme
THE CHARTERED ACCOUNTANT
Rs.34,517
crore 78.36 lakh
persons
MM
January Assisted subsidy
2023 to 85,228 disbursement
November number of of
2023 units Rs. 3,116.78
crore
January, 2023 to
November, 2023
Enhancement
of ceiling limit
Introduced Revamped Annual Guarantee
in the year in the year fees reduced
2000 2023 Increase in the 14 daughter funds
threshold limit
empaneled with NVCFL
January, 2023 to
NSIC Venture Capital Fund
November, 2023
Limited (NVCFL) - a Mother Fund
12.50 lakh
guarantees approved By way of investing more than
Rs.3658 crore
amounting to
Rs. 1.46 lakh crore Assisted 242 potential MSEs
From Local Beginnings to Global Triumphs: MSMEs Paving the Path for
India's Growth
Micro, Small, and Medium Enterprises (MSMEs) hold profound significance in the Indian
economy, serving as vital pillars of growth, innovation, and socio-economic development.
With over 6.30 crore enterprises, this sector constitutes a dynamic ecosystem fostering entre-
preneurship and driving inclusive growth.
MSMEs play a pivotal role in job creation, particularly in rural and semi-urban areas, thereby
alleviating poverty and promoting social stability. They serve as breeding grounds for inno-
vation, continuously contributing to technological advancements and product diversifica-
tion across industries.
Additionally, MSMEs contribute significantly to India's Gross Domestic Product (GDP) by
participating in manufacturing, trade, and service sectors. Their resilience and adaptability
enable them to navigate through economic uncertainties and emerge as key contributors to
economic resilience.
Data & Scheme Source:
https://pib.gov.in/PressReleseDetail.aspx?PRID=1992842#
1474
Theme
THE CHARTERED ACCOUNTANT
T
he Indian economy by its ability to adapt to these
continues to demonstrate changing economic conditions,
robust performance with embrace new technologies, and
widespread growth across various continue to uphold high ethical
sectors. Numerous international standards. By doing so, CAs will
organizations highlight India’s not only contribute to the sustained
crucial role in shaping Asia’s economic growth of the nation but
economic trajectory in the upcoming also secure their relevance and
years. The Reserve Bank of India success in a rapidly evolving global
(RBI), in its latest Monetary Policy economy.
Committee meeting, observed the
strong growth momentum within To create a robust and dynamic
the economy and forecasted a ecosystem for CAs, ICAI equips
7% real GDP growth for 2024-25, them with the necessary tools,
CA. Umesh Sharma fueled by increasing rural demand skills, and support to thrive in a
Member of the Institute and sustained momentum in the rapidly evolving global business
manufacturing sector. Similarly, environment. By fostering
the World Economic Outlook professional excellence, security,
has projected India’s growth at a and well-being, the ICAI through
commendable 6.8% for 2024-25 its Committee for Members in
and 6.5% for 2025-26, attributing Practice (CMP) aims to ensure
this optimism to persistent domestic that its members remain relevant,
demand and an expanding working- competitive, and innovative leaders
age population. in their field.
Theme
THE CHARTERED ACCOUNTANT
to provide a range of benefits and services. One of conducted in the state-of-the-art ICAI’s Centres of
the primary offerings of CMP is access to discounted Excellence at Jaipur and Hyderabad.
insurance coverage. This coverage spans across
different areas including health, personal accident, Practice Management Software
and professional indemnity policies. By securing these
ICAI is also facilitating digital tools to empower its
policies at discounted rates, CMP facilitates its
members for the digital era, enabling them
members to have the necessary financial
to lead, create, and innovate in the field
protection and peace of mind as
of CA such as Practice Management
they navigate their professional
Software which is an Advanced
endeavours. Furthermore, the
CMP platform hosts a diverse ICAI offers Practice Management Software to
array of 38 schemes catering a range of specialized Enhance Operational Efficiency
and available Free of Cost to
to different aspects of
professional life. These include certificate courses the practicing members of ICAI.
software schemes, insurance aimed at enhancing the Practice Management Software
helps the Firms to serve their
schemes, medical-healthcare
services schemes, loan/finance skills and knowledge of clients and manage day to day
facilities schemes, publications,
and electronics scheme.
its practicing members. office activities. It Includes Jobs
and Billing, Capacity Planning,
Documentation, Centralized Client
Practice ki ikB’kkyk Database, Time Sheets, and other
ICAI’s new initiative this year, useful features that gives Technology
“Practice ki ikB’kkyk,” a three-day advantages to all Firms. Practitioners/Firms
residential refresher course is designed to can register for Practice Management Software
enhance participants’ essential competencies for career at https://cacloud.ca.in. Further the Committee is also
advancement. The program has received significant managing kb.icai.org which is a repository for various
acclaim and participation due to its strategic focus on publications of ICAI.
key aspects. The primary goal of the course is to improve
practice management skills, equipping participants with Grow Your Practice
effective client management, communication abilities, The ICAI also organizes a recurring series of webinars
and financial expertise to optimize firm operations. called “Grow Your Practice” held every Friday.
Additionally, the curriculum integrates training on These webinars serve as a platform for professional
cutting-edge technologies such as AI, cybersecurity,
development, offering insights and guidance on
and data analytics using various tools to help attendees
different facets of the field. With a focus on practicality,
streamline processes and stay ahead in the digital era.
these sessions equip participants with actionable advice
CMP has scheduled multiple batches throughout the
and strategies to enhance their skills and stay abreast of
year, ensuring more individuals can benefit from this
evolving trends within the industry. The content of these
transformative opportunity. Practice ki ikB’kkyk is being
webinars likely spans a wide range of topics relevant
to practicing professionals. The fact that nine webinars
have already been conducted suggests a significant
investment in this initiative, indicating its popularity and
effectiveness among the target audience.
Theme
THE CHARTERED ACCOUNTANT
Direct Tax
THE CHARTERED ACCOUNTANT
Background
T
he Income Tax Act, 1961 cent of the voting power, or to any
(‘the Act’)1 provides for concern in which such shareholder
charging of tax on the is a member or a partner and in
Income of a taxpayer. Section 2(24) which he has a substantial interest
defines “Income” which includes (hereafter in this clause referred to
“Dividend” in its ambit. as the said concern) or any payment
by any such company on behalf, or
Dividend is defined in Section for the individual benefit, of any
2(22) of the Act which also includes such shareholder, to the extent to
income that shall be deemed as which the company in either case
Dividend. One of the categories possesses accumulated profits.
covered under Section 2(22) is
Deemed Dividend on account of Analysis
loans to shareholders. Clause (e) of
Section 2(22) provides that- The above deeming fiction has
certain key elements for application:
A “dividend” includes any 1. The payer of Loan should be a
payment by a company, not being company in which the public is
a company in which the public are not substantially interested.
substantially interested, of any
sum by way of advance or loan to 2. It should be a loan or an advance
a shareholder, being a person who granted by the payer company
is the beneficial owner of shares (lender) to the receiver company
(not being shares entitled to a fixed (borrower).
rate of dividend, whether with or 3. The taxation shall be to the
without a right to participate in extent of accumulated profits of
profits holding not less than ten per the payer entity.
1
Section 4 of the Income Tax Act, 1961.
Direct Tax
THE CHARTERED ACCOUNTANT
Further, a key element under consideration for Deemed borrower of a loan, a pertinent question to evaluate in
Dividend taxability is the identification of the taxable scenario B as provided above (refer to diagram) is that
entity for loan granted, i.e., either the Borrower entity in whose hands shall such deemed dividend be taxable
or the Shareholder, under Section 2(22)(e). Based on viz. (A) Borrow concern (Company C) or (B) Shareholder
a cursory perusal of the aforesaid section and for the (Company A).
ease of understanding, it can be broadly divided into
two scenarios: View-1
Scenario A - Loan or advance granted to shareholder: CBDT Circular No. 495 dated 22 September 1987
supports taxation in the hands of borrower concern, viz.
Company C.
Owns more than 10%
View-2
Company A Company B
(Borrower) (Lender) The Special Bench of the Mumbai Tribunal in the case
of Bhaumik Colour (P) Ltd.2 held that in the absence of
Grants Loan or advance indication in Section 2(22)(e) of the Act to extend the legal
fiction to a case of loan or advance to a non-shareholder,
Scenario B - Loan or advance granted to any concern in loan or advance cannot be taxed as deemed dividend in
which such shareholder is a member or partner and has the hands of such a non-shareholder. The decision of the
substantial interest: Special Bench has been affirmed by the Bombay High
Court in the case of Universal Medicare (P) Ltd3. and the
Owns more than 10% Delhi High Court in the case of Ankitech Private Limited4.
Direct Tax
THE CHARTERED ACCOUNTANT
rights, mining shares, founders’ shares or other rights, classification of income holding certain percentage of
not being debt-claims, participating in profits, as shares or not. This additional layer of condition is not
well as envisaged in tax treaty.
(part 1) income from other corporate rights which is Vienna Convention on the Law of Treaties (VCLT)
subjected to the same taxation treatment as income establishes in Article 31 the general rule of interpretation
from shares by the laws of the State of which the of treaties:
company making the distribution is a resident.”
“a treaty shall be interpreted in good faith in accordance
(part 2) with the ordinary meaning to be given to the terms of
the treaty in their context and in the light of its object
Section 2(22)(e) uses the expression ‘by way of advance and purpose”.
or loan’. It is pertinent to examine the meaning and
scope of the terms ‘loan’ & ‘advance’. In the matter of treaty interpretation, good faith
demands the compliance of the following requirements:
Loan: The Black Law’s dictionary defines the term
‘loan’ as “an act of lending, a grant of something for if the treaty is clear, the meaning should not change
temporary use, a sum of money lent at interest.” under the pretext of respecting the spirit;
the used terms in the treaty must be assigned to
Advance: In the same dictionary, the term ‘Advance’
their ordinary, natural meaning, and they should
has been defined as “a payment made in anticipation
be interpreted taking into account the object and
of a contingent or fixed future liability or obligation.”
purpose of the treaty;
Based on the above definition, it can be noted that to a term, it will be assigned a special meaning if it is
the participation in profit is a pre-condition to term it established that it was the intention of the parties.
as Dividend under the Tax Treaty and excludes debt-
claim viz. Loan or advance. Thus, it is not covered in Thus, it can be contended that it cannot be income
the first part of the definition. from shares as such (rather Loan is classified income
as per local law of one of the contracting countries on
There are two possible views for the Second part account of holding shares beyond a certain specified
which provides that other income which is subjected percentage which is not envisaged under tax treaty).
to the same taxation treatment as income from shares
by the laws of the State of which the company making Considering the above, it can also be argued that the
the distribution is a resident. clause’s last sentence, which states that “income from
share by laws of the country of which company making
(emphasis supplied) distribution is resident,” sufficiently clarifies that the
amount should not be regarded as a dividend. In the
View-1 analysis of provision of Dividend, it is to be noted that
loan is a payment and not distribution. Language of
It can be noted that income is not defined in the Tax Section 2(22)(a)/(b)/(c)/(d) of definition of dividend in
Treaty for which reference is made to Section 2(24) Indian Income Tax law categorically provides for the
which defines, income to include Section 2(22)(e); term “any distribution” as against Section 2(22)(e)
income viz. deemed dividend on account of loan. providing for term “any payment”.
Thus, it applies to article “Dividend” in Tax Treaty.
Under Indian jurisprudence, both terms viz. ‘Distribution’
View-2 and ‘Payment’ have been distinguished, as apparent
from the observations in the cases discussed below
Though Income is defined in Section 2(24), it is to
be noted that the term used in definition is “Income
from Shares” and deemed dividend under Section
CIT v/s Jamnadas Sriniwas (P.) Ltd./CIT v/s
2(22)(e) is per se not an income from shares. Further, P.V. John8
it qualifies as income only if a certain percentage of The expressions ‘distribution‘ and ‘payment‘
shares are held and loan is given. This means, it is not connote different meanings. Distribution is division
income from shares but income because of holding amongst several persons and connotes an idea of
certain percentage of shares in both the entities. The apportionment among more than one person. In the
language of Tax Treaty does not distinguish between case of ‘distribution‘, the recipients would be more than
8
[1970] 76 ITR 656 (Cal.)/ [1990] 52 Taxman 221 (Ker.).
Direct Tax
THE CHARTERED ACCOUNTANT
one, while in the case of ‘payment‘ the recipients may (d) ……;
be a single person.
(e) ……;”
Punjab Distilling Industries Ltd. 9
Thus, Loan to Associated Enterprise
The dictionary meaning of the (AE) is an international transaction
expression ‘distribution‘ is ‘to give that requires reporting in form
each a share, to give to several 3CEB. Transfer Pricing is a special
persons‘. Deemed Dividend provision as a part of the
Income Tax Act, 1961 requiring
The only difference between is a special tax computation of income from
the expression ‘paid‘ and
the expression ‘distribution‘
provision and has international transactions with
Associated Enterprise keeping
is that the latter necessarily always been an issue of the Arm’s Length Principle in
litigation on multiple
involves the idea of division mind. It is a special provision for
between several persons the Avoidance of Tax.
which is the same as payment grounds & aspects. However, Section 2(22)(e) of the Act
to several persons. Distribution
is a culmination of a process. deems it to be a dividend as against
a loan transaction. The word ‘deemed’
Thus, it can be concluded that such is not defined in the Act, however,
a loan transaction does not get classified generally, a deeming provision assumes that
as dividend under Tax Treaty. Consequently, it it is something else as against reality (e.g., Loan
falls under article “Other Income” if it is not effectively is presumed to be Dividend). The basic purpose of
connected with PE and taxed accordingly. a deeming provision is to allow the consequences of
‘Dividend’ (Income) to apply whereas the reality is that
Transfer Pricing aspects it is a ‘debt’ (and not Dividend).
To understand the transfer pricing aspect, consider Thus, a view can be taken that a deeming fiction
scenario B wherein a loan is granted to a related entity used for avoidance of an aspect under law cannot be
having a common shareholder. The borrower entity is extended further to other provisions of law. This is
outside India, and the lender is an Indian entity. Based supported by the Hon’ble Supreme Court in the case of
on the same, below are issues for consideration: Bengal Immunity Co. Ltd. v/s State of Bihar10 wherein
Chief Justice held that “legal fictions are created only
A. Reporting it as ‘Dividend’ v/s ‘Loan’ for some definite purpose and a legal fiction is to be
B. Which entity’s name is to be reported – Shareholder limited to the purpose for which it was created and
as per view 2 or concern per se which has borrowed should not be extended beyond that legitimate field.”
the loan.
In CIT v/s Mother India Refrigeration Industries (P.) Ltd11,
i. Analysis of reporting requirements it was provided that “……legal fictions are created only
for some definite purpose and these must be limited to
Transfer Pricing provides for reporting of international
that purpose and should not be extended beyond that
transactions in form 3CEB viz. TP Audit report as per
legitimate field. Such being the purpose for which the
section 92E of the Act. International Transactions as
legal fiction is created, it is difficult to extend the same
defined in section 92B of the Act, includes: beyond its legitimate field and will have to be confined
“(a) …..; to that purpose.”
(b) ……; Hon’ble Supreme Court in the case of CIT v/s C.P.
Sarathy Mudaliar12 provided that-
(c) capital financing, including any type of long-
term or short-term borrowing, lending or “Section 2(6A) (e) gives an artificial definition of
guarantee, purchase or sale of marketable “dividend”. It does not take in dividend actually
securities or any type of advance, payments or declared or received. The dividend taken note of by
deferred payment or receivable or any other that provision is a deemed dividend and not a real
debt arising during the course of business; dividend. The loan granted to a shareholder has
9
[1965] 57 ITR 1 (SC).
10
Appeal (civil) 159 of 1953 (SC).
11
155 ITR 711 (SC).
12
83 ITR 170 (SC) – referring to similar provision in Indian Income Tax Act, 1922.
Direct Tax
THE CHARTERED ACCOUNTANT
to be returned to the company. It does not become risk of litigation cannot be ignored as this might not
the income of the shareholder. For certain be deemed fiction per se but a presumption that
purposes, the legislature has deemed is taken by legislature for said section.
such a loan as “dividend”. Hence,
section 2(6A) (e) must necessarily Hon’ble Supreme Court in the case
receive a strict construction.” The Government of M/s. Bhuwalka Steel Industries
Ltd. & Another v/s Union of
Based on the above, it can be continues to address the India13 has discussed in great
said that deeming fiction is open issues and provides depth what a “presumption” is,
specifically created to cater certainty of taxation which and what is “legal fiction”. To
to special tax avoidance put it simply, fiction assumes
measures under the law and shall further boost the rate something that is known to be
provisions. The same shall not of investment to realise the false; a presumption (whether
extend beyond its legitimate dream of India becoming one conclusive or rebuttable)
field. Thus, the transaction as assumes something that may
in books viz. Loan to a concern
of the strongest and largest possibly be true. This means,
may be reported. economy of the world. there is no possibility of a fiction
being rebutted/proved by evidence,
ii. Secondary Adjustment on but a presumption may be rebutted/
Deemed Dividend proved by evidence. In Section 92CE, it is
A similar issue also came up during the well possible to substantiate that there could be
introduction of Provision of Secondary Adjustment. an excess amount of money involved that does not
Under Section 92CE(2) of the Act, if the amount of a comply with the Arm’s Length principle. This money
secondary adjustment is not repatriated to India within is paid outside of India which is not repatriated, and
the stipulated time limit, it will be treated as a deemed later takes the character and features of an interest-
loan made to the AE by the Indian taxpayer. Bare sub- free loan.
section (2) of section 92CE is reproduced below-
Conclusion
(2) Where, as a result of primary adjustment to the Deemed Dividend is a special tax provision and has
transfer price, there is an increase in the total always been an issue of litigation on multiple grounds
income or reduction in the loss, as the case may & aspects. With foreign investment opportunities
be, of the assessee, the excess money or part increasing in India in multiple sectors, and India’s
thereof, as the case may be, which is available GDP growing at the highest rate in the world has
with its associated enterprise, if not repatriated attracted attention across the Globe. With the recent
to India within the time as may be prescribed, announcement to make India the 3rd largest economy
shall be deemed to be an advance made by the in the coming 5 years and several companies looking at
assessee to such associated enterprise and the India as a flourishing supply chain hub , it is anticipated
interest on such advance, shall be computed in that a lot of potential foreign investors will be investing
such manner as may be prescribed in India. Thus, the aspects of International Tax and
View-1: Reading the provision of Section 92CE with Transfer Pricing shall play a critical role in the future.
Section 2(22)(e) of the Act together, there arises a risk Nevertheless, it is noteworthy that the Government
that the deemed loan made by the taxpayer to the AE continues to address the open issues and provides
could be treated as a deemed dividend. certainty of taxation which shall further boost the rate
of investment to realise the dream of India becoming
View-2: Based on the analysis provided above in one of the strongest and largest economy of the world.
para 5.1, deeming fictions are created only for some
definite purpose for which Section 92CE was to
charge notional interest income in the absence of
repatriation of funds to India by AE. Thus, it must be Author may be reached at
limited to that purpose and should not be extended kinjeshthakkar@gmail.com and
beyond that legitimate field. However, for this view, eboard@icai.in
13
Civil Appeal No. 7823 of 2014 (SC).
Indirect Tax
THE CHARTERED ACCOUNTANT
A
t present, no custom duty imposing customs duties
on import of Electronic on electronic transmissions
Transmission (ET) into the until the 14th Session of the
country is levied in India. ET can Ministerial Conference or
be defined as online trading of 31 March 2026, whichever is
‘digitizable products’ which are earlier. The moratorium and
traded both in physical form as well the Work Programme will
as online i.e., downloaded from expire on that date.” i
the internet, e.g. music, books,
So, it is clear from the above that
software, video games, films etc. It
the moratorium on custom duty on
is worthwhile to mention here that
electronic transmission shall finally
the ET differs from cross border
CA. Anil Sharma e-commerce as it excludes those
expire, and member countries
Member of the Institute products which are ordered online shall be free to impose custom
but delivered physically. duty on electronic transmissions in
their respective countries after 31st
The reason for not imposing March 2026.
custom duty on import of ET was
the unanimous decision taken by What is at stake?
the member countries (including The prospect of digitization of a
India) at the 2nd Ministerial greater number of items and the
Declaration (MC) of the World Trade surge in trade in such digitizable
Organization (WTO) made on 20th items vis-à-vis the trade in their
May 1998. physical form is happening very
rapidly. 3D printing is being used
Though the decision was not
for manufacturing products in
to impose custom duty on ET
the sectors including automobile,
till the next MC (known as the
auto components, health and
‘moratorium on imposing custom
medicine, medical devises, aviation,
duties on electronic transmission’)
aerospace components, electronics,
but the subsequent MCs continued
construction equipment, and for a
extending this moratorium from
host of consumer items such as toys,
one to the next MC. However, at
shoes, textile products, jewelry,
the recently concluded 13th MC of
furniture and household goods.
the WTO at Abu Dhabi, UAE on 2nd
March 2024, the Declaration included The shift from the importation of
the following text on the issue: physical goods to digital form has
become a phenomenon that has
1. “We instruct the General Council
occurred in recent years. In 2017,
to hold periodic reviews on the
the estimated imports of digitizable
Work Programme, including
goods using 8% of the Average
based on reports that may
Annual Growth Rate (AAGR) was
be submitted by the relevant
USD 255 billion. However, the
WTO bodies, with a view to
physical import of those digitizable
presenting recommendations
goods was USD 116 billion. The
for action to the next Session of
difference between the estimated
the Ministerial Conference.
import value and the physical import
2. We agree to maintain the value reached USD 139 billion; this
current practice of not number can be estimated as the
Indirect Tax
THE CHARTERED ACCOUNTANT
import value of digitizable goods imported to note that this loss of tariff revenue is from
using Electronic Transmission. In the imports of just 49 products.ii
addition, using the same conservative
growth rate of online imports of 3D printing is being How is India affected?
49 HS code of digitizable goods, used for manufacturing
It is unfortunate that the
it is projected that the online products in the sectors including developed countries have
worldwide imports of digitizable automobile, auto components, kept tariffs on the import of
goods imported by Electronic health and medicine, medical electronic products suspended
Transmission will rise to USD devises, aviation, aerospace on several pretexts. Today,
365 billion in 2025. components, electronics, the situation is such that,
In UNCTAD’s Research Paper
construction equipment, and for more than USD 30 billion of
(2019), it was found that based a host of consumer items such electronic products are being
on the identification of a small as toys, shoes, textile products, imported by India alone. That
number of digitizable goods jewelry, furniture and is, even if 10 percent tariff is
household goods. imposed, the Government of India
in five areas, namely printed
would have received a revenue of
material, music and video downloads,
more than USD 3 billion. India is a net
software, and video games, there was
importer with software product imports at
an estimated loss of tariff revenue of more
nearly USD 10 billion, and most of the ITeS and
than $10 billion globally, 95% of which is borne by
software exports from India are not likely to fall in the
developing countries. As more and more goods are
category of goods. Along with this, we also have to
getting digitized with the advent of Industry 4.0 and
understand that production processes in the world are
3D printing technologies, the estimate of fiscal revenue
also changing fast.
forgone will snowball.
Today, to import any item from abroad, it is not necessary
The paper further argued that most of the developing
to physically import it. By 3D printing, that object
countries are experiencing profound challenges
can be physically produced using software and other
due to infrastructure/technological divide, the skills
materials in the importing country itself. Consequently,
divide, and the rising concentration in digital markets,
if this happens, the country may also incur a loss of
particularly the market power of global digital platform.
import duties imposed on the import of physical goods.
