Guidance Note on Reports in
Company Prospectuses
(Revised 2016)
The Institute of Chartered Accountants of India
(Set up by an Act of Parliament)
New Delhi
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Edition : December, 2016
Committee : Auditing and Assurance Standards Board
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December/2016/
FOREWORD
In 2006, the Auditing and Assurance Standards Board of the
Institute of Chartered Accountants of India had issued the
"Guidance Note on Reports in Company Prospectuses" to provide
guidance to the members who undertake engagements requiring
them to issue reports in company prospectuses. The Guidance
Note was based on the provisions of the Companies Act, 1956
and the Securities and Exchange Board of India (Disclosure and
Investor Protection) Guidelines, 2000 (DIP Guidelines 2000).
Since 2006, a number of developments are taking place
necessitating the need to revise this Guidance Note. The
Companies Act, 1956 is replaced by the Companies Act 2013.
Further, DIP Guidelines 2000 is also replaced by the SEBI (Issue
of Capital and Disclosure Requirements) Regulations, 2009.
It is heartening that the Auditing and Assurance Standards Board
has brought out this revised Guidance Note on Reports in
Company Prospectuses to provide appropriate guidance to the
members. The Guidance Note has been written in an easy to
understand language and contains detailed guidance on various
issues involved in such engagements. I am happy that the
Guidance Note is a comprehensive and self-contained reference
document for the members.
I wish to compliment CA. Shyam Lal Agarwal, Chairman, CA.
Sanjay Vasudeva, Vice-Chairman and other members of the
Auditing and Assurance Standards Board for bringing out this
Guidance Note for the benefit of the members.
I am sure that the members would find the Guidance Note
immensely useful.
November 23, 2016 CA. M. Devaraja Reddy
New Delhi President, ICAI
PREFACE
The Auditing and Assurance Standards Board of the Institute of
Chartered Accountants of India issued the `Guidance Note on
Reports in Company Prospectuses' in the year 2006. Since the
issuance of this Guidance Note, a number of changes have
occurred in the laws and regulations which deal with the matters
to be included in the companies' prospectuses including the
reports to be given by auditors/ chartered accountants therein.
These changes include replacement of the Companies Act 1956
by the Companies Act 2013, replacement of the SEBI (Disclosure
and Investor Protection) Guidelines, 2000 by the SEBI (Issue of
Capital and Disclosure Requirements) Regulations, 2009,
issuance of the Companies (Prospectuses and Allotment of
Securities) Rules, 2014. These changes necessitated revision of
this Guidance Note.
It gives me immense pleasure to place in your hands this
thoroughly revised edition of the `Guidance Note on Reports in
Company Prospectuses' which incorporates the impact of these
changes at appropriate places. The Guidance Note has been
written in simple and easy to understand language and contains
detailed guidance on various issues involved in the engagements
to issue reports in companies' prospectuses.
At this juncture, I wish to place on record my gratitude to all the
members of Study Group viz. CA. Vijay Agarwal (Convenor) and
CA. Anup Kumar Sharma, for sparing time out of their other
preoccupations for revising the Guidance Note. I would also like to
thank all the members of Jaipur Study Group viz. CA. Vishnu
Mantri, CA. Bhupendra Mantri and CA. Sandeep Jhanwar for their
dedicated efforts in reviewing and finalising the Guidance Note.
I wish to express my sincere thanks to CA. M. Devaraja Reddy,
Honourable President, ICAI and CA. Nilesh S. Vikamsey, Vice
President, ICAI for their guidance and support to the activities of
the Board.
I wish to place on record high appreciation of CA. Sanjay
Vasudeva, Vice Chairman of the Board and all the Board
Members and also all the Council Members for their whole-
hearted support in finalising this Guidance Note as well as other
pronouncements of the Board. I also wish to thank CA. Megha
Saxena, Secretary to the Board and other officers and staff of
AASB for their continued co-operation.
I am confident that the revised Guidance Note would be well
received by the members and other interested readers.
November 23, 2016 CA. Shyam Lal Agarwal
New Delhi Chairman,
Auditing and Assurance Standards Board
CONTENTS1
Paragraph Page
No. No.
Applicability of the Guidance Note 1
Legal Aspects 1.1-1.5 1
Who are Eligible to Make the Reports 1.6-1.8 3
Fees for Issuing the Reports 1.9 4
Signing the Report 1.10 5
Consent Letter 1.11 5
Comfort Letter 1.12 6
Liability for Misstatement in Prospectus 1.13-1.15 6
Reports and Certificates 1.16-1.22 8
Rights and Powers 1.23-1.24 10
Person to whom the report should be 1.25 11
addressed
Overview of Rules 4 and 5 of Companies 1.26 11
(Prospectus and Allotment of Securities)
Rules, 2014
Financial Information of the Issuer 1.27-1.43 11
Company
Accounting and Auditing Aspects 2.1- 2.9 18
Appendices 28-176
1
This Guidance Note was issued in December, 2016. With the issuance of this
Guidance Note, the Guidance Note on Reports in Company Prospectuses
(Revised) issued by the Institute in October 2006 shall stand withdrawn.
Applicability of the Guidance Note
This Guidance Note is issued for providing guidance to the
practitioners in reporting requirements that are required in relation
to financial information to be included in the prospectus in case of
initial public offering (IPO). This Guidance Note, apart from the
IPO, is also applicable to other type of filings for the issue of
securities (equity shares, debentures and notes etc.) such as
letter of offer (in case of right issue), placement document (in case
of Qualified Institutional Buyers `QIBs') etc. and filings for the
issue of units under Securities and Exchange Board of India
(Infrastructure Investment Trusts) Regulations, 2014, as amended
and Securities and Exchange Board of India (Real Estate
Investment Trusts) Regulations, 2014, as amended to the extent
applicable. The Guidance Note is drafted considering the offer or
sale of the securities in India. Accordingly, the guidance or formats
included may need to be modified based on other international
guidance or practices, in case an offer or sale of the securities is
made outside India. This Guidance Note will be applicable in
relation to initial offer document such as DRHP/ DLoF/ PPD and
others which are filed on or after January 1, 2017. Earlier
application is voluntary.
Legal Aspects
1.1 The purpose of this Guidance Note is to provide guidance
on compliance with the provisions of the Companies Act,
20131(hereinafter referred to as "the Act" unless otherwise
specified), and the Securities and Exchange Board of India (Issue
of Capital and Disclosure Requirements) Regulations, 2009,as
amended (hereinafter referred to as the "ICDR Regulations2"),
relating to the reports required to be issued by chartered
1
References to Companies Act, 2013 in the Guidance Note refers to the extent
notified.
2
Securities and Exchange Board of India (Issue of Capital and Disclosure
Requirements) Regulations, 2009, as amended includes references to
Companies Act, 1956. However with the issuance of Companies Act, 2013, it is
assumed that references made to Companies Act, 1956 in Securities and
Exchange Board of India (Issue of Capital and Disclosure Requirements)
Regulations, 2009, as amended refer to corresponding relevant sections and
rules of Companies Act, 2013. This Guidance Note has been developed and
issued considering the requirements of Companies Act, 2013 in relation to
offerings to be made by the companies.
Guidance Note on Reports in Company Prospectuses
accountants in prospectus issued by the companies for the
offerings made in India.
1.2 The relevant provisions of the Act dealt within this
Guidance Note are:
(a) Section 2(1) definition of abridged prospectus;
(b) Section 2(38) definition of expert;
(c) Section 2(70) definition of prospectus;
(d) Section 14 requirements to be complied with by a private
company which becomes a public company by altering its
Articles of Association;
(e) Sections 23 to 42 relating to prospectus and allotment of
securities for public offer and private placement;
(f) Sections 387 to 393 relating to prospectus issued by
companies incorporated outside India; and
(g) Companies (Prospectus and Allotment of Securities) Rules,
2014 containing guidelines for information to be stated and
reports to be set out in prospectus and other matters and
reports to be stated in prospectus.
The Guidance Note also deals with relevant aspects of the ICDR
Regulations.
1.3 Section 2(70) of the Companies Act, 2013 defines
'Prospectus' as any document described or issued as a
prospectus and includes a red herring prospectus referred to in
Section 32 or shelf prospectus referred to in Section 31 or any
notice, circular, advertisement or other document inviting offers
from the public for the subscription or purchase of any securities
of a body corporate. The object of issuing a prospectus is,
therefore, to invite the public to invest their moneys in the
company or to purchase shares offered for sale by existing
shareholder(s) of the company. In order to enable the potential
investors to take a well-informed decision in the matter, the Act
and Chapter V of the ICDR Regulations spell out, in details, the
information to be given in a prospectus. Furthermore, to ensure
that the information required to be stated in a prospectus is
2
Guidance Note on Reports in Company Prospectuses
truthfully disclosed, the relevant statutes prescribe severe
penalties for untrue statements in a prospectus, the object of the
law being to protect the potential investors.
1.4 Section 26 of the Act read with Companies (Prospectus
and Allotment of Securities) Rules, 2014 deals with the matters to
be stated in the prospectus and the reports to be set out therein.
Requirements of Section 26 of the Act read with Companies
(Prospectus and Allotment of Securities) Rules, 2014 and Chapter
V of the ICDR Regulations are to be complied with when a
company invites the public to subscribe for its shares or
debentures.
1.5 Companies (Prospectus and Allotment of Securities)
Rules, 2014 deal with the reports to be set out in a prospectus.
Rule 4 of the aforesaid Rules requires a report by the auditors of
the company, containing the particulars specified in the said rule.
Sub-rules (1) and (2) of Rule 5 of the aforesaid Rules under the
circumstances specified therein require a report, containing the
specified particulars, by chartered accountants, as named in the
prospectus. Further paragraphs (1) to (5) of sub-item (B) of Item
(IX) of Part A of Schedule VIII to the ICDR Regulations require the
same reports to be set out in the prospectus as provided in Rules
4 and 5 of the Companies (Prospectus and Allotment of
Securities) Rules, 2014.
Who are Eligible to Make the Reports
1.6 The report to be included in a prospectus under Rule 4 of
the Companies (Prospectus and Allotment of Securities) Rules,
2014 and paragraphs (1) to (3) of sub-item (B) of Item (IX) of Part
A of Schedule VIII to the ICDR Regulations should be made by
the auditors of the Company in case of type of transactions
covered in Part A. Auditors may refer to Part B, C, E of Schedule
VIII to the ICDR Regulations for other type of issuances. In case
the Company has joint auditors, the report should be signed by all
the joint auditors in accordance with the principles enunciated in
Standard on Auditing (SA) 299, "Responsibility of Joint Auditors".
The report under Rule 5 of the Companies (Prospectus and
Allotment of Securities) Rules, 2014 and paragraphs (4) and (5) of
3
Guidance Note on Reports in Company Prospectuses
sub-item (B) of Item (IX) of Part A of Schedule VIII to the ICDR
Regulations should be made by the chartered accountant(s) who
shall be named in the prospectus. According to Note 1 and 2 to
Item (IX) of Part A of Schedule VIII to the ICDR Regulations, the
financial information specified in this item shall be certified by only
those auditors who have subjected themselves to the peer review
process of the Institute of Chartered Accountants of India (`ICAI'/
`Institute') and hold a valid certificate issued by the `Peer Review
Board' of the ICAI. In case where the financial statements were
audited by an auditor who had not been subjected to peer review
process of ICAI, all financial information specified in this item must
be re-audited for one full financial year and the stub period, by the
chartered accountants certifying them. ICDR Regulations refer to
"auditors" / "chartered accountants" as "accountants" in various
sections. Accordingly, the word "accountants" mentioned in the
Guidance Note should be read as "auditors" or "chartered
accountants", as applicable. The word "chartered accountants"
has been interchangeably used as auditors in the Guidance Note.
1.7 Further, in terms of Section 141 of the Act read with Rule
10 of the Companies (Audit and Auditors) Rules, 2014, a
chartered accountant who is indebted to the Company for an
amount exceeding five lac rupees, or who has given any
guarantee or provided any security in connection with the
indebtedness of any third person to the Company for an amount
exceeding one lac rupees or holds any security of that Company,
is disqualified for appointment as its auditor. "Security" for this
purpose means any instrument which carries voting rights. In
addition, the Act provides requirements in relation to eligibility,
qualifications and disqualifications of auditors which need to be
considered as applicable.
1.8 From the above paragraph, it is clear that the intention of
the Act is that even the `chartered accountant' should not have
incurred any disqualification mentioned in section 141 of the Act.
Fees for Issuing the Reports
1.9 Rule 4 of the Companies (Prospectus and Allotment of
Securities) Rules, 2014 and paragraphs (1) to (3) of sub-item (B)
4
Guidance Note on Reports in Company Prospectuses
of Item (IX) of Part A of Schedule VIII to the ICDR Regulations
states that the report shall be made by the auditor(s) of the
Company. An auditor appointed under Section 139 of the Act at
the annual general meeting holds office until the conclusion of the
sixth annual general meeting subject to ratification by members at
every annual general meeting. In terms of Section 142 of the Act,
the remuneration of the auditor is fixed in general meeting of the
company or in such manner as the company in a general meeting
may determine. Normally, the shareholders at the general meeting
authorise the Board of Directors to fix up the fee of the auditor(s).
The fee for issuance of the reports in the company prospectus is a
part of the remuneration of the statutory auditor in terms of
Section 142 of the Act. It is, therefore, advisable for the members
to ensure, before accepting the appointment for issuing the report
in the prospectus, that the Board of Directors has requisite
authority with them to fix the auditor's fee. The amount of fee for
making the reports is a matter of agreement between the
company and the reporting member and is determined on the
basis of factors such as the quantum of work involved, extent of
the reporting auditor's/ chartered accountant's responsibility, etc.
Signing the Report
1.10 Where the report is issued in a firm name, it should be
signed by the member in his individual name, as partner/
proprietor, as the case may be, for and on behalf of the firm, as in
the case of other company audit reports, along with his
membership number and the firm's registration number as
required under Standard on Auditing (SA) 700, "Forming An
Opinion and Reporting on Financial Statements", issued by the
Institute of Chartered Accountants of India.
Consent Letter
1.11 Section 26(7) of the Act requires that the Registrar shall
not register a prospectus unless the requirements of this section
with respect to its registration are complied with and the
prospectus is accompanied by the consent in writing of all the
persons named in the prospectus. Section 26(1)(a)(v) of the Act
requires that every prospectus issued by or on behalf of a public
5
Guidance Note on Reports in Company Prospectuses
company either with reference to its formation or subsequently, or
by or on behalf of any person who is or has been engaged or
interested in the formation of a public company, shall be dated
and signed and shall state consent of auditors, or from any person
who is an expert in terms of Section 26(5) of the Act. Accordingly,
a chartered accountant whose report (including certificate) is
included in the prospectus is to be treated as an expert (read with
Section 2(38) of the Act). Further, according to Section 26(5), the
expert should give his written consent to the issue of the
prospectus. The prospectus should further state that he has not
withdrawn his consent as aforesaid. An illustrative format of the
consent letter has been given in Appendix 1 to the Guidance
Note.
Comfort Letter
1.12 In certain circumstances, the issuer company may request
the auditor(s) to provide a comfort letter on the financial
information of the company to the requesting parties (such as
Lead managers and other managers etc.). The purpose of comfort
letter is to assist Lead managers and other managers, etc., in
performing a "due diligence review" process of the prospectus.
The scope of comfort letter needs to be agreed with the
underwriters, lead managers, etc. Comfort letters are not required
under the ICDR Regulations and copies of the same are not
required to be filed with SEBI. It may, however, be noted that
issuance of comfort letters is in the nature of an assurance
engagement and thus, the fees received on account of issuance
of comfort letter would not be considered in the ceiling on fees
from an individual client. A brief overview of the concept of comfort
letters, has been provided in Appendix 2 to the Guidance Note.
Liability for Misstatement in Prospectus
1.13 As per Section 34 of the Act where a prospectus, issued,
circulated or distributed under Chapter III of the Act, includes any
statement which is untrue or misleading in form or context in
which it is included or where any inclusion or omission of any
matter is likely to mislead, every person who authorises the issue
of such prospectus shall be criminally liable under Section 447 of
6
Guidance Note on Reports in Company Prospectuses
the Act which states that any person who is found to be guilty of
fraud, shall be punishable with imprisonment for a term which
shall not be less than six months but which may extend to ten
years and shall also be liable to fine which shall not be less than
the amount involved in the fraud, but which may extend to three
times the amount involved in the fraud. It is further provided that
where the fraud in question involves public interest, the term of
imprisonment shall not be less than three years. However, if the
person proves that such statement or omission was immaterial or
that he had reasonable grounds to believe, and did up to the time
of issue of the prospectus believe, that the statement was true or
the inclusion or omission was necessary, nothing in Section 34 of
the Act will apply. Further, Section 15HB of the Securities and
Exchange Board of India Act, 1992, also provides that whoever
fails to comply with any of the provisions of the aforementioned
Act, the rules or the regulations made thereunder or directions
issued by SEBI thereunder, for which no separate penalty has
been provided, shall be liable to a penalty which may extend to
one crore rupees.