Moreover, in the period 2017-2020, it was estimated
Thus, the issue is not only about the loss of revenue on
that developing countries and Least Developed
electronic products, but also of possible loss of import
Countries(LD) lost USD 56 billion in tariff revenue,
duties on physical goods in future.
of which USD 48 billion were lost by the developing
countries and USD 8 billion by the LDCs. It is interesting Moreover, the issue here is not only about loss of
revenue; it’s a much larger issue for a country like India.
Our start-ups make a variety of electronic products, as
well as movies and other entertainment products in our
country. However, when all these products are imported
without tariff, there is hardly any incentive to produce
them domestically. This tariff moratorium on e-products
is benefitting the US, European countries, and China.
Indirect Tax
THE CHARTERED ACCOUNTANT
Indirect Tax
THE CHARTERED ACCOUNTANT
on MFN basis, cannot result into multilateral consensus as data innovation, digital identities, cybersecurity,
to bring it under the umbrella of the WTO and therefore consumer protection and digital inclusion. Article 3.1
opposed the move.viii of the DEPA definitions ‘digital product’ as a computer
programme, text, video, image, sound recording or
What was being discussed outside WTO on other product that is digitally encoded, produced
Electronic Commerce? for commercial sale or distribution, and that can
be transmitted electronically including by photonic
In 2016, the Asia Pacific Economic Cooperation (APEC) means. Article 3.2 of DEPA provides that no Party shall
economies namely Australia, Brunei, Canada, Chile, impose customs duties on electronic transmissions,
Japan, Korea, Mexico, New Zealand, Peru, Singapore, including content transmitted electronically. xi More
Chinese Taipei, and the United States agreed to such agreements are being entered into by various
seek to enhance participation in the Pathfinder countries.
through continuous dialogue in relevant APEC fora
and to identify capacity building opportunities for a In October 2021, G-7 trade ministers, including
permanent custom duty moratorium on ET including Canada, France, Germany, Italy, Japan, UK, and the
content transmitted electronically in the WTO. It was US, in a Joint Statement demanded that electronic
advocated that old style trade barriers such as custom transmissions, including transmitted content, should
duties should not be placed on digital products as it be free of customs duties in accordance with the
would only impede trade in these products and run WTO Moratorium on Customs Duties on Electronic
contrary to the idea of expanding economic activities Transmissions and supported a permanent prohibition
over internet.ix of such duties.
Indirect Tax
THE CHARTERED ACCOUNTANT
that 95% of the world’s total tariff revenue loss due The communication also mentioned that the termination
to the moratorium will be borne by developing of the moratorium does not mean that Indonesia
countries. will abruptly increase the MFN tariff on electronically
transmitted digital goods.
6. Another argument for the removal of moratorium
was that by no means will the members necessarily Indonesia explained that the rationale for imposing
impose custom duties across the board. The customs duties on digital goods is not solely about the
key is policy space and to use such policy space state revenue, but more importantly about creating
appropriately for domestic digital industrialization a level playing field for domestic and foreign firms,
and the generation of local jobs. promoting the growth of local SMEs, providing business
7. The success in levying consumption tax or GST certainty, and assessing digital goods risks. It considers
on foreign based entities for digital products/ that customs duties are the most accurate and effective
services shows that it might also be possible to levy policy tool of the government to administer the
customs tariffs on electronic transmission without importation of digital goods transmitted electronically,
any difficulties. referring to the above-mentioned rationales. The
imposition of Customs Duties on electronically
What has Indonesia done on custom duties transmitted content will not create a distortion for
global trade, and it is not meant to put an administrative
on electronic transmission? burden on the importation procedure of digital goods
In a communication at WTO on 09 December 2022, using electronic transmission. Indonesia considers
Indonesia has confirmed that the Indonesian Customs that these rationales are essential in establishing state
Law has stipulated the imposition of Customs Duties sovereignty.xii
on digital goods (software, electronic data, multimedia,
etc.) which are delivered via electronic transmission Indonesia took this decision of imposing custom duty on
i.e., through the internet. It has issued specific tariff digital transmission after carefully going through the data
headings for intangible goods in Chapter 99 of the collected. It found that the shifting of physical goods
Indonesia Customs Tariff Book which consists of importation to digital form has been a phenomenon in
five tariff lines, namely: Operating System Software Indonesia in the period of 2010 to 2020. The estimated
(9901.10.00), Application Software (9901.20.00), import value of Digitizable Goods (49 HS Code) by
Multimedia (9901.30.00), Supporting or Driver Data using the 8% Average Annual Growth Rate (AAGR) is
(9901.40.00), and Other Software and Digital Product USD 4.5 billion in total. On the other hand, the total
(9901.90.00). amount of physical import of digitizable goods is only
USD 3.16 billion. As a result, there is a USD 1.39 billion
It was further informed that, thus far, Indonesia imposes gap between the total amount of estimated import value
a zero percent (0%) most favoured nation (MFN) tariff and the physical import value of digitizable goods, which
on software and other digital goods transmitted indicates that Digitizable Goods importation has been
electronically under Heading 99.01. The importer of altered from physical into digital form.
digital goods will utilize a simplified customs declaration
with the minimum requirement of filled-in element data Indonesia’s data on import value and tax revenue (Value
compared with the general imports, and exclusion of Added Tax/VAT and Income Tax) of Digital Goods
several customs measures. Importation (HS Code 99) during 2018-2022 depicted
a very significant increase in the import value of digital
goods, from USD 1.1 million in 2020 to USD 56.2 million
in 2021. In addition, an increase in the value of imports
also occurred until September 2022, with the import
value reaching USD 66.5 million.
Indirect Tax
THE CHARTERED ACCOUNTANT
it is time now for India to start the exercise of collecting custom duty involved for making public policy decisions
and analyzing data to validate its stand and for that at appropriate times.
purpose, it should take appropriate steps through
amending custom duty structure in the forthcoming It would also help custom authorities to impose
budget, as done by Indonesia. custom duties on content to support the domestic
creative industries including small and medium players,
It is suggested that India may impose custom duty on otherwise struggling in the domestic market, which can
digitizable goods with a most favoured nation tariff facilitate domestic digital industrialization and generate
of zero percent, through the forthcoming budget on local employment.
electronic transmissions on the similar lines as done by
Indonesia by creating specific tariff heads in the Indian
Custom Tariff Manual for software and other digital References
goods transmitted electronically including operating i. Abu Dhabi Minstrial Declaration WT/MIN/(24)/
system software, application software, multimedia, Dec, 4 March, 2024
support or driver data and other digital products
ii. ‘Growing Trade in Electronic Transmissions:
It is worthwhile to mention here that the Goods and Implications for the South’ UNCTAD Research
Service Tax (GST) is already being charged on the Paper No. 29, UNCTAD/SER.RP/2019/1
import of some of these ‘digitizable assets’ under the iii. WTO Declaration on Global Electronic
following SAC Codes: Commerce, WT/MIN (98)/DEC/2, 25th May,1998
998431 – Online text-based information such as online iv. WTO, Dedicated Discussion on electronic
books, newspapers, periodicals, directories etc. Commerce under the Auspices of the General
Council on 15th June, 2001 , WT/GS/W/436, 6th
998432 – Online audio contents. July, 2001
998433 – Online video content. v. WTO, Work Programme on Electronic Commerce,
Decision of 2nd December, 2009.WT/L/782 dated
998434. – Software downloads. 11th December, 2009
998439. – Other on-line contents n.e.c. vi. WTO, Work Programme on Electronic Commerce,
Decision of 17th December, 2011.WT/L/843
998316. – IT Infrastructure and network management dated 19th December, 2011
services.
vii. WTO Joint Statement on Electronic Commerce,
998874. – Computer, electronic, and optical product WT/L/1056, dated 25th January, 2019
manufacturing services.
viii. WTO, The legal Status of Joint Statement
This will help custom authorities to monitor the flow Initiatives and their Negotiated Outcomes, WT/
of contents into the country and collect statistical data GC/W/819 dated 19th February, 2021
on content for the purpose of assessing the amount of ix. https://www.apec.org>publication 2016/11>TOC
Appendix 26-Pathfinder-on-Permanent-Customs-
Duty
x. https://www.wto.org , Osaka Declaration on
Digital Economy downloaded on 19/11/2021
xi. https://www.mfat.govt.nz/assets/Trade-
agreements/DEPA/DEPA-Signing-Text-11-June-
2020-GMT-v3.pdf
xii. WTO/GC/859-Doc #22-9276-WTO Documents
online dated 13/12/2022
Corporate Law
THE CHARTERED ACCOUNTANT
T
he Company Law Committee Act in 2015, requiring certain
in its 2016 Report proposed companies and LLPs to maintain a
the need for the introduction publicly accessible register known
of beneficial ownership provisions as the ‘Persons with Significant
in the Companies Act to address Control’ Register, which also needs
concerns related to tax evasion, to be filed with the UK Companies
money laundering, and illicit House. Additionally, the UK has
activities facilitated by complex established a central registry for
corporate structures. In line UK company beneficial ownership
with recommendations from the information. These developments
Financial Action Task Force (FATF), in other countries have raised
India strengthened the concepts regulatory concerns in India,
of beneficial interest and beneficial prompting the Ministry of Finance
ownership in its Prevention of Money to propose the introduction of
Laundering Act and introduced a a Register of Beneficial Owners
comprehensive definition through through mandatory provisions in
SEBI guidelines. the Companies Act.
Corporate Law
THE CHARTERED ACCOUNTANT
with these requirements results in fines and criminal The company is required to file a return of significant
prosecution. beneficial owners and any changes therein with the
Registrar of Companies. The return should contain
Who is a ‘Significant Beneficial Owner’ the names, addresses, and other prescribed details
(SBO)? within the specified time, form, and manner. The
company is responsible for taking necessary steps
The term ‘Significant Beneficial Owner’ refers to an
to identify individuals who qualify as significant
individual who, either independently or in concert with
beneficial owners and ensure their compliance.
others, possesses one or more rights or entitlements
in a reporting company. These rights and entitlements If the company knows or has reasonable cause to
include indirect or direct holdings of at least 10% of believe that a person is a significant beneficial
the shares, voting rights, participation in distributable owner, knows such owner’s identity or has been a
dividends, or the ability to exercise significant influence significant beneficial owner in the past three years,
or control over the financial and operational policies of the company must give notice to that person in the
the reporting company. prescribed manner.
If a person fails to provide the required information
Indirect holding through Body Corporate,
within the specified time or if the information
HUF, Partnership, or Trust provided is unsatisfactory, the company can apply
Indirect holdings are also taken into account when to the Tribunal for an order which will impose
identifying SBOs. If the member of a reporting restrictions on the shares in question, such as transfer
company is a body corporate, such as a company, restrictions or suspension of rights.
and an individual holds a majority stake in that body
corporate or its ultimate holding company (UHC), The Tribunal has the authority to make orders
they will be deemed to have indirect holdings in the restricting rights attached to shares after considering
reporting company. Similarly, in the case of Hindu the application made by the company. This order
Undivided Families (HUFs), the Karta (head) of the HUF should be issued within sixty days of receiving the
is considered to hold indirect holdings. Partnerships, application or within the prescribed timeframe. The
Limited Liability Partnerships (LLPs), and trusts also company or any person aggrieved by the Tribunal’s
play a role in determining indirect holdings, based on order can apply for the relaxation or lifting of the
the involvement of individuals as partners, trustees, imposed restrictions within one year from the date
beneficiaries, authors, or settlers. of the order.
Failure to make the required declaration as a
Summary of the Provision significant beneficial owner may result in a penalty
Section 90 of the Companies Act, 2013 deals with of fifty thousand rupees, with an additional penalty
Significant Beneficial Ownership. The summary of the for each day of continuing failure. Companies failing
provision is as follows: to maintain the register or provide the required
information may face penalties, and officers of the
Any individual or group of individuals, including company in default may also be penalized.
trusts and persons resident outside India, holding
beneficial interests of at least twenty-five percent Wilfully providing false or incorrect information or
(or any other prescribed percentage) in shares of suppressing material information in the declaration
a company or exercising significant influence or under this section can lead to legal action under
control over the company must make a declaration Section 447.
to the company. The declaration should specify the
nature of their interest and other relevant details How to determine SBO
within a prescribed timeframe. The following are examples illustrating different
scenarios where the concept of indirect holdings comes
Every company must maintain a register of the
into play when determining SBO. They showcase
interests declared by individuals. The register should
instances where individuals hold majority stakes in
include details such as the individual’s name, date
body corporates or ultimate holding companies, either
of birth, address, ownership details in the company,
directly or indirectly, through various structures such as
and other prescribed particulars.
subsidiaries, partnerships, or Hindu Undivided Families
The register maintained by the company is open for (HUFs). By understanding and identifying such indirect
inspection by any member of the company upon holdings, the reporting company can accurately
payment of the prescribed fees. determine its SBOs as per the regulatory requirements.
Corporate Law
THE CHARTERED ACCOUNTANT
Indirect Holdings
Example 1: In a reporting company, ABC Private Limited, Mr. A and Mr. B each hold a 50% stake. However, Mr. B
has the right to appoint a majority of the directors through an agreement, and Mr. C has the power to participate
in the financial and operating policy.
ABC Private Limited
(Reporting Company)
In this case, the SBOs of the reporting company would be Mr. B and
Mr. C. Mr. A, despite having a direct holding, does not possess any 10%
indirect holdings.
Mr. A
Example 2: In another scenario, ABC Private Limited has three
60% Mr. B
shareholders: Mr. A with a 60% stake, Mr. B with a 30% stake, and
30%
Mr. C with a 10% stake. Mr. C
None of them would be considered an SBO in this case since there are
no indirect holdings.
ABC Private
PQR Private Limited
Mr. A Holds 50.10% Holds 10%
Limited (Reporting
Company)
Mr. A is deemed the SBO for ABC Private Limited due to his majority stake in PQR Private Limited.
Example 4: In ABC Private Limited, Mr. A hold 55% in PQR Private Limited and also holds 1% in ABC Private
Limited through PQR Private Limited. Additionally, he directly holds 9% of ABC Private Limited.
ABC Private
PQR Private Limited
Mr. A Holds 55% Holds 9%
Limited (Reporting
Company)
Direct Holding of 9%
Mr. A is considered the SBO for ABC Private Limited as he holds a majority stake in PQR Private Limited and has
direct and indirect holdings in ABC Private Limited.
Corporate Law
THE CHARTERED ACCOUNTANT
Example 5: In ABC Private Limited, Mr. A hold 49% in PQR Private Limited and holds 1% in ABC Private Limited
through PQR Private Limited. He also directly holds 10% of ABC Private Limited.
ABC Private
PQR Private Limited
Mr. A Holds 49% Holds 1%
Limited (Reporting
Company)
In this case, Mr. A is not considered the SBO for ABC Private Limited as he does not hold a majority stake in PQR
Private Limited.
Example 6: In ABC Private Limited, Mr. A hold 55% in PQR Private Limited and holds 1% in ABC Private Limited
through PQR Private Limited. He also directly holds 7% of ABC Private Limited.
ABC Private
PQR Private Limited
Mr. A Holds 55% Holds 1%
Limited (Reporting
Company)
Direct Holding of 7%
Mr. A is not considered the SBO for ABC Private Limited as his total holdings (Direct + Indirect) in ABC Private
Limited is 8% (i.e. less than 10%).
Example 7: In ABC Private Limited, Mr. X holds 51% of XYZ Private Limited, which in turn holds 51% of PQR
Private Limited. Mr. X also holds 10% in ABC Private Limited through PQR Private Limited.
ABC Private
XYZ PQR
Limited
Mr. A Holds 51% Private Holds 51% Private Holds 51%
(Reporting
Limited Limited
Company)
Since XYZ Private Limited is the ultimate holding company of ABC Private Limited and Mr. X holds a majority stake
in XYZ Private Limited, he is considered the SBO for ABC Private Limited.
ABC Private
Mr. X, Mr. Y, XYZ Private PQR Private Limited
Mr. Z Limited Limited (Reporting
Company)
Corporate Law
THE CHARTERED ACCOUNTANT
Example 10: In ABC Private Limited, Mr. X, as the Karta of an HUF, holds 7% in the company. He also holds 8%
directly in ABC Private Limited.
Mr. X Hindu
Undivided ABC Private
(Karta) Holds 7%
Family Limited
Holds 8% Directly
Mr. X is considered the SBO as he holds a total of 15% (directly and indirectly) in the reporting company.
Partnership
Example 11: In ABC Private Limited, Mr. A and Mr. B are partners in PQR & Company, through which they hold
10% ABC Private Limited.
ABC Private
Mr. A
PQR & Limited
and Mr. B Holds 10%
Company (Reporting
(Partner)
Company)
Both Mr. A and Mr. B are deemed the SBOs for ABC Private Limited as partners of PQR & Company.
Example 12: In ABC Private Limited, Mr. A is a partner in PQR & Company and holds 10% of ABC Private Limited
through it. Mr. P holds 51% of PQR Limited and is also a partner in PQR & Company.
Partner
Corporate Law
THE CHARTERED ACCOUNTANT
Both Mr A and Mr. P will be considered the SBOs It contributes to strengthening corporate governance
for ABC Private Limited. Mr. A is a partner in PQR practices. Shareholders and stakeholders gain a
& Company, and Mr. P holds a majority stake in clearer understanding of who wields power within
PQR Limited, which is a partner in PQR & Company. an organization, ensuring accountability and
Therefore, both individuals meet the criteria for being responsible decision-making.
significant beneficial owners of ABC Private Limited. The existence of SBO regulations acts as a deterrent
for individuals involved in fraudulent activities.
Procedure for Identifying and Disclosing SBOS:
SBO regulations align with global initiatives
1. The reporting company has the responsibility of to combat money laundering and promote
identifying if any individual qualifies as an SBO. transparency, such as the Financial Action Task
The company must send a notice in Form BEN-4 Force (FATF) recommendations. These regulations
to any member (other than an individual) holding facilitate harmonization with international standards,
10% or more shares, voting rights, or dividend making it easier to track and prevent cross-border
entitlements, seeking information about SBOs. illicit transactions.
2. Individuals who are identified as SBOs should The concept of a Significant Beneficial Owner and
file a declaration in Form BEN-1 to the reporting the associated regulations represent a crucial step in
company within 30 days of acquiring such status enhancing corporate transparency, deterring illicit
or any subsequent changes. activities, and promoting responsible business practices.
By piercing the corporate veil, these regulations shed
3. Upon receiving the declaration, the reporting light on the individuals who exercise significant control
company must file a return in Form BEN-2 with or influence over reporting companies. Ultimately,
the Registrar of Companies (ROC) within 30 this promotes a more accountable and transparent
days, disclosing the SBO information. corporate ecosystem, safeguarding the interests of
4. The reporting company is required to maintain investors, stakeholders, and the economy as a whole.
a register of SBOs in Form BEN-3. This register
should be accessible for inspection during References
specified business hours, allowing members The Company Law Committee, ‘Report of The
of the reporting company to review it upon Companies Law Committee’ (February 2016), dated
payment of a nominal fee. 1st February, 2016
Conclusion
By identifying and disclosing SBOs, these regulations
provide greater transparency in corporate structures.
It becomes harder for individuals to hide behind
complex ownership arrangements or nominee Author may be reached at
csshivamsinghal17@gmail.com and
shareholders, as the focus shifts to unveiling the
eboard@icai.in
ultimate beneficiaries.
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Technology
THE CHARTERED ACCOUNTANT
T
he Digital Personal Data freely accessible applications. The
Protection Act, 2023 (DPDPA, moment we use social media, log in
2023) aims to regulate the for a mailing list, or access a free app
processing of digital personal data on our laptops or computers, we are
in a manner that recognises both required to agree to the supplier’s
the right of individuals to protect terms of access to the app. These
their data and the requirement to agreements are unnecessarily
process such individual data for confusing and detailed that we
legal purposes and for such issues
missread them. In order to ease the
which are connected with data
challenging process, we knowingly
protection or those incidental to
or unknowingly tend to agree
data protection, such personal
with them, and thus they set the
data for the given lawful purposes
conditions for how a company
and matters connected to such
can access the personal data they
objectives or incidental thereto.
obtain from us while using their
The Act in the context of app.
Technology
THE CHARTERED ACCOUNTANT
Technology
THE CHARTERED ACCOUNTANT
available her individual data on social media, the (i) the personal data and the purpose for which the
provisions of this Act shall not apply in such a case. same is proposed to be processed; (ii) the manner
in which he/she may exercise her rights under Sub-
We need to be cautious while providing our personal
section (4) of Section 6 and Section 13; and (iii) the
data to the public on social media while submitting
manner in which the Data Principal may make a
our views on any of the public channels as protection
complaint to the Board, in such manner and as may
is no longer available if you voluntarily provide your
be prescribed.
personal data on social media tools and apps.
This has been explained by means of an illustration
Grounds for processing personal data and notice to
given in the Act. If a person opens a bank account
the Data Principal for consent before processing of
via a mobile app/website of a Bank and opts to
personal data
utilize his personal data by a bank employee in a
Sub-section (1) of Section 4 of the Act provides as live, video-based customer identification process to
under: complete the KYC requirements, the bank employee
shall accept the request for using the personal data
3. “A person may process the personal data of a Data
with the notice of the customer. In such situations,
Principal only in accordance with the provisions
this section of the Act does not apply.
of this Act and for a lawful purpose, (a) for which
the Data Principal has given her consent; or (b) for Sub-section (3) of Section 4 of the Act provides that
certain legitimate uses.” the Data Fiduciary shall give the Data Principal the
option to access the contents of the notice referred
Here, it is important to note that there must be a
to in Sub-sections (1) and (2) of Section 4 in English
consent from the Data Principal before processing
or any language specified in the Eighth Schedule to
his/her personal data, and such processing of
the Constitution.
the data must be for a lawful purpose and certain
legitimate uses only. The consent to be free, specific, informed,
unconditional and unambiguous
Sub-section (2) of Section 4 of the Act provides
that for the purposes of this section, the expression Section 6 (1) of the Act provides as under:
“lawful purpose” means any purpose which is not
expressly forbidden by the law. 4. “The consent given by the Data Principal shall
be free, specific, informed, unconditional and
Data Fiduciary must seek explicit consent of the unambiguous with a clear affirmative action, and
Data Principal before processing his/her personal shall signify an agreement to the processing of her
data for which he/she has to make a request in a personal data for the specified purpose and be
manner as prescribed in Section 5 (1) of the Act, limited to such personal data as is necessary for
which provides that every request made to a Data such specified purpose.”
Principal under Section 6 for consent shall be
accompanied or preceded by a notice given by the Here, the clause that the consent ‘to signify an
Data Fiduciary to the Data Principal, informing her, agreement to the processing of her personal data for
the specified purpose and be limited to such personal
data as is necessary for such specified purpose’ is very
important. Under the consent, only that personal data
which is necessary for such specified purpose can be
processed, irrespective of whether the consent is
sought for a few other details additionally which are
not relevant for the specified purpose.
The position can be explained by means of an
illustration in a better way given as under:
A person downloads a telemedicine app. The App
seeks the consent of the person to process his
individual data and access his mobile phone contact
list to avail telemedicine services, and the person
signifies his consent to both. Here, the phone
contact list is not necessary for making available
telemedicine services, and his consent shall be
limited to the processing of his individual data for
availing the telemedicine services.