1.14 Every person who authorises the issue of the prospectus
is, in terms of Section 35(1) of the Act, liable to pay compensation
to every person who subscribes for securities on the faith of the
prospectus, for any loss or damage that the latter may have
sustained by reason of any untrue statement included therein.
However, a chartered accountant giving his consent under Section
26(5) or 26(1)(a)(v) or 26(7), shall be liable, only in respect of an
untrue statement, if any, made by him in his capacity as an expert.
However he shall not be held liable under Section 35(1) if he
proves that the prospectus was issued without his knowledge or
consent, and that on becoming aware of its issue, he forthwith
gave a reasonable public notice that it was issued without his
knowledge or consent as mentioned in Section 35(2)(b).
1.15 The reporting auditor/ chartered accountant while carrying
out such engagements, should also comply, to the extent
practicable, with the principles enunciated in the Engagement and
Quality Control Standards issued by the Institute of Chartered
Accountants of India. Since such types of engagements are
7
Guidance Note on Reports in Company Prospectuses
subject to peer review requirements of the Institute of Chartered
Accountants of India, the auditor should properly document all the
working papers necessary to provide evidence of the procedures
performed and the basis of his conclusions therefrom. The
member would also need to ensure compliance with the
requirements of the Code of Ethics issued by the Institute of
Chartered Accountants of India.
Reports and Certificates
1.16 Rule 4(1) of the Companies (Prospectus and Allotment of
Securities) Rules, 2014 read with Section 26(1)(b)(i) of the Act
begins with the words "a report by the auditor..............", but later
in the proviso to Explanation to paragraph below sub-rule (1) of
the said rule 4, the words "together with a certificate from the
auditors" have been used. The certificate as to the correctness
referred to therein is required to be issued in respect of broken
period only. Accordingly, the auditor may be required to apply
additional and/or more extensive procedures to be able to certify
the correctness of the financial statements for the broken period.
The concept of broken period has been explained further in
paragraph 1.28.
1.17 Bankers may request auditors to issue certificates in
respect of Non-GAAP measures or other financial information
(items those are not defined under Accounting Standards as
notified under the Companies (Accounting Standards) Rules, 2006
(as amended) or Indian Accounting Standards as notified under
the Companies (Indian Accounting Standards) Rules, 2015 (as
amended), as applicable. However, auditors may decide based on
professional judgment whether certificate can be issued in respect
of Non-GAAP measures or other financial information (e.g., net
worth, operating profit, net asset value, accounting ratios, etc.) as
requested by the bankers. Auditors may consider performing
agreed upon procedures as agreed upon with bankers as per
Standard on Related Services 4400, "Engagements to Perform
Agreed-upon Procedures Regarding Financial Information" for
such Non-GAAP measures. Auditors should submit such agreed-
upon reports to the Company and address to the Board of
Directors of the Company. Unless required by ICDR Regulations
8
Guidance Note on Reports in Company Prospectuses
or other regulators, auditors may not issue any certificate in
relation to account balances, classes of transactions and
disclosures of the financial statements for which they have already
issued an audit opinion or review report for the purpose of
Bankers due diligence obligation towards SEBI. Auditors may
consider providing circle up comfort in relation to such items if
requested by Bankers or consider performing agreed upon
procedures as agreed upon with bankers as per Standard on
Related Services 4400, "Engagements to Perform Agreed-upon
Procedures Regarding Financial Information" and submit such
agreed-upon reports to the Company and address to the Board of
Directors of the Company.
1.18 If auditors decide to issue certificates on Non-GAAP
measures or other financial information or in relation to account
balances, classes of transactions and disclosures of the financial
statements for which they have already issued an audit opinion or
review report, then issuance of such certificates should be in
compliance with the `Guidance Note on Reports or Certificates
for Special Purposes (Revised 2016)' issued by the ICAI and to be
addressed to the Board of Directors of the Company.
1.19 Bankers referred herein refers to "any person who is
engaged in the business of issue management either by making
arrangements regarding selling, buying or subscribing to securities
or acting as manager, consultant, adviser or rendering corporate
advisory service in relation to such issue management" as defined
under Securities and Exchange Board of India (Merchant
Bankers) Regulations, 1992 as amended. Bankers are generally
referred to as `Merchant Bankers'.
1.20 The auditor should also comply with the requirements of
the Standard on Auditing (SA) 720, "The Auditor's Responsibility
in Relation to Other Information in Documents Containing Audited
Financial Statements", issued by the Institute of Chartered
Accountants of India. It is the company's responsibility to ensure
that all the information included in the prospectus is accurate and
factually correct. The auditor's responsibility is to read the
information (to the extent it relates to the information obtained
during audit or review for reporting) and ensure that such
9
Guidance Note on Reports in Company Prospectuses
information is properly included.
1.21 The auditor should read the other information in the
prospectus because the credibility of the audited financial
statements may be undermined by material inconsistencies
between the audited financial statements and other information in
the prospectus.
1.22 Other information as defined in SA 720 refers to financial
and non-financial information (other than the financial statements
and the auditor's report thereon) which is included, either by law,
regulation or custom, in a document containing audited financial
statements and the auditor's report thereon.
Rights and Powers
1.23 The next point for consideration is the rights and powers
which a chartered accountant enjoys for performing his onerous
duties in such engagement. In this connection it should be noted
that only the report required by Rule 4 of Companies (Prospectus
and Allotment of Securities) Rules, 2014 and paragraphs(1) to(3)
of sub-item (B) of Item (IX) of Part A of schedule VIII to ICDR
Regulations is to be made by the Company's auditors; all other
reports required by sub-rule (1) and (2) of Rule 5 of Companies
(Prospectus and Allotment of Securities) Rules, 2014 and
paragraphs (4) and (5) of sub-item (B) of Item (IX) of Part A of
schedule VIII to the ICDR Regulations are to be made by
chartered accountants to be named in the prospectus, and not
necessarily by the Company's auditors.
1.24 In cases falling under Rule 4 of Companies (Prospectus
and Allotment of Securities) Rules, 2014, the report is to be given
by the auditors, who, in turn, are empowered, by Section 143(1) of
the Act, to have a right of access at all times to the books and
accounts of the company and to require from the officers of the
Company, necessary information and explanations. Thus, they are
vested with sufficient powers to discharge their duties. As
mentioned in sub-rules (1) and (2) of Rule 5 of Companies
(Prospectus and Allotment of Securities) Rules, 2014 other reports
are to be made by a chartered accountant but not an officer or a
servant of the company. It may also be noted that such chartered
10
Guidance Note on Reports in Company Prospectuses
accountant has no statutory powers. Therefore, he should ensure
that necessary authority is given to him by the Board of Directors
to discharge his duties and must mention the need for such
powers in the engagement letter issued by him for this
engagement.
Person to whom the report should be addressed
1.25 There are no provisions either in the Act or in the ICDR
Regulations as to whom the report should be addressed. The
usual practice is to address the report to the Board of Directors of
the Company.
Overview of Rules 4 and 5 of Companies
(Prospectus and Allotment of Securities) Rules,
2014
1.26 Rule 4 deals with report on statements of profit and loss
and assets and liabilities of a company and its subsidiaries, if any.
Rule 5(1) deals with the matters to be stated in relation to
purchase of a business or purchase of interest in a business or
purchase or acquisition of any immovable property. Rule 5(2)
deals with acquisition of a subsidiary company.
Financial Information of the Issuer Company
1.27 Sub-section (b) of Section 26(1) of Companies Act, 2013
read with Sub-rule (1) of Rule 4 of the Companies (Prospectus
and Allotment of Securities) Rules, 2014 and paragraph (1) of
sub-item (B) of Item (IX) of Part A of schedule VIII to the ICDR
Regulations require that the prospectus issued by the Issuer
Company should contain a report by its auditors with respect to:
(a) profits and losses and assets and liabilities, in accordance
with paragraph (2) or (3) of sub-item (B) of Item (IX) of Part A
of schedule VIII to the ICDR Regulations as the case may
require (these have been dealt with in paragraph 1.34 and
1.35, respectively); and
(b) the rates of dividends, if any, paid by the issuer company in
respect of each class of shares in the issuer company for
each of the five financial years immediately preceding the
11
Guidance Note on Reports in Company Prospectuses
issue of the prospectus, giving particulars of each class of
shares on which such dividends have been paid and
particulars of the cases in which no dividends have been paid
in respect of any class of shares for any of those years.
Sub-rule (1) of Rule 4 of the Companies (Prospectus and
Allotment of Securities) Rules, 2014 and paragraph 1 of sub-item
(B) of Item (IX) of Part A of schedule VIII of the ICDR Regulations
also requires that where no accounts have been made up in
respect of any part of the period of five years ending on a date
three months before the issue of the prospectus, a statement of
that fact should also be given. The report should also be
accompanied by a statement of the account of the Issuer
Company in respect of that part of the said period up to a date not
earlier than six months of the date of issue of the prospectus
indicating the profit or loss for that period and the assets and
liabilities position as at the end of that period together with a
certificate from the auditors that such account has been examined
and found correct by them. The said statement may indicate the
nature of provision or adjustments made or are yet to be made.
1.28 It may be noted that though the law requires the auditors to
certify the correctness of the financial statements for the broken
period, yet having regard to the fact that such financial statements
would invariably involve accounting and other estimates, members
should make it clear in their reports on prospectus that they have
carried out their examination of the financial statements for the
broken period in accordance with the Engagement and Quality
Control Standards. The Engagement and Quality Control
Standards require that the auditor plan and perform the audit to
obtain reasonable assurance in respect of the subject financial
statements/ information. Further, the Engagement and Quality
Control Standards also provide that while performing the audit
procedures to obtain such reasonable assurance, the auditor
should also consider the concept of materiality.
1.29 In general, the requirement is to give the figures of profits
and losses for the five financial years preceding the issue of the
prospectus. If the entity has been carrying on business for less
than five financial years, the figures are to be given for the actual
12
Guidance Note on Reports in Company Prospectuses
period of its existence. Where the five financial years immediately
preceding the issue of the prospectus cover a period less than five
years, i.e., 60 months (this can happen if the Company has
changed its accounting period), the report should cover as many
financial years as may be necessary, so that the aggregate period
covered is not less than five years, i.e., 60 months.
1.30 The Company Law Board in consultation with the Ministry
of Law has clarified vide its communication no. 5/72, CL VI, 65
dated 11th November 1968, that the period of "five years" refers to
simple period of five years ending on a date three months before
the issue of the prospectus. Hence, every company will have to
furnish in the prospectus, accounts up to a date not earlier than
six months from the date of issue of the prospectus, irrespective of
the fact whether or not the financial year of the Company closes
on a date three months before the issue of the prospectus.
1.31 To illustrate, suppose a Company's accounting year ends
on 31st March 2016 and it issues a prospectus when its accounts
for the year ended March 2016 have been made up. In such case,
no accounts for the part of the period are required to be given if
the prospectus is issued before 30th September 2016. The auditor
is required to give his report on simple five years, equivalent to
sixty months, irrespective of number of financial years, in case
company changes its accounting period. To illustrate, let us
assume that the accounting periods of the company are as
follows:
I April 2014 - March 2015 : 12 months
II June 2013 March 2014 : 10 months
III October 2012 - May 2013 : 8 months
IV April 2012 - September 2012 : 6 months
V October 2010 - March 2012 : 18 months
VI April 2010 - September 2010 : 6 months
1.32 In present case immediately preceding five financial years
end on with the period starting October 2010, the report should
take into account another accounting year to complete period
13
Guidance Note on Reports in Company Prospectuses
equivalent to 60 months. In this case, another accounting year
consists of 6 months only. However, even if it consists of more
than six months say 12 months, say ending on October 2009
(exceeding period of 60 months), the auditor will have to report for
the entire accounting period i.e., upto October, 2009, and not
restrict to the fraction of the year.
1.33 However, if the financial statements for the year ended
March 2016 have not been made up, then if the prospectus is
issued, say on 30th June 2016, the Company would be required to
give a statement of accounts made up to at least 31st December,
2015 and if the prospectus is issued on or after 1st July, 2016, say
on 31st July, a statement of accounts made up to, at least, 31st
January, 2016 is required to be given.
1.34 In terms of paragraph (2) of sub-item (B) of item (IX) of
Part A of Schedule VIII to the ICDR Regulations, if the issuer
Company has no subsidiaries/ joint ventures/ associates, the
report issued should cover the following:
(a) so far as regards profits and losses, deal with the profits or
losses of the issuer company (distinguishing items of a non-
recurring nature) for each of the five financial years
immediately preceding the issue of the prospectus; and
(b) so far as regards assets and liabilities, deal with the assets
and liabilities of the issuer company at the last date to which
the accounts of the issuer company were made up.
1.35 Paragraph (3) of sub-item (B) of item (IX) of Part A of
Schedule VIII to the ICDR Regulations provides that if the issuer
company has subsidiaries, the report issued should cover:
(a) separately, the issuer Company's profits or losses as
provided above in paragraph 1.34 and in addition, deal either:
(i) as a whole with the combined profits or losses of its
subsidiaries, so far as they concern the members of the
issuer Company; or
(ii) individually with the profits or losses of each subsidiary,
so far as they concern the members of the issuer
Company.
14
Guidance Note on Reports in Company Prospectuses
Alternatively, instead of dealing separately with the issuer
Company's profits or losses, the report may deal as a whole
with the profits or losses of the issuer Company, and with the
combined profits or losses of its subsidiaries so far as they
concern the members of the issuer Company; and
(b) separately, the issuer Company's assets and liabilities as
provided above in paragraph 1.34 and in addition, deal either:
(i) as a whole with the combined assets and liabilities of its
subsidiaries, with or without the issuer Company's assets
and liabilities; or
(ii) individually with the assets and liabilities of each of the
subsidiaries;
In addition, the report should also indicate as respects the assets
and liabilities of the subsidiaries, the allowance to be made for
persons other than the members of the issuer Company.
1.36 From the provisions of the Act and the ICDR Regulations
as stated in paragraph 1.35 above, it can be seen that there are
various alternatives for incorporating the financial information of
the issuer Company and its subsidiaries in the prospectus.
1.37 The alternatives are outlined below:
(a) Consolidated financial information in respect of the issuer
Company along with the issuer Company's interest in the
subsidiary Companies, and stand- alone financial information
of the issuer Company; or
(b) Information of the issuer Company and issuer Company's
interest in the subsidiary Companies be combined for all such
subsidiaries; or
(c) Information of the issuer Company and issuer Company's
interest in the subsidiary Companies to be given individually
in respect of each such subsidiary.
However, presenting the information as per alternative (a) should
be preferred as it is in line with the requirements of Accounting
Standard (AS) 21, "Consolidated Financial Statements" or Indian
Accounting Standard (Ind AS) 110, "Consolidated Financial
15
Guidance Note on Reports in Company Prospectuses
Statements", as applicable and the consolidation should be done
in accordance with the principles outlined in AS 21 or Ind AS 110,
as applicable.
1.38 It may be noted that the ICDR Regulations and the Act are
silent as to the interest in partnership(s), joint ventures, and
associates. Accounting in respect of investments in joint ventures
and associates should be done as per the requirements of
Accounting Standard (AS) 23 "Accounting for Investments in
Associates in Consolidated Financial Statements" and Accounting
Standard (AS) 27 "Financial Reporting of Interests in Joint
Ventures" or Ind AS 28 "Investments in Associates and Joint
Ventures", as applicable. Interest in partnership firms should be
accounted in standalone and consolidated financial statements as
per the ICAI guidance and Ind AS as the case may be.
1.39 There may be cases where the holding company has been
in existence for a period shorter than the subsidiary. In such
cases, the figures have to be given for the holding company for
the period it has been in existence, and for the subsidiary only for
the period for which it has been such holding Company's
subsidiary company or partnership firm.
1.40 It may be noted that as per sub-item (C) of item (IX) of part
A of schedule VIII to the ICDR Regulations, the issuer Company is
required to disclose information with respect to its group
companies, but the auditor is not required to report on the same.