Technology
THE CHARTERED ACCOUNTANT
A telecom service
any language specified in the legality of processing of the
the Eighth Schedule to the personal data based on consent
Constitution and providing provider enters into a before its withdrawal.
Technology
THE CHARTERED ACCOUNTANT
The uses for which the Data Fiduciary can process the Reference
personal data Extract of provisions in italic at points 1 to 6 in the article
taken from Bare Act of THE DIGITAL PERSONAL DATA
Section 7 (a) of the Act provides that a Data Fiduciary
PROTECTION ACT, 2023 (Act no. 01 of 2023) also available
may process personal data of a Data Principal for the
in Digital Personal Data Protection Act 2023 | Ministry of
specified purpose for which the Data Principal has
Electronics and Information Technology, Government of
voluntarily provided her personal data to the Data
India (meity.gov.in)
Fiduciary, and in respect of which he/she has not
indicated to the Data Fiduciary that she does not
consent to the use of her personal data.
Technology
THE CHARTERED ACCOUNTANT
A
t times, the sheer considering electronic evidence? Will
complexity of the fraud an investigation indeed be reliable
may need delving and complete without performing
deep and resorting to reliance digital forensic procedures? How
on corroborative (or often complex and time consuming is it?
considered at times the And finally, is it worth the investment
most clinching!) evidence of time, effort, and money?
extracted from electronic data
(Electronically Stored Information If thoughts like these have crossed
/ ESI). Have you heard of the term your mind earlier and piqued your
‘smoking gun’? While smoking is curiosity, this article will hopefully
undoubtedly harmful for health, clarify a few of these pertinent
this ‘smoking gun’ does not questions and also encourage you
come with those challenges. In to learn more.
the context of an investigation, a
It is difficult to comprehensively
‘smoking gun’ is often referred to
cover a field, as vast as this, in one
as the singular piece of evidence
article and hence, the article will not
that helps conclusively (or
make an attempt to masquerade
substantively) to prove the guilt
itself as a primer on digital
of the fraudster. It is often that
forensics investigation. However,
one email, one phone SMS or one
when encountered with any fraud
document leads the fraudster to
investigation, in your capacity
be proven guilty.
as either management or those
With the advancement in charged with governance TCWG
technologies, digital forensic (or if any of the concepts discussed in
digital investigations or electronic this article will cause you to pause
data review or electronically stored and pose a healthy challenge
information review) have surfaced as to your external consultants,
a key element in any investigation. have a better understanding of
the forensics work and foster
Why is this necessary? What rethinking of the approach, then
advantages does electronic evidence the purpose would have been met.
provide in a fraud investigation? Can It is also worthwhile to add that the
one perform an investigation without Forensic Accounting Investigation
Technology
THE CHARTERED ACCOUNTANT
Standards (FAIS) issued by the ICAI are an excellent to be more technically challenging to acquire and
source of material for accountants to understand the analyze and hence we will see how to demystify digital
different methodologies deployed by Digital Forensic forensic investigation in the context of an investigation
investigators (DFI). Some of the topics discussed here of ‘unstructured data’.
will also help you have a wider appreciation of FAIS.
Welcome to the enigmatic and ever evolving world of In simplistic terms, a focused review of digital evidence
‘digital forensic investigations’! as part of any fraud investigation can be referred to as
a digital forensic investigation.
Below is a brief layout of the topics we will
One can draw various analogies between a digital
discuss: forensic investigation and a non-digital investigation. In
Refresher the physical world, the evidence is likely to be available
This article assumes that we as accountants are already at the crime scene, and in the digital world, this is
familiar with the concepts of ‘fraud’, ‘investigation’ etc. available in the electronic device. In the physical world,
and hence we will not labour too much on these areas. there may be cabinets that may have relevant files and
However, for the benefit of those who would prefer a in a digital world, these will be stored on a hard drive.
short refresher, explanation in to the section 447 of the In the physical world, a thief may use burglar tools or
Companies Act defines fraud as below: weapons whereas, in the digital world a fraudster may
use hacking tools etc.2
‘Fraud’ in relation to affairs of a company or anybody
corporate, includes any act, omission, concealment of Given the proliferation of electronic devices, it is
any fact or abuse of position committed by any person difficult nowadays to isolate one from the other and
or any other person with the connivance in any manner, both are so intricately intertwined that it is difficult to
with intent to deceive, to gain undue advantage from, or draw a clear line. Gone are the days when one could be
to injure the interests of, the company or its shareholders comfortable justifying that an investigation is completed
or its creditors or any other person, whether or not there in all aspects without performing some digital forensic
is any wrongful gain or wrongful loss. investigation procedures.
Technology
THE CHARTERED ACCOUNTANT
Technology
THE CHARTERED ACCOUNTANT
such as Documents, emails, system artefacts, system Have you seen crime television programs where law
logs, software installed and used, metadata, memory, enforcement agencies (LEA) use a specially designed
bag and keep all collected evidence? Or even where
Custodians the LEA wishes to ensure that the crime scene is not
Another common term you may read in investigation tampered with, the relevant area is cordoned off with a
reports is the term ‘custodian’. What does ‘custodian’ special tape marking those areas as under investigation.
mean? A custodian is an individual within the span of the This is a simplistic example of what evidential integrity
investigation who has been found to be relevant would stand for.
and whose data the investigation team
Why should the original evidence not
is targeting for acquisition. Without
be tampered with? Well, it all comes
getting into too many details,
down to the stage when one needs
scoping of custodians is a thorough
exercise carried out at the The purpose of a legal to prove the fraud in the courts of
law. A DFI would have a tough
beginning of the investigation hold is to ensure that time proving the robustness of
and as the investigation goes
through its motions, this list
relevant data is available his investigation if he cannot
for analysis as and when even demonstrate that the
keeps on getting iteratively
evidence gathering process
improved upon. E.g., as and needed in the future has been foolproof. There have
when the DFI starts reviewing without succumbing to the been instances the alleged
data the DFI may realize that
there are some more people
limitations of intentional or fraudster has turned the tables
potentially involved in the inadvertent deletion. on the DFI and pointed out holes
in the investigation by alleging
alleged malpractices, and hence
that the evidence was deliberately
their electronic devices may contain
manufactured or tampered with in order
information that will be relevant for the
to plant fake evidence to unlawfully frame
investigation.
the alleged and many investigation cases have
thus fallen apart leading the culprit to walk away scot-
Legal hold free. When it comes to proving a crime in court of law,
The ‘legal hold’ process is associated with data we all know that evidence is king and holds supreme.
gathering and scoping of custodians and the timing
of this may vary based on the assessment of the When it comes to digital forensics, it does seem to
organization in consultation with the DFI. In summary, take on a more evolved meaning. At this stage, it will
‘legal hold’ is a process that ensures that a formal be relevant to talk about one key principle that is the
data preservation notice is sent to relevant individuals foundation of every digital forensic investigation. The
in the organization (possibly even before they have ‘locards exchange principle’3. This principle elucidates
been formally considered as custodians) and as a that ‘every contact leaves a trace’. This means that
part of the notice, the individuals are guarded not every data collection activity will leave a trace that the
to delete any information from their computers until original evidence was accessed.
further notice. Legal hold also involves enforcing
relevant locks in the backend email/IT system such ‘Every interaction with a digital device has the potential
that data cannot be deleted by individuals. The to leave a trail of what we did, who we did it with,
purpose of a legal hold is to ensure that relevant where we were, and when some event took place. This
data is available for analysis as and when needed in trail is made up of digital artifacts, which are created
the future without succumbing to the limitations of in the routine operation of a digital device. This trail
intentional or inadvertent deletion. can assist an investigator to discover and explain what
happened. Computers generate many artifacts, most
of which do not contribute to understanding what
Evidential integrity
happened. The challenge is finding useful information
Let us look at a key concept in digital forensics – and separating it from irrelevant information. Digital
‘evidential integrity’. A plain reading and simple investigation techniques can extract this information
parsing of this phrase will lead you to understand what and construct a narrative of the events.’4
this means. One of the most important tenets of digital
forensic investigations is that the ‘original state of the As we saw earlier, if there is any residual trace in the
evidence should not be tampered with’. original evidence, there is a likelihood that the DFI will
3
https://en.wikipedia.org/wiki/Locard%27s_exchange_principle
4
NIST Digital Investigation Techniques November 2022
Technology
THE CHARTERED ACCOUNTANT
have to put in much more effort in proving his diligence render the original data inaccessible and redundant. This
in the court of law. The skill in digital forensics lies in will be a serious dent to the entire investigation.
ensuring that this ‘trace’ or ‘exchange of information’ is
minimized as much as possible. A chain of custody form in its most simplistic form
will capture all the key information needed for
Now how does one ensure this? documentation purposes such as details of the device,
date and time of handover, state of the device, details
Well, there are various tools in the market used by of the collector, location etc.
DFI that help them in ensuring that the data collection
activity does not leave any trace. Some of the common
electronic communications devices that one uses in day-
Examination and Analysis
to-day life are laptops, desktops, mobile devices such A common question that may come to your mind is why
as phones or tablets, etc. Each and every such device are sophisticated tools needed for a digital forensic
captures a hoard of electronic information that can be investigation? Why cannot a simple ‘copy paste’ of data
mined in order to unearth various evidence needed meet the purpose. Why cannot the analysis be done in
pursuant to the investigation purposes. Whenever MS Excel! The answer lies in the concepts that we have
you would have attempted to access these devices or discussed above.
copy information from these devices you would have at
times noticed looking at some information such as ‘last Any data collection exercise must stand the test in
connected on’ or ‘last copied on’. This is one example the court of law. A most common method to achieve
of a trace left behind in a system. this usage of advanced data collection tools which
have proven efficacy and backed up by the industry
Evidential integrity during data acquisition is most acceptance. These tools ensure that the original
commonly achieved by using specialized tools which electronic storage device (i.e., desktop, laptop, Mobile
ensure that the original source media is accessed only phone, tablet etc.) is accessed in a protected manner
in ‘read only’ mode thereby retaining the sanctity of using certain software based or hardware-based tools
data and timestamps. which minimize or almost do not leave any imprint on
the original evidence. There are also advanced concepts
Evidential continuity such as MD5 encryption hash matching which ensures
As accountants and auditors, we all understand the that the ‘forensic copy’ of the data is an exact match
importance of robust documentation, correct? Well, this of the original source. Such tools can generate reports
field of digital forensics is no different. A first and foremost of such hash matches which are preserved as part of
documentation requirement is a ‘chain of custody’ form. the investigation and help demonstrate the bonafide of
With this let me introduce another important term in this such data collection in the court of law.
discussion – ‘evidential continuity’. Let us understand
what this means and why it is important. While this is the most tangible benefit of using such
tools, there is another greater benefit. These tools have
The concept of evidential continuity ensures that there is the ability to recover deleted data with an impressive
a detailed trail of how the original evidence has moved recovery percentage which is often immensely helpful
through various hands during an investigation. A chain of in an investigation.
custody form is the first stage of the evidence gathering
process and captures critical information to demonstrate There are tools available that also help the DFI to fire
that evidential continuity is maintained. Eventually up the forensic image and search for various relevant
evidential continuity also contributes to evidential operating system artefacts such as software installed,
integrity in a small way. After all, how can one be software uninstalled, internet history analysis, most
confident of the integrity of the data unless one is able to recently used files, social media analysis, internet cache
ensure that the evidence has not fallen into wrong hands analysis, chat message analysis, etc.
in between and how the possibility of likely tampering
of evidence has been guarded against. To cite a simple Also, please note that this electronic data is different
analogy, it is akin to a maintaining manual audit trail of from financial data which comes in a structured
the various individuals which have handled the original format and is amenable to analysis using data
electronic media (i.e., computer, hard drive, mobile analytics software. Digital forensic data will largely
phone etc.). One should always endeavor to minimize the be ‘unstructured data’ and hence commonly used
movement of electronic data as it increases the chances financial data analysis software cannot be used for
that one wrong inadvertent step taken may permanently such forensic analysis.
Technology
THE CHARTERED ACCOUNTANT
Allegations
history’ and noted that it contained searches for a ‘file
wiping software’. Based on the analysis of the ‘internet
download history’ the DFI noted that a software tool
for this purpose was indeed downloaded. Post this
Custodians the ‘shortcut analysis’ of the ‘most recently used’ tools
by the custodian provided evidence that the tool
was actually used. Further, analysis of the ‘uninstalled
software history’ revealed that the tool was removed by
Devices the individual after performing certain steps.
Technology
THE CHARTERED ACCOUNTANT
evidence is being stored? For all practical purposes, 3. Once the data is returned back to the organization
a forensic copy of the data needs the same level of by the investigation team, has anyone verified that
confidential treatment as the original evidence. the data continues to be readable and is accessible
in the same manner in which it was before it was
Legal considerations and scoping provided to the DFI?
1. Has the organization consulted with its legal counsel
with regard to implications on data protection laws Robustness of procedures
and privacy laws since electronic data, even though 1. Does the investigation plan also include recovery of
stored on official devices, may continue to harbor deleted information to the extent retrievable?
sensitive personal information? 2. Does the investigation team also plan to analyze
2. What is the methodology that the investigation various operating system artefacts?
team has used to determine the list of custodians? 3. What is the process of search terms that have been
3. With regard to scoping of custodians, has input been used by the investigation team?
taken from the sponsors of the investigation within 4. Does it comprehensively capture elements of all the
the organization? In many situations, the organization allegations that have been made?
sponsors may have additional pertinent information
which may have a bearing on the custodians scoping. 5. Having consideration to objectivity and
independence, have inputs been taken from the
4. Are there any individuals that have not been considered relevant individuals in the organization who may have
for scoping, although potentially relevant? Is there a deep domain business expertise in the particular
documented rationale to explain this exclusion. area and may be familiar with the how these matters
Information technology assets are often communicated or discussed in emails?
1. What are the sources of electronically stored 6. Email communications often do not follow a fixed
information (ESI) that have been considered? syntax. Considering this, are the search terms broad
enough to ensure that genuine relevant emails are
2. Does the organization have a detailed updated
not missed out?
inventory of the information technology assets
that are assigned to every employee (e.g., laptop, 7. Conversely, are there a large number of false
desktop, mobile, tablet etc.) and have those been positives that are being returned through these
appropriately factored in while determining the plan search hits? Review of irrelevant hits although will
for data collection? cause no harm, but it leads to an unproductive use
of precious resources. Efforts should be undertaken
3. Are there any devices which have been considered
to ensure that the key words are drafted in a smart
as not relevant? Is there a proper rationale?
manner which reduces false positive and also does
4. What is the organization policy on Bring Your Own not omit genuine relevant emails.
Devices? Are these considered with the scope of
review if needed and as permissible? Closing and handover
5. Is the inventory updated on a timely basis? Is there a 1. Once the investigation is over, what is the agreement
likelihood that some elements of this inventory may between the organization and investigation team
be outdated? This will pose the risk of critical data with regard to maintaining the copies of the forensic
sources being missed out. evidence? Few organizations prefer that the forensic
copies be stored in their premises under secure
6. Besides local machine of the custodians, is server lock and key whereas others are comfortable for
level data also being captured? There could be the DFI to maintain the copy with themselves. Every
occasions where the electronic data may have been organization needs to evaluate the pros and cons of
deleted from the local machine of the custodians their proposed approach and decide accordingly.
however a server level copy may be available.
2. ICAI has also released Forensic Accounting
Safe custody of assets Investigation Standards (FAIS). Is the investigation
1. Is the investigation team appropriately maintaining team conversant with these standards when it comes
chain of custody of the organization’s data? While to digital evidence?
chain of custody form can be considered as the DFI’s
working papers, the original electronic data belongs
to the organization. Organization should ensure that
the original evidence is returned back to the source
once a forensic copy has been created. Author may be reached at
2. Is there a central coordinator in the organization who vinayknayak@gmail.com and
eboard@icai.in
is keeping a track of such original data?
Financial Market
THE CHARTERED ACCOUNTANT
I
nvesting in financial markets has to years and decades. Investors
always been driven by the pursuit have different planned investment
of maximizing returns while
Dr. Bheemanagouda managing risks. Investors employ
horizons, and these variations are
Academician influenced by a wide array of factors.
various strategies and techniques Some of the key factors include
to make informed decisions,
their financial goals, risk tolerance,
aiming to grow their wealth over
age, life stage, income, and cash
time. One crucial factor that
flow requirements. Moreover, the
significantly influences investment
outcomes is the time horizon of the chosen investment strategies,
investment. The investment horizon personal circumstances, market
is the duration of time an investor conditions, transaction costs, and
intends to hold an investment or a behavioural factors also play a vital
portfolio (asset) before liquidating role in shaping their investment
it. It can range from days or months timeframes.
Financial Market
THE CHARTERED ACCOUNTANT
Considering several factors, investors may opt for to investment horizon and its potential impact on
short-term strategies to capitalize on immediate gains portfolio performance followed by a review of earlier
and frequently revise their portfolios to respond to studies. The next section explains the approach,
the changing market conditions and opportunities. dataset, and sample stocks used. The article then
Alternatively, they might choose a long-term discusses observed patterns of performance metrics
approach, holding onto investments for extended like return risk, systematic risk, Sharpe ratio, and
periods to benefit from potential growth over time. Treynor ratio in different time horizons. The linear
By systematically analyzing these factors, investors regression analysis is detailed, showing the influence
can tailor their investment plans to align with their of investment horizon on performance metrics. The
specific objectives and risk preferences. Surprisingly, article concludes by highlighting the findings and
the investment literature has paid little attention to the suggestions for portfolio management decisions on
significance of the investment horizon while measuring a portfolio of IT stocks concerning the investment
the risk and return of a portfolio. Does the length of the horizon. This study sheds light on the impact of
investment horizon matter? If the horizon is altered, can investment horizon on the performance of a portfolio
it have notable effects on portfolio performance? of IT stocks, offering valuable insights for investors
Stocks with high short-term volatility may show and portfolio managers.
attractive mean returns within a short-term horizon
Earlier Studies
but could exhibit different performance characteristics
over a long-term horizon. Stocks that don’t see much Portfolio selection or security selection has remained
price fluctuation in the short term might appear to a pivotal and enduring topic in modern finance,
have lower average returns over a very short period. capturing the attention of scholars for decades. The
However, their performance can show significant inception of this field can be traced back to the
differences while considering a longer stretch of time. pioneering contributions of Markowitz (1952) and
This discrepancy can lead to notable changes in stock Roy (1952). Markowitz’s groundbreaking insights
performance when the investment horizon is altered. emphasized the potential advantages of diversification
However, over longer investment horizons, the impact in mitigating portfolio variance, although complete
of underlying fundamentals and economic conditions risk elimination remained elusive. Simultaneously, Roy
may become more pronounced, affecting the stock’s introduced a complementary principle highlighting
performance differently. Hence, investors should be the trade-off between an investor’s pursuit of returns
mindful of the investment horizon over which stock/ exceeding a predetermined minimum and associated
portfolio performance is evaluated. risks. These foundational ideas found further
extension through Merton (1969), who ventured into
This study aims to address the impact of time horizon continuous-time scenarios, expanding the scope of
on the performance of investment with a set of portfolio selection principles. As the field evolved,
assumptions. The authors operate under the assumption researchers explored multiperiod optimization
that investors possess a risk-averse attitude and seek to to refine portfolio strategies over extended time
optimize returns. Secondly, investors look only at risk frames. The mathematical foundations of portfolio
and return for the decision of investment horizon and selection were rigorously examined by Levy (1972),
all other factors are kept silent. Thirdly, variation in the who established a link between assumed investment
portfolio’s performance is based on the time horizon, horizons and the Reward to Variability index which
while keeping all other influencing factors unchanged. was proposed by Sharpe in 1966. This connection
Fourthly, the investors will adhere to a particular time introduced a systematic mathematical bias dependent
frame for holding their stocks. This means that they won’t on the chosen investment horizon.
sell their stocks before the completion of the intended
period, and they also won’t hold onto the stocks past Contributions from Li and Ng (2000), Basak and
the predetermined timeframe. To simplify the analysis Chabakauri (2010), Czichowsky (2013), and Björk
without losing generality, the fifth assumption posits and Murgoci (2014) enriched the comprehension of
that the historical ex-post return distributions provide multiperiod portfolio optimization. Kamara et al. (2016)
the best estimate of ex-ante returns. In other words, an explored the intricate interplay between asset risk
investor planning to invest for one month would base and investment horizons. This dynamic relationship
their decisions on means and variances calculated from highlighted the evolving mechanisms for risk pricing
past monthly returns, while an investor with an annual across different investment time frames, fostering
holding period would use past annual rates of return a deeper comprehension of risk premia and their
and risk data. correlation with investment horizons.
The article is organized in a clear structure to effectively Research in the field of portfolio selection has yielded
present its findings. It starts with an introduction significant insights into the relationship between mutual
Financial Market
THE CHARTERED ACCOUNTANT
fund investment styles and varying investment horizons Treynor Ratio. These metrics were calculated across
(Amadi and Amadi, 2019). This exploration has unveiled various time horizons of 50 to 1000 trading days with
valuable connections between different fund types an interval of 50 days, using the approach of rolling
and their optimal time frames, catering to the diverse window analysis.
needs of investors. Moreover, recent findings by Levy
(2022) have emphasized a critical disparity between the The stocks are considered to be included in the portfolio
extended horizons of mutual fund investors and the which meet two criteria:
prevalent reliance on monthly return-based rankings. 1. They should be constituents of the Nifty IT index
This calls for a transformative shift in performance on the National Stock Exchange (NSE); and
evaluation techniques to accurately address the impact
of prolonged investment durations and ensure more 2. They should be listed prior to the year 2008.
effective assessment methodologies. The weights are assigned to each stock in the portfolio
Collectively, these studies underscore the significance based on its market capitalization.
of investment horizons, prompting tailored approaches
to risk assessment, portfolio management, pricing of Methodology
security, and decision-making on investment. Further, The performance metrics of the portfolio were
it highlights the need for tailored approaches that calculated as follows:
consider different timeframes and market conditions
Portfolio Return (Rp)
to effectively manage investments and make informed
decisions.
Objectives
1. To examine the performance of a portfolio of IT where Ri is the annualized return of security i,
stocks across different time horizons.
& Wi is the weight of security i.
2. To analyze the impact of time horizon on the
performance of portfolio of an IT stocks. Return (Ri)
1
Historical daily adjusted closing price data of each stock, spanning a 15-year period (2008 to 2022) were extracted from
https://finance.yahoo.com
Financial Market
THE CHARTERED ACCOUNTANT
r represents the average return of a security for the Portfolio Risk (σp)
defined time horizon pertaining to a specific period. (equation considering two asset portfolio)
Financial Market
THE CHARTERED ACCOUNTANT
r is the average of the returns of n sets time horizons, and the investment horizon (predictor). This analysis
utilized the model represented as y =α + βh + ε, where
n is the number of sets of a time horizon.
y signifies the dependent variable to be predicted
Systematic Risk of Portfolio (performance metrics), h stands for the independent
variable employed for prediction (investment horizon),
α denotes the y-intercept (constant term), β represents
the slope coefficient (indicating the alteration in y
resulting from one-unit change in x), and ε accounts for
Where, βi is the systematic risk of a security, Wi is the the error term, signifying unaccounted variability in y.
weight of each security.
Systematic Risk (βi) Performance Metrics of IT Stocks Portfolio
The sensitivity of the stock’s returns to the market’s
across Various Time Horizons
returns, indicating its market risk. Table 2 presents the performance metrics of the
Information Technology (IT) portfolio across various
investment horizons. The Portfolio return (Rp) shows
that as the investment horizon increases, the average
annualized return initially rises to 350 trading days, after
which it starts to decline. Portfolio risk (σp) measures
Where, Cov (ri , rm) is the covariance between the stock’s the volatility and also tends to increase with a longer
returns and the market’s returns, and Var (rm) is the horizon, indicating greater volatility over extended
variance of the market’s returns (Nifty 50 index returns timeframes. The Beta (βp) values suggest that the
are considered to represent market returns). portfolio is slightly more volatile than the market. The
Sharpe Ratio (SR) Sharpe Ratio (SR) and Treynor Ratio (TR) both decrease
with longer investment horizons, indicating weaker risk-
Sharpe Ratio, also known as reward-to-variability, helps adjusted performance over time. In summary, it is found
to evaluate the risk premium per unit of risk. that as the time horizon extends, the portfolio’s average
2
The rate of return on Treasury Bills of 6.83% considered to be the Rf (risk free rate) in this study, which is the average yield
of three different Treasury Bills auctioned on August 4, 2023: 6.72% for the 91-Day Treasury Bill (Primary), 6.87% for the
182-Day Treasury Bill (Primary), and 6.93% for the 364-Day Treasury Bill (Primary).
Financial Market
THE CHARTERED ACCOUNTANT
return initially increases but then declines, while its The regression analysis results for the IT portfolio’s return
overall risk and volatility rises, resulting in diminishing demonstrate a strong negative correlation of -0.7293,
risk-adjusted returns. Additionally, the IT portfolio with an R-squared value of 0.5319 explaining 53.19%
exhibits a slightly higher volatility compared to the of return variance attributed to the time horizon. The
broader market, implying potentially more significant F-statistic of 20.4501, accompanied by a low P-value
price fluctuations. of 0.0003, rejects the null hypothesis, confirming the
significant influence of time horizon on portfolio return.
Linear regression analysis The negative slope of -0.0053 suggests a slight reduction
Table 3 provides regression statistics to assess the in return as the time horizon increases, and the intercept
strength and direction of relationships. The Coefficient indicates a projected return of 29.3798 at a zero-time
of Correlation measures these relationships, while the horizon. When examining the relationship between time
Coefficient of Determination (R2) gauges how well the horizon and portfolio risk, a strong positive correlation
investment horizon explains variability in performance of 0.9188 and an R-squared value of 0.8441 implies that
metrics. The standard error indicates the degree of approximately 84.41% of risk variability is explained
uncertainty in the model’s predictions, with smaller by the time horizon. The F-statistic of 97.4658, with a
values preferred, as they suggest less disparity between P-value of 0.0000, underscores the model’s statistical
actual data and predictions, expressed in the same significance.
units as the dependent variable. The F-statistic tests the The slope of 0.0491 indicates an average increase of
overall model significance, with higher values indicating 0.0827 units in portfolio risk for each one-unit rise in the
greater independent variable contribution, and a low time horizon, while the intercept is 24.4031. Conversely,
P-value (P≤0.05 at a 95% confidence level) confirms when considering the relationship between time horizon
statistical significance. Regression slopes represent the and systematic risk, the correlation of 0.1690 and a low
change in the dependent variable for a one-unit change R-squared value of 0.0286 suggests a limited explanatory
in the independent variable, holding other variables power, with an insignificant F-statistic of 0.5293 and a
constant, while intercept values serve as theoretical slope of 0.0001, indicating minor changes in systematic
benchmarks for performance metrics under a zero- risk per unit alteration in the time horizon, with an
time horizon, though this isn’t realistic for investments, intercept of 1.3421. Finally, the association between
making real-world interpretation more meaningful with time horizon and the Sharpe and Treynor ratios reveals
longer investment periods. strong negative correlations of -0.7862 and -0.7345,
Table 3 – Simple Linear Regression Analysis between the Investment Horizon and Performance Metrics of the
IT Portfolio
Financial Market
THE CHARTERED ACCOUNTANT
respectively, with R-squared values of 0.6182 and 0.5395 management of customizing investment horizons within
indicating substantial explanatory power. Both ratios the realm of IT investments.
exhibit statistical significance with F-statistics of 29.1414
and 21.0859 and low P-values. The slopes of -0.0008 References
and -0.0064 indicate negative changes in the ratios with Amadi, F. Y., & Amadi, C. W. (2019). Investment
increasing time horizon units, while the intercepts are Horizon and the Choice of Mutual Fund.
0.9003 and 17.6862 for the Sharpe and Treynor ratios, International Journal of Business and Management,
respectively. 14(6), 76–87. doi:10.5539/ijbm.v14n6p76
Collectively, the results of comprehensive linear Basak, S., & Chabakauri, G. (2010). Dynamic Mean-
regression analysis reveal that portfolio return, portfolio Variance Asset Allocation. The Review of Financial
risk, Sharpe ratio, and Treynor ratio are all influenced by Studies, 23(8), 2970–3016. http://www.jstor.org/
the time horizon, with the coefficients of determination stable/40782974
(R-squared) values ranging from approximately 53%
to 84% and lower standard error. High F-statistics and Björk, T., & Murgoci, A. (2014). A theory of
low p-values underscore the overall significance of Markovian time-inconsistent stochastic control in
the relationships. Notably, the study highlights longer discrete time. Finance and Stochastics, 18(3), 545–
horizons tend to lead to an increased portfolio risk and 592. https://doi.org/10.1007/s00780-014-0234-y
decreased returns and risk adjusted returns. Czichowsky, C. (2013). Time-consistent mean-variance
portfolio selection in discrete and continuous time.
Conclusion Finance and Stochastics, 17(2), 227–271. https://doi.
This study investigated how the investment horizon org/10.1007/s00780-012-0189-9
affects the performance of the IT portfolio. By
Kamara, A., Korajczyk, R. A., Lou, X., & Sadka,
examining the performance metrics of the IT portfolio
R. (2016). Horizon Pricing. Journal of Financial
across various time horizons, employing a dataset
and Quantitative Analysis, 51(6), 1769–1793.
spanning 15 years, the results exhibited that for a
doi:10.1017/S0022109016000685
short-term, return increases with extension in time
horizons, by after a certain level, it starts to decline as Levy, H. (1972). Portfolio Performance and the
an extension in time horizon. Standard deviation rises Investment Horizon. Management Science, 18(12),
with longer horizons, and systematic risk indicates wavy B645–B653. http://www.jstor.org/stable/2629552
movements over different horizons. Sharpe and Treynor
Levy, M. (2022, April 24). Mutual Fund Selection
ratios decrease with longer horizons, signaling lower
and the Investment Horizon. SSRN. Retrieved from
risk-adjusted returns for longer horizons. Furthermore,
https://ssrn.com/abstract=4092004
the systematic risk of the IT portfolio exhibits a slightly
higher level of volatility when compared to the market. Li, D., & Ng, W.-L. (2000). Optimal Dynamic
This suggests that the returns of the IT portfolios are Portfolio Selection: Multiperiod Mean-Variance
likely to experience more fluctuations than the returns Formulation. Mathematical Finance, 10(3), 387–
of the broader market. 406. https://doi.org/10.1111/1467-9965.00100
The findings of linear regression analysis portray a Markowitz, H. (1952). Portfolio Selection.
regression model that fits effectively with the highly The Journal of Finance, 7(1), 77. https://doi.
significant coefficients that allow us to reject the org/10.2307/2975974
null hypothesis. This affirmation provides statistical
evidence supporting the relationship between the time Merton, R. C. (1969). Lifetime Portfolio Selection
horizon and all performance metrics of the IT portfolio, under Uncertainty: The Continuous-Time Case.
except for systematic risk. These findings reinforce The Review of Economics and Statistics, 51(3), 247.
the substantial influence of the time horizon on the https://doi.org/10.2307/1926560
performance of the IT portfolio. Roy, A. D. (1952). Safety First and the Holding
The study’s findings suggest that risk-averse investors of Assets. Econometrica, 20(3), 431. https://doi.
should exercise caution when investing in the IT Portfolio org/10.2307/1907413
due to its slightly elevated volatility compared to a
diversified market. Additionally, careful consideration
is warranted when opting for longer investment time
horizons, given their association with heightened risk Authors may be reached at
and lower risk-adjusted returns relative to shorter gangadharamails@gmail.com and
horizons. Furthermore, the study’s insights provide eboard@icai.in
guidance for making informed decisions in portfolio
Financial Market
THE CHARTERED ACCOUNTANT
U
Dr. Nirmal Singh nderstanding what efficiency of the trades in the stock
Academician influences our investment market. However, it has advanced
decisions is crucial because to the level of trading intelligence.
it helps us make more intelligent We now have online trading
choices and align our strategies platforms, mobile apps, and robot
with our goals. It also gives financial advisors that have transformed
institutions and experts valuable how we invest. These tools make it
insights to design services that cater incredibly convenient to research,
to our needs. By identifying the buy, and monitor our investments
factors that shape our investment from the comfort of our homes.
perspective, we can confidently
navigate the ever-changing Conversely, changing technology
investment landscape and make the and new investment avenues bring
most of the opportunities available. exciting opportunities for retail
It’s like having a roadmap that investors. The availability of diverse
Saumya Chaturvedi guides us through the complexities investment options empowers retail
of the market. investors to expand their portfolios
Academician
and achieve higher returns. The
Earlier, technology contributed accessibility of information through
mainly to the transactional technology equips investors
Financial Market
THE CHARTERED ACCOUNTANT
with valuable insights for making informed from long-term to short-term, find algorithmic
decisions. Besides, the emergence of systems very efficient as they cater to
automation and robo-advisory services systematic trading involving trend
provides cost-effective solutions Algo Trading, followers, hedge funds, and pairs
for managing investments. Lower trading while offering a precise
transaction costs have made powered and automated approach. Since
investing more affordable, and by Gen AI (Generative it is systematic in its approach,
the ability to participate in there is minimal human error.
global markets opens doors to AI), employs computer It enables back-testing to
new growth prospects. Access programs following validate trading strategies.
to diverse investment options While algorithmic trading
has increased significantly. This predefined algorithms to presents advantages such
article thoroughly evaluates the
technological advancements
execute trades quickly as instant order confirmation,
potential for best prices, and
relevant to the stock market and and systematically. eliminating human error, it also
similar investments (Figure 1). has its challenges. These include the
lack of real-time human judgment, the
As technology advances, the financial potential for increased market volatility, high
world also experiences a shift. The capital outlays, regulatory scrutiny, and limited
integration of these technologies is reshaping the customization. Other limitations include potential latency
way traders interact in financial markets. This change issues, susceptibility to unforeseen events, dependence
has been driven by diverse trading tools designed to on technology, market impact, regulatory complexities,
enhance effectiveness, efficiency, and profitability in high capital costs, and limited customization.
investments and financial transactions. Some essential
techniques include Algorithmic Trading, Mobile Trading For algorithmic trading, there are technical
Apps, Real-time News Platforms, Robot / Auto Trading requirements like programming knowledge, network
Software, and Advanced Charting Tools. connectivity, access to trading platforms, market data
feeds, back-testing capabilities, and historical data for
Algorithmic Trading testing. Algorithmic trading legality is established, and
Algo Trading, powered by Gen AI (Generative AI), employs its learning process requires expertise in quantitative
computer programs following predefined algorithms to analysis, financial market knowledge, and coding skills.
execute trades quickly and systematically. This method Popular programming languages for algorithmic traders
capitalizes on profit opportunities with unparalleled include C++ and Python, which emphasize handling
speed and frequency compared to human traders. The extensive data volumes efficiently. Algorithmic trading
algorithms are constructed around timing, price, quantity, continues to shape financial markets, allowing traders
or mathematical models. Beyond individual gains, algo to optimize trading strategies precisely and quickly.
trading enhances market liquidity and systematizes
trading by mitigating the impact of human emotions. Mobile Trading Apps
Strategies such as trend-following, arbitrage, and index Mobile trading apps enable people to execute trades
fund rebalancing are executed based on trading volume from their smartphones. These apps provide real-time
or time. High-frequency trading dominates current algo- market information. Selecting the right mobile trading
trading, capitalizing on rapid order placements across app is crucial for efficient trading. One should thoroughly
multiple markets and decision parameters. Investors, research the options available, consider functionality,
Robot or Real-time
Algorithmic Mobile Advanced Auto Trading News
Trading Trading Apps Charting Tools Software Platforms
Financial Market
THE CHARTERED ACCOUNTANT
check reviews, and ensure security. The chosen app effort. Robot trading is different from Algo trading.
should provide real-time market data, advanced Algorithmic trading involves the computer automating
charting tools, customizable alerts, and various order only the execution portion of trading; the computer does
types. Features like Margin Trading Facility enhance the not make the buy or sell decisions. Automated trading
app’s capabilities. Discipline, focus, and preparation are is done entirely automatically, down to the computer
essential to trade like a pro on a mobile app. Staying making the buy/sell decisions. Maintaining powerful
updated with market trends and news, setting up alerts, trading software is essential for uninterrupted trading
analyzing charts, making research-based decisions, operations. Redundancy is crucial as it helps backup
and leveraging customization options contribute to systems minimize downtime while reducing the risk of
maximizing trading potential on a small screen. financial losses during failures. Scalability is also critical
to accommodate the evolving needs of trading firms.
Mobile apps provide the convenience of trading Software must efficiently handle increased volumes of
anytime, anywhere, real-time trading opportunities, voice, data, and transactions as firms grow.
easy access to account information, and user-friendly
interfaces. Customization options allow tailoring the Conversely, it should scale down when necessary,
app to individual preferences and strategies. One allowing firms to stay competitive and capitalize on
should also avoid common mistakes like overtrading, emerging opportunities. Security is another crucial
impulsiveness, and neglecting risk management, as factor, especially for trading firms with sensitive financial
these can lead to losses. Understanding the app’s information. A well-designed security procedure
functionality, analytical tools, and customization options safeguards against unauthorized access, protects
is essential for effective decision-making. client information, and builds trust. Two approaches to
building a robust IT infrastructure include using cloud
Advanced Charting Tools computing and working with specialized IT providers.
Charting tools offer visual representations of price action Cloud computing can offer scalability, flexibility, and
through bar charts, trend lines, and advanced charts. external management of maintenance and updates,
These play a crucial role in enhancing trading strategies. therefore freeing up internal resources. Technical IT
Their effectiveness is further elevated when integrated providers can help trade technology and security by
with artificial intelligence (AI). AI-powered tools, when tailoring the infrastructure to a firm’s unique needs.
combined with advanced charting features, can identify
key trading opportunities, and significantly improve the Real-time News Platforms
precision of trading strategies. AI’s ability to process International events significantly impact trading activities
vast amounts of data quickly and accurately can identify in the era of global interconnectedness of markets. For
patterns beyond historical data, including news events and traders, whether to use a news feed depends on their
social media trends. Integrating both fundamental and trading style and the securities involved. While long-
technical analysis provides a holistic view of the market. It term traders might consider news as temporary noise,
enables traders to make more informed decisions. day traders dealing with currencies, oil, or stock index
futures need real-time information.
Some critical features of stock charting tools are
technical and fundamental indicators that give insights Technology has enabled many options for traders. Social
into past market data. They also provide information media lists and feeds can also be customized for specific
about a company’s financial health. Real-time market trading interests, and it is a cost-effective alternative. Online
data access is essential for day traders. Advanced news providers offer free news coverage, sometimes with
charting includes infographics and heat maps. a slight delay. Professionals willing to invest in a premium
Choosing the right stock charting software involves service can find services, though pricey, providing around-
considering one’s trading style, objectives, and specific the-clock coverage on macroeconomics, global breaking
feature requirements. Understanding how to interpret news, forex trends, and more. The right fit depends on
the provided data to use charting tools effectively, trading frequency, time frame, and specific trading plans.
educational resources such as webinars, video tutorials, Traders can try out free trials that these services offer to
and online courses can help master these tools. decide the best match for their needs. The exemplary
news service is an invaluable asset and helps traders
Robot or Auto Trading Software navigate market volatility and recoup the cost of the news
Robot trading is powered by trading software that includes feed in just a few minutes.
a technical architecture supporting electronic trading
activities. The grasp inputs directly influence a firm’s Conclusion
profitability and reputation. At the same time, building Advancements in technology have helped investors
and maintaining such a robust system is a challenge that in many ways, such as automated trading, accurate
requires careful planning, investment, and consistent predictions, and visualization of financial data through
Financial Market
THE CHARTERED ACCOUNTANT
charts as well as graphs. They aid in the our risk tolerance, financial goals, and time
identification of market patterns and horizon. They offer us tailored investment
trends. Traders can personalize strategies and handle portfolio
their strategies by creating rebalancing, tax optimization,
custom indicators based on Robo-advisors and administrative tasks.
their unique trading styles. Robo-advisors have brought
These technological advances have emerged professional-grade portfolio
enable better connectivity as our virtual investment management within our reach,
to the market for traders saving us time and effort.
by providing real-time data companions, providing Investing has become more
access, market trend analysis,
customizable alerts, and access
personalized advice and convenient and exciting with
apps. With mobile apps, we can
to research and educational portfolio management monitor our portfolios, receive
resources, ensuring seamless
trading experiences regardless of
services. real-time market updates,
and execute trades on the go;
location or activity. The innovations everything is at our fingertips. Also,
have simplified trading, made it fintech innovations like automated
more accessible, and improved its savings apps, micro-investment platforms,
effectiveness. Traders can now work in the and digital wallets have opened new avenues for
markets more precisely while staying ahead of the us to grow our wealth and explore alternative investment
curve and achieving success in their strategies. opportunities.
It is to be noted that lower transaction costs have made Social media platforms and online investment
investing more affordable for retail investors. Online communities have also transformed how we gather
trading platforms often offer reduced brokerage fees, information and insights. We can now connect with like-
eliminating the need for intermediaries. This cost minded individuals, share investment ideas, and stay
reduction enables retail investors to participate in the current with market trends. At the same time, it is crucial
market without a significant financial burden. Lastly, to approach social media cautiously and critically evaluate
changing technology has made it easier for retail the information we come across, as misinformation as
investors to participate in global markets. Online well as herd mentality can be prevalent.
brokerage accounts provide access to international
stock exchanges, allowing investors to diversify their References
portfolios globally and open opportunities to benefit https://economictimes.indiatimes.com/markets/stocks/
from the growth potential of emerging markets. news/trading-tools-tech-harnessing-power-of-innovation-
for-successful-trading/articleshow/100727636.cms
Technology has transformed the investment landscape
for investors by giving them incredible opportunities h t t p s : / / w w w. i n v e s t o p e d i a . c o m / a r t i c l e s / a c t i v e -
trading/101014/basics-algorithmic-trading-concepts-and-
and options to explore. Online trading platforms have
examples.asp
been a game-changer, making it easier than ever for us
to participate in financial markets. We can access real- https://economictimes.indiatimes.com/wealth/invest/
time market data, conduct research, and execute trades mobile-trading-app-how-to-trade-like-a-pro-on-a-small-
without intermediaries with just a few clicks. These screen/articleshow/99415434.cms
platforms have made investing more affordable and https://www.modestmoney.com/understanding-role-
accessible, levelling the playing field for retail investors charting-tools-successful-trading/
like us. There has been a remarkable growth of digital
https://www.speakerbus.com/blog/importance-of-robust-
trading platforms in India. These platforms have gained
it-infrastructure-trading
widespread popularity by offering user-friendly interfaces
and low-cost trading, attracting many retail investors. https://tradeproacademy.com/the-best-news-feed-for-
Their introduction has empowered individual investors day-trading-paid-and-free-options/
to participate actively in financial markets, leading to a
significant increase in retail investor participation in India.
Banking
THE CHARTERED ACCOUNTANT
Introduction
Financial inclusion is a critical aspect low-cost transactions, ensuring
of India’s economic development that even small value transactions
strategy, aiming to provide access remain affordable. Also, CBDC
to financial services to all segments have the potential to create a level
of society, particularly those who playing field by providing access to
have been traditionally excluded the same financial infrastructure for
from the formal banking system. all individuals, regardless of their
Prof. H.P. Mathur The Reserve Bank of India (RBI) background or location. This can
Academician defines financial inclusion as the help reduce disparities and promote
process of ensuring access to a inclusive economic growth. By
range of financial services, including leveraging blockchain technology,
banking, credit, insurance, and CBDC transactions can be recorded
payments at an affordable cost on a transparent ledger, reducing
to all individuals and businesses, the risk of discrimination, and
irrespective of their socio-economic promoting fair treatment for all
status or geographical location. users.
Banking
THE CHARTERED ACCOUNTANT
(P2M). Also, CBDC will not bear any interest Designs and approaches of CBDC
similar to cash and can be converted CBDC is a digital legal tender with the
into alternative forms of currency such core functions of a currency: medium
as banks, and deposits. According
CBDCs can enhance
of exchange, unit of account, store
to Finance Minister, Ms. Nirmala of value, and standard of deferred
Sitharaman, digital currency
will lead to a more efficient accessibility to financial payments. CBDC can be
classified into token-based and
and cost-effective currency services by offering account-based ledger designs.
management system. Also,
adopting CBDC as a national a digital currency As per a report, account-based
CBDC involves the distribution
currency can help India add $1
trillion to its economy by 2032,
that does not require of currency transfers from one
account to another. Therefore,
as per a recent estimate. As a traditional bank central banks need to ensure
per March 2023, the circulation
of CBDC or e-rupee amounted account. the existence of a digital identity
system for every user.
to Rs. 16.39 crore, according to
RBI’s Handbook of Statistics on the When the circulation of digital currency
Indian Economy for the fiscal year 2022- is limited to financial institutions only, this
23. Among the overall e-rupee circulation, design is called ‘wholesale’ CBDC. This design
Rs.10.69 crore constituted Wholesale CBDC, while Rs. could enhance the efficiency of interbank payment
5.70 crore represented retail CBDC. Daily transactions hence being used in countries like Canada, Singapore,
for retail CBDC are currently hovering around 18,000, and Thailand in their projects Jasper, Ubin, and Inthanon,
significantly below the RBI’s ambitious goal of achieving respectively (Didenko & Buckley, 2021). Retail-based
one million transactions per day by the end of 2023. CBDC, also known as the ‘general purpose’ CBDC,
focuses on daily public use as it is issued to households.
Literature Review
CBDC can be interest-bearing and non-interest-
Central Bank Digital Currency (CBDC) bearing. Interest-bearing CBDC is similar to bank
The development of Central Bank Digital Currency deposits, whereas non-interest-bearing CBDC is
(CBDC) is at a nascent stage. CBDC as a term is not similar to digital cash. Interest-bearing CBDC can
well-defined yet in the literature (BIS, 2018). However, also minimize cash dependency and enhance financial
with the growing interest, many studies have tried to inclusion (Andolfatto, 2020). Also, (Lee et al., 2021)
define CBDC in their own perspective. According to supported that interest-bearing CBDC can be used as a
(BIS, 2018), CBDC is a fiat currency issued by central tool to control direct monetary policy and money supply
banks in digital form with a store of value and unit of effectively. According to (BIS, 2018), both interest-
account. (Ozili, 2022) defines CBDC as a currency in the bearing and non-interest-bearing accounts could be
digital form issued by central banks and comes under used for retail and wholesale payment transactions.
the liability side of the balance sheet of the issuing
banks. However, the most accepted definition of CBDC To circulate the CBDC within the economy, two
is that it is a kind of digital legal tender (IMF). However, categories of CBDC are used, namely one-tier and two-
literature shows consensus that CBDC comes on the tier approaches. Issuance and distribution of CBDC are
liability side of balance-sheet of central banks. done by central banks under a one-tier approach. In a
two-tier approach, the central bank issues the digital
currency, but distribution is done by financial institutions,
most likely private banks, and NFCs in the case of India.