1.41 Sub-rule (1) of Rule 5 of the Companies (Prospectus and
Allotment of Securities) Rules, 2014 and paragraph 4 of sub-item
(B) of item (IX) of Part A of Schedule VIII to the ICDR Regulations
also require a report made by an accountant (who would be
named in the prospectus) in case the proceeds, or any part of the
proceeds, of the issue of the shares or debentures are, or is, to be
applied directly or indirectly:
(a) in the purchase of any business; or
(b) in the purchase of an interest in any business and by reason
of that purchase, or anything to be done in consequence
thereof, or in connection therewith; the issuer Company will
become entitled to an interest as respects either the capital or
16
Guidance Note on Reports in Company Prospectuses
profits and losses or both, in such business exceeding fifty
percent, thereof.
The abovementioned report would cover the following
aspects:
(i) the profits or losses of the business of each of the five
financial years immediately preceding the issue of the
prospectus; and
(ii) the assets and liabilities of the business at the last date to
which the accounts of the business were made up, being
a date not more than one hundred and twenty days
before the date of the issue of the prospectus.
Generally, the auditors of the acquiree entity should issue such
report. The auditors of the acquirer entity should place reliance on
the report issued by auditors of the acquiree entity.
1.42 Further, in terms of the requirements of Sub-rule (2) of
Rule 5 of the Companies (Prospectus and Allotment of Securities)
Rules, 2014 and paragraph 5 of sub-item (B) of Item (IX) of Part A
of schedule VIII to the ICDR Regulations:
(a) If:
(i) the proceeds, or any part of the proceeds, of the issue of
the shares or debentures are or is to be applied directly
or indirectly in any manner resulting in the acquisition by
the issuer Company of shares in any other body
corporate; and
(ii) by reason of that acquisition or anything to be done in
consequence thereof or in connection therewith, that
body corporate will become a subsidiary of the issuer
Company;
the prospectus should also contain a report made by
accountants (who shall be named in the prospectus)
upon:
(i) the profits or losses of the other body corporate for
each of the five financial years immediately
preceding the issue of the prospectus; and
17
Guidance Note on Reports in Company Prospectuses
(ii) the assets and liabilities of the other body corporate
at the last date to which its accounts were made up.
Generally, the auditors of the acquiree entity should issue such
report. The auditors of the acquirer entity may place reliance on
the report issued by auditors of the acquiree entity.
1.43 The above provisions also require that the report should:
(i) indicate how the profits or losses of the other body corporate
dealt with by the report would, in respect of the shares to be
acquired, have concerned members of the issuer company
and what allowance would have fallen to be made, in relation
to assets and liabilities so dealt with for holders of other
shares, if the issuer company had at all material times held
the shares to be acquired; and
(ii) where the other body corporate has subsidiaries, deal with
the profits or losses and the assets and liabilities of the body
corporate and its subsidiaries in the manner provided by sub-
clause (a)(ii) above in relation to the issuer company and its
subsidiaries.
Accounting and Auditing Aspects (read with
Appendix 6 and Appendix 6.1)
2.1 As stated earlier in preceding paragraphs, the reporting
auditor/accountant is required to report on the profits and losses
(distinguishing items of non-recurring nature) for the preceding
five years and on the assets and liabilities, after making such
adjustments as explained in paragraph 2.2 below. The term non-
recurring has not been defined either in the Act or in the ICDR
Regulations. The auditor should therefore exercise judgement,
and accordingly, his report should be made based on the
information that he considers will be relevant. Since what
constitutes "non-recurring" has been defined neither in the Act nor
in the ICDR Regulations, members should draw guidance in this
regard from the Accounting Standard (AS) 5, "Net Profit or Loss
for the Period, Prior Period Items and Changes in Accounting
Policies".
2.2 The Statements of Assets and Liabilities and Statement of
18
Guidance Note on Reports in Company Prospectuses
Profit and Loss or any other financial information needs to be
adjusted in the following manner.
(a) Adjustments for all incorrect accounting practices or failure to
make provisions or other adjustments, which resulted in audit
qualification. It is relevant to note here that in case of
prospectus, the auditor/ accountant reports on the Statement
of Assets and Liabilities and the Statement of Profit and Loss
extracted from the audited financial statement and approved
by the Board of Directors to which further adjustments may be
required. Accordingly, it is expected that all quantifiable
adjustments are carried out and only non-quantifiable
qualifications remain unadjusted. Any non-quantifiable
qualification should, however, be dealt with in the
auditor's/accountant's report appropriately in accordance with
the provisions of SA 705.
(b) As per ICDR Regulations, material amounts relating to
adjustments for previous years should be adjusted in arriving at
the profits for the years to which they relate irrespective of the
year in which event triggering the profit or loss has occurred. In
other words, where there are material facts which would have
been taken into consideration while preparing the accounts for
the respective years, had those facts been known at that time,
the same should be considered in the year to which it relates.
The auditor should, therefore, review the relevant information in
respect of earlier years, such as, settlement of significant
litigations items already reported as prior period adjustments,
extraordinary items identified and adjusted in the respective
years etc.
(c) Where there has been a change in accounting policy, the
profits or losses of the earlier years (required to be shown in
the prospectus) and of the year in which the change in
accounting policy has taken place should be recomputed to
reflect the profits or losses of those years that would have
been if a uniform accounting policy was followed in each of
these years. It should be noted that, if for any of these years,
the change is not quantifiable, the same needs to be brought
out in the report of the auditor/accountant. It is likely that the
19
Guidance Note on Reports in Company Prospectuses
companies would have changed accounting policies to
comply with several of the Accounting Standards that have
become mandatory in the recent past. The Standards become
applicable from a particular date specified in the Standard and
some Standards have transitional provisions as well. In this
regard, the date when the Standard became applicable would
not be relevant since same would tantamount to change in
accounting policy and this would have to be applied
throughout the period covered by the auditor/accountant.
However, in case of practical problems in adoption of a
Standard in earlier years for making the adjustment, the fact
should be adequately brought out in the
auditor's/accountant's report as an emphasis of matter
paragraph or a qualification, as may be necessary, depending
upon the facts and circumstances of each case.
(d) Statement of profit or loss should disclose the profit or loss
arrived at before and after considering the profit or loss from
extraordinary items. The turnover disclosed in the Statement
of Profit and Loss Statement should be bifurcated into:
(i) turnover of products manufactured by the issuer
company;
(ii) turnover of products traded in by the issuer company;
and
(iii) turnover in respect of products not normally dealt in by
the issuer company but included in (ii) above, should be
mentioned separately.
Further, in all cases where other income (net of related expenses)
exceeds 20% of the net profit before tax, then the details of such
income is also required to be disclosed. Such disclosure should
include:
(i) the sources and other particulars of such income; and
(ii) an indication as to whether such income is recurring or
non-recurring, or has arisen out of business activities/
other than the normal business activities.
(e) The statement of assets and liabilities should be prepared
20
Guidance Note on Reports in Company Prospectuses
after deducting the balance outstanding on revaluation
reserve account both from fixed assets and reserves and the
net-worth arrived at after such deductions.
2.3 In addition to above, Part A of schedule VIII to the ICDR
Regulations require the following other information also to be
disclosed by the issuer Company:
(i) the changes (with quantification, wherever possible) in the
activities of the issuer company during last five years which
may have had a material effect on the statement of profit/loss,
including discontinuance of lines of business, loss of agencies
or markets and similar factors.
(ii) the accounting and other ratios for each of the accounting
periods for which the financial information is given. These
ratios, as explained below are computed on the basis of
restated financial statement.
a. Earnings Per Share: This ratio is calculated after
excluding extra ordinary items and as per the provisions
of Accounting Standard (AS) 20, "Earnings Per Share"3.
b. Return on Net Worth: This ratio is calculated excluding
revaluation reserves and extra ordinary items. Section
2(57) of the Act defines net worth as the aggregate value
of the paid-up share capital and all reserves created out
of the profits and securities premium account, after
deducting the aggregate value of the accumulated
losses, deferred expenditure and miscellaneous
expenditure not written off, as per the audited balance
sheet, but does not include reserves created out of
revaluation of assets, write-back of depreciation and
amalgamation.
c. Net Asset Value Per Share: This ratio is calculated
excluding revaluation reserves.
3
In case financials are prepared under Ind AS, Earnings Per Share should be
computed as per the provisions of Ind AS 33, `Earnings Per Share' as notified by
the Companies (Indian Accounting Standards) Rules, 2015.
21
Guidance Note on Reports in Company Prospectuses
(iii) A Capitalisation Statement showing total debt, net worth, and
the debt/equity ratios before and after the issue is made. The
same is sometimes not possible as the post issue
capitalisation can only be determined after final pricing of the
issue based on the book building process and this fact needs
to be disclosed. Also, in case of any change in the share
capital since the date as of which the financial information has
been disclosed in the prospectus, a note explaining the nature
of the change should be given. An illustrative capitalisation
statement is given in Appendix 3 to the Guidance Note.
(iv) As per paragraph 15 of sub-item (B) of item (IX) of schedule
VIII to the ICDR Regulations, in case of change in standard
denomination of equity shares, the compliance with the
following shall be ensured while making disclosure in the offer
document:
a. All the financial data affected by the change in
denomination of shares shall be clearly and
unambiguously presented in the offer document.
b. Comparison of financial ratios representing value per share
and comparison of stock market data in respect of price
and volume of securities shall be clearly and
unambiguously presented in the offer document.
c. The capital structure incorporated in the offer document
shall be clearly presented giving all the relevant details
pertaining to the change in denomination of the shares.
(v) As per paragraph 16 of sub-item (B) of item (IX) of Schedule
VIII to the ICDR Regulations, the break-up of total outstanding
unsecured loans taken by the issuer company along with the
terms and conditions, including interest rates and the
repayment schedule shall be given in the offer document.
Further, the fact whether the loan can be recalled by the
lenders at any time needs to be disclosed in the risk factors.
(vi) As per paragraph 17 of sub-item (B) of item (IX) of Schedule
VIII to the ICDR Regulations, the following disclosures along
with explanations shall be given for understanding the future
tax incidence on the Company:
22
Guidance Note on Reports in Company Prospectuses
(i) profits after tax are often affected by the tax shelters
which are available.
(ii) permanent differences and timing differences.
(iii) timing differences which can be reversed in the future, for
example, the difference between book depreciation and
tax depreciation.
The term tax shelter has not been defined in any of the
statutes. However, the dictionary meaning of the term is "an
investment intended to reduce the income tax liability". Tax
shelter statement requires to disclose tax at the notional rate
and other adjustments which could be in the nature of
permanent and timing differences as identified in accordance
with Accounting Standard (AS) 22, "Accounting for Taxes on
Income" or adjustments which could be in the nature of
temporary differences as defined in accordance with Ind AS 12
"Income Taxes", as applicable. These adjustments may be
verified with the income tax returns and other records giving
effect of the appeal and other assessment orders in those
respective assessment years. In nutshell, the tax shelter
statement is a reconciliation between provision for tax
according to the Income-tax Act, 1961 and tax expense as
explained in AS 22 or Ind AS 12, as applicable after
considering the effect of permanent differences under AS 22 or
`initial recognition exception' under Ind AS 12 .
(vii) As per paragraph 18 of sub-item (B) of item (IX) of schedule
VIII to the ICDR Regulations, the issuer Company, if it so
desires, may include in the offer document, the financial
statements prepared on the basis of more than one
accounting practice, subject to disclosure of the material
differences arising because of different accounting practices.
(viii) The accountant will have to consider whether all the
Significant Accounting Policies and Notes on Accounts
appearing in the published accounts need to be reproduced. It
may well be that many of them can be omitted. It may equally
be found necessary to add certain new items. In any case, all
significant accounting policies and standards followed in the
23
Guidance Note on Reports in Company Prospectuses
preparation of the financial statements based on which the
Statement of Assets and Liabilities and Statement of Profit
and Loss has been extracted should be disclosed. It must be
appreciated that the published Statement of Profit and Loss
and Balance Sheet are general-purpose financial statements.
While using such financial statements for a specific purpose,
it may be necessary to make certain adjustments in view of
the nature of information required. Such adjustments,
however, do not imply any criticism of the accounts as
originally drawn up since the adjustments are to be made
because of the differences in requirements. While reporting
on such adjustments, the accountant should exercise his
professional judgment and independence.
(ix) As the figures to be given in the financial information are to be
given for five financial years (minimum of 60 months),
therefore, there may be accounts which have not been
audited by the auditor giving report at the time of issue of
prospectus. Accordingly, in such cases, reports from the
auditors of the respective periods covered in the period of 60
months will have to be taken and the same would be relied
upon by the auditor giving the final report. The audit
procedures to be followed in such case should be in line with
the procedures stated in the Standard on Auditing (SA) 600,
"Using the Work of Another Auditor". The fact that the
financial statements audited by other auditors have been
relied upon for reporting in the prospectus needs to be
disclosed in the report given by the auditor.
(x) Similar disclosure as in (ix) would also be required in case of
branch accounts and accounts of project operations,
associate companies, joint ventures, partnership firms and
subsidiary companies which have been incorporated in the
financial information or which have been stated in the report
set out in the prospectus and which have been audited by the
auditors other than that/those issuing the report in the
prospectus.
(xi) Report given by the accountant would also disclose reliance,
if any, on the accounts audited by other auditor(s) as the
24
Guidance Note on Reports in Company Prospectuses
accountant may not be the auditor of the Company or the
business/body corporate being purchased /acquired.
(xii) The law does not specify whether the report or the financial
information included in the prospectus should show the profits
before or after taxes. The usual practice, and the
recommended procedure, is to show the profit before tax, the
charge for tax, and the profit after tax.
2.4 As explained in paragraph 1.28, it may become necessary
to prepare accounts for part of the current accounting period. This
need should be identified as early as possible so that there is
adequate time to organise for the preparation of accounts for such
broken period and for their audit. In preparation of accounts for
the broken period, the recognition and measurement principles
laid down in Accounting Standard (AS) 25, "Interim Financial
Reporting" or Ind AS 34 "Interim Financial Reporting", as
applicable, should be applied. AS 25 or Ind AS 34 requires that an
enterprise should apply the same accounting policies in its interim
financial statements as are applied in its annual financial
statements, except for accounting policy changes made after the
date of most recent audited financial statements that are to be
reflected in the next annual financial statements. The preparation
of interim financial statements should not affect the measurement
of its annual results. Revenues that are received seasonally or
occasionally within a financial year should not be anticipated or
deferred as of an interim date if anticipation or deferral would not
be appropriate at the end of the enterprise's financial year.
Similarly, costs that are incurred unevenly during an enterprise's
financial year should be anticipated or deferred for the broken
period if, and only if, it is also appropriate to anticipate or defer
that type of cost at the end of the financial year. If it is identified
during the preparation of the interim financial statement that there
is a change in the accounting policy or that there is an error of the
past, the same needs to be adjusted not only in the Statement of
Profit or Loss or Statement of Assets and Liabilities or other
financial information for the broken period but also in the years
being reported upon by the auditor/ accountant in the same
principles as set out in paragraph 2.2 above.
25
Guidance Note on Reports in Company Prospectuses
2.5 The report on profits to be included in the prospectus is
usually fairly detailed, starting from the sales turnover, and
showing the cost of sales with varying degrees of detail, ending up
with profits before tax, provision for taxation and profits after tax.
The statement of assets and liabilities may be so arranged that
liabilities are deducted from the assets ending with the owner's
funds (share capital and reserves). Refer Appendix 6 to the
Guidance Note for guidance on restated financial information. An
illustrative format of the report of auditors on standalone financial
statements and information in Company prospectuses is given as
Appendix 4 to this Guidance Note. Also, in case of a report by an
accountant who is not the auditor, the same format can be
modified as necessary. An illustrative format of the report of
auditors on consolidated financial statements and information in
the Company Prospectuses is given as Appendix 5 to the
Guidance Note.
2.6 In the interest of both client and auditor, the
auditor/reporting accountant should send an engagement letter,
preferably before the commencement of the engagement, to help
avoid any misunderstandings with respect to the engagement. In
this regard, the auditor/ reporting accountant should conform to
the requirements of Standard on Auditing (SA) 210, "Agreeing the
Terms of Audit Engagements" issued by the Institute of Chartered
Accountants of India. An illustrative format of the Engagement
Letter is given as Appendix 7 to the Guidance Note.
2.7 The auditor should obtain evidence that management
acknowledges its responsibility for the appropriate preparation and
presentation of financial information and that management has
approved the financial information including the restatement as
detailed in paragraph 2.2 above. In this regard it is advisable to
get the financial information adopted by the Board of Directors.
The auditor should also obtain other representations from
management, as considered appropriate in terms of Standard on
Auditing (SA) 580, "Written Representations" issued by the
Institute of Chartered Accountants of India. The auditor (whose
reports are included) would, in due course, be required to give his
consent to the inclusion of his report in the prospectus in the form
26
Guidance Note on Reports in Company Prospectuses
and context in which it is so included. For this purpose, he should
study the prospectus carefully and also take note of:
(a) the manner in which the directors, in their estimate of current
and future profits, would deal with figures shown in the
accountant's report and with matters to which attention has
been drawn in that report;
(b) the manner in which the directors have dealt with any special
circumstances, where the auditor has decided that no
reference thereto is necessary in his report.
He should also obtain the necessary management certificates and
representations as stated above and only after satisfying himself
of the above, he should provide the Company with the consent
letter. An illustrative format of the Management Representation
Letter is given as Appendix 8 to the Guidance Note.
2.8 If, after giving his report but before the issue of the
prospectus, or after the issue of the prospectus and before
allotment thereunder, the reporting accountant/auditor becomes
aware of any important information which significantly affects the
report given by him, he would need to consider whether he should
withdraw his consent by writing to the company, the Registrar of
Companies, the stock exchanges, and through suitable press
publicity. The subject is complex and it will be prudent for the
members to seek legal advice in case such a situation arises.
2.9 For a further reading on some common issues associated
with prospectus, readers are requested to refer Appendix 9 to the
Guidance Note, containing an extract of some frequently asked
questions in respect of prospectus as prepared and answered by
SEBI.
27
Guidance Note on Reports in Company Prospectuses
Appendix 1
Illustrative Format of the Consent Letter
(Refer paragraph 1.11)
[Date]
The Board of Directors
[Name and Address of the Company]
Dear Sirs,
Proposed Offering of securities in India by [ name of the
issuer] (the "Issuer").
We hereby consent to use in this [Draft Red Herring
Prospectus/ the Red Herring Prospectus/ the Prospectus] 4 of
[name of the issuer ] (the "Issuer") to be submitted/filed with [the
Securities and Exchange Board of India (SEBI)/ and the
Registrar of Companies (ROC)/ the Stock Exchanges] our
reports dated [date] relating to (i.) [financial information,
prepared under the Securities and Exchange Board of India
(Issue of Capital and Disclosure Requirements) Regulations,
2009 as amended (the " ICDR Regulations ") and Part I of
Chapter III to the Companies Act, 2013], and (ii.) Statement of
Tax Benefits, and specify others ], which appear in such [Draft
Red Herring Prospectus/ the Red Herring Prospectus/ the
Prospectus].
We also consent to the references to us as ["Statutory
Auditors"] or ["Reporting Accountant"]* under the headings
"[Definitions and Abbreviations]", "[General Information]", and
"[other sections]" in such [Draft Red Herring Prospectus/ the
Red Herring Prospectus/ the Prospectus]. The following
information in relation to us may be disclosed:
4
Separate consent letter should be issued at each stage.
*
Chartered Accountants providing consents separately as "Auditors" and as
"Reporting Accountant" should provide consents by issuing two separate consent
letters.
28
Guidance Note on Reports in Company Prospectuses
Statutory Auditors' Name:
Address:
Telephone Number:
Fax Number:
Firm Registration Number:
E-mail:
[We further consent to be named as an "expert" as defined
under Section 2(38) of the Companies Act, 2013, read with
Section 26(1)(a)(v) of the Companies Act, 2013, in relation to
the above mentioned financial information, our report thereon,
and the Statement of Tax Benefits included in the [Draft Red
Herring Prospectus/ the Red Herring Prospectus/ the
Prospectus].]
The above consents are subject to the condition that we do not
accept any responsibility for any reports or matters (including
information sent to Merchant Bankers) or letters included in the
[Draft Red Herring Prospectus/ the Red Herring Prospectus/ the
Prospectus]. Neither we nor our affiliates shall be liable to any
investor or merchant bankers or any other third party in respect
of the proposed offering. Further, the Company agrees to
indemnify us and our affiliates and hold harmless from all third
party (including investors and merchant bankers) claims,
damages, liabilities and costs arising consequent to our giving
consent.
Nothing in the preceding paragraph shall be construed to (i)
limit our responsibility for or liability in respect of, the reports we
have issued, covered by our consent above and are included in
the [Draft Red Herring Prospectus/ the Red Herring Prospectus/
the Prospectus] or (ii) limit our liability to any person which
cannot be lawfully limited or excluded under applicable laws or
regulations or guidelines issued by applicable regulatory
authorities.
We also authorise you to deliver a copy of this letter of consent
pursuant to the provisions of the Companies Act, 2013 to SEBI,
29
Guidance Note on Reports in Company Prospectuses
ROC, the stock exchanges or any other regulatory authority as
required by law.
For ABC and Co.
Chartered Accountants
Firm's Registration Number
Signature
[Name of the Member]
Designation **
Place of Signature: Membership Number
Date:
**
Partner or proprietor, as the case may be.
30
Guidance Note on Reports in Company Prospectuses
Appendix 2
Comfort Letter
(Refer Paragraph 1.12)
1. A prospectus is issued with the intention of inviting the
public to subscribe to the securities being offered by the issuer.
The decision to invest in the securities is dependent to a large
extent on the financial and other information contained in the
prospectus. To help investors make an informed decision, the
prospectus contains huge amounts of data, prepared with the help
of a number of experts. Over the period, a number of mechanisms
have developed in the securities market to provide the general
public easier and fair access to securities of the issuer. The need
for comfort letters has arisen mainly due to the emergence of the
concept of underwriting. Therefore, before understanding the
concept of "comfort letters" it may be useful to understand what is
underwriting.
2. Underwriting involves selling of securities from the issuer
to the public to ensure successful distribution. There can be two
types of underwriting agreements, one, hard underwriting and two,
soft underwriting. Hard underwriting is when an underwriter
agrees to buy his commitment at its earliest stage. The
underwriter guarantees a fixed amount to the issuer from the
issue. Thus, in case the shares are not subscribed by investors,
the issue is devolved on underwriters and they have to bring in the
amount by subscribing to the shares. The risk borne by the
underwriter in case of hard underwriting is much higher as
compared to that in soft underwriting. Soft underwriting is when
an underwriter agrees to buy the shares at later stages as soon as
the pricing process is complete. He then, immediately places
those shares with institutional players. The risk faced by the
underwriter as such is reduced to a small window of time. Also,
the soft underwriter has the option to invoke a force majeure
clause in case there are certain factors beyond the control that
31
Guidance Note on Reports in Company Prospectuses
can affect the underwriter's ability to place the shares with the
5
buyers.
3. From the above, it is clear that the underwriters and lead
managers (hereinafter referred to as "requesting parties") to the
issue face a lot of risk while dealing in public issues. Added to this
is the fact that the regulator of the securities markets is normally
very sensitive in the matters of ensuring free, fair and transparent
issue process so that no body is able to obtain an undue
advantage of the offer. Accordingly, most of the securities
regulations provide heavy penalties in case any of the market
players is found wanting on the grounds of the issue process or
the information provided to the investors in the prospectus. For
example, Section 15HB of the Securities and Exchange Board of
India Act, 1992 (as amended by the Securities Laws (Amendment)
Act, 2014) provides for penalty which shall not be less than rupees
one lac but may not extend to rupees one crore. As a
consequence, underwriters and lead managers normally
undertake a due diligence process on the information contained in
the prospectus. As a part of that process, they also seek to obtain
an added level of comfort from the auditors on various aspects of
the prospectus (in the form of a comfort letter), in addition to the
report of the auditors already contained in the prospectus. This
comfort letter is not to be filed with the regulator/ stock
exchange(s). Normally, the need for a comfort letter is set out as a
precondition in the underwriting agreement itself.
4. Since the auditor's association with the financial
information contained in the prospectus is limited to the five
financial years and the broken period, the requesting parties
usually seek comfort letters in respect of such financial information
in respect of which there is no report by the auditor but where for
the requesting parties need a due diligence to be carried out to
ensure correctness of such information. The extent of examination
required to be done in respect of such financial information as
would satisfy the requesting parties would need to be decided by
themselves. The auditor(s) should carefully read the underwriting
5
Source: SEBI.
32
Guidance Note on Reports in Company Prospectuses
agreement and the agreement with the lead manager(s) to
ascertain the scope of the comfort letter.
5. The comfort provided by the auditor would, however, be
subject to certain limitations. One of the major limitations is that
the auditor can comment in their professional capacity only on
matters to which their professional expertise is substantially
relevant. The second limitation is that the auditor would be able to
provide only negative assurance on the information subjected to
such examination. Thus, the requesting parties run a risk that the
auditors might have provided negative assurance in respect of
such conditions or matters that may later prove to have existed.
Process for Issuing a Comfort Letter
6. The auditor should obtain a copy of the agreement
containing the request for a comfort letter and the scope thereof to
adjudge whether he will be able to furnish a comfort letter as
desired in the agreement. The auditor should hold a meeting with
the client as well as the requesting parties to discuss the scope of
the comfort letter. Such a discussion would also help in clarifying
as to the procedures that the latter expects to be followed by the
auditor. The auditor should, however, make it clear that his
acceptance of the engagement to provide a comfort letter does
not in any way indicate his assurance about the sufficiency of the
procedures that the requesting parties expect the auditor to
perform. The fact should also be adequately brought out in the
comfort letter issued by him. Further, the auditor should not agree
to provide in the comfort letter any kind of assurance on his report
already issued on the financial information contained in the
prospectus.
7. In the interest of the auditor, client and the requesting
parties, it is advisable that the auditor furnishes a draft comfort
letter in accordance with the scope of such a letter as specified in
the underwriting agreement. The auditor should consider obtaining
a copy of issue agreement / underwriting agreement prior to
issuance of comfort letter to the bankers. The draft comfort letter,
to the extent possible, should cover all such matters as are to be
covered in the final comfort letter, using exactly the same terms as
33
Guidance Note on Reports in Company Prospectuses
to be used in the final comfort letter. The auditor should, however,
make it adequately clear:
(i) that the letter is a draft comfort letter; and
(ii) that the comments that would be contained in the final
comfort letter cannot be given until the auditor has
performed the underlying procedures.
The draft comfort letter provides an opportunity to the concerned
parties to discuss further the expected procedures to be followed
by the auditor, as indicated in the draft comfort letter and request
additional procedures. Where the additional procedures so
requested are within the professional competence of the auditor,
he would normally, be willing to perform them. It is advisable that
the auditor then also furnishes a revised draft of the comfort letter.
The fact that the requesting parties have accepted the draft
comfort letter and subsequently, the final comfort letter, is an
indication enough for the auditor that the former accept the
auditor's procedures as being sufficient for their purposes. Thus, it
is essential that the auditor's procedures are clearly set out in the
draft as well as the final comfort letter. As mentioned earlier, the
auditor does not undertake to assess the sufficiency or otherwise
of the procedures that the underwriter/ lead manager expects the
former to perform. Accordingly, statements, whether express or
implied, to the effect that the auditor has carried out such
procedures as they consider necessary should, normally, be
avoided since this may create misunderstanding as to the
responsibility for sufficiency of the procedures for the purposes of
the requesting parties. Following is an illustrative wording of the
necessary caveats that may be used in a draft comfort letter:
"This draft is furnished solely for the purpose of indicating the form
of letter that we would expect to be able to furnish to __________
[name of the Book Running Lead Managers/ Lead Managers/
Placement Agents] in response to their request, the matters
expected to be covered in the letter, and the nature of the
procedures that we would expect to carry out with respect to such
matters. Based on our discussions with __________[name of the
Book Running Lead Managers/ Lead Managers/ Placement
34
Guidance Note on Reports in Company Prospectuses
Agents], it is our understanding that the procedures outlined in this
draft letter are those they wish us to follow. Unless [name of the
Book Running Lead Managers/ Lead Managers/ Placement
Agents] informs us otherwise, we shall assume that there are no
additional procedures they wish us to follow. The text of the letter
itself will depend, of course, on the results of the procedures,
which we would not expect to complete until shortly before the
letter is given and in no event before the cutoff date indicated
therein."
8. Further, before agreeing to provide a comfort letter, the auditor
should also obtain a written representation from the requesting
parties to the effect that they are aware of their responsibility to
carry out a due diligence process and that and that the comfort
letter provided by the auditor would not be a substitute for such a
due diligence process required to be carried out by them. Thus,
the representation letter issued by the requesting parties should,
inter alia, clearly mention that:
(a) the requesting parties are knowledgeable with respect to
the due diligence review process required under Securities
and Exchange Board of India (Issue of Capital and
Disclosure Requirements) Regulations, 2009, as amended;
and
(b) in connection with the offering of Securities, the review
process performed by the requesting parties is
substantially consistent with the due diligence review
process required under Securities and Exchange Board of
India (Issue of Capital and Disclosure Requirements)
Regulations, 2009, as amended.
This fact also should be brought out in the comfort letter. The
representation letter may also make references to the review
process to be undertaken by the requesting parties in connection
with the prospectus. This specific reference is necessary because
the extent of that review (carried out in accordance with the
principles enunciated in Revised Standard on Review
Engagements 2400, "Engagements to Review Historical Financial
Statements") is fairly well understood by chartered accountants,
35
Guidance Note on Reports in Company Prospectuses
lead managers, lawyers etc., and would provide the auditors with
an objective basis against which the auditor can determine the
level of assurance that he is willing to provide to the underwriter,
given the inherent legal risk involved in being associated with a
public offering of securities. Auditors should agree to provide
negative assurance only where the requesting parties provide
them with such a representation. In case the requesting parties
refuse to provide such a representation, the auditors should,
ordinarily, not undertake to provide a negative assurance in their
comfort letters. In such a case, the procedures to be performed
by the auditor should be agreed between the auditor and the
requesting parties and adequately brought out in the engagement
letter as well as the comfort letter. Thus, in the latter situation, the
auditor would also need to bear in mind the principles enunciated
in the Standard on Related Services 4400, "Engagements to
Perform Agreed upon Procedures Regarding Financial
Information". An illustrative format of representation letter is given
in Appendix 2.1 to this Appendix.
Engagement/Arrangement Letter (Refer Appendix 2.5)
9. The terms of the engagement letter should clearly mention
that the procedures do not constitute an audit conducted in
accordance with the Standards on Auditing issued by the Institute
of Chartered Accountants of India and that accordingly, the same
might not reveal all matters of significance. As a corollary, the
engagement letter should clearly bring out the caveats associated
with the procedures to be performed by the auditor, whether for
providing a negative assurance as in case of a review or as
agreed between the auditor and the requesting parties.
10. In case the comfort letter is being issued by a member who
was not the auditor of the financial statements of the immediately
preceding year, he should obtain knowledge about the internal
controls of the company over financial reporting.
11. Comments regarding subsequent changes typically relate
to whether there has been any change in paid up share capital,
increase in long-term debt or decreases in other specified financial
36
Guidance Note on Reports in Company Prospectuses
6
statement items during a period, known as the "change period,"
subsequent to the date and period of the latest financial
statements included in the Prospectus. These comments would
also address such matters as subsequent changes in the amounts
7
of (a) net current assets or stockholders' equity and (b) net sales .
The member will ordinarily be required to read minutes and other
information and make inquiries of company officials relating to the
whole of the change period. For the period between the date of
the latest financial statements made available and the cutoff date,
the auditors must base their comments solely on the limited
procedures actually performed with respect to that period (which,
in most cases, will be limited to the reading of minutes and the
inquiries of company officials) and their comfort letter should make
this clear.
12. The underwriting agreement or other arrangements with
requesting parties usually specifies the dates as of which, and
periods for which, data at the cutoff date and data for the change
period (change period is period in which changes subsequent to
the date and period of the latest balance sheet occurred and it
ends on cut-off date) are to be compared. For balance sheet
items, the comparison date is normally that of the latest balance
sheet included (that is, immediately prior to the beginning of the
change period).
13. For income statement items, the comparison period or
periods might be one or more of the following:
(a) the corresponding period of the preceding year,
(b) a period of corresponding length immediately preceding
the change period,
(c) a proportionate part of the preceding fiscal year, or
6
Based on the facts and circumstances, the auditors may consider, as per their
judgement, whether any such or additional balance sheet / profit and loss line
items can be included for providing negative assurance.
7
Based on the facts and circumstances, the auditors may consider, as per their
judgement, whether any such or additional balance sheet / profit and loss line
items can be included for providing negative assurance.
37
Guidance Note on Reports in Company Prospectuses
(d) any other period of corresponding length chosen by the
underwriter. Whether or not specified in the underwriting
agreement, the date and period used in comparison should
be identified in the comfort letter in both draft and final form
so that there is no misunderstanding about the matters
being compared and so that the underwriter can determine
whether the comparison period is suitable for their
purposes.