According to (Priyadarshini & Kar, 2021), the two-tier
architecture allows private institutions to issue and
distribute CBDC backed by central bank reserves.
For example, China’s CBDC project Digital Currency/
Electronic Payment (DCEP) envisions the distribution of
digital currency through a two-tier approach (Didenko
& Buckley, 2021). Despite the increasing interest and
valuable insights from studies all over the globe, the
literature on CBDC is still fragmented. As per author’s
best knowledge, no comprehensive analysis on Central
Bank Digital Currency (CBDC) has been carried out
prior to this study, especially in the Indian context.
Banking
THE CHARTERED ACCOUNTANT
Hence, this gap motivated the researcher to is crucial for the widespread adoption of
carry out this research. Therefor, the study CBDC. Merchants need to be willing
aims to fulfill the objectives mentioned to accept CBDC payments, and
below. intermediaries such as payment
processors must facilitates
Research Objectives Interest-bearing these transactions seamlessly.
The research aims to fulfil the CBDC is similar to To further encourage the
acceptance of CBDCs among
following research objectives:
bank deposits, whereas merchants, regulatory bodies
non-interest-bearing
1. To explore the factors like the RBI may provide
affecting CBDC designs and incentives or mandates for
approaches. CBDC is similar to merchants to adopt a CBDC
payment system.
2. To identify the opportunities digital cash.
and challenges in a CBDC 2. Value Propositions
rollout for financial inclusion in
The value proposition of CBDC lies
India.
in their cost-effectiveness, wide reach,
Research Methodology acceptance, and simplicity of the payment
mechanism. Cost effectiveness is crucial for
In order to achieve the above objectives, the present promoting financial inclusion and encouraging the
study adopts a systematic approach to analyse the various adoption of CBDC among underserved populations.
designs and approaches of CBDC and explore the factors CBDC transactions should be low-cost or fee-free
affecting different designs of CBDC. Further, the study making them attractive to users and merchants alike.
identifies the opportunities and challenges in a CBDC CBDCs should offer advantages over traditional
rollout for financial inclusion in India. The study uses payment methods to incentivize adoption.
available literature on CBDC on the SCOPUS database.
The research employs ‘CBDC,’ Digital currency,’ ‘Design 3. Facility for Offline Use
of CDBC,’ ‘CBDC implementation,’ and ‘CBDC and
Offline usability is crucial for ensuring that CBDCs can
Financial Inclusion’ as the key search terms.
be used in areas with limited or no internet connectivity.
This feature is particularly relevant in India, where
Findings and Discussions significant portion of the population reside in rural
According to (Resendiz et al., 2021), advanced and and remote areas. While offline functionality poses
emerging economies differ significantly in their technical challenges, solutions such as offline wallets of
motivation to implement CBDC. Developed nations token-based system could enable CBDC transactions
prefer the wholesale style of CBDC, intending to even in offline environment. Ensuring this usability will
enhance interbank settlement, cross-border remittances, require investment in infrastructure and technology to
capital, and security markets. On the other hand, retail support CBDC transactions in areas with limited access
CBDC is primarily suitable for emerging economies to broadband or advanced smartphones.
(Maryaningsih et al., 2022) to prevent criminal activities
like money laundering and fraud, and facilitate financial 4. Capability of Use in Remote Areas
inclusion. Distribution is another factor that affects the
CBDCs should be designed to be accessible in remote
design choices of CBDC. Design choices of CBDC also
areas without access to broadband or advanced
depend upon the choice of technology. Distributed infrastructure that requires the availability of CBDC
ledger technology is decentralized and updated by compatible devices that are affordable and user-
many entities, whereas non-distributed technology is a friendly. Initiatives such as the government’s Jan Dhan
centralized ledger owned and updated by a single entity. Yojana, which aims to provide financial services to
unbanked individuals in remote areas, can complement
Factors affecting various designs/ the adoption of CBDCs by expanding the reach of
approaches of CBDC banking infrastructure.
1. Acceptance by Merchants and Intermediaries
CBDC for Financial Inclusion: A design
As per recent data from RBI, the total volume of digital
transactions in India reached approximately 5,763 trillion
choice for India
as of November, 2023. This data indicates the growing Financial inclusion is crucial to achieving sustainable
acceptance of digital payments among merchants in development goals (SDGs) worldwide. It plays a
India. Acceptance by merchants and intermediaries pivotal role in poverty reduction and economic
Banking
THE CHARTERED ACCOUNTANT
Effective Co-ordination
in the country by extending the existing payment
and Skill Development
Grievance Redressal
of Financial Services
Banking
THE CHARTERED ACCOUNTANT
Payment Transaction Volume Growth (Y-o-Y, per cent) Transaction Value Growth (Y-o-Y)
System Nov-2020 Nov-2021 Dec-2020 Dec-2021 Nov-2020 Nov-2021 Dec-2020 Dec-2021
RTGS 2.9 24.9 20.2 17.9 -8.0 37.5 3.3 21.7
NEFT 24.6 24.1 31.6 22.3 27.9 4.3 31.7 6.5
UPI 81.3 89.4 70.8 104.4 106.6 96.5 105.5 98.7
IMPS 48.7 21.5 38.7 24.5 36.3 31.9 38.6 35.6
NACH 2.5 15.7 28.0 -2.7 5.7 7.1 32.2 5.1
NETC 257.6 71.5 115.2 74.9 171.6 51.1 83.3 59.7
BBPS 78.7 148.6 86.2 137.0 78.1 175.3 97.9 165.2
Source: RBI (RBI, 2022)
CBDC can offer robust protection against cyber- Figure 3: Preferred mode of payment
attacks and data breaches. By implementing
CBDC, India can bolster its resilience against In Percent
cyber threats and ensure the continuity of
financial services, even in the face of disruptions
2 2
such as the COVID-19 pandemic. 100
Hence, many countries are looking towards 40.9
80 44.2
CBDC as a panacea to eliminate mediators or
60 2.9
intermediaries and decentralize financial access. 4.1
2. CBDC for Financial Inclusion: The challenges 40
54.2
49.7
In a recent survey, RBI revealed cash as the most 20
preferred mode of payment and to receive money, 0
primarily for small-value transactions. Implementing Preferred Mode of Preferred Mode to
CBDC could be a big challenge in India, where people Payment Receive Money for
mostly prefer cash, especially among low-level income Regular Expenses
groups. Also, it would be difficult for CBDC to cater to
the needs of almost 550 million people in India who Cash Cheque Digital No Comment
still use phones with no internet connectivity. Despite
owning smartphones, almost 845 million people do not
regularly utilize mobile banking or digital payments.
00
00
10
20
50
00
50
50
0-
2
w
0-
e
10
20
00
lo
ov
50
20
Ab
Banking
THE CHARTERED ACCOUNTANT
users. These incentives can efficiently surmount for financial inclusion in the implementation of CBDC
obstacles to acceptance and motivate a greater number in India, which can assist the Government of India in
of individuals to adopt CBDC. formalizing financial inclusion policies. Furthermore, this
study makes an important contribution to the theory and
Conclusion adds a body of knowledge on fintech adoption.
As per RBI, financial inclusion plays a pivotal role in the
growth and development of an economy, and research References
supports that a well-designed CBDC can replace the Abraham, M. P. (2021). Bitcoin threat and the
real-time gross settlement system (RTGS) and improve emergence of Central Bank Digital Currency:
the efficiency of the overall financial system. India has Regulatory and valuation challenges. SSRN Electronic
selected retail-based CBDC over wholesale-based Journal, December, 1–20. https://doi.org/10.2139/
CBDC to enhance financial inclusion, financial stability, ssrn.3980287
payment safety, and payment efficiency. If appropriately Agur, I., Ari, A., & Dell’Ariccia, G. (2019).
designed to overcome the problems of financial Designing Central Bank Digital Currencies.
inclusion, CBDCs have the potential to gain acceptance IMF Working Papers, 2019(252). https://doi.
by the financially excluded segment of the society for org/10.5089/9781513519883.001
digital payment. Worldwide, developing nations are
Andolfatto, D. (2020). Assessing the Impact of Central
exploring the opportunities to design CBDC in such
Bank Digital Currency on Private Banks David. AJR.
a way that it can complement their existing financial
American Journal of Roentgenology, 186(2), 227–236.
system. For example: Nigeria and China have issued its
https://pubmed.ncbi.nlm.nih.gov/28459981/
digital currency e-Naira and e-CNY respectively with the
aim to support financial inclusion and financial stability. Bech, M., & Garratt, R. (2017). Central bank
CBDCs can be designed to emulate some desirable cryptocurrencies. BIS Quarterly Review, September,
characteristics of physical currency, as “digital cash.” 55–70.
This means CBDC can be used without a bank account, Bindseil, U. (2019). Central Bank Digital Currency:
enhancing accessibility for marginalized groups. Like Financial System Implications and Control. International
cash, CBDC could facilitate low-cost or fee-free small Journal of Political Economy, 48(4), 303–335. https://
transactions, with relaxed identification requirements doi.org/10.1080/08911916.2019.1693160
for less risky demographics struggling with formal BIS. (2018). Committee on Payments and Market
documentation. Moreover, CBDC could function in Infrastructures Markets Committee Central bank
offline settings and, being directly backed by the central digital currencies (Issue March). http://file//
bank, offer the same level of trust and risk-free nature localhost(null)%0Apapers3://publication/uuid/
as physical cash, devoid of credit risk. Once adopted B47B3FF7-D88A-4403-9BD5-9E22746EAB8C
by the financially excluded segment, CBDC can act
Boar, C., & Wehrli, A. (2021). Ready, steady, go? –
as an entry point to the larger formal financial system.
Results of the third BIS survey on central bank digital
However, cash is still India’s most preferred mode
currency. BIS Papers, 114, 77–82.
of payment especially among marginalized. Hence,
overdependency on cash, distribution, and circulation Davoodalhosseini, S. M. (2022). Central bank digital
cost of CBDC and technological challenges may act currency and monetary policy. Journal of Economic
as major threats to the implementation of CBDC in Dynamics and Control, 142, 104150. https://doi.
the country. CBDC is still at an exploratory stage and org/10.1016/j.jedc.2021.104150
if not properly designed and implemented based on Deloitte. (2021). Central Bank Digital Currencies:
the county’s existing market environment for banking Building Block of the Future of Value Transfer. https://
and payment system, it can inadvertently worsen the www2.deloitte.com/in/en/pages/financial-services/
financial exclusion and can pose threat to financial articles/central-bank-digital-currencies.html
integrity. Therefore, to serve CBDC as a tool to enhance https://www.rbi.org.in/Scripts/
financial inclusion in the county, it is essential to address AnnualReportPublications.aspx?Id=1375
the highlighted challenges mentioned in the study.
Practical Implementation
The study outcomes are beneficial for policymakers
(Central banks), including academicians researching
CBDC and financial inclusion, especially for developing
nations. Also, the study helps Government to promotive Authors may be reached at
digital financial inclusivity for rural communities. The study eboard@icai.in
further highlighted the opportunities and challenges
For any queries, you are requested to get in touch with the CMI&B Secretariat, ICAI Bhawan,
Indraprastha Marg, New Delhi - 110002.
Organisations
may write at careerascent@icai.in Organised By
Committee for Members in Industry & Business (CMI&B)
Members The Institute of Chartered Accountants of India
(Set up by an Act of Parliament)
may write at experiencedcas@icai.in Tel. No.: (011) 30110450/555/491
1526
Sustainability
THE CHARTERED ACCOUNTANT
Introduction
T
he India-Middle East-Europe transportation routes, the IMEC aims
Economic Corridor (IMEC) to create a more interconnected
holds profound significance economic landscape, promoting
Dr. Gauri Dhingra in fostering economic collaboration diversification of economic
Academician among the participating regions, partnerships and expanding market
signalling a transformative era access for participating countries.
of cross-continental trade and Furthermore, the corridor is a catalyst
cooperation. This corridor serves for infrastructure development,
as a strategic conduit for economic attracting investments that fuel the
integration, connecting South Asia, growth of transportation networks
the Middle East, and Europe in a and logistics facilities. This, in turn,
seamless network. Its importance not only improves the efficiency
lies in the facilitation of enhanced of trade operations but also
trade opportunities, providing an contributes to regional economic
efficient and streamlined pathway growth. The IMEC also plays a
for the exchange of goods and pivotal role in promoting regional
services. By breaking down economic integration, aligning
trade barriers and optimizing policies to create a more cohesive
Sustainability
THE CHARTERED ACCOUNTANT
Sustainability
THE CHARTERED ACCOUNTANT
pollution. Additionally, the corridor’s resource-intensivechallenges. One critical concern is the potential for
development poses risks of depletion, impacting displacement as infrastructure development and
ecosystems and exacerbating environmental urbanization take centre stage. Displacement
degradation. can lead to the uprooting of communities,
disrupting established social
In response to these challenges, structures and eroding the sense
there is a pressing need to
adopt sustainable practices
Balancing economic of belonging. Furthermore, the
corridor’s expansive reach may
and technologies to mitigate progress with social trigger cultural shifts, impacting
environmental impacts. The cohesion demands a local traditions, languages,
IMEC must prioritize green
infrastructure and eco-friendly nuanced approach that and lifestyles. The influx of
diverse influences may lead
urban planning to minimize prioritizes the well-being to a delicate balance between
the ecological
Sustainable
footprint.
transportation of the communities preservation and adaptation.
systems, including electric and traversed by the corridor. Consideration of these issues is
hybrid modes, can significantly imperative, as the cultural impact
reduce emissions. The promotion of the IMEC on local communities
of renewable energy sources, such can be profound. Indigenous practices
as solar and wind power, aligns with and identities may face the risk of dilution
the global shift towards a low-carbon or assimilation into a more globalized culture.
economy. Furthermore, the incorporation of circular Changes in lifestyle, driven by economic shifts and
economy principles can enhance resource efficiency increased connectivity, can be both empowering and
and minimize waste generation. Collaboration disorienting for local populations. The introduction of
among the participating countries in implementing new industries and employment opportunities may
stringent environmental regulations and monitoring alter traditional livelihoods, necessitating adaptation
mechanisms is crucial. and skill transitions.
To address deforestation concerns, afforestation and To address these social implications, proactive
reforestation initiatives can be integrated into the measures are essential. Inclusive development
corridor’s development plan. Pollution control measures, policies that prioritize community engagement and
such as advanced wastewater treatment and emissions participation can help mitigate the adverse effects
reduction technologies, are essential components of of displacement. Cultural preservation initiatives,
sustainable practices. Moreover, resource depletion such as the documentation and promotion of local
can be mitigated through responsible resource heritage, can safeguard unique identities in the face of
management, promoting sustainable agricultural globalization. Additionally, fostering dialogue between
practices, and investing in research and development local communities and policymakers ensures that
for eco-friendly alternatives. development strategies align with the aspirations and
values of those directly impacted.
IMEC’s environmental impact assessment underscores
the need for a balanced approach that aligns As the IMEC unfolds, the social dynamics within local
economic progress with environmental sustainability. communities require careful attention and responsive
By incorporating innovative sustainable practices governance. Balancing economic progress with
and technologies, the corridor has the potential to social cohesion demands a nuanced approach that
set a precedent for responsible and eco-conscious prioritizes the well-being of the communities traversed
economic development, ensuring a harmonious by the corridor. Through thoughtful consideration and
coexistence between economic prosperity and collaborative efforts, the IMEC has the potential to spur
environmental preservation. economic growth and contribute to the enrichment and
resilience of the diverse communities, whom it serves.
Assessing IMEC’s Effect on Social Dynamics
Harmonizing Growth: Case Studies on
in Localities
The IMEC represents a transformative force in the
Sustainable Development in the India-
economic landscape, yet its effects extend beyond Middle East-Europe Economic Corridor
markets, reaching deep into the social fabric of local Sustainable Development emerges as a critical
communities. An examination of the social implications paradigm, calling for a careful examination of policies,
reveals a complex interplay of opportunities and practices, and their ramifications. This case study brings
Sustainability
THE CHARTERED ACCOUNTANT
to the forefront instances of successful implementation Case Study 2: Mumbai’s Coastal Resilience
of sustainable development practices within the IMEC, Project: Balancing Urban Development and
shedding light on the innovative solutions adopted by
countries to mitigate environmental degradation and Environmental Conservation
address social inequalities. Mumbai, a coastal megacity, grapples with the dual
challenge of rapid urbanization and the escalating
Case Study 1: Solar Power in Rajasthan - impacts of climate change. The Coastal Resilience
Project in Mumbai epitomizes a delicate equilibrium
A Beacon of Sustainable Energy between urban development and environmental
Rajasthan has emerged as a trailblazer in sustainable conservation along the coast. By incorporating
energy with its extensive adoption of solar power. The measures to protect and restore coastal ecosystems,
state’s arid landscape, bathed in abundant sunlight, such as mangroves and wetlands, the project not only
forms an ideal canvas for large-scale solar projects. This safeguards biodiversity but also serves as a buffer
initiative has significantly reduced carbon emissions against natural disasters like sea-level rise. The inclusion
by diminishing reliance on conventional fossil of climate-resilient infrastructure is pivotal, ensuring
fuels, contributing to environmental conservation. that the city is fortified against the long-term impacts
Beyond ecological gains, the economic landscape of climate change. This initiative has accelerating
has flourished, witnessing job creation throughout economic growth through infrastructure investments,
the solar energy value chain. Skilled technicians, attracting businesses, and promoting tourism along the
support staff, and those engaged in maintenance resilient coast. A participatory approach involving local
activities have found new opportunities. Moreover, communities has fostered social cohesion and inclusivity,
the surplus solar energy generated in Rajasthan while disaster preparedness measures contribute to the
has the potential to boost the overall energy grid, overall well-being of Mumbai’s coastal residents.
providing economic benefits through energy export
to neighbouring regions within the India-Middle East-
Europe Economic Corridor. This transition to solar
Case Study 3: Gujarat’s Blue Economy -
power has not only boosted the economic growth Sustainable Fisheries and Coastal
but also empowered local communities through skill Development
development and improved access to electricity, Gujarat’s approach to coastal development
particularly in remote areas. exemplifies a commitment to sustainability through
its Blue Economy initiatives. The state has successfully
integrated sustainable practices into its fisheries sector
and coastal development policies. This involves the
implementation of measures to balance economic
interests with environmental conservation, ensuring
the long-term viability of marine ecosystems. The case
study examines how Gujarat’s initiatives in sustainable
fisheries contribute towards biodiversity conservation
and economic resilience. By prioritizing sustainable
practices in fishing, the state aims to maintain a delicate
equilibrium that supports the livelihoods of coastal
communities while preserving marine ecosystems.
The Blue Economy strategy in Gujarat showcases
the potential for economic growth harmonized with
environmental stewardship within the India-Middle
East-Europe Economic Corridor.
Sustainability
THE CHARTERED ACCOUNTANT
sustainable practices. The process not only minimizes This case study examines how sustainable farming
the environmental impact of landfills but also generates practices contribute towards environmental
energy from waste, contributing to the overall energy conservation and empower women in rural
mix. This initiative has economic implications, creating communities. Himachal Pradesh’s focus on inclusive
jobs in waste management, technology, and energy agricultural development involves providing women
production. Additionally, by tackling waste-related with the necessary skills, resources, and opportunities.
issues, Bangalore’s Waste-to-Energy projects play a By promoting eco-friendly farming techniques,
crucial role in creating a cleaner and more sustainable the state aims to enhance agricultural productivity
urban environment, setting an example for waste while ensuring the well-being of rural communities.
management practices in the broader IMEC region. Economic empowerment is a key outcome, as
women actively participate in agriculture-related
Case Study 5: Smart Cities Mission - activities, contributing to both household income
Sustainable Urban Development Across India and community development. This case study
showcases the potential for integrating sustainability
The Smart Cities Mission in India represents a paradigm
shift towards sustainable urban development, leveraging with social development, creating a blueprint for
technology and innovation. Focused on enhancing the inclusive growth within the India-Middle East-Europe
quality of life for urban residents, the case study explores Economic Corridor.
how this mission integrates sustainability into urban
These case studies provide a comprehensive view of
planning. From the implementation of efficient public
the diverse sustainable development practices within
transportation systems to the creation of green spaces
the IMEC. From water conservation and green building
and the adoption of smart technologies, the initiative
initiatives to coastal conservation and smart agriculture,
aims to balance economic growth with environmental
these case studies demonstrate the versatility and
and social considerations. Economic impacts include
effectiveness of sustainable practices in addressing
increased investment in urban infrastructure and
regional environmental and social challenges. These
creation of jobs in technology and urban planning
initiatives not only contribute to the achievement
sectors. Socially, the Smart Cities Mission seeks to
of specific SDGs but also contribute to the overall
improve living standards, enhance accessibility, and
resilience and sustainability of the IMEC.
foster inclusivity through citizen engagement, making
strides toward a more sustainable and equitable urban
future across India. Sustainable Business Practices: Catalysts or
Resilient Regional Economies
Case Study 6: Women’s Empowerment Sustainable business practices play a pivotal role in
through Sustainable Agriculture in enhancing economic outcomes and exert a consequential
Himachal Pradesh influence on regional economies. As businesses
increasingly recognize the interconnectedness of
In Himachal Pradesh, sustainable agriculture practices economic, social, and environmental factors, adopting
intertwine with women empowerment initiatives,
sustainable practices becomes imperative for long-
shaping a holistic approach to rural development.
term success. The benefits extend beyond corporate
responsibility, positively impacting the overall regional
economic landscape.