14. The member should ensure that comments are made only
with respect to information:
(a) that is expressed in reporting currency (or percentages
derived from such rupee amounts) and that has been
obtained from accounting records that are subject to the
entity's controls over financial reporting or
(b) that has been derived directly from such accounting
records by analysis or computation. The member may also
comment on quantitative information that has been
obtained from an accounting record if the information is
subject to the same controls over financial reporting as the
reporting currency amounts.
15. The member generally should not comment on matters:
(a) merely because they happen to be present and are
capable of reading, counting, measuring, or performing
other functions that might be applicable. Examples of
matters that, unless subjected to the entity's controls over
financial reporting (which is not ordinarily the case), should
ordinarily not be commented on by the member include the
square footage of facilities, number of employees (except
as related to a given payroll period), etc.
(b) like tables, statistics, and other financial information
relating to an unaudited or un-reviewed period unless:
(i) they have performed an audit of the client's
financial statements for a period including or
immediately prior to the unaudited period or have
completed an audit for a later period or
38
Guidance Note on Reports in Company Prospectuses
(ii) they have otherwise obtained knowledge of the
client's internal control. For example for the proper
understanding of the control they should take some
additional procedures, like, opening balances. In
addition, the member should not comment on
information subject to legal interpretation, such as
beneficial share ownership.
Auditors are further advised to not include any such matter in the
comfort letter, which is already covered in their report on the
financial information contained in the prospectus.
16. To avoid ambiguity, the specific information commented on
in the letter should be identified by reference to specific captions,
tables, page numbers, paragraphs, or sentences. Descriptions of
the procedures followed and the findings obtained may be stated
individually for each item of specific information commented on.
17. In comments concerning tables, statistics, and other
financial information, the expression "true and fair view" (or a
variation of it, for example, "presented fairly") should not be used,
as it is not an audit. That expression, when used by member,
ordinarily relates to presentations of financial statements and
should not be used in commenting on other types of information.
18. At times, it may happen, there is a time lag between the
date the reviewed or audited balance sheet / accounts and the
cut-off date for the comfort letter is of more than 135 days. Since
no review /audit have been applied on financial information flowing
from this period, it is suggested that the review procedures should
be carried out for this period (at least for the quarter subsequent to
reported period) before concluding on the comfort letter. However,
if the bankers request negative assurance as to subsequent
changes in specified financial statement items as of a date 135
8
days or more subsequent to the end of the most recent period for
which the auditors have performed an audit or a review, the
8
It is expected that generally a company should be able to prepare its interim
financials within 45 days of end of last quarter, hence 135 days (90 days plus 45
days) is prescribed.
39
Guidance Note on Reports in Company Prospectuses
auditors may not provide negative assurance but the auditors
reporting is limited to reporting procedures performed and findings
obtained. In such scenario, auditors may consider providing
enquiry level of comfort stating "Those officials stated [mention the
facts]".
Use of Services of Other Auditors
19. There may be situations in which more than one auditor is
involved in the audit of the financial statements of an entity for
various periods or in case of audit of divisions, branches, or
subsidiaries/joint ventures/associates and in which the reports of
more than one auditor appears in the Prospectus (including other
type of filings). Further, there could be situations when the reports
of the principal auditor only are included in the Prospectus
(including other type of filings) in relation to audits of the financial
statements of standalone company and the consolidated financial
statements of the group. The principal auditor in its report relating
to audit of the consolidated financial statements of the group
draws a reference of the work done by other auditors, if
applicable. For example, certain significant divisions, branches, or
subsidiaries/joint ventures/associates may be audited by other
auditors, or during the 5 years' period there might have been a
change in the auditors also. In such cases, following is applicable:
(a) separate comfort letters in respect of such past years or
such significant divisions, branches, or subsidiaries/joint
ventures/associates are issued by the respective past
auditors or respective auditors of such significant divisions
etc. for submission as such to the requesting parties
(addressed to the requesting parties(i.e. bankers) based
on the format as used by the principal auditors);
(b) in certain rare situation (e.g. auditor firm is not in practice
any more for any reason or the signing partner is not alive
in case of a sole proprietorship auditing firm, etc.), the past
auditors or auditors of such significant divisions, branches,
or subsidiaries/joint ventures/associates express their
inability or are not in a position to provide comfort letters in
respect of the financial statements of the past years or
40
Guidance Note on Reports in Company Prospectuses
such significant divisions, branches, or subsidiaries/joint
ventures/associates audited by them. In other situation, the
past auditors or auditors of such significant divisions,
branches, or subsidiaries/joint ventures/associates should
issue comfort letters to the bankers directly in respect of
the financial statements of the past years or such
significant divisions, branches, or subsidiaries/joint
ventures/associates audited by them.
In case of (a) above, the client should, at the earliest practicable
date, advise such other auditors as to the Comfort Letter that may
be required from them and should arrange for them to receive a
draft of the underwriting agreement so that they (other auditors)
may make necessary arrangements at an early date for the
preparation of a draft of their comfort letter (a copy of which
should be furnished to the principal auditors) and for the
performance of their procedures. The principal auditors (that is,
those who report on the consolidated financial statements and,
consequently, are asked to give a comfort letter with regard to
information expressed on a consolidated basis) should read the
comfort letters of the other auditors reporting on significant
divisions, branches, or subsidiaries/joint ventures/associates
audited by them and of the previous auditors. Such comfort letters
to be issued by the other auditors and previous auditors should be
addressed to the requesting parties (bankers) and should contain
statements similar to those contained in the comfort letter
prepared by the principal auditors, including statements about
their independence. The principal auditors should state in their
comfort letters that (a) reading comfort letters of the other auditors
was one of the procedures followed, and (b) the procedures
performed by the principal auditors (other than reading the comfort
letters of the other auditors) relate solely to companies audited by
the principal auditors and to the consolidated financial statements
as relates to the aggregation of the financial statements the
Company/Issuer and its [subsidiaries/ joint ventures/ associates]
and the consolidation adjustments thereof. The principal auditors
should read the comfort letters of the other auditors as mentioned
above while issuing comfort letter on consolidated financial
information as the consolidated financial information include the
41
Guidance Note on Reports in Company Prospectuses
financials of the significant divisions, branches, or
subsidiaries/joint ventures/associates. The principal auditors
based on their judgement need to decide whether a division,
branch, or subsidiary/joint venture/associate is significant or not
based on both qualitative and quantitate factors. In case of (b)
above, the principal auditors would need to carry out procedures
necessary (additional audit procedures) to be able to give comfort
in relation to financials to provide the comfort letter for all the past
periods or for such significant divisions, branches, or
subsidiaries/joint ventures/associates, including such years in
which he was not the auditor.
Providing Tick and Tie (Circle up) comfort
20. Auditors should follow the guidance below while providing tick
and tie comfort.
The procedures that the auditors may perform in connection
with comfort letters are limited to matters to which their
professional expertise as independent accountants and
auditors is relevant.
They should only circle up information that has been obtained
from accounting records that are subject to their client's internal
control (of which they have obtained knowledge) as it relates to
the preparation of financial information.
The auditors may perform procedures and comment only on
the following types of information:
(i) Amounts or percentages derived from amounts obtained
from accounting records that are subject to controls over
financial reporting;
(ii) Information derived directly from such accounting
records by analysis or computation; or
(iii) Quantitative information obtained from the accounting
records if such information is subject to the same internal
control as the amounts.
They should not simply compare specified items appearing in
an Offering Circular with worksheets, analyses and schedules
42
Guidance Note on Reports in Company Prospectuses
that have been prepared by employees in their client's
accounting department. Rather they should also compare the
specified items appearing in the worksheets, analyses and
schedules to the appropriate accounting records.
Accordingly, they should not circle up the following:
(i) Size of the Plant/Office and Unit of
Production/Capacities
(ii) Sensitivity analysis and other similar information
(iii) No. of Employees
(iv) No. of Shareholders
(v) Available lines of credits
Circle up comfort is associated with only "numbers" and hence
the auditors should not circle up any words, sentences or
paragraphs.
Circle up comfort is meant to provide a tick and tie comfort for
the numerical information contained in the offering circular
extracted from:
(i) The Financial Information contained on the F-pages
(Financial Statements section) of the offering circular
(ii) The Audited/Unaudited Financial Statements which are
not included in the offering circular
(iii) The Schedules/Analysis prepared by the Company from
the accounting records
(iv) Ratios and Percentages calculated from the Financial
Information contained on the F-Pages or from the
Audited/Unaudited Financial Statements or from the
information contained in the Schedules prepared by the
Company from the accounting records.
No circle comfort should be provided for F-pages (Financial
Statements section) and Auditors should not provide any
reproduction comfort of F-Pages in the prospectus. It should be
the responsibility of the management of the company to ensure
43
Guidance Note on Reports in Company Prospectuses
that audited / reviewed financials are appropriately reproduced
in the prospectus.
Comfort Letter Line Items
21. In determining what, if any, line items will be provide comfort
on, as well as the type of comfort the auditors will provide, the
auditors should evaluate the information Management has utilised
to arrive at their determination regarding any changes in the
financial statement line items. In doing so, the auditors should
consider the items such as the following (list is not intended to be
exhaustive):
Length of change period,
Significance of trends,
Volatility and complexity of business,
Specific events which may have taken place during the period
which would impact trend,
History of closing/ audit adjustments,
Status of audit of the financial statements as well as the audit
procedures effecting the specific line item being evaluated (will
it be substantially complete at the time comfort letter is issued),
Ability of company to perform cutoff or closing procedures as of
the cutoff date,
Ability of company to perform a monthly hard close and prepare
monthly financial statement of the same basis (i.e.,
consolidated) as those included in the document,
Other procedures.
Elements of a Comfort Letter
22. A comfort letter (Refer Appendix 2.3) normally includes
the following elements:
(i) Addressee The comfort letter should be addressed only to
the client and the party requesting the comfort letter (for
example, the underwriters).
(ii) A statement as to the independence of the auditors.
44
Guidance Note on Reports in Company Prospectuses
(iii) Introductory paragraph The introductory paragraph of the
comfort letter should draw attention to the report of the
auditor on the financial information contained in the
prospectus, adequately identifying the financial information
as well in the prospectus. The auditor should not
reproduce his opinion in the comfort letter. The
introductory paragraph should also make a reference to
any other report (such as reports on Proforma Financial
Information and Interim Financial Information etc. based on
which circle up comforts are provided) issued by the
auditor in connection with the prospectus, identifying
adequately the subject matter of the report .
When the report on the audited financial statements
departs from the standard report, for instance, where one
or more explanatory paragraphs or a paragraph to
emphasise a matter regarding the financial statements
have been added to the report, the auditors should refer to
that fact in the comfort letter and discuss the subject matter
of the paragraph. Similar principles will apply in case of
qualified opinion on historical financial statements and the
auditors should refer to the qualification in the opening
paragraph of the comfort letter and discuss the subject
matter of the qualification.
In case a review is performed - Auditors may comment in
the form of negative assurance only when they have
conducted a review of the interim financial information in
accordance with Standard on Review Engagements 2410,
"Review of Interim Financial Information Performed by the
Independent Auditor of the Entity". The auditors may state
in the comfort letter that they have performed the
procedures in accordance with Standard on Review
Engagement 2410 for a review of interim financial
information (see Appendix 2.3 - paragraph 3.a) or if the
auditors have issued a report on the review, they may
mention that fact in the comfort letter in the introductory
paragraph section. When the accountants have not
conducted a review in accordance with Standard on
45
Guidance Note on Reports in Company Prospectuses
Review Engagement 2410, the accountants may not
comment in the form of negative assurance and are,
therefore, limited to reporting procedures performed and
findings obtained.
(iv) Scope paragraph This paragraph would outline the scope of
work of the auditor and the procedures to be performed by
him, as agreed with the client and the parties requesting the
comfort letter. Any limitations, agreed among the parties,
subject to which the procedures would be performed, should
also be appropriately brought out in this paragraph.
However, where the auditor has been requested to provide
negative assurance (i.e., carry out a review) in respect of
certain information, it is not necessary for the auditor to
describe the procedures performed by him.
(v) Report paragraph This paragraph should contain the
findings or opinion reached by the auditor after performing
the procedures outlined in the scope paragraph. Any
limitations, in addition to those described in the scope
paragraph should also be disclosed in the report
paragraph along with the impact, if any, of such limitations.
(vi) Concluding paragraph In order to avoid
misunderstanding as to the purpose and intended use of
the comfort letter, it is advisable that the comfort letter also
includes a paragraph as to the purpose and intended use
of the comfort letter.
(vii) Signature of the auditor
(viii) Date
(ix) Place
Bankers may request to issue a letter reaffirming comments in a
previously issued comfort letter for which auditors can issue an
updated comfort letter (Bring Down Comfort Letter) (Refer
Appendix 2.4).
46
Guidance Note on Reports in Company Prospectuses
Proforma financial statements/information
23. Securities and Exchange Board of India (Issue of Capital and
Disclosure Requirements) (Fourth Amendment) Regulations, 2010
lay down the following requirements in relation to Proforma
financial statements:
Requirements to disclose Proforma financial statements /
information
The issuer shall disclose Proforma Financial Statements in the
offer document, if-
(a) an acquisition or divestment is made by the issuer after the
end of the latest disclosed annual financial results in the offer
document, due to which certain companies become/cease to
be direct or indirect subsidiaries of the issuer, and
(b) the financial statements of such acquired or divested entity is
material to the financial statements of the issuer company.
Explanation: The financial statements of the acquired or divested
entity shall be "material" to the financial statements of the issuer if:
(i) the total book value of the assets of the acquired/divested
entity amounts to more than 20% of the pre-acquisition/pre-
divestment book value of the assets of the issuer;
or
(ii) the total income of the acquired / divested entity amounts to
more than 20% of the pre-acquisition / pre-divestment total
income of the issuer.
Period covered for proforma financial statements/ information
Proforma Financial Statements shall be disclosed in respect of the
following, namely:
i. the last completed accounting year, and
ii. the period beginning from the date of the end of the last
completed accounting year and ending on the date on which
financial statements of the issuer have been disclosed in the offer
document.
47
Guidance Note on Reports in Company Prospectuses
Where the said acquisition or divestment does not fulfill the tests
of materiality specified in clause 23(1)(b) of Securities and
Exchange Board of India (Issue of Capital and Disclosure
Requirements) (Fourth Amendment) Regulations, 2010, the fact of
the acquisition or divestment along with the consideration paid /
received and the mode of financing such acquisition shall be
disclosed.
Reporting requirements for proforma financial statements /
information
The information disclosed as per sub-clause (2) and (3) of clause
23 of Securities and Exchange Board of India (Issue of Capital
and Disclosure Requirements) (Fourth Amendment) Regulations,
2010 above shall be certified by the statutory auditor of the issuer.
Comments on Pro Forma Financial Statements/Information in
Comfort Letter
If the auditors did previously report on the Pro Forma Financial
Statements/ Information in accordance with SAE 3420 `Assurance
Engagements to Report on the Compilation of Pro Forma
Financial Information Included in a Prospectus', they may refer in
the introductory paragraph of the comfort letter to the fact that they
have issued a report. In that circumstance, therefore, the
procedures in paragraph 7 mentioned below ordinarily would not
be performed, and the auditors should not separately comment on
the Pro Forma Financial Statements/ Information, since that
confirmation is encompassed in the auditors' report on the Pro
Forma Financial Statements/ Information.
Auditors should not comment in a comfort letter on proforma
financial information unless they have an appropriate level of
knowledge of the accounting and financial reporting practices of
the entity (or, in the case of a business combination, of a
significant constituent part of the combined entity). This would
ordinarily have been obtained by the auditors auditing or reviewing
historical financial statements of the entity for the most recent
annual or interim period for which the proforma financial
information is presented.
48
Guidance Note on Reports in Company Prospectuses
Auditors should not give negative assurance in a comfort letter on
the application of proforma adjustments to historical amounts, the
compilation of proforma financial information, whether the
proforma financial information complies as to form in all material
respects with the applicable accounting requirements or otherwise
provide negative assurance with respect to proforma financial
information unless they have obtained the required knowledge
described above and they have performed an audit of the annual
financial statements, or a review in accordance with Standard on
Review Engagements (SRE) 2410 "Review of Interim Financial
Information Performed by the Independent Auditor of the Entity" of
the interim financial statements, of the entity (or, in the case of a
business combination, of a significant constituent part of the
combined entity) to which the proforma adjustments were applied.