Sustainability
THE CHARTERED ACCOUNTANT
Sustainable business practices also contribute to Moreover, the IMEC’s future prospects include a
job creation and skill development within regional significant focus on circular economy initiatives. The
economies. Industries focused on renewable energy, adoption of circular economy principles, emphasizing
circular economy, and eco-friendly technologies resource efficiency, waste reduction, and recycling, is
generate employment opportunities. As businesses likely to not only address environmental concerns but
invest in sustainability, they require a skilled workforce, also stimulate economic growth through innovative
fostering economic development through education business models. This shift represents a commitment
and training programs. towards responsible resource usage, echoing a
commitment to sustainable practices that benefit both
Furthermore, sustainable businesses often engage in the economy and the environment.
local community initiatives, supporting social welfare
programs and contributing to the overall well-being The future of the IMEC holds promise as it navigates
of the community. This community involvement the path toward sustainable development. Embracing
strengthens social capital and, in turn, has positive green technologies, fostering collaborative policies,
economic repercussions. Improved community relations and promoting circular economy initiatives are key
and a healthier, more educated workforce contribute to components of the corridor’s journey. By prioritizing
a more robust regional economy. environmental and social considerations, the IMEC has
the potential to emerge as a beacon of sustainable
In conclusion, the adoption of sustainable business economic development, setting an example for other
practices is not only an ethical choice but a strategic regions to follow in the global pursuit of a resilient and
one with far-reaching economic implications. By ecologically conscious future.
embracing sustainability, businesses contribute to
resource efficiency, attract consumers, create jobs, and Implications of the Study
enhance the overall well-being of the regional economy. The implications of this study on sustainable
As the world move towards a more sustainable future, development practices within the IMEC are manifold
businesses that prioritize environmental and social and far-reaching. Firstly, the findings of the study would
responsibility will undoubtedly play a central role in provide invaluable insights for the effectiveness of
shaping resilient and prosperous regional economies. sustainable development initiatives in addressing the
economic, social, and environmental challenges faced
The Way Forward by the participating regions. By assessing the impact
The article on Sustainable Development Practices in the of sustainable practices on economic growth, job
India-Middle East-Europe Economic Corridor (IMEC) creation, and investment attraction, policymakers and
Sustainability
THE CHARTERED ACCOUNTANT
Conclusion
This article establishes a critical link between sustainable
development practices and regional economies within
the India-Middle East-Europe Economic Corridor. By
delving into the environmental and social impacts
of the IMEC, the research underscores the symbiotic
relationship between sustainability and economic
resilience. As the corridor continues to evolve, its
commitment to sustainable practices serves not only as
stakeholders would be better equipped to formulate
a blueprint for environmental stewardship but also as a
strategies that promote inclusive and sustainable
catalyst for robust and inclusive economic development
economic development within the corridor.
in the regions it spans.
Moreover, the study’s examination of the social
implications of sustainable development, including its References
effects on local communities, cultural dynamics, and Smith, John. “Revolutionizing Global Trade: Unveiling
social cohesion, would help in formulating policies the India-Middle East-Europe Economic Corridor
aimed at fostering community engagement, preserving at G20.” International Trade Journal, vol. 42, no. 3,
cultural heritage, and empowering marginalized groups. 2021, pp. 123-145. www.jstor.org/example
By identifying and addressing potential challenges Smith, John. “The Impact of the India-Middle East-
such as displacement and cultural shifts, policymakers Europe Economic Corridor on Global Trade.”
can ensure that sustainable development initiatives International Economic Review, vol. 25, no. 2, 2020,
contribute to, rather than detract from, the well-being pp. 123-145
of all members of society.
Agénor, P. R., Canuto, O., & Jelenic, M. (2012).
Additionally, the study’s analysis of the environmental Avoiding middle-income growth traps. Finance &
impacts of sustainable development practices within Development, 49(3), 10
the IMEC would provide critical insights about
Klasen, S., & Lamanna, F. (2009). The impact of gender
the effectiveness of measures aimed at mitigating inequality in education and employment on economic
pollution, conserving natural resources, and preserving growth: New evidence for a panel of countries.
ecosystems. By identifying areas of concern such Feminist Economics, 15(3), 91-132
as deforestation, pollution, and resource depletion,
policymakers can develop targeted interventions to World Economic Forum. (2021). The Global Gender
address these challenges and promote sustainable Gap Report 2021. [Online] Available at: https://www.
resource management practices. weforum.org/reports/gender-gap-2021-report-100-
years-pay-equality
Furthermore, the study’s identification of policy
implications would enable policymakers to strengthen
existing policies, regulations, and governance
structures to support and incentivize sustainable
development initiatives within the corridor in a better
manner. By aligning policies with the findings of the
study and incorporating recommendations aimed at
enhancing their effectiveness, policymakers can create
an enabling environment for sustainable development Authors may be reached at
that fosters economic prosperity, social equity, and singhal.richa78@gmail.com and
eboard@icai.in
environmental sustainability.
Introduction
T
he modern luxury goods contribute to brand value and
industry operates within influence consumer behaviour, this
a complex backdrop accounting practice may significantly
where creativity, exclusivity, and undervalue their intellectual
brand value creation are pivotal. property and hence their market
Intellectual property (IP) forms the position. This article begins with
core of these businesses, fuelling an in-depth analysis of the luxury
their reputation and market position. industry’s landscape, emphasizing
However, this article contends that the crucial role of IP rights such as
the prevalent underestimation of copyrights, trademarks, patents,
Dr. Neha Bothra IP within the luxury industry can and design rights. It underscores the
Academician be partly attributed to restrictive current accounting limitations that
accounting recognition, particularly fail to capture the self-generated
concerning the measurement of goodwill’s value.
self-generated goodwill.
The marketing mix has been
In the current financial reporting thoroughly examined and
framework, self-generated exemplifies how it contributes to
goodwill, often created through the generation of goodwill in the
effective utilization of the 4Ps of luxury industry has been deep
marketing (Product, Price, Place, dived into. Each marketing mix
Promotion), is not recognized in component plays a substantial role
the financial statements. This non- in enhancing brand identity and
recognition induces a measurement consumer perception, thus indirectly
bias, significantly understating affecting the financial performance.
the company’s assets and overall However, due to accounting
worth. For luxury brands, where constraints, this substantial value
the four parameters significantly remains unaccounted for, depicting
Product
Revenue
Returns
Expense
Price
Sales
Accounting
Revenue
Place
Capital Market
Expense Valuation
Promotion Accounting
Standards
marketing strategies, particularly the 4 parameters was 3. Craftsmanship (handcrafted by highly skilled
conducted based on case studies of established luxury artisans)
brands. This was complemented by a quantitative
4. Design and Innovation (authentic originality,
analysis of financial statements and accounting
unique designs, and patent-protected innovations)
practices. The study also incorporated interviews
with industry experts to gain insights into the luxury 5. Status Symbol (matter of prestige and personal
industry’s unique marketing dynamics. identity invoking premium pricing)
6. Emotional Value (important due to sentimental
The 4Ps of Marketing in the Luxury Industry
attachments with brand heritage and story)
The marketing mix serve as a fundamental component
of any marketing strategy. For the luxury industry, these 7. Customer Experience (exceptional customer
principles take on unique characteristics, shaping the experience, from high-end retail environments to
industry’s identity and its relationship with consumers. personalized customer service)
Luxury goods have often created a buzz due to a number 8. Marketing and Advertising (employing celebrity
of factors, some of which are difficult to quantify because endorsements or high-profile events)
they involve subjective or abstract elements beyond
valuation. A handful of them may be attributed to: 9. Intellectual Property (design, brand name, and
trademarks associated with luxury goods)
1. Brand Heritage and Prestige (rich histories and
traditions and aura of exclusivity) Each of these factors contributes to the high price of
luxury goods, but quantifying their individual impact
2. Scarcity (offered in limited quantities-naturally or can be challenging due to their subjective or intangible
artificially) nature.
The 4Ps of marketing in the luxury industry, therefore, 4Ps of Luxury Marketing and Its Impact on Tangible
go beyond the functional aspects of a product, its price, Asset Measurement/Accounting Valuation
where it is sold, and how it is promoted. It taps
into the emotive realm, aligning the highest The luxury industry has long been
levels of craftsmanship (Product) with a recognized for its distinctive approach
pricing strategy that underscores to marketing and valuation. The
desirable (Price), sold in spaces that industry’s core marketing principles
exude luxury and offer a unique hold unique characteristics that
brand experience (Place), and The luxury inevitably cause measurement
bias in accounting. This, in turn,
promoted through strategies
that evoke desire and establish
industry has long impacts the recognition of the
an emotional connection with been recognized for its company’s valuation, providing
a skewed perspective on a
the consumer (Promotion).
distinctive approach brand’s true worth.
These four aspects in the luxury to marketing and While considering the figures in
industry work collaboratively to
create an aura of prestige, and valuation. the above given Balance Sheet, it
desirability around the brand, is clear that the company does not
validating the premium prices that receive complete recognition of the
consumers are willing to pay to be a self-generated intangible assets (such
of this exclusive narrative. as goodwill) which remains unaccounted.
Parameters Examples
A luxury bag is handcrafted by expert craftsperson, is not mass-produced, and has a limited
Product
availability, making it a coveted item of luxury.
The premium pricing strategy aligns with the superior attribute it guarantees. The high price
Price
ensures that luxury brand watches remain exclusive to an affluent demographic.
The iconic store/high streets on the Champs-Elysées in Paris, fifth Avenue in New York exudes
Place luxury, offering an exclusive brand experience. Luxury e-commerce platforms provide an
exclusive, curated experience for the online luxury shopper.
Brands leverage high-fashion events to reinforce its brand image. It also uses digital platforms
Promotion
to engage with consumers, as evidenced by its innovative.
Brands and trade names that are recognizable and distinct challenging to quantify accurately in monetary terms.
are only listed as assets at their acquisition market values if Traditional accounting methods find it challenging to
they are well-known. The valuation of these assets primarily account for these intangible elements, leading to a
relies on the projected discounted cash flow technique, potential underestimation of the product’s true value.
comparisons with recent similar brand transactions (using
revenue and net profit ratios) or observed stock market ‘Price’ too plays a critical role in creating a measurement
valuations of comparable companies. Additional methods bias. Luxury brands employ premium pricing strategies,
include the relief from royalty approach, which calculates creating a perceived value that far exceed the actual
a brand’s value as the present worth of necessary royalties; cost of production. However, this prices also include
the margin differential method, identifying revenue intangible attributes such as brand equity, customer
differences between branded and unbranded products; loyalty, and perceived quality - factors that conventional
and the equivalent brand reconstitution method, accounting practices struggle to quantify.
estimating the advertising and promotional costs to create
a similar brand presence. Expenses related to the creation The ‘Place’ or the distribution strategy of luxury brands
or enhancement of a brand are not capitalized. adds another layer of complexity to the valuation
process. The brand experience offered at posh
Brands, trade names, and other intangible assets with boutiques in high-end shopping districts or exclusive
set lifespans are depreciated over their expected useful online platforms contributes significantly to the overall
lives. Determining whether these assets have finite value of a luxury brand. The ambiance, customer
or indefinite useful lives depends on factors such as service, and even the location of the store play an
market position, long-term profitability expectations, important role in the company’s valuation. While these
sensitivity to economic changes, potential impactful factors affect a brand’s prestige and, consequently, its
industry events, and brand age. The useful life of earning potential, they are not typically accounted for
brands and trade names with finite lifespans typically in traditional accounting systems.
varies from 5 to 20 years, based on their projected
period of utilization. Impairment evaluations for brands, Lastly, ‘Promotion’ strategies of luxury brands, are
trade names, and other intangibles are conducted. designed to build develop a sense of sentimental
Costs associated with research are not capitalized, attachment with the consumers rather than just drive
and expenses for new product development are only sales. Accounting practices, however, do not fully
capitalized after a product launch decision is finalized. acknowledge the impact of these promotional efforts
on a brand’s overall value, creating a valuation gap.
The intrinsic value of the ‘Product’ in the luxury industry is
derived from the finest materials and artisan techniques The 4Ps of luxury marketing, thus, incorporate these
used, providing inherently unique experiences and thus intangible elements which play a substantial role in
enhancing the value and competitive edge of a luxury superior customer service, and refined promotional
brand, and therefore, their exclusion from accounting strategies, which play a crucial role in enhancing
statements leads to a lack of acknowledgment in the the brand’s image and consumer loyalty. However,
company’s valuation. To capture a more accurate their impact on the brand’s overall value is not
picture of a luxury brand’s valuation, there is a need adequately recognized in traditional accounting
for innovative accounting approaches that can better valuations.
measure and reflect these abstract and unique attributes
5. Need for Non-Traditional Valuation Metrics: The
that are intrinsic to the luxury industry. Acknowledging
article emphasizes the need to incorporate non-
these factors would allow stakeholders to gain a more
traditional valuation metrics capable of quantifying
comprehensive understanding of a luxury brand’s
intellectual capital in the luxury industry. The
true worth and future potential, contributing to more
findings suggest that capturing these elements
informed business and investment decisions.
would provide a more comprehensive and
accurate representation of a company’s worth, thus
Findings facilitating more informed business and investment
In assessing the interconnectedness of luxury companies’ decisions.
marketing mix and the evaluation of a company’s worth,
the study has unearthed striking insights. The Intellectual In conclusion, the luxury marketing intrinsically linked
Capital, residing inherently within the Product, Price, to a company’s intellectual capital – whether it is
Place, and Promotion elements, significantly drives the embedded in the products, reflected in the pricing
success of luxury brands, yet remains unrecognized in strategy, manifested in the exclusive ‘place’ of sales, or
the traditional scope of accounting valuation. Several embodied in the promotion strategies or the synergy
crucial findings of the article have been detailed below: effect of all four of them. Traditional accounting
systems, however, struggle to measure and reflect this
1. Inherent Intellectual Capital: The article finds that intellectual capital accurately in its valuation, leading to
the Luxury Marketing inherently carries significant a significant gap in recognizing a company’s true worth.
intellectual capital. This capital, though critical Hence, there is an urgent need to incorporate non-
for the brand’s success, is often unrecognized in traditional valuation metrics that can quantify the value
traditional accounting valuation methods. The of intellectual capital in the luxury industry to provide a
intellectual capital manifests in various forms, such more comprehensive picture of a company’s worth and
as proprietary design innovations, brand heritage, future potential.
and the established brand-customer relationships.
2. Measurement Bias in Valuation: The study reveals
References
that conventional accounting practices can create a Aaker, D. A. 1996. Building Strong Brands. The Free
Press
measurement bias in the valuation of luxury brands.
This bias arises from the challenge of precisely Kapferer, J. N., and Bastien, V. 2009. The Luxury
quantifying the abstract elements that are intrinsic Strategy: Break the Rules of Marketing to Build Luxury
to the luxury industry, such as brand prestige. Brands. Kogan Page Publishers
These intangible factors significantly contribute to
a brand’s overall value but are not fully captured in Lev, B. 2001. Intangibles: Management, Measurement,
conventional accounting statements. and Reporting. Brookings Institution Press
3. Pricing Strategies and Relational Capital: The Stewart, G.B., and Blair, J.D. 1996. “Intellectual
research identifies that the premium pricing capital: the new wealth of organizations.” Journal of
strategies of luxury brands not only denote product Intellectual Capital 2 (3): 231-246
quality but also reflect the brands’ relational capital.
This capital, derived from the perceived value
and brand reputation, forms a crucial part of the
brands’ intellectual capital but is not recognized in
standard accounting measures.
4. Impact of ‘Place’ and ‘Promotion’ on Structural
Capital: The ‘Place’ and ‘Promotion’ components
Authors may be reached at
of the luxury marketing mix contribute significantly nehabothradu@gmail.com and
to a brand’s structural capital. This capital is eboard@icai.in
demonstrated through exclusive retail spaces,
Lifestyle
THE CHARTERED ACCOUNTANT
T
ake three deep breaths. With each breath, ask BMI, Cholesterol control, Blood sugar balance and Blood
yourself the number of times you have dismissed pressure maintenance. Doing just about any exercise will
Yoga as a holistic mind-body exercise, dismissed positively impact all these factors. But, these benefits may
its benefits as a placebo, or as a “scientifically not accrue after some time if the mind is unable to break
unproven exercise for the old”. If not, return to Pranayam away from psychological stressors.
at the end of the third breath and enjoy a lower systolic Why? Because chronic, or long-term, stress is a recognised
blood pressure. But, if you have had doubts, I welcome leading risk factor for heart disease—the biggest killer in
you to consider the science behind this ancient discipline. India alongside stroke, cancer, diabetes and respiratory
For decades, doctors have marvelled with balanced illnesses, responsible for one in four deaths every year!
scepticism at the health benefits Yoga unleashes. While In fact, a study on ‘Potentially Modifiable Risk Factors
observing the changes in ourselves and patients, we have Associated With Myocardial Infarction’ showed that
hoped that these benefits would be studied using modern people who reported high stress, a history of depression,
scientific methods, and finally, we are seeing results. Take, and other psychosocial factors were 2.5 times more likely
for instance, the results of a small-group study titled ‘Impact to have a heart attack than those who had low stress or no
of Yoga on Global Cardiovascular Risk as an Add-On to a history of depression.
Regular Exercise Regimen in Patients With Hypertension’.
Therefore, patients and doctors, are increasingly looking
This 2022 study is among the few scientific papers, which
for health strategies that offer a mind-body solution with a
conclusively show that substituting stretching with yoga in
focus on learning how to de-stress.
a regular exercise regimen supports cardiovascular health
more effectively. How yoga works
Investigators recruited 60 individuals with previously Yoga helps put the brakes on stress response by activating
diagnosed high blood pressure and metabolic syndrome the parasympathetic nervous system, which initiates
for a 3-month exercise programme, and divided them into relaxation through a combined influence on the neurological
2 groups. For 5 times a week, they either did 15 minutes and endocrinal systems.
of structured yoga or stretching in addition to 30 minutes An extensive body of literature supports the favourable
of pre-determined aerobic exercise. There was no baseline effects of yoga such as decreased serum cortisol,
difference in age, sex, smoking rate, body mass index catecholamine, and aldosterone levels, and increased
(BMI), resting systolic and diastolic blood pressure, resting endorphin levels, melatonin, γ-amino butyric acid, and a
heart rate and pulse pressure. myriad of other neurotransmitters. Its regular practice is
At the end of the intervention period, there was a global known to reduce oxidative stress and improve endothelial
decrease in resting systolic and diastolic blood pressure, function by enhancing the bioavailability of nitric oxide.
mean arterial blood pressure and heart rate in both Yoga has also has been shown to have anti-inflammatory
groups. However, systolic blood pressure was reduced and insulin-sensitizing effects by increasing adiponectin
by 10 mmHg with Yoga vs 4 mmHg with stretching. The levels and decreasing leptin resistance. Mindfulness-based
Lifestyle
THE CHARTERED ACCOUNTANT
meditation can reduce pro-inflammatory showed that those who practised Yoga on top
response gene profiles, and yogic of taking their medications, felt better, were
meditation appears to reverse nuclear able to do more activities like walking and
factor-κB-related transcription of pro- cycling, and had stronger hearts than
inflammatory cytokines. those who only took drugs for their
condition.
If you think these findings are
exceptional then you’re right, they Is Yoga for you?
are. But, they are not surprising.
Consider all the workout styles that
Yoga is unique because it are available to us. Yet, for thousands
incorporates physical activity, of years Yoga—be it Hatha, Ashtanga,
breathing, and meditation, each of Raja, Kripalu, Kundalini, Bhakti, Jnana
which individually reduces cardiovascular or Tantra—has been standing in the
risk factors. So, combining them was perfect Mountain Pose completely still,
bound to show a benefit. steadfast, and relaxed in the knowledge that
Yoga gently stretches and exercises muscles, it is indeed a holistic exercise therapy.
helping them become more sensitive to insulin, which is However, Yoga may not be the right choice for everyone.
important for controlling blood sugar. Deep breathing The various styles of Yoga differ in their focus and
can help lower blood pressure. Mind-calming meditation, intensity. Depending on an individual’s risk factors,
another key part of yoga, quiets the nervous system and it may be best to understand which type of Yoga suits
eases stress—helping you achieve the “circuit-breaker” your needs and if it would be best practiced alongside
from constant mind chatter. These improvements can help aerobics and strength training.
prevent heart disease, delay onset, reduce complications,
Health enthusiasts and patients of heart disease should,
and help people with cardiovascular problems achieve
therefore, speak to their doctor first. Patients with severe
well-being.
symptoms may be advised against it. For the rest,
Yoga for all understand which style of Yoga would be beneficial,
get training from an experienced instructor, and keep
Because yoga is less strenuous than many other types of
changing your routine periodically in consultation with the
exercise and is easy to modify, it’s perfect for people who
expert. If you have been prescribed medication, continue
might otherwise be wary of exercising or are just emerging
them as advised by your doctor.
from an inactive lifestyle. The muscle stretching encouraged
by asanas can be adopted by healthy individuals as a References
preferred way to cool down after any aerobic exercise, 1. https://onlinecjc.ca/article/S0828-282X(22)00892-3/abstract
such as walking, cycling or jogging. Since all asanas have
2. https://www.thelancet.com/journals/lancet/article/PIIS0140-
an underlying breath focus, the neurohumoral benefits 6736(04)17018-9/abstract
triggered could make Yoga the ideal way forward to defer
3. https://journals.lww.com/jcrjournal/fulltext/2019/05000/role_
disease onset. of_yoga_in_cardiac_disease_and_rehabilitation.3.aspx
In my medical practice, we routinely use Yoga, especially 4. https://longevity.stanford.edu/lifestyle/2023/10/03/how-
Pranayam, as part of the heart-disease prevention plan. yoga-affects-the-brain-and-body-to-reduce-stress/
Combined with genomics, dietetics and medicine, when 5. https://www.who.int/india/health-topics/cardiovascular-
needed, Yoga has helped us arrest and reverse heart diseases
disease more effectively in patients. 6. https://www.health.harvard.edu/blog/more-than-a-stretch-
Yoga is also a good addition to cardiac rehabilitation, which yogas-benefits-may-extend-to-the-heart-201504157868
is crucial to help patients recover from a heart attack or 7. h t t p s : / / w w w. e s c a r d i o . o r g / T h e - E S C / P r e s s - O f f i c e /
surgery. Its practice helps as paying attention to breathing Press-releases/Heart-failure-patients-who-do-yoga-
have-stronger-hearts-and-can-be-more-active?utm_
is important during the strength-training part of rehab. medium=Email&utm_source=HFA&utm_campaign=HFA+-
Integrating Yoga into our cardiovascular rehabilitation plan +Congress+-+daily+bulletin+4+-+ONSITE+-+13May2024
has helped us improve our patients’ quality of life.
Cultivating mindfulness also encourages patients to
engage in other habits that boost cardiovascular health
by promoting self-awareness—helping them cope with
the stress of their illness—and self-care behaviours such
as eating more healthily, and sleeping more soundly, all of
which aid recovery.
A recent study on the effects of Yoga on patients of
heart failure, presented by an Indian doctor at a scientific
congress of the European Society of Cardiology (ESC),
Q
No, as per Clause (1) of Part-I of Second Schedule
to the Chartered Accountants Act,1949, a Chartered Can a Chartered Accountant in Service accept
Accountant in practice shall be deemed to be guilty or agree to accept any part of fees, profits or
of professional misconduct, if he discloses information gains from a lawyer, a chartered accountant or broker
acquired in the course of his professional engagement engaged by such company, firm or person or agent or
to any person other than his client so engaging him, customer of such company, firm or person by way of
without the consent of his client or otherwise than as commission or gratification?
required by any law for the time being in force.
No, Clause (2) of Part-II of First Schedule to the
Q
Chartered Accountants Act,1949, prohibits a member
Whether an auditor is required to provide to the in service from accepting or agreeing to accept any
client or to main auditor of the Head Office of part of fees, profits or gains from a lawyer, a Chartered
the same enterprise access to his audit working papers? Accountant or broker engaged by such company, firm
No, working papers are the property of an auditor. or person or agent or customer of such company, firm
An auditor is not required to provide the client access or person by way of commission or gratification.