In the case of a business combination, the historical financial
statements of each constituent part of the combined entity on
which the proforma financial information is based should be
audited or reviewed.
This section is applicable when the auditors are asked to
comment on the application of pro forma adjustments to historical
amounts in the compilation of the pro forma financial statements/
information.
The following paragraph is intended to be inserted after paragraph
6 in Appendix 2.3. The auditors have audited the March 31, 20X6,
financial statements and have conducted a SRE 2410 review of
the June 30, 20X6, interim financial information of the acquiring
company. Other auditors conducted a review of the June 30,
20X6, interim financial information of XYZ Company, the company
being acquired. This section assumes that the auditors have not
previously reported on the pro forma financial statements/
information. If the auditors did previously report on the pro forma
financial statements/ information, they may refer in the
introductory paragraph of the comfort letter to the fact that they
have issued a report. In that circumstance, therefore, the
procedures in 7b(i) and 7c mentioned below ordinarily would not
be performed, and the auditors should not separately comment on
the application of pro forma adjustments to historical financial
49
Guidance Note on Reports in Company Prospectuses
statements/ information, since that assurance is encompassed in
the auditors' report on pro forma financial statements/ information.
Paragraph 7 - "At your request, we have--
a. Read the unaudited pro forma condensed balance sheet
as of June 30, 20X6, and the unaudited pro forma
condensed statements of profit and loss for the year ended
March 31, 20X6, and the three-month period ended June
30, 20X6 (collectively, "Pro forma Financial Information"),
included in the Prospectus.
b. Inquired of certain officials of the company and of XYZ
Company (the company being acquired) who have
responsibility for financial and accounting matters about--
i. The basis for their determination of the pro forma
adjustments, and
ii. Whether the unaudited pro forma condensed financial
statements referred to in paragraph 7a. above comply
with the pro forma adjustments as described in Note
[xx] to the pro forma financial information.
Those officials stated, in response to our inquiry, that the
proforma adjustments have been determined based on
Note [xx] to the Proforma Financial Information.
c. Proved the arithmetic accuracy of the application of the pro
forma adjustments to the historical amounts in the
unaudited pro forma condensed financial statements.
The foregoing procedures are substantially less in scope than an
examination, the objective of which is the expression of an opinion
on management's assumptions, the pro forma adjustments, and
the application of those adjustments to historical financial
information. Accordingly, we do not express such an opinion. The
foregoing procedures would not necessarily reveal matters of
significance with respect to the comments in the following
paragraph. Accordingly, we make no representation about the
sufficiency of such procedures for your purposes."
50
Guidance Note on Reports in Company Prospectuses
Financial Projections
24. Securities and Exchange Board of India (Infrastructure
Investment Trusts) Regulations, 2014, as amended and Securities
and Exchange Board of India (Real Estate Investment Trusts)
Regulations, 2014, as amended laid down the following
requirements in relation to financial forecasts:
Requirements to disclose financial forecasts - Securities and
Exchange Board of India (Infrastructure Investment Trusts)
Regulations, 2014, as amended
Projections of revenue and operating cash flows by Investment
Infrastructure Trust (InvIT), project-wise over next three years
including assumptions details as certified by the auditor.
Requirements to disclose financial forecasts - Securities and
Exchange Board of India (Real Estate Investment Trusts)
Regulations, 2014, as amended
Projections of income of the Real Estate Investment Trust over
next three years beginning the current financial year certified by
the manager with respect to calculation and assumptions and
certified by the auditor with respect to arithmetical accuracy.
Comments on Prospective Financial Information in Comfort
Letter
If the auditors did previously report on the prospective financial
information in accordance with SAE 3400 `The Examination of
Prospective Financial Information', they may refer in the
introductory paragraph of the comfort letter to the fact that they
have issued a report. In that circumstance, therefore, the
procedures in paragraphs 7 and 8 mentioned below ordinarily
would not be performed, and the auditors should not separately
comment on the prospective financial information, since that
assurance is encompassed in the auditors' report on prospective
financial information.
This section is applicable when auditors are asked to comment on
a financial projections (see paragraph above). The material in this
section is intended to be inserted after paragraph 6 in Appendix
2.3. This section assumes that the auditors have previously not
51
Guidance Note on Reports in Company Prospectuses
reported on the examination of the financial projections. For
auditors to perform agreed-upon procedures on a financial
projections and comment thereon in a comfort letter, they should
obtain the knowledge of internal controls and then perform
procedures prescribed in SAE 3400 `The Examination of
Prospective Financial Information'. Auditors may not provide
negative assurance on the results of procedures performed.
Paragraph 7 - "At your request, we performed the following
procedure with respect to the forecasted consolidated [financial
line items] as of March 31, 20X6, and for the year then ending.
With respect to forecasted [items to be mentioned such as rental
income], we compared the occupancy statistics about expected
demand for rental of the housing units to statistics for existing
comparable properties and found them to be the same [to be
modified suitably].
8. Because the procedure described above does not constitute an
examination of prospective financial statements in accordance
with Standards on Auditing, we do not express an opinion on
whether the prospective financial statements are presented in
conformity with Securities and Exchange Board of India
(Infrastructure Investment Trusts) Regulations, 2014 or Securities
and Exchange Board of India (Real Estate Investment Trusts)
Regulations, 2014, as amended guidelines or on whether the
underlying assumptions provide a reasonable basis for the
presentation.
Had we performed additional procedures or had we made an
examination of the forecast in accordance with standards
established by ICAI, matters might have come to our attention that
would have been reported to you. Furthermore, there will usually
be differences between the forecasted and actual results, because
events and circumstances frequently do not occur as expected,
and those differences may be material. We make no
representations about the sufficiency of such procedures for your
purposes."
52
Guidance Note on Reports in Company Prospectuses
Combined Financial Statements / Information
25. Securities and Exchange Board of India (Infrastructure
Investment Trusts) Regulations, 2014, as amended and Securities
and Exchange Board of India (Real Estate Investment Trusts)
Regulations, 2014, as amended laid down the following
requirements in relation to financials which may be required to be
prepared on combined basis:
Requirements to disclose combined financial statements -
Securities and Exchange Board of India (Infrastructure Investment
Trusts) Regulations, 2014, as amended
Principles for preparation of combined financial statements:
1. For preparation of Combined Financial Statements InvIT shall
follow the following principles:
1.1. Period for which combined financial statements shall be
disclosed
When the InvIT has not been in existence for some portion or the
entire portion of the reporting period of three years and interim
period, if any, then the financial information must be provided
through combined financial statements, showing the combined
financial performance of all the proposed InvIT assets, for such
period when InvIT was not in existence.
1.2. Assets/entities forming part of Combined Financial
Statements:
All the assets or entities, which are proposed to be owned by the
InvIT, as per the disclosures in the offer document / placement
memorandum, shall collectively form part of combined financial
statements.
1.3. Underlying assumption for preparation of Combined Financial
Statements
Such combined financial statements shall be prepared based on
an assumption that all the assets and/or entities, proposed to be
owned by InvIT, were part of a single group for such period when
InvIT was not in existence.
53
Guidance Note on Reports in Company Prospectuses
1.4. Preparation of Combined Financial Statements:
i. These statements shall be prepared on a combined basis and
presented as if InvIT assets were a part of a single group
since the first day of the reporting period for which information
is being presented.
ii. The principles for preparation of combined financial
statements shall be same as the principles laid down in "Ind
AS 110 Consolidated Financial Statements", to the extent
applicable. However, unlike consolidated financial statements,
the combined financial statements shall not have the parent.
iii. While preparing Combined Financial Statements, transactions
between the entities proposed to be owned by InvIT (i.e.
transactions between the entities which are forming part of
the combined financial statements) shall be eliminated.
Further, all pertinent matters, such as non-controlling
interests, foreign operations, different fiscal periods, or
income taxes, etc. shall be treated in the same manner as in
consolidated financial statements, to the extent applicable.
iv. In cases where one or more of the underlying InvIT assets
have been held by the sponsor or its associates or its group
entities for a period lesser than the last three completed
financial years, then such assets may be reflected in the
Combined Financial Statements only from the date of holding
by such entity.
However, if the discrete financial information for such assets
is also available for the pre-holding period (i.e. the period
before the acquisition by the sponsor or its associates or its
group entities), then such assets shall be reflected in the
Combined Financial Statements for such pre-holding period
as well.
v. If there are any assets for which the financial information is
considered for a period lesser than three years and the
additional interim period, if any, then such fact shall be clearly
disclosed in the offer document/placement memorandum,
along with all pertinent details.
54
Guidance Note on Reports in Company Prospectuses
vi. Assumptions made in preparation of the Combined Financial
Statements shall be disclosed in `Basis of Preparation' of
such statements.
vii. The basis of preparation shall also explain the principles of
combination and elimination of transactions amongst entities
that are included in the Combined Financial Statements.
2. In addition to the principles listed at paragraph `1' above, the
InvIT/Investment Manager, while preparing the Combined
Financial Statements of the InvIT, shall also be guided by the
requirements laid down in the `Guidance Note on Combined and
Carve-Out Financial Statements' and any other pertinent
guidance/directions issued by ICAI in this context.
Comments on Combined Financial Statements / Information
in Comfort Letter
Auditors should not comment in a comfort letter on combined
financial statements / Information unless they have an appropriate
level of knowledge of the accounting and financial reporting
practices of the entities involved. This would ordinarily have been
obtained by the auditors auditing or reviewing of the combined
financial statements / Information of the entities involved for the
past periods or interim period for which the combined financial
statements / Information is presented.
If the auditors did previously report on the combined financial
statements / Information in accordance with SA 800 `Special
Considerations--Audits of Financial Statements Prepared in
Accordance with Special Purpose Frameworks' and `Guidance
Note on Combined and Carve-Out Financial Statements' and any
other pertinent guidance/directions issued by ICAI in this context.,
they may refer in the introductory paragraph of the comfort letter
to the fact that they have issued a report.
Due Diligence Call with Bankers
26. Bankers also request to do a due diligence call (as part of the
issuance of comfort letter) with the auditors to obtain information
in relation to (i) the financial statements/ information, (ii)audit or
review reporting and (iii) confirmation on certain matters (such as
55
Guidance Note on Reports in Company Prospectuses
independence, rotation policy of the firm, meeting with audit
committee and internal auditors etc.). The auditors should attend
such due diligence call and provide oral responses (no written
response should be provided) to queries made by the bankers.
Auditors' responses should be based on their audit or review
procedures performed on financial information and internal
controls (if applicable). On such calls, auditors should not confirm
any matter in relation to prospective financial information.
56
Guidance Note on Reports in Company Prospectuses
Appendix 2.1
Illustrative Format of Representation Letter from
Bankers (ICDR Regulations Representation Letter)
(Refer paragraph 8 of Appendix 2)
[Name and Address of the Chartered Accountant]
Dear Sirs:
[Name of the Bankers], each, as principal or agent, in the initial
public offering of [identify securities] to be issued by [name of
issuer] (the "Issuer"), will be reviewing certain information relating
to the Issuer that will be included in the Draft Red Herring
Prospectus/ Red Herring Prospectus/ Prospectus which may be
accessible to prospective investors and utilised by them as a basis
for their investment decision. This review process, applied to the
information relating to the Issuer, is (will be) substantially
consistent with the due diligence review process that we are
required to perform in connection with the filing of the Draft Red
Herring Prospectus/ Red Herring Prospectus/ Prospectus
pursuant to the Securities and Exchange Board of India (Issue of
Capital and Disclosure Requirements) Regulations, 2009, as
amended (the "ICDR Regulations"). [It is recognised that what is
substantially consistent may vary from situation to situation and
may not be the same as that done in another offering of the same
securities for the same Issuer. Whether the procedure being or to
be followed will be 'substantially consistent' will be determined by
the [Lead Managers] on a case-by-case basis.] We are
knowledgeable with respect to the due diligence review process
under the ICDR Regulations. We would require you to deliver us
"comfort" letters as and when requested by us concerning the
[financial statements] of the Issuer and certain statistical and other
data included in the Draft Red Herring Prospectus/ Red Herring
Prospectus/ Prospectus. We will contact you to identify the
procedures we wish you to follow and the form we wish the
comfort letters to take.
This letter is solely for the information and use of [name of the
Chartered Accountant Firm] in issuing comfort letters in
57
Guidance Note on Reports in Company Prospectuses
connection with the proposed offering of securities in India of the
Issuer and it is not to be used, circulated, quoted or otherwise
referred to in the Draft Red Herring Prospectus/ Red Herring
Prospectus/ Prospectus or any other document or disclose to any
other person.
Yours sincerely,
[Name of the Lead Manager/ Underwriter]
[Name of the Lead Manager/ Underwriter]
As representatives of the several underwriters
Place
Date
58
Guidance Note on Reports in Company Prospectuses
Appendix 2.2
Illustrative Format of Representation Letter from
Management9 for issuance of comfort letter
[Name and Address of the Chartered Accountant]
Dear Sirs:
Proposed Offering by [.] (the "Issuer" or the "Company") of [.] (the
"Securities")
In connection with the above issue of Securities, we confirm on
behalf of the Board, and having made appropriate inquiries of
other directors and officials of the Company and its subsidiaries
(collectively, the "Group"), that
1. the facts as stated in your comfort letter dated [date]
("Comfort Letter"), are accurate in all material respects and any
opinions attributable to us are fair and reasonable. We have made
available to you all significant information relevant to your Comfort
Letter of which we have knowledge and we are not aware of any
matters relevant to your engagement letter dated [date] which
have been excluded.
2. the minutes of meetings of the shareholders, the board of
directors, audit committee and the compensation committee of the
Company are set forth in minute books for the period from [date],
up to and including [date] (the "Cut-off date"), except for the
minutes relating to the meetings as mentioned in Appendix [.],
which was not approved in final form for which draft was provided
to you and we confirm that such drafts include all substantive
actions taken at such meeting.
3. details of changes in the issued and paid-up share capital
and long term debt (including current maturities) of the Company
as at the Cut-off Date as compared with [date] audited Financial
Statement of the Company as referred in the Comfort Letter, are
given below:
9
Such management representation letter to be obtained at each stage of
issuance of comfort letter.
59
Guidance Note on Reports in Company Prospectuses
Particulars As at XX XXX, As at the Cut- Increase/
20x6 off Date (Decrease)
Issued Share
Capital
Paid-up Share
Capital
Long Term Debt
(including
current
maturities)
(amend as appropriate if other items of profit or loss and balance
sheet are considered)
We have no reason to believe that at the Cut-off Date, there was
any decrease or increase in the issued and paid-up share capital
or increase in long term debt (including current maturities) of the
Company compared to the amounts shown in the [date] audited
financial statements of the Company as referred in the Comfort
Letter other than as stated above.
4. we are not aware of any matters to which attention should
be drawn in the Draft Red Herring Prospectus dated [date], that
there has been material adverse change in the financial position
or prospects of the Company since the date of its last published
financial statements.
4. all the items compared by you for circle up comfort, set out
in annexure xx, are accurate and properly drawn from accounting
records or financial statements, as applicable.
5. we are responsible for the following:
a. the preparation of the financial information [mention the
period - subsequent to date of latest audit/ review period]
and the fair presentation therein of the financial information
60
Guidance Note on Reports in Company Prospectuses
of the Company/Group in conformity with the accounting
principles generally accepted in India.
b. designing, implementing, and maintaining internal controls
relevant to the preparation and fair presentation of such
financial information which are free from material
misstatements, whether due to fraud or error.
6. in connection with your report on F-xx and F-xx, set out in
the F pages of the Offering Memorandum dated [date], we
acknowledge as duly appointed officials of the Company our
responsibility for the financials statements of the Company as of
and for the years ended [dates]. The figures disclosed in the
financial information are extracted from the audited financial
statements as of and for the years ended [dates], approved by the
Board of Directors on [dates].
Yours faithfully,
[For and on behalf of Board of Directors of XYZ Limited]
61
Guidance Note on Reports in Company Prospectuses
Appendix 2.3
Illustrative Format of Comfort Letter
[This draft is furnished solely for the purpose of indicating the form
of letter that we would expect to be able to furnish to __________
[name of Lead Managers] in response to their request, the
matters expected to be covered in the letter, and the nature of the
procedures that we would expect to carry out with respect to such
matters. Based on our discussions with __________ [name of
Lead Managers], it is our understanding that the procedures
outlined in this draft letter are those they wish us to follow. Unless
[name of Lead Managers] informs us otherwise, we shall assume
that there are no additional procedures they wish us to follow. The
text of the letter itself will depend, of course, on the results of the
procedures, which we would not expect to complete until shortly
before the letter is given and in no event before the cutoff date
indicated therein.]