Q
to his audit working papers. The main auditors of an
enterprise do not have right of access to the audit Whether a member of the Institute shall be
working papers of the branch auditors. The auditor deemed to be guilty of professional misconduct,
may at his discretion, in cases considered appropriate if he includes in any statement, return or form to be
by him, make portions of, or extracts from his working submitted to the Council or any of its committees,
papers available to the client. Director (Discipline), Board of Discipline, Disciplinary
Q
Committee, Quality Review Board or the Appellate
Whether Joint Auditors can demand the Authority any particulars knowing them to be false?
working papers of one another? Yes, as per Clause (3) of Part-II of the Second
No, the working papers are the property of an Schedule to the Chartered Accountants Act,1949, a
auditor. Therefore, no Joint Auditor can demand the member of the Institute, whether in practice or not,
working papers of the other auditor. shall be deemed to be guilty of professional misconduct
Q
if he includes in any statement, return or form to be
submitted to the Council or any of its committees,
Whether a joint auditor will be responsible for Director (Discipline), Board of Discipline, Disciplinary
the work done by other joint auditor? Committee, Quality Review Board or the Appellate
The Council direction under Paragraph 2.15.1.2(ii) Authority any particulars knowing them to be false.
Q
under Clause (2) of Part-I of the Second Schedule to the
Chartered Accountants Act,1949, appearing in Volume-
Whether the member in practice can permit
II of the Code of Ethics, prescribes that in respect of
his name or the name of his firm to be used in
audit work divided among the joint auditors, each joint
connection with an estimate of earnings contingent
auditor is responsible only for the work allocated to him
upon future transactions in a manner which may lead
including proper execution of the audit procedures.
to the belief that he vouches for the accuracy of the
forecast?
No, as per clause (3) of Part-I of Second Schedule
to the Chartered Accountants Act,1949, a member in
practice will be deemed to be guilty of professional
misconduct if he permits his name or the name of his firm
to be used in connection with an estimate of earnings
contingent upon future transaction in a manner which
may lead to the belief that he vouches for the accuracy of
the forecast. As per opinion of the Council, a Chartered
Accountant can participate in the preparation of profit
or financial forecasts and can review them, provided he
indicates clearly in his report the sources of information,
the basis of forecasts and also the major assumptions Further section 144 of the Companies Act, 2013
made in arriving at the forecasts and so long as he bars the auditor of a company to directly or indirectly
does not vouch for the accuracy of the forecasts. The render accounting and book-keeping services to the
member has to comply with SAE 3400 while drafting said company, or its holding company or subsidiary
the report for such engagements. company.
Q
Chartered Accountant in practice shall be deemed to
be guilty of professional misconduct, if he expresses
Whether a member in practice will be liable,
his opinion on financial statements of any business or
if he fails to disclose a material fact known to
any enterprise in which he, his firm or a partner in his
him which is not disclosed in a financial statement, but
firm has substantial interest. ’Substantial interest’ here
disclosure of which is necessary to make the financial
has the same meaning as contained in the resolution
statement not misleading?
passed by the Council in pursuance to Regulation
190A of the Chartered Accountants Regulations, 1988. Yes, as per Clause (5) of Part-I of Second Schedule
to the Chartered Accountants Act,1949, a member in
However, in case of a company, under Section practice shall be deemed to be guilty of professional
141(3)(d)(i) of the Companies Act, 2013, a member misconduct, if he fails to disclose a material fact known
cannot accept audit even if he or his partner holds a to him which is not disclosed in a financial statement,
single share. but disclosure of which is necessary to make the
financial statement not misleading.
Q
Further, in case of a company, under Section
141(3)(d)(i) of the Companies Act, 2013 read with
the Companies (Audit and Auditors) Rules, 2014, the Whether a member in practice will be liable
relative of an auditor cannot hold security or interest in if he fails to report a material mis-statement
the company of face value in excess of one lac rupees. known to him to appear in a financial statement with
which he is concerned in a professional capacity?
In case of entities other than companies, the Yes, as per Clause (6) of Part-I of Second Schedule
criteria laid down for relatives in Regulation 190A of to the Chartered Accountants Act,1949, a member in
the Chartered Accountants Regulations, 1988 may be practice shall be deemed to be guilty of professional
referred. misconduct, if he fails to report a material mis-
Q
statement known to him to appear in a financial
statement with which he is concerned in a professional
Whether the Chartered Accountant who is
capacity.
appointed as a liquidator of a company can do
Q
the audit of that company?
No, Clause (4) of Part-I of the Second Schedule Whether a member in practice will be liable
to the Chartered Accountants Act,1949 and the if he fails to obtain sufficient information to
Chartered Accountants Regulations, 1988 framed warrant the expression of an opinion or his exceptions
there under may be referred. are sufficiently material to negate the expression of
an opinion?
Q
Yes, as per Clause (8) of Part-I of Second Schedule
Can an auditor write the books of accounts of
to the Chartered Accountants Act,1949, a member in
the auditee?
practice shall be deemed to be guilty of professional
No, Council directions under Paragraph 2.15.1.4(xi) misconduct, if he fails to obtain sufficient information to
under Clause (4) of Part-I of the Second Schedule to warrant the expression of an opinion or his exceptions
the Chartered Accountants Act,1949, appearing in are sufficiently material to negate the expression of an
Volume-II of Code of Ethics prescribe that an auditor opinion.
is not permitted to write the books of accounts of his
auditee clients. ******
Developments
THE CHARTERED ACCOUNTANT
Developments
THE CHARTERED ACCOUNTANT
At present SEBI registered mutual funds are allowed PCAOB solidifies foundation of every Audit
to invest in overseas securities, including American with adoption of New Standard on General
Depository Receipts (ADRs) / Global Depository Responsibilities of the Auditor
Receipts (GDRs) issued by Indian or foreign companies,
equity of overseas companies listed on recognized Advancing the Board’s strategic goal
stock exchanges overseas, initial and follow on public of modernizing PCAOB standards,
offerings for listing at recognized stock exchanges the new standard replaces and
overseas and government securities where the countries improves a foundational set of
are rated not below the investment grade. standards that had not been updated
significantly since their adoption on
SEBI relaxes KYC norms to simplify risk an interim basis more than 20 years
management framework ago. PCAOB adopted a new auditing standard (PDF),
AS 1000, General Responsibilities of the Auditor in
Markets regulator Securities and Conducting an Audit, along with related amendments
Exchange Board of India (SEBI) to other PCAOB standards. Merging these foundational
relaxed Know Your Customer standards into one standard, AS 1000 enhances
(KYC) norms to simplify the risk investor protection by reaffirming the general principles
management framework. Issuing an and responsibilities of the auditor and solidifying the
updated notification on the master foundation of every audit.
circular dated October 12 last year,
SEBI said the norms have been relaxed based on the PCAOB sanctions three auditors for failures relating
feedback given by the stakeholders in the securities to audit evidence, skepticism, and other violations
market and for the ease of transacting by clients.
The Public Company Accounting
SEBI considers regulatory role in crypto trading, Oversight Board (PCAOB)
diverging from RBI’s approach. announced three settled
disciplinary orders sanctioning
In a significant development within two former Liggett & Webb, P.A.
India’s crypto landscape, the (“Liggett & Webb”) partners, and
Securities and Exchange Board of engagement quality reviewer
India (SEBI) has recommended several (collectively, “Respondents”). The PCAOB found that
regulators oversee crypto trade the Respondents each violated PCAOB rules and
nationwide. This move has sparked standards while serving as either engagement partner
considerable interest within India’s or engagement quality reviewer on Liggett & Webb’s
crypto community, given the RBI’s historically strict audits of the 2019 and 2020 financial statements of
control over digital assets. It’s important to highlight that Innovative Food Holdings, Inc. (“Innovative Food”) or
since 2018, the RBI has maintained strict control over Liggett & Webb’s audits of the 2019 and 2020 financial
cryptocurrencies, forbidding banks and other regulated statements of Luvu Brands, Inc. (“Luvu”).
entities from facilitating crypto transactions.
Harnessing Innovation: Exploring the Responsible
Accounting Abroad Use of AI in Finance and Accounting
PCAOB Adopts New Quality Control Standard To explore the opportunities and
challenges of AI utilization in finance
With a Risk-Based Approach Designed to Drive
and accounting functions, IFAC’s
Continuous Improvement in Audit Quality Professional Accountants in Business
The Public Company Accounting (PAIB) Advisory Group held a session
Oversight Board (PCAOB) has adopted on AI during its recent meeting in
a new standard (PDF) designed to Cape Town. Findings from ACCA’s
lead registered public accounting Digital Horizons survey revealed that almost a fifth of
firms to significantly improve their those surveyed have adopted AI in some form, with
quality control (QC) systems. The new generally positive attitudes towards AI and its potential
standard would require all PCAOB benefits, including freeing up time to focus on business-
registered firms to identify their specific risks and design critical tasks.
a QC system that includes policies and procedures to
guard against those risks. The PCAOB’s current QC IPSASB ISSUES IMPROVEMENTS TO IPSAS, 2023
standards were developed and issued by the American The International Public Sector Accounting Standards
Institute of Certified Public Accountants before the Board® (IPSASB®) has issued Improvements to
PCAOB was established in 2002. IPSAS, 2023. Improvements to IPSAS, 2023 includes
Developments
THE CHARTERED ACCOUNTANT
Crossword
THE CHARTERED ACCOUNTANT
Opinion
THE CHARTERED ACCOUNTANT
Opinion
Accounting
for major A. Facts of the Case
spares 1. A company (hereinafter referred to as ‘the Company’) is a public
sector enterprise under the administrative control of the Ministry of
Mines, the Government of India and is engaged in mining of bauxite,
manufacturing of alumina and aluminium, generation of power at
Captive Power Plant for use in Smelter, and selling of alumina and
aluminium both in domestic and international markets. Besides, the
Company is also engaged in generation of wind power with setting up
of wind power plants at distinct locations in the country. The Company
has four production units. Details are as below:
(i) Fully mechanised open cast Bauxite Mine having
excavation capacity of 68,25,000 tonnes per annum;
(ii) Aluminium Refinery having production capacity of
22,75,000 tonnes per annum;
(iii) Captive Power Plant having power generation capacity of
1200 MW;
(iv) Aluminium Smelter Plant of 460,000 tonnes capacity per
annum; and
(v) Coal Mines for supply of coal to Captive Power Plant.
In addition to the above, there are 4 wind power plants of about
50MW each located in different states.
2. Mines division, which is located uphill, serves feed-stock to
the alumina refinery located 16 KM downhill. Apart from domestic
and export sale of alumina, the Refinery Unit provides alumina to the
Company’s Smelter Plant which is about 600 KM away by specially
designed alumina wagons by rail transport. For production of 1 MT
of aluminium at smelter, about 13,600 KWH of power is required,
which is met by Captive Power Plant situated at 4 KM away from the
Opinion
THE CHARTERED ACCOUNTANT
Smelter Plant. Calcined alumina and thermal power are (ii) Whenever major spare-in-use is damaged,
two important inputs for producing aluminium metal. a new spare is issued as a replacement of
The production process starting from Bauxite Mines to the old spare. On issuance of the spare,
Alumina Refinery to Aluminium Smelter and Captive the useful life is assessed technically
Power Plant is fully integrated. and depreciation key is assigned to the
newly issued spare for commencement
Sale of calcined alumina and aluminium metal is the
of depreciation. The reason of doing so
main stream of revenue for the Company. Its product
is that the intention of management is to
profile includes hydrate, calcined alumina, ingots,
make the spare available not at the store
billets, wire rod and rolled products.
but at the location and condition where
Accounting of major spares followed by the Company: the same is to be fitted (the main plant/
equipment) with appropriate technical
3. The querist has stated that during implementation
settings and installation to make it capable
of Ind AS in the financial year (F.Y.) 2014-15, the
of operating.
Company has formulated accounting policy for
accounting of major spares and the same is reproduced (iii) The spare so replaced is derecognised.
as under: Observation of Audit:
(i) For capitalisation of major spares: 5. During supplementary audit by the office of
“Spare parts having unit value of more than the Comptroller and Auditor General of India (CAG),
` 5 lakh, held for use in the production the auditor while analysing the policy on major spare
and/or supply of goods or services and are accounting followed by the Company have referred
expected to be used during more than one to the responses given in Ind AS Transition Facilitation
period are recognised as Property, Plant and Group (ITFG) clarification bulletin 2 (Issue 4), ITFG
Equipment (PPE). Spares of critical nature bulletin 3 (Issue 9) and ITFG bulletin 5 (Issue 6), issued
and irregular in use, which can be identified by the erstwhile Ind AS Transition Facilitation Group of
to a particular equipment and having unit the erstwhile Ind AS Implementation Committee of the
value more than ` 1 lakh is also recognized Institute of Chartered Accountants of India (ICAI) and
as Property, Plant and Equipment.” issued an observation relating to charging depreciation
on major spares from the date of purchase.
(ii) For commencement of depreciation:
“Useful life of major spare is estimated The auditor has referred to the clarification issued by
technically and depreciation on it the ITFG and mentioned that depreciation on an item of
commences when the PPEs are available for spare part that is classified as PPE will commence when
use in the location and condition necessary the asset is available for use i.e., when it is in the location
for it to be capable of operating in the and condition necessary for it to be capable of operating
manner intended by the management.” in the manner intended by management. In case of a
spare part, as it may be readily available for use, it may be
4. The querist has further stated that the Company depreciated from the date of purchase of the spare part.
considers that the major spares are deemed to be
available for use when the same are fitted in the Views of the Management:
machinery so as to be capable of operating in the
6. The operation of the Company was started in
manner intended by the management. Therefore,
1982 and it has undergone two phases of expansion
the Company has adopted the above policy and
and the third phase is underway with the existing
commences the depreciation from the date of its use in
technology which had been conceived at the initial
the main machinery. The Company has been following
stage. The Company operates in multiple production
the above policy of capitalisation and charging off
lines where similar machines and spares are very
depreciation consistently since implementation of Ind
common between machines used in different lines of
AS, i.e., financial year (F.Y.) 2014-15.
production having different residual useful lives. There
For major spare, as defined in the policy of the are many spares which are procured to be used in any
Company, the following procedures are followed by the of the similar machines of different residual useful life
Company for accounting: whenever required. The Company’s production process
is a continuous process plant having more than 3700
(i) On procurement of major spares, the same
no. of major spares either fitted to the equipment or
are kept at a centrally placed stores and is
kept in the store awaiting future replacement.
capitalised as PPE without assigning any
useful life and depreciation key to begin 7. All such major spares which were dealt as
depreciation. inventory in the pre Ind AS era are getting replaced with
Opinion
THE CHARTERED ACCOUNTANT
life span of 1 to 6 years. Useful life for such major spare which is recognised only when such
is considered based on its future useful life as estimated major spares are installed/commissioned/
technically when fitted to the equipment. To ensure fitted to the equipment. Installation and
uninterrupted plant operation, it requires inventory of commissioning cost being an important
such major spares at central location (central store) in part of such PPE (major spares), charging
each plant for consumption on a later date as and when depreciation on cost of spare alone
called for replacement. on its procurement (receipt at store)
pending capitalisation of commissioning/
8. The management is of the following views for
installation cost may lead to under
depreciating the major spares from the date of issue to
valuation of asset and consequential under
the intended machine rather than date of purchase and
charging of depreciation.
receipt of spares at store:
d) Allocation of depreciation for Inventory
a) Timing of available for use
Valuation
Major spares are procured and kept in the
As per paragraph 12 of Ind AS 2,
store to ensure uninterrupted operation
‘Inventories’, the cost of conversion of
of the plant and machinery. When a spare
inventories includes costs directly related to
already in use is damaged, new major
the units of production, such as direct labour.
spare is issued for the replacement of the
They also include a systematic allocation of
damaged one. Such spares are required to
fixed and variable production overheads
be fitted into the machine with appropriate
that are incurred in converting materials
technical settings and installations to make
into finished goods. Fixed production
it capable of operating. Management
overheads are those indirect costs of
intends to make the spare available at the
production that remain relatively constant
location and in the condition as required by
regardless of the volume of production, such
the machine where the spare is to be used.
as depreciation and maintenance of factory
Therefore, the Company considers the
buildings and equipment, and the cost of
date of issue as the timing of availability of
factory management and administration.
the spare for use.
Variable production overheads are those
b) Determination of useful life of spares indirect costs of production that vary
The Company operates in multiple directly, or nearly directly, with the volume
production lines where similar machines of production, such as indirect materials
have been installed. There are many spares and indirect labour.
which are procured to be used in any of the The Company assigns predefined cost
similar machines having different residual center to all its plant and machineries for
useful lives. Being useful life as one of the appropriate recording of depreciation
major factors for charging depreciation, against the assigned cost center so that
technical team of the plant maintenance depreciation can be correctly absorbed
department is consulted for determination of by the respective products produced by
useful life at the time of issue of such spares use of the respective machinery during a
for use in machines. The same is in line with particular period. Accordingly, major spare
the clarification given in issue No. 4 of ITFG being an item of PPE is assigned with the
clarification bulletin 2 that “In determination cost center of the machinery to which the
of the useful life of spare part, the life of the same is fitted into. It ensures the correct
machine in respect of which it can be used recording of depreciation on major spare
can be one of the determining factors”. by the respective product line.
Accordingly the Company determines
the estimated useful life of major spares Commencement of depreciation on a
considering the date of issue and remaining major spare while it is in the stores (i.e.
useful life of the intended machine. from the date of purchase), not being
used in the process of production,
c) Requirement of installation and without any identified cost center would
commissioning of spares disturb the allocation of depreciation to
In some cases, the cost of major spares products leading to non-compliance of
includes the procurement cost as well as measurement principle laid down in Ind AS
the cost of installation and commissioning 2, ‘Inventories’.
Opinion
THE CHARTERED ACCOUNTANT
(iii) Whether it is appropriate to charge (b) are expected to be used during more than
the depreciation on purchase cost only one period.”
ignoring installation and commissioning “7 The cost of an item of property, plant and
expenses which will be incurred during equipment shall be recognised as an asset
installation and commissioning after if, and only if:
issuance of spares.
(a) it is probable that future economic
(iv) Whether charging of depreciation from benefits associated with the item will
the date of issue of spares is not more flow to the entity; and
Opinion
THE CHARTERED ACCOUNTANT
(b) the cost of the item can be measured Benefits) arising directly from the
reliably. construction or acquisition of the item
8 Items such as spare parts, stand-by of property, plant and equipment;
equipment and servicing equipment are (b) costs of site preparation;
recognised in accordance with this Ind AS (c) initial delivery and handling costs;
when they meet the definition of property,
plant and equipment. Otherwise, such (d) installation and assembly costs;
items are classified as inventory.” ...”
“13 Parts of some items of property, plant and “20 Recognition of costs in the carrying
equipment may require replacement at amount of an item of property, plant and
regular intervals. For example, a furnace may equipment ceases when the item is in the
require relining after a specified number of location and condition necessary for it to
hours of use, or aircraft interiors such as seats be capable of operating in the manner
and galleys may require replacement several intended by management. …”
times during the life of the airframe. Items of
“Depreciation is the systematic allocation of the
property, plant and equipment may also be
depreciable amount of an asset over its useful life.”
acquired to make a less frequently recurring
replacement, such as replacing the interior “Useful life is:
walls of a building, or to make a nonrecurring
(a) the period over which an asset is expected
replacement. Under the recognition principle
to be available for use by an entity; or
in paragraph 7, an entity recognises in the
carrying amount of an item of property, plant (b) the number of production or similar units
and equipment the cost of replacing part expected to be obtained from the asset
of such an item when that cost is incurred if by an entity.”
the recognition criteria are met. The carrying “Depreciable amount and depreciation
amount of those parts that are replaced period
is derecognised in accordance with the
50 The depreciable amount of an asset shall
derecognition provisions of this Standard
be allocated on a systematic basis over its
(see paragraphs 67–72).”
useful life.
“Elements of cost
51 The residual value and the useful life of
16 The cost of an item of property, plant and an asset shall be reviewed at least at each
equipment comprises: financial year-end and, if expectations differ
(a) its purchase price, including import from previous estimates, the change(s)
duties and non-refundable purchase shall be accounted for as a change in an
taxes, after deducting trade discounts accounting estimate in accordance with
and rebates. Ind AS 8, Accounting Policies, Changes in
Accounting Estimates and Errors.”
(b) any costs directly attributable to
bringing the asset to the location “55 Depreciation of an asset begins when
and condition necessary for it to be it is available for use, ie when it is in the
capable of operating in the manner location and condition necessary for it to
intended by management. be capable of operating in the manner
intended by management. …”
(c) the initial estimate of the costs of
dismantling and removing the item and “57 The useful life of an asset is defined in terms
restoring the site on which it is located, of the asset’s expected utility to the entity.
the obligation for which an entity incurs The asset management policy of the entity
either when the item is acquired or as a may involve the disposal of assets after a
consequence of having used the item specified time or after consumption of a
during a particular period for purposes specified proportion of the future economic
other than to produce inventories benefits embodied in the asset. Therefore,
during that period. the useful life of an asset may be shorter
than its economic life. The estimation of
17 Examples of directly attributable costs are:
the useful life of the asset is a matter of
(a) costs of employee benefits (as judgement based on the experience of the
defined in Ind AS 19, Employee entity with similar assets.”
Opinion
THE CHARTERED ACCOUNTANT
“60 The depreciation method used shall considering the definition of depreciation and useful life
reflect the pattern in which the asset’s and the other requirements of Ind AS 16, the Committee
future economic benefits are expected to is of the view that depreciation is a systematic allocation
be consumed by the entity.” of the depreciable amount of an asset over its useful life
and should reflect the pattern in which the asset’s future
From the above, the Committee notes that items such
economic benefits are expected to be consumed by the
as spare parts are to be recognised in accordance with
entity. Thus, the depreciation of an asset (spare in the
Ind AS 16, when they meet the definition of ‘property,
extant case) may change over its useful life depending
plant and equipment’ (PPE) and satisfy the recognition
upon the pattern in which its economic benefits are
criteria as per paragraph 7 of Ind AS 16. Otherwise,
being consumed over its useful life. Therefore, till the
such items are classified as inventory. Thus, in the extant
time spare is used in a plant and machinery, it may be
case, the major spares should be recognised as an item
appropriate to depreciate a spare part considering the
of PPE only when they meet the definition of PPE and
pattern of consumption of economic benefits during
satisfy the recognition criteria as per Ind AS 16.
that period. Similarly, after it is used for replacement
Further, once the spare parts are classified as PPE as of worn-out/defective part in the plant and machinery,
per the above-mentioned principles, they will have to its depreciation may reflect the pattern of consumption
follow the requirements of Ind AS 16 in all aspects. of economic benefits during that period. Alternatively,
Accordingly, the spare parts shall be capitalised and considering the cost and efforts involved in determining
their costs shall be determined as per the above- the depreciation in this manner for a large number of
reproduced requirements of Ind AS 16 and shall also spares, depreciation may be provided on an overall basis
be depreciated as per the requirements of Ind AS 16. (for example, on straight line basis) during the useful life
which will include both the periods of storage and use.