The Board of Directors
[Name of the Company and Address]
and
[Name of LM1 & Address]
and
[Name of LM2 & Address]
and
[Name of LM3 & Address]
and
[Name of LM4 & Address]
[(The latter four addressees above are referred to herein as the
"Lead Managers")]
Dear Sirs:
62
Guidance Note on Reports in Company Prospectuses
Proposed Offering of ..................... Equity Shares of Rs.........
each (the "Securities") pursuant to an Initial Public Offering in
India of [Name of the Company] (the "Company").
We have audited the [standalone]/ [consolidated] financial
statements of [Name of the Company] (the "Company") [and its
subsidiaries associates and jointly controlled entities (collectively,
the "Group") as of [dates] and also for each of the [no. of years]
years in the period ended [last date audited] and [no. of months in
interim period, if any] period ended (collectively, the "Audited
[Standalone]/ [Consolidated] Financial Statements")[, and the
adequacy and operating effectiveness of the Company's internal
financial controls over financial reporting as of March 31, 20X6].
(State number of years not audited by the Principal Auditor and
state the reliance placed on the work done by other auditors).
These Audited [Standalone]/ [Consolidated] Financial Statements
and our reports thereon are not included in the Company's [Draft
Red Herring Prospectus / Red Herring Prospectus / Prospectus]
dated [xxx] hereinafter referred to as the [DRHP / RHP/
Prospectus].
[We did not audit the financial statements of certain subsidiaries,
whose financial statements reflect total assets of Rs. xxx as at
[dates], total revenues of Rs. xxx and total cash flows of Rs. xxx
for the years ended on [dates] respectively. Further, we did not
audit the financial statements of associates and joint ventures
whose financial statements reflect the consolidated entities' share
of profits of Rs. xxx for the years ended [dates] respectively.
These financial statements have been audited by other auditors
whose reports have been furnished to us, and our opinion, insofar
as it relates to the amounts included in respect of such
subsidiaries, associates and joint ventures, is based solely on the
report of the other auditors.]
We have examined [, as appropriate (refer paragraph below),] the
restated [standalone]/ [consolidated]summary statement of assets
and liabilities of the Company as of [dates] and the related
restated [standalone]/ [consolidated] summary statement of profit
and loss, and restated [standalone] / [consolidated] statement of
cash flows for each of the [no. of years] years in the period ended
63
Guidance Note on Reports in Company Prospectuses
[last date audited] and [no. of months in interim period, if any]
period ended (collectively, together with the annexures thereto,
the "Restated [Standalone]/ [Consolidated] Financial Statements")
each restated in accordance with the requirements of the
Companies Act, 2013 read with the Companies (Prospectus and
Allotment of Securities) Rules, 2014, to the extent applicable
(together the "Companies Act") and the Securities and Exchange
Board of India (Issue of Capital and Disclosure Requirements)
Regulations, 2009, as amended (the "ICDR Regulations") and the
"Guidance Note on Reports in Company's Prospectuses (Revised
2016)" issued by the Institute of Chartered Accountants of India
(ICAI), to the extent applicable, as amended from time to time
("Guidance Note"). The Audited [Standalone]/ [Consolidated]
Financial Statements and our reports thereon form the basis of the
Restated [Standalone]/ [Consolidated] Financial Statements. The
Restated [Standalone]/ [Consolidated] Financial Statements and
our report thereon are included in the [DRHP/RHP/ Prospectus].
[The restated financial information of the Company and the Group
as of [dates] and also for each of the [no. of years] years in the
period ended [last date audited] and of certain subsidiaries as of
[dates] and also for each of the [no. of years] years in the period
ended [last date audited] and [no. of months in interim period, if
any] period ended (details furnished in Appendix xx) have been
examined and reported upon by other auditors. Our examination,
in so far as it relates to the amounts considered in the Restated
Consolidated Financial Statements for these entities are solely
based on the report of other auditors.] (amend as applicable)
This letter is being furnished in reliance upon the Lead Managers
representation to us that:
a. The Lead Managers are knowledgeable with respect to the
due diligence review process required under Securities and
Exchange Board of India(Issue of Capital and Disclosure
Requirements) Regulations, 2009 as amended.
b. In connection with the offering of Securities, the review
process the Lead Managers have performed is substantially
consistent with the due diligence review process required
64
Guidance Note on Reports in Company Prospectuses
under Securities and Exchange Board of India(Issue of
Capital and Disclosure Requirements) Regulations, 2009, as
amended.[It is recognised that what is substantially consistent
may vary from situation to situation and may not be the same
as that done in another offering of the same securities for the
same Issuer. Whether the procedure being or to be followed
will be 'substantially consistent' will be determined by the
[Lead Managers] on a case-by-case basis.]
[This letter is being furnished in accordance with the terms of the
arrangement letter dated [XX, 20x1] (the "Arrangement Letter"),
which have been agreed between us and govern the matters
addressed by this comfort letter and its use in connection with the
sale of the securities in India.]10
In connection with the [DRHP / RHP / Prospectus]:
1. We are independent chartered accountants with respect to
the Company pursuant to the rules promulgated in Clause 4, Part
I, The Second Schedule, of The Chartered Accountants Act, 1949.
2. We have not audited any financial statements of the
Company as of any date or for any period subsequent to [latest
audited date]; although we have conducted an audit for the year
ended [latest audited date], the purpose and therefore the scope
of the audit was to enable us to express an opinion on the
[standalone]/ [consolidated] financial statements as of [latest
audited date] and for the year then ended, but not on the financial
statements for any interim period within that year. Therefore, we
are unable to and do not express any opinion on the unaudited
[standalone]/ [consolidated] balance sheet as of [latest interim
review date] and the unaudited [standalone]/ [consolidated]
statements of income and cash flows for the [no. of months for
which limited review is done] periods ended [latest interim review
date and the corresponding previous period date] in the [DRHP /
RHP / Prospectus] or on the financial position, results of
operations, or cash flows as of any date or for any period
subsequent to [latest audited date].
10
The auditor may provide a reference to arrangement letter.
65
Guidance Note on Reports in Company Prospectuses
3. For the purposes of this letter, we have read the [year]
minutes of the meetings of the shareholders, the Board of
Directors and (include other appropriate committees, if any) of the
Company [and its subsidiaries] as set forth in minute books as of
[cut-off date generally minimum 3 business days before date of
comfort letter], officials of the Company having advised us that the
minutes of all such meetings through that date were set forth
therein [(except for the minutes of the [dates] Board of Directors
meeting which were not approved in final form, for which drafts
were provided to us; officials of the Company have represented
that such drafts include a summary of the topics discussed at such
meeting)] and have carried out other procedures to [cut-off date]
(our work did not extend to the period from [cut-off date to date of
comfort letter] inclusive) as follows:
a) With respect to the [mention no. of months] periods ended
[current period and corresponding previous period], we have
performed the procedures specified by the Institute of
Chartered Accountants of India as described in Standard on
Review Engagements 2410 "Review of Interim Financial
Information Performed by the Independent Auditor of the
Entity" on the unaudited condensed [standalone]/
[consolidated] balance sheet of the Company as of [latest
interim review date] and the unaudited condensed
[standalone]/ [consolidated] statements of profit and loss
account and cash flow for the [no. of months for which limited
review is done] periods ended [latest interim review date and
the corresponding previous period date] (collectively
"unaudited condensed [standalone]/ [consolidated] financial
statements") prepared by the Company in accordance with
Accounting Standard 25 "Interim Financial Reporting" or Ind
AS 34 "Interim Financial Reporting", as applicable.
b) With respect to the period from [date after the latest interim
review date] to [agreed month(s) period end], we have:
i. read the unaudited [standalone]/ [consolidated] financial
statements/ information of the Company for the [periods]
of both [latest year] and [previous year] furnished to us by
the Company, officials of the Company having advised us
66
Guidance Note on Reports in Company Prospectuses
that no such financial statements/ information as of any
date or for any period subsequent to [agreed period end]
were available. The financial information for [the periods]
of both [latest year] and [previous year] is incomplete in
that it omits the statements of cash flows and other
disclosures.
ii. inquired of certain officials of the Company who have
responsibility for financial and accounting matters
whether the unaudited financial statements/ information
referred to in b(i) are stated on a basis substantially
consistent with that of the restated [audited] financial
statements included in the [DRHP / RHP/ Prospectus].
[c) We have read11 the comfort letters of other auditors of the
entities as mentioned in Appendix xx [and comfort letter(s) of
the previous auditors]. The procedures performed by us and
described in this letter (other than reading of comfort letters
issued by other auditors [and previous auditors]) relate solely
to the entities [and periods] audited by us, listed in Appendix
xx, and the overall consolidated financial statements (which is
based on reliance of comfort letters issued by other auditors
in respect of certain entities, listed in Appendix xx, not audited
by us and included in the Audited Consolidated Financial
Statements/ Restated Consolidated Financial Statements) as
relates to the aggregation of the financial statements the
Company and its [subsidiaries/ joint ventures/ associates] and
the consolidation adjustments thereof.
The foregoing procedures do not constitute an audit done in
accordance with Standards on Auditing in India. Also, they would
not necessarily reveal matters of significance with respect to
comments in the following paragraph. Accordingly, we make no
11
In case previous auditors and components' auditors are involved, the previous
auditors and components' auditors should issue comfort letters (directly to the
bankers) in relation to the financial information for the periods audited/examined
by them and the principal/ current auditor should read the comfort letters issued
by previous auditors and components' auditors.
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Guidance Note on Reports in Company Prospectuses
representations regarding the sufficiency of the foregoing
procedures for your purposes.
4. Nothing came to our attention as a result of the foregoing
procedures [(which insofar in respect of certain entities listed in
Appendix xx audited by other auditors listed in Appendix xx is
concerned, consisted solely on the basis of reading of the comfort
letters referred to in paragraph 3(c))], however, that caused us to
believe that:
i. Any material modifications should be made to the unaudited
condensed [standalone]/ [consolidated] financial statements
described in 3a for them to be in conformity with accounting
principles generally accepted in India, {except that the
detailed disclosure notes required by Accounting Standard 25
"Interim Financial Reporting" or Ind AS 34 "Interim Financial
Reporting", as applicable, have not been presented}.
ii. At [agreed month(s) period end], there was any change in the
[issued share capital] or increase in [long-term debt]12, of the
Company on an [standalone]/ [consolidated] basis as
compared with amounts shown in the [latest interim review
date], [standalone]/ [consolidated] balance sheet included in
the DRHP/RHP, [except for an increase in the long term debt
that the DRHP/RHP discloses have occurred or may occur.]
OR
[except as mentioned below:
Particulars As at [date As at [date Increase /
(last balance (agreed (decrease)
sheet date)] month(s)
(Rs. in
period
(Rs. in million)
end)]
million)
(Rs. in
million)
12
Based on the facts and circumstances, the auditors may consider, as per their
judgement, whether additional financial statements line items can be included for
providing negative assurance.
68
Guidance Note on Reports in Company Prospectuses
Paid up share
capital
Long-term debt
(including current
maturities)
5. As mentioned in 3b, Company officials have advised us
that no [standalone]/ [consolidated] / [consolidated] financial
statements/ information as of any date or for any period
subsequent to [agreed period end], are available; accordingly the
procedures carried out by us with respect to changes in financial
statement items after [agreed period end], have, of necessity,
been even more limited than those with respect to the periods
referred to in 3. We have inquired of certain officials of the
Company who have responsibility for financial and accounting
matters whether (i) at [cut-off date] there was any change in the
paid-up share capital and increase in long term debt13 of the
Company as compared with amounts shown on the [latest interim
review date] unaudited [standalone]/ [consolidated]14balance sheet
included in the [DRHP / RHP/ Prospectus]. On the basis of these
inquiries and our reading of the minutes as described in paragraph
3(a) above [and the comfort letters of the other auditors as
mentioned Appendix xx in respect of certain entities listed in
Appendix xx], nothing came to our attention that caused us to
believe that there was any such change, increase, or decrease,
[except for an increase in the long term debt that the [DRHP/RHP]
discloses have occurred or may occur.]
OR
[except as mentioned below:
13
Based on the facts and circumstances, the auditors may consider, as per their
judgement, whether additional financial statements line items can be included for
providing negative assurance.
14
Auditors should not provide comfort on a consolidated basis unless they are
auditing ALL components of the Group or are able to read the comfort letters of
ALL other auditors of the group entities.
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Guidance Note on Reports in Company Prospectuses
Particulars As at [date As at [date Increase /
(last balance (cut-off (decrease)
sheet date)] date)]
(Rs. in
(Rs. in (Rs. in million)
million) million)
Paid up share
capital
Long-term debt
(including current
maturities)
6. For the purposes of this letter we have, at your request,
also read the items identified by you on the attached pages of the
[DRHP/RHP], in respect of which one of the following tests were
applied in each case as indicated by the corresponding letter (i.e.
reference to the relevant sub-paragraph below) shown against the
items:
A. Compared the amount identified to a corresponding
amount in the Company's Restated [Standalone]/ [Consolidated]
Financial Statements, included in the [DRHP / RHP/ Prospectus]
for the period indicated and found such amount to be in
agreement.[However, we make no comment as to the
appropriateness with respect to reasons given for changes
between periods.]
[B. Compared the amount identified to a corresponding
amount in the Company's Audited [Standalone]/ [Consolidated]
Financial Statements") for the period indicated and found such
amount to be in agreement. [However, we make no comment as
to the appropriateness with respect to reasons given for changes
between periods.]]
C. Compared the amount identified to a corresponding
amount included in the Company's accounting records for the
period indicated and found such amount to be in
agreement.[However, we make no comment as to the
70
Guidance Note on Reports in Company Prospectuses
appropriateness with respect to reasons given for changes
between periods.]
D. Compared the amounts identified to a schedule prepared
and derived by the officials of the Company from its accounting
records for the period indicated and found such amounts to be in
agreement and we determined that the schedule was
mathematically correct, but in relation to which no other tests
whatsoever such as definitions, reasonableness and presentation
have been performed. [We have not traced the information to the
accounting records themselves.] Further, we make no comments
whether the compared number read in isolation is useful for any
purpose or misleading.
E. Recomputed the mathematical accuracy of the amounts,
total, percentage and ratio for the period indicated from amounts
appearing in [DRHP / RHP/ Prospectus]. However, we make no
comment as to the appropriateness with respect to classification
of such item and with respect to reasons given for changes
between periods.
F. Proved the arithmetic accuracy of the conversion of the
corresponding amount in Rupees to US Dollars (as rounded off),
or vice versa, at the applicable exchange rate and found them to
be in agreement. We make no representation as to the
appropriateness of the rate applied.
[Member should exercise judgment on what level of comfort
i.e. item (A) to (F) above can be given to a particular
information according to the circumstance of each case.
Additional level of comfort can be included based on
agreement with the bankers]
For purposes of the above symbols, the following definitions
apply:
· The phrase "compared" means compared and found to be in
agreement unless otherwise noted. Such agreed amounts or
percentages are deemed to be in agreement if differences are
attributable to rounding.
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Guidance Note on Reports in Company Prospectuses
· The phrase "recomputed" means recalculated to determine
mathematical accuracy and compared the result to the
amount shown and found the amounts to be in agreement
unless otherwise noted. Such recomputed amounts or
percentages are deemed to be in agreement if differences are
attributable to rounding.
7. Our audit of the [standalone] / [consolidated] financial
statements for the periods referred to in the introductory
paragraph of this letter comprised audit tests and procedures
deemed necessary for the purpose of expressing an opinion on
such financial statements taken as a whole. For none of the
periods referred therein, or any other period, did we perform audit
tests for the purpose of expressing an opinion on individual
balances of accounts or summaries of selected transactions such
as those enumerated above and accordingly, we express no
opinion thereon.
8. It should be understood that we make no representations
regarding questions of legal interpretation or regarding sufficiency
for your purposes of the procedures enumerated in the preceding
paragraph 6; also, such procedures would not necessarily reveal
any material misstatement of the amounts or percentages listed
above. Further, we have addressed ourselves solely to the
foregoing data as set forth in the [DRHP / RHP/ Prospectus] and
make no representations regarding the adequacy of disclosure or
regarding whether any material facts have been omitted. It should
be noted that certain information contained in the [DRHP / RHP/
Prospectus] are not measures of operating performance or
liquidity as defined by generally accepted accounting principles
and may not be comparable to similarly titled measures presented
by other companies. We make no comment about the Company's
definitions, calculations or usefulness for any purpose.