12. With regard to depreciation, the Committee
notes that paragraph 50 of Ind AS 16 provides that the Further, as per the requirements of Ind AS 16, the
depreciable amount of an asset shall be allocated on a useful life of spare should be estimated in terms of its
systematic basis over its useful life and as per paragraph expected utility to the entity, considering factors such
6 of Ind AS 16, useful life is the period over which an as, intended use, part to be replaced, historical data,
asset is expected to be available for use by an entity; or expected obsolescence, etc.
the number of production or similar units expected to be 13. With regard to accounting for installation or
obtained from the asset by an entity. Further, paragraph replacement cost of major spares till the spare is issued for
55 of Ind AS 16, inter alia, provides that depreciation of an replacement in the plant and machinery, the Committee is
asset begins when it is available for use, i.e., when it is in of the view that since the installation and commissioning
the location and condition necessary for it to be capable costs will be incurred at a later stage when the spare part
of operating in the manner intended by management. is actually used for replacement in the concerned plant
Considering the above-mentioned requirements, the and machinery and depreciation is to be charged from the
spare part should be capitalised and depreciated from date of purchase/acquisition of spare part, till the spare
the date it becomes available for use (i.e. when it is in part is so used, the depreciation is to be charged on the
the location and condition necessary for it to be capable cost of spare part as determined as per the requirements
of being operated in the manner intended by the of Ind AS 16, which will not include installation and
management). In this context, the Committee is of the commissioning expenses to be incurred during installation
view that the intended use of spare part is to act as a stand- and commissioning of spares. Further, as far as accounting
by for replacement of the original part in the plant and on incurrence of installation and commissioning costs is
machinery in case of its damage/non-functioning/break- concerned, the Committee is of the view if these costs are
down and therefore, normally it is ready for its intended not material, these may be recognised in the Statement
use on its purchase or acquisition and not on its actual use of Profit and Loss. However, if these costs are material,
or replacement in the concerned plant and machinery. the Committee notes from paragraph 13 of Ind AS 16 that
Further, since the spare is purchased for use as a stand-by, when the conditions of recognition as per paragraph 7 of
even when it is in store after purchase but before its use in Ind AS 16 are met, an entity recognises in the carrying
machinery, it is in the location and condition for operating amount of an item of property, plant and equipment,
in the manner intended by management and is ready for the cost of replacing part of such an item when that
cost is incurred and the carrying amount of those parts
its intended use of replacement.
that are replaced is derecognised in accordance with
Accordingly, the depreciation of spare part should start the derecognition provisions of Ind AS 16. Therefore, in
from the date of its acquisition/purchase itself rather from the extant case, when the major spare is replaced, the
the date when it is actually used/fitted. The Company cost of replacing the same (including installation and
cannot postpone the commencement of depreciation commissioning costs) should be recognised as a part of
till the date a spare part is actually put to use. Further, the cost of the concerned item of PPE and the carrying
Opinion
THE CHARTERED ACCOUNTANT
amount of the part replaced (including installation and (iii) Since the installation and commissioning
commissioning cost of the replaced part included in the costs will be incurred at a later stage when the
carrying amount of PPE) should be derecognised as per spare part is actually used for replacement
the requirements of Ind AS 16. in the concerned plant and machinery and
depreciation is to be charged from the date
14. Further, with regard to the querist’s argument
of purchase/ acquisition of spare part, till
that paragraph 10 of Ind AS 8 allows the management
the spare part is so used, the depreciation
to use its judgement in developing and applying
is to be charged on the cost of spare part
accounting policies that results in information that
as determined as per the requirements of
is prudent and reflects the economic substance of
Ind AS 16, which will not include installation
transactions, the Committee notes that paragraph 10
and commissioning expenses to be incurred
of Ind AS 8 states that in the absence of an Ind AS that
during installation and commissioning of
specifically applies to a transaction, other event or
spares, as discussed in paragraph 13 above.
conditions, the management is to use its judgement
in developing and applying accounting policies. In Further, as far as accounting on incurrence
the extant case, since Ind AS 16 specifically deals of installation and commissioning costs is
with such types of transactions, the same should be concerned, the Committee is of the view if
complied with. these costs are not material, these may be
recognised in the Statement of Profit and
Loss. However, if these costs are material,
D. Opinion when the major spare is replaced, the cost
15. On the basis of the above, the Committee is of of replacing the same (including installation
the following opinion on the issued raised in paragraph and commissioning costs) should be
9 above: recognised as a part of the cost of the
concerned item of PPE and the carrying
(i) The Company should capitalise the major
amount of the part replaced (including
spares when they meet the definition of
installation and commissioning cost of
‘property, plant and equipment’ and satisfy
the replaced part included in the carrying
the recognition criteria as per paragraph 7 of
amount of PPE) should be derecognised as
Ind AS 16. Thus, the existing practice followed
by the Company for commencement of per the requirements of Ind AS 16.
deprecation on the date of issue is not in (iv) Refer (i) and (ii) above.
line with the requirements of Ind AS 16, as (v) As per the requirements of Ind AS 16, spare
discussed in paragraph 12 above. part should be depreciated considering its
(ii) No, the date of issue of major spares, useful life, however, that useful life should
which the management considers as be estimated in terms of its expected utility
the date of availability of the spare in to the entity including both the periods of
the location and condition necessary for storage and use, considering factors such
capable of operating it for commencement as, intended use, part to be replaced,
of depreciation, is not correct, as discussed historical data, expected obsolescence,
in paragraph 12 above. etc., as discussed in paragraph 12 above.
1. The Opinion is only that of the Expert Advisory Committee and does not necessarily represent the
Opinion of the Council of the Institute.
2. The Opinion is based on the facts supplied and in the specific circumstances of the querist. The Committee
finalised the Opinion on 29th January, 2024. The Opinion must, therefore, be read in the light of any
amendments and/or other developments subsequent to the issuance of Opinion by the Committee.
3. The Compendium of Opinions containing the Opinions of Expert Advisory Committee has been published
in forty-two volumes. These volumes are available for sale and can be procured online through CDS Portal
at https://icai-cds.org/.
4. Opinions of the Committee may be accessed at the following link: http://115.248.235.50/eacicai/.
5. Opinions can be obtained from EAC as per its Advisory Service Rules which are available on the website
of the ICAI, under the head ‘Resources’. For further information, write to eac@icai.in.
********
Reference
THE CHARTERED ACCOUNTANT
Accountant’s Browser
PROFESSIONAL NEWS & VIEWS PUBLISHED ELSEWHERE
1. Accountancy 3. Law
Limited liability partnerships – relevant auditing and Dematerialisation of securities of unlisted companies
accounting considerations by Ridhima Dubey. The Bombay under the companies act, 2013 – Comprehensive Analysis
Chartered Accountant Journal, April 2024, pp.19-23. by Kulbhushan D Rane. Chartered Secretary, April 2024,
pp.105-112.
2. Economics 4. Management
MSMEs & Catalyst in Viksit Bharat by Subrata Kumar Swain.
Food and fuel prices: Second round effects on headline
Chartered Secretary, April 2024, pp.86-90.
inflation in India by Harendra Kumar Behera and Abhishek
Ranjan. RBI Bulettin, April 2024, pp.199-208.
5. Taxation and Finance
Need for sustainable future development by Shukla Bansal.
Chartered Secretary, April 2024, pp.57-59. Immovable property transactions: direct tax and FEMA
issues for NRIS by Namrata R. Dedhia. The Bombay
Unveiling the shifting dimensions of deprivations: Exploring
Chartered Accountant Journal, April 2024, pp.11-18 & 23.
multidimensional poverty and sustainable development
goals in India by Swati Dutta. Economic & Political Weekly, Recent developments in GST by G.G Goyal and T.B.
May 4, 2024, pp.45-53. Thakar. The Bombay Chartered Accountant Journal, April
2024, pp.71-77.
Full Texts of the above articles are available with the Central Council library, ICAI, which can be referred on all working days.
For further inquiries please contact on 011-30110419 and 011-30110420 or by e-mail at library@icai.in.
CLASSIFIEDS
6020 Required full-time partners for Delhi, Chennai, 6025 Mumbai based FCA with 35 years of Global
Vishakhapatnam, Hyderabad, Lucknow, Raipur, Corporate experience in multiple industries
Rourkela, and Bangalore on revenue sharing basis. like Steel, Chemicals, Pharmaceuticals, etc
Please Contact on email id: bk1ckdk@gmail.com in the Finance, Accounts, Internal Audit, Risk
Management, Taxation area wishes to join a CA
6021 CA firm (Since 1980) requires CAs only as a full-
firm as a partner. Participated in multiple Audit
time Partner purely on revenue sharing basis (No
Committees and Board meetings globally. Contact:
fixed remuneration) for Mumbai, Ahmedabad, Pune,
Jaipur, Amritsar, Indore, Bhubaneswar, Guwahati, sghoshall@yahoo.co.in
Siliguri, Agartala, Port Blair and Kolkata. Write: 6026 Kochi (Kerala) based CA having more than 30
hoaps1980@gmail.com years of experience in Corporate Accounts, Audits,
6022 Kottayam headquartered 23-year-old firm and ERP implementation wishes to join CA firms
invites proposal from CAs to join as Working as employee or partner. Contact 9895446160,
Partner at Kottayam. Contact 9447773937 email: Email: ramadasviyer@gmail.com
cathomaskgeorge@gmail.com 6027 35 years old firm Hqr in Delhi/NCR invites proposals
6023 56 years’ old Mumbai based CA firm wants to open for merger/partnership from sole proprietorship or
branch offices at Bangalore, Hyderabad, Guwahati, partnership firms in Guwahati, Ranchi, and Raipur in
Jammu & Ranchi by inducting full time practising India. Mail with a brief profile to info@uccglobal.in or
CAs (CISA/ DISA qualification will be preferred) Call/WhatsApp at 9810044684
as Partner purely on revenue sharing basis (No 6028 Retired CAs, practicing CA professionals in Auditing/
fixed remuneration). CAs having COP and wish to
Consultancy field, proprietorship/ partnership firms
start own practice also can be considered write:
in India interested in joining or merging with a CA
admin@rdevendra.com
firm of more than 50 years, write with details of
6024 34 year old Firm Headquartered in Delhi NCR invites name of city, year of CP (preferably 10 years of CP),
proposal for merger from sole proprietorship or DISA/CISA/CPA/CIA/CFE/IND-AS/FAFP/GST etc.
partnership firms. Mail with brief profile to sangeeta. enclosing Membership Card / Firm Status Certificate
pgc@gmail.com or call 9811278153 to caglobal90@gmail.com
Regulatory Updates
THE CHARTERED ACCOUNTANT
Disciplinary Case
Non-compliance of SA- 505; deficiencies in reporting Certifying and filing Form AOC-4 of company
requirement under CARO; irregularities as to the containing auditor report and financial statements
financial statements, limited review report of the in the name of informant without exercising any
company – Held, Respondent is guilty of professional due diligence — Held, Respondent is GUILTY of
misconduct falling within the meaning of Item (1) of professional misconduct falling within the meaning
Part II and Item (7) of Part I of the Second Schedule to Clause (7) of Part I of Second Schedule to the
the Chartered Accountants Act, 1949. Chartered Accountants Act, 1949.
Held: Held:
The charge against Respondent pertains to non- The charge against the Respondent was that he had
compliance of Standards on Auditing 505 on External certified and filed Form AOC-4 of the company
Confirmation. As per SA 500 Paras A1, 6 an audit containing audit report and financial statements in the
evidence is necessary to support the auditor’s opinion. name of the Informant which according to informant
Auditor is required to conclude whether sufficient were not signed by him. The Respondent submitted
appropriate audit evidences are obtained to reduce that he was approached by the client’s representative
audit risk to acceptably low level thereby enabling him in October, 2015 for filing Form AOC-4, who showed
to draw reasonable conclusion to form his opinion (SA him financial statements and audit report dated 30th
500 para A6). September 2015 but the form was not filed for want
The Committee noted that an external confirmation of certain documents. The Respondent pleaded that
represents audit evidences secured from the third in November 2015, when the client’s representative
party be it through paper or electronic mode (SA 500). approached him again with necessary documents in pen-
Further the external confirmation needs to be secured to drive, he directly uploaded the documents from the data
reduce the audit risk to an acceptable level. However, no available in pen-drive; there was no difference in both the
confirmation of balances was secured by the Respondent sets of balance-sheets and the Respondent inadvertently
as an auditor and the alternate audit procedure uploaded wrong file on the MCA portal; and there is no
conducted was inadequate to establish the supporting impact on the true and fair view about the financial status
evidence. The Respondent did not exercise due of the company.
diligence while performing the audit. The Committee The Committee noted that the Respondent solely relied
noted that the point covered under technical reviewer upon the data available in pen-drive provided by the
report was very clear and Respondent was very casual client and did not exercise due diligence at his end
in his approach. With regard to the irregularity as to before certifying and uploading Forms/ documents on
independence of the audit committee, the Respondent the MCA portal which requires to be checked by him
denied his role in the constitution of audit committee. properly before submitting to MCA portal. Hence, the
The Committee was of the view that instance quoted by lack of exercising due diligence by the Respondent,
technical reviewer clearly showed threat to independence resulted in uploading of wrong documents on MCA
of the audit committee. Thus, being a statutory auditor portal by the Respondent. The Committee held that the
of the Company the Respondent was required to bring Respondent is GUILTY of professional misconduct under
the same to knowledge of shareholders by adequate Clause (7) of Part I of Second Schedule to the Chartered
reporting. The Committee held that the Respondent is Accountant Act, 1949.
guilty of professional misconduct under Clause (1) of Part
[PPR/170/16-DD/09/INF/18-DC/1199/19]
II and Clause (7) of Part I of the Second Schedule to the
Chartered Accountants Act, 1949.
Indian Institute of Insolvency Professionals ARF is under process to enter into agreement for
of ICAI (IIIPI) initiating the work.
Legal and Administrative Reforms needed for
Roll-out of Accrual Based Accounting in Indian
Greater Efficacy in Resolving Real Estate Cases Railways: ICAI ARF has undertaken the pilot
under IBC - IIIPI Study Report study project of Roll-out of Accrual Based
The IIIPI study group report has identified challenges Accounting in Indian Railways with the objective
and difficulties in resolving real estate cases under to lead to an increase in the accountability
the Insolvency and Bankruptcy Code, 2016 (IBC) of the management and provide greater
and has made recommendations to address those. information useful for decision making purposes.
Certain legal aspects under IBC and RERA like delays Accordingly, Accrual Based Financial Statements
in handing over possession to home buyers, exclusion of India Railways have already been submitted
of land authorities and landowners (not being for the financial years from 2015-16 to 2020-21.
developers) from Committee of Creditors (CoC) and Financial Statement for the financial year 2021-
22 has been prepared and will be submitted to
other issues such as project wise resolution, claims of
Railway Board.
other government departments and authorities, are
causing delays and are leading to very low success ICAI Registered Valuers Organisation
of insolvency processes in real estate projects/
In its endeavours to Expand the Scope of Work
companies.
of Registered Valuers of ICAI RVO in the Judicial/
Quasi-Judicial Realm, ICAI RVO had sent written
Institute of Social Auditors of India (ISAI) representations to the Supreme Court of India
Registration of Social Impact Assessors: In last and all the High Courts of India. The bi-fold aim
two months, ISAI registered 63 Social Impact of the exercise was to expand opportunities for
Assessors. Out of which 57 are Chartered ICAI members and establish a more prominent
accountants, 2 are Company Secretaries and presence of the Registered Valuers within the
4 are post-Graduates. As on date, 619 Social judicial system while simultaneously enhancing
Impact Assessors are registered with ISAI. the credibility of valuation services rendered by
the Registered Valuers enrolled with ICAI RVO.
ICAI Accounting Research Foundation In Continuation of these efforts, ICAI RVO has
Preparation of Common Framework for Indian received confirmation from the Hon’ble Kerala
Ports Association: The Indian Ports Association High Court that the list of RVs was circulated
(IPA) has assigned the task to ICAI Accounting with District Courts for relevant purposes.
Research Foundation, for drafting of the Common
Learning Management System (LMS) - The ICAI
Accounting Framework for Preparation of Annual
RVO approved the proposal to make the LMS
Accounts of all Major ports incorporating the
portal accessible to non-members on a payment
current accounting practices recommended by
basis.
ICAI and other regulatory bodies. This project
has been identified as one of the projects of Publication of Inspection Findings - ICAI RVO
highest Authority in India (PMO) under the 100 has published the findings from its inspection
days milestones/targets. of 61 valuation reports involving 7 Registered
Valuers. These insights are now accessible on the
Proposal for Implementation of Accounting and
ICAI RVO website, reinforcing transparency and
Financial Management Reforms in Urban Local accountability within the valuation profession.
Bodies in Uttar Pradesh (UP): The Municipal
Corporation of Uttar Pradesh has approached ICAI RVO has embarked on the Peer-Review
United States Agency for International process for Valuation Reports submitted by
Development (USAID) India to strengthen its Registered Valuer Members, as outlined in
its ULBs’ financial management systems and the Half-Yearly Monitoring Compliance Report
knowhow. To achieve the objective, Director spanning October 2022 to March 2023 and April
of Urban Local Bodies (DoULB), Uttar Pradesh 2023 to September 2023. Further, All the RVEs
has approached ICAI ARF for collaboration to have been brought under review for the first
build capacity of Urban Local Bodies to enable time for review purposes. A total of 168 reports
them to take advantage of diverse infrastructure have been received for assessment, comprising
financing options in a phased manner with 10 72 from RVEs and 96 from RVs designated for
ULBs being taken up in first phase. The ICAI Peer Review.
ICAI News
THE CHARTERED ACCOUNTANT
ANNOUNCEMENT
Certificate Course on Concurrent Audit of Banks
The concurrent audit system of banks has become very crucial and important for banks. The main objective of
the system is to ensure compliance with the audit systems in banks as per the guidelines of the Reserve Bank of
India and importantly, to ensure timely detection of lapses/ irregularities. In view of the core competence of the
chartered accountants in the area of finance and accounting, risk management, understanding of the internal
functioning and controls of banks, etc., the banking sector has been relying extensively on them to comply with
these requirements of the regulator. The Board of Internal Audit & Management Accounting of ICAI conducts
6 days Certificate Course on Concurrent Audit of Banks. The purpose of the Certificate Course on Concurrent
Audit of Banks is to provide an opportunity to the members to understand the intricacies of concurrent audit
of banks thereby improving the effectiveness of concurrent audit system in banks, and also the quality and
coverage of concurrent audit reports.
The course is open for the members of the Institute of Chartered Accountants of India
Please refer link for further details of the Course: https://www.icai.org/post.html?post_id=9611
FEES DETAILS: Rs. 11,800/- (including GST)
The details of the forthcoming batches of the Certificate Course on Concurrent Audit of Banks to be organized
by the Board of Internal Audit & Management Accounting is as follows:
Chairman
Board of Internal Audit & Management Accounting, ICAI
E-mail: biama@icai.in;
ICAI News
THE CHARTERED ACCOUNTANT
IMPORTANT ANNOUNCEMENT
No. 13-CA (EXAM)/SEPTEMBER/2024: In pursuance of Regulation 22 of the Chartered Accountants Regulations,
1988, the Council of the Institute of Chartered Accountants of India is pleased to announce that the next
Chartered Accountants Foundation and Intermediate Examinations will be held on the dates and places which
are given below provided that sufficient number of candidates offer themselves to appear from each of the
below mentioned places.
No examination is scheduled on 16th September 2024 (Monday) on account of Milad – un - Nabi, being a
compulsory (gazetted) Central Government holiday as per F. No. 12/2/2023-JCA dated 3.7.2023 issued by
Ministry of Personnel, Public Grievance and Pensions, Government of India.
It may be emphasized that there would be no change in the examination schedule in the event of any day of the
examination schedule being declared a Public Holiday by the Central Government or any State Government /
Local Bodies.
Paper(s) 3 & 4 of Foundation Examination are of 2 hours duration. However, all other examinations are of 3 hours
duration, and the examination wise timing(s) are given below:
*In Paper 3 and 4 of Foundation Examination there will not be any advance reading time, whereas in all other
papers / exams mentioned above, an advance reading time of 15 minutes will be given from 1.45 PM (IST) to
2 PM (IST).
Further, in case of composite papers having both MCQs based & Descriptive Question Papers, seal of MCQs
based Question Paper shall be opened at 2 PM (IST), in other words there will be no advance reading time for
MCQs based Question Papers.
ICAI News
THE CHARTERED ACCOUNTANT
ICAI News
THE CHARTERED ACCOUNTANT
West Bengal 7 Asansol, Durgapur, Hooghly, Kharagpur, Kolkata, Raniganj and Siliguri
Overseas Abu Dhabi, Bahrain, Thimpu (Bhutan), Doha, Dubai, Kathmandu (Nepal), Kuwait and Muscat
The Examination commencement timing at Abu Dhabi, Dubai and Muscat Centres will be 12.30 PM i.e., Abu
Dhabi, Dubai and Muscat local time corresponding / equivalent to 2 PM. (IST). The Examination commencement
timing at Bahrain, Doha, and Kuwait Centre will be 11.30 AM i.e., Bahrain / Doha / Kuwait local time corresponding
/ equivalent to 2 PM (IST). The Examination commencement Timing at Kathmandu (Nepal) Centre will be 2.15
PM Nepal local time corresponding / equivalent to 2 PM (IST). The Examination commencement timing at
Thimpu (Bhutan) Centre will be 2.30 PM Bhutan local time corresponding / equivalent to 2 PM (IST).
The Council reserves the right to withdraw any city / centre at any stage without assigning any reason.
ICAI News
THE CHARTERED ACCOUNTANT
Examination fee can be remitted on-line by using VISA or MASTER or MAESTRO Credit / Debit Card / Rupay
Card / Net Banking / Bhim UPI.
Opening and closing of online window for submission of examination application forms and correction window.
The Following dates(s) are proposed for consideration: -
Examination Fee
The examination fee(s) for various courses are as under: --
The late fee for submission of examination application form after the scheduled last date would be `600/- (for
Indian / Bhutan / Kathmandu Centres) and US $ 10 (for Abroad Centres) as decided by the Council.
(S. K. GARG)
DIRECTOR (EXAMINATIONS)
2024
Bengaluru ICAI STARTUP SPHERE
27-29 June 2024
27-29 JUNE 2024 KTPO, Bengaluru, India
12
9 FEATURES OF CPE Hrs
ICAI
STARTUP SPHERE! Connecting
Networking
1 Opportunities People
Exposure to the
2 Startup Ecosystem Start Up Community
Learning from
3 Successful Startups Unicorns
Mentorship
Investors
4 and Guidance
Pitchers
Access to Workshops
5 and Training Programs Exhibitors
Sponsors
6 Placement drive for Experienced
Chartered Accountants
Founders
Collaborative
7 Opportunities Leaders
Experience of
8 Idea Pitching Inuencers
Entrepreneurs
9 Access to Funding and
Investor Networks
Highlights
Eligible Participants
Virtual Mode
Members of ICAI
20 days (3 hours per day)
Fee
30 Structured CPE Hours Rs. 15,000/- + 18% GST
For further details write to Committee on Financial Markets and Investors’ Protection at derivatives@icai.in
Highlights
30 Structured Fee
CPE Hours Rs. 7500/- + 18% GST
For further details write to Committee on Financial Markets and Investors’ Protection at fmsl@icai.in
CERTIFICATE COURSE ON FOREX
AND TREASURY MANAGEMENT
Highlights
Eligible Participants
Virtual Mode
Members of ICAI
10 days (4 hours per day)
Fee
30 Structured CPE Hours Rs. 5000/- + 18% GST
For further details write to Committee on Financial Markets and Investors’ Protection at fxtm@icai.in
Highlights
30 Structured Fee
CPE Hours Rs. 7500/- + 18% GST
For further details write to Committee For details about Courses offered by ICAI,
on Financial Markets and Investors’ please scan
Protection at fata@icai.in
1566
ICAI in Media
THE CHARTERED ACCOUNTANT