9. This letter is solely for the information of the addressees
and to assist the Lead Managers in conducting and documenting
their investigation of the affairs of the Company / [Group] in
connection with the proposed offering of securities covered by the
[DRHP / RHP/ Prospectus] solely in India, [when the comfort letter
is furnished by the auditors for a branch/subsidiary/joint venture
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Guidance Note on Reports in Company Prospectuses
entity/associate and they are not also accountants for the parent
company, the comfort letter should include the following phrase at
this point: "and for the use of the auditors for [name of issuer] in
furnishing their letter to the Lead Managers,"]and it is not to be
used circulated or quoted or otherwise referred to for any other
purposes, including but not limited to the registration, purchase or
sale of securities, nor is it to be filed with or referred to in whole or
in part in the [DRHP / RHP/ Prospectus] or any other document,
except that reference may be made to it in [the Issue Agreement/
Offer Agreement/ Underwriting Agreement] or [any list of closing
documents] pertaining to the proposed offering of securities
covered by the [DRHP / RHP/ Prospectus].
10. This letter has not been prepared in connection with, nor is
it intended for use in any connection with, any offer or sale of
securities outside India. We will accept no duty or responsibility to
and deny any liability to any party in respect of any use of this
letter in connection with an offer or sale of the Securities outside
India.
For ABC and Co.
Chartered Accountants
Firm's Registration Number
Signature
[Name of the Member]
Designation15
Membership Number
Place of Signature:
Date:
15
Partner or proprietor.
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Guidance Note on Reports in Company Prospectuses
Appendix 2.4
Illustrative Format of Bring Down Comfort Letter
[Insert date]
[Name of the Company and Address]
and
[Name of LM1 & Address]
and
[Name of LM2 & Address]
and
[Name of LM3 & Address]
and
[Name of LM4 & Address]
Dear Sirs:
We refer to our letter of [Insert Date], relating to the Prospectus of
[Company] involving the sale of _________________ [securities]
of _____________. We reaffirm16 as of the date hereof (and as
though made on the date hereof) all statements made in that letter
except that, for the purposes of this letter--
a. The Prospectus to which this letter relates is as amended on
[Insert date].
b. The reading of minutes described in paragraph XX of that
letter has been carried out through [Insert date].
c. The procedures and inquiries covered in paragraph XX of that
letter were carried out to [Insert date] (our work did not extend
to the period from [Insert date] to [Insert date], inclusive).
d. The period covered in paragraph XX of that letter is changed
to the period from [date], to [date], officials of the Company
16
The auditors should read the comfort letters in respect of entities audited by
other auditors while issuing bring down comfort letter.
74
Guidance Note on Reports in Company Prospectuses
having advised us that no such financial statements as of any
date or for any period subsequent to [date], were available.
e. The references to [date], in paragraph XX of that letter are
changed to [date].
f. The references to [date], in paragraph XX of that letter are
changed to [Insert date].
This letter is solely for the information of the addressees and to
assist the Lead Managers in conducting and documenting their
investigation of the affairs of the Company/ [Group] in connection
with the proposed offering of securities covered by the [DRHP /
RHP/ Prospectus] solely in India, [when the comfort letter is
furnished by the auditors for a branch/subsidiary/joint venture
entity/associate and they are not also accountants for the parent
company, the comfort letter should include the following phrase at
this point: "and for the use of the auditors for [name of issuer] in
furnishing their letter to the Lead Managers,"] and it is not to be
used circulated or quoted or otherwise referred to for any other
purposes, including but not limited to the registration, purchase or
sale of securities, nor is it to be filed with or referred to in whole or
in part in the [DRHP / RHP / Prospectus] or any other document,
except that reference may be made to it in [the Issue Agreement/
Offer Agreement/ Underwriting Agreement] or [any list of closing
documents] pertaining to the proposed offering of securities
covered by the [DRHP / RHP / Prospectus].
For ABC and Co.
Chartered Accountants
Firm's Registration Number
Signature
[Name of the Member]
Designation17
Membership Number
Place of Signature:
Date:
17
Partner or proprietor.
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Guidance Note on Reports in Company Prospectuses
Appendix 2.5
Illustrative Format of Arrangement Letter
(to be amended based on mutual agreement among the parties)
The Board of Directors
[Name of the Company & Address]
The Lead Manager (name and address)
("Lead Manager")
and the other Managers (as defined in Paragraph 2 below)
[Date]
Dear Sirs,
[PROPOSED] EQUITY ISSUE BY [ISSUER'S NAME] ("the
Issuer")
Introduction
1. This arrangement letter sets out the scope and limitations
of the work to be performed by us in connection with the above
transaction, namely the proposed issue of [ ] ("the Issue") which
will involve the preparation by the Issuer, and for which the Issuer
will be solely responsible, of a Draft Red Herring Prospectus
("DRHP"), a Red Herring Prospectus ("RHP") and a Prospectus,
and any amendments and supplements thereto (collectively, the
"Offering Circular") [in accordance with the Securities and
Exchange Board of India (Issue of Capital and Disclosure
Requirements) Regulations, 2009, as amended ("ICDR
Regulations")]. This letter is written in the context of the respective
roles of the directors of the Issuer, the Lead Manager ("the Lead
Manager"), the other Managers (as defined in Paragraph 2 below)
and ourselves.
Addressees
2. This arrangement letter is addressed to the directors of the
Issuer, to the Lead Manager and to each of the managers who
have agreed or, prior to the issue of our comfort letter, will agree
to participate in the proposed Issue and who have or, prior to the
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Guidance Note on Reports in Company Prospectuses
issue of our comfort letter, will have validly authorised the Lead
Manager to sign this arrangement letter on their behalf. Their legal
names are set out in Appendix 2.5.1 to this arrangement letter
and, together with the Lead Manager, are referred to in this
arrangement letter as "the Managers".
3. By signing and accepting the terms of this arrangement
letter, the Lead Manager confirms that it will ensure that it receives
prima facie authority from each Manager identified in Appendix
2.5.1 authorising it to enter into this arrangement letter on the
relevant Manager's behalf. However, the Lead Manager makes no
representation as to whether such prima facie authority actually
confers the necessary authority.
4. Up to the date of the relevant comfort letter, a Manager
may be added to Appendix 2.5.1 by the Issuer or by the Lead
Manager by written notice to us and the Issuer or the Lead
Manager. A Manager may also be deleted from Appendix 2.5.1
where the Manager withdraws from the Issue and/or advises the
Lead Manager that it does not wish to receive the benefit of the
comfort letter or for this arrangement letter to be signed on its
behalf or where the Lead Manager does not receive authority to
sign this arrangement letter on behalf of the relevant Manager.
The revised managers shall then, together with the Lead
Manager, be referred to in this arrangement letter as "the
Managers".
Comfort Letter
5. The Lead Managers will be reviewing certain information
relating to the Company that will be included in the Offering
Circular, which may be accessible to investors and utilised by
them as a basis for their investment decision. The Lead Managers
are knowledgeable with respect to the due diligence review
process required under the ICDR Regulations. This review
process, applied to the information relating to the issuer, will be
substantially consistent with the due diligence review process
required under the ICDR Regulations. It is recognised that what is
substantially consistent may vary from situation to situation and
may not be the same as that done in another offering of the same
77
Guidance Note on Reports in Company Prospectuses
securities for the same issuer. Whether the procedure being or to
be followed will be 'substantially consistent' will be determined by
the [Lead Managers] on a case-by-case basis.
6. Our comfort letter will be provided to the addressees of this
letter solely in the context of the due diligence procedures that you
undertake, or procure to be undertaken, pursuant to the guidance
referred to in Paragraph 5 above in connection with the contents
of the Offering Circular for the purpose of any defence in such
context that you may wish to advance in any claim or proceeding
in connection with the contents of the Offering Circular.
Accordingly our comfort letter will be addressed to you for that
purpose and may not be relied on by you for any other purpose.
7. For the avoidance of doubt and subject to the limitations or
exclusions which are contained in or referred to in Paragraphs 8,
9, 27, 33 and 34 of this letter, nothing in this letter shall preclude
the Managers from obtaining compensation from us in respect of
any liability that the Managers incur to an investor arising out of
the contents of the Offering Circular to the extent that such liability
arises because the work undertaken pursuant to this arrangement
letter or the comfort letter was undertaken negligently.
8. Any comfort letter issued pursuant to this arrangement
letter will not have been provided in accordance with the
professional standards of the US American Institute of Certified
Public Accountants and accordingly should not be relied upon in
connection with any obligations or responsibilities that you may
have under any legislation, regulations and/or rule of law in the
United States and, in the event of any such use in the United
States, we accept no responsibility in this regard.
9. Our work and findings shall not in any way constitute
advice or recommendations (and we accept no liability in relation
to any advice or recommendations) regarding any commercial
decisions associated with the Issue, including, in particular, but
without limitation, any which may be taken by the Managers (or
any person connected to the Managers or any one of them) in the
capacity of investor or in providing investment advice to their
clients.
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Guidance Note on Reports in Company Prospectuses
10. Our comfort letter will be provided solely for your private
information and should not be used for any purpose other than as
set out in Paragraph 6. Our comfort letter may not be referred to
in any other document (except that reference may be made to its
existence in any contract or other communication between the
Issuer and/or the Managers, and/or ourselves), nor made
available to any other party (except that a copy may be included in
the bible of transaction documents memorialising the Issue
prepared for the Issuer and the Managers).
11. Nothing in Paragraphs 8 and 10 shall prevent you from
disclosing our comfort letter to your professional advisers or as
may be required by law or regulation, and/or referring to and/or
producing our comfort letter in court proceedings relating to the
Issue or the Offering Circular. Provided that you first obtain our
prior written consent, you may disclose our comfort letter to third
parties where to do so would reasonably be necessary in the
interest of a resolution of a dispute with that third party.
12. Other than to those who have validly accepted this
arrangement letter, we will not accept any responsibility to any
party to whom our comfort letter is shown or into whose hands it
may come.
13. You may only rely on information and comments set out in
our comfort letter on the basis of this arrangement letter.
Work and procedures
14. Our work will, where appropriate, be conducted in
accordance with Standards on Auditing in India. In other
jurisdictions, standards and practice relevant to reporting
accountants may be different and may not provide for reporting in
the manner contemplated herein. Accordingly our report should
not be relied on as if it had been provided in accordance with the
standards and practice of any professional body in any other
jurisdiction.
15. We have not carried out an audit in accordance with any
generally accepted auditing standards of any financial information
relating to the Issuer for any period subsequent to [date of last
audited balance sheet]. The procedures we will use to perform the
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Guidance Note on Reports in Company Prospectuses
work set out in this arrangement letter will not constitute an audit
or review made in accordance with any generally accepted
auditing standards. Furthermore, they will not necessarily reveal
matters of significance with respect to any material misstatement
of the information referred to below.
16. The procedures that we plan to conduct have been
discussed between and agreed to by the Issuer, the Lead
Manager and us and will be recorded in the comfort letter itself. If
during the course of carrying out such procedures as are planned
and agreed upon under this letter, and solely as a result of
information provided to us in so doing, we conclude that there has
been any withholding, concealment or misrepresentation in
relation to such information, (or otherwise we conclude that such
information contains an inconsistency which clearly indicates that
there may have been such a withholding, concealment or
misrepresentation), we will discuss with you whether further
procedures can be designed to seek to resolve the matter. Where
such procedures are agreed between us, we will carry them out
and amend the comfort letter accordingly.
17. We will only carry out those verification procedures
expressly provided for in the comfort letter. Accordingly, we make
no representations as to the sufficiency for your purposes of such
procedures and, therefore, our responsibility shall be limited to
performing the work agreed upon in this arrangement letter and/or
recorded in the comfort letter with due skill, care and attention. If
we were to perform additional procedures or if we were to conduct
an audit or review of the financial statements of the Issuer in
accordance with auditing standards generally accepted in India,
other matters might come to our attention which we would report
to you. The procedures to be performed by us should not be
taken to supplant any additional enquiries or procedures that may
be appropriate in the performance of your role under the proposed
offering.
18. In relation to the contents of the Offering Circular, we will
address ourselves solely to such financial information in the
Offering Circular as is identified in the comfort letter and we will
make no representations as to the adequacy of disclosure in the
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Guidance Note on Reports in Company Prospectuses
Offering Circular or as to whether any material facts have been
omitted by the Issuer.
19. Any opinions expressed on financial information outside
the context of this arrangement letter were or are expressed solely
in the context of the specific terms and conditions governing their
preparation. In particular, the terms of this arrangement letter and
any action pursuant to it shall be additional to and shall not detract
from or change in any way any legal rights which any party to this
letter may otherwise have acquired, whether in contract or in tort,
in connection with our audits of the financial statements of the
Issuer.
20. Save as may be expressly recorded in the comfort letter,
we do not accept any responsibility for any other reports or letters
beyond any responsibility that we owed to those to whom our
reports or letters were addressed at the date of their issue.
Contents of the Comfort Letter
21. We will prepare and expect to issue a comfort letter
addressed to the Issuer and the Managers in connection with their
due diligence enquiries in connection with the contents of the
Offering Circular on the basis described above. [Based upon our
present understanding of your requirements we expect to be able
to provide you with a comfort letter substantially in the form
contained in Appendix 2, setting out the procedures that we
expect to carry out prior to issuing our comfort letter.] Your
acceptance of our comfort letter in final form constitutes your
agreement to the scope and extent of such procedures.
[22. We would be grateful if you would review the draft comfort
letter that we expect to be able to provide you with and let us have
any amendments you propose to the procedures as soon as
possible, so that we can provide you with a revised draft for your
further consideration and approval.]18
18
The first draft of the arrangement letter will include the form of comfort letter in
Appendix xx. The final arrangement letter will include these sentences if it
predates the issuance of the comfort letter. If the arrangement letter and the
comfort letter are signed contemporaneously, these sentences will be omitted.
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Guidance Note on Reports in Company Prospectuses
[23. Once an advanced draft of the Offering Circular is
available and you have identified, and we have agreed, the
detailed financial information whose extraction or calculation you
require to be covered in the comfort letter, we will provide you with
a further revised draft of the comfort letter for your approval of its
scope prior to finalisation.]
24. For the avoidance of doubt, we will not comment on, or
otherwise give comfort in relation to, the prospects or trading
position or, save as expressly stated in the comfort letter,
comment on or provide any opinion or other conclusion as to the
19
current overall financial position of the Issuer.
Drafts
25. During the course of the arrangement we may show drafts
of, or report orally on, our comfort letter to you. In so far as any
such draft or oral report is inconsistent with the subsequent final
comfort letter, it will be deemed to be superseded by such final
comfort letter.
Audit Opinion
26. The Issuer may not include our audit opinion in the
Offering Circular without our prior written approval.
Meetings
27. It [will be] [has been] necessary for us to receive copies of
the draft Offering Circular as it [is] [was] produced and it [may be]
[has been] necessary for us to attend meetings (including, but not
limited to, meetings with the Issuer, and its directors and/or
employees, and the Lead Manager and its employees or agents)
at which the Offering Circular [is] [has been] discussed and
drafted or at which other related matters [are] [have been]
discussed. We [shall answer] [have answered] queries raised at
such meetings on an informal basis but you should neither act nor
refrain from acting on the basis of such informal answers unless
19
If specific procedures and appropriate terms (e.g. as to timing) are agreed
between all parties, the auditors may undertake additional work (for example in
relation to the Issuer's current overall financial position).
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Guidance Note on Reports in Company Prospectuses
and until they are confirmed in writing by us, whether in the final
comfort letter or otherwise. In the absence of such written
confirmation we shall have no liability to you in contract or in tort
(including negligence) for our answers.
28. Unless otherwise specifically agreed between the parties,
we are authorised by the Issuer to speak to the Managers and
other professional advisers advising on the proposed Issue. In
connection with our work pursuant to this arrangement letter, we
may release to the Managers and such other professional
advisers any information relating to the Issuer, whether
confidential or not and obtained during the course of our work or
otherwise and shall not be liable to the Issuer for any use
subsequently made of that information.
Timetable
29. [We will endeavour to carry out our work in accordance
with a timetable to be agreed between all parties that will satisfy
the requirements of the Issue.]. We [intend to provide] [are
providing] [(i) a comfort letter on each of the date of (a) the filing of
the Draft Red Herring Prospectus with SEBI, (b) the filing of the
Red Herring Prospectus with the Registrar of the Companies in
India ("ROC"), (c) the filing of the Prospectus with the ROC and (ii)
a bring down comfort letter on the date of the closing of the Issue
i.e. the date of allotment,] or on such other date as may be agreed
in writing among the Issuer, the Lead Managers and us. [We will
discuss with you any difficulties we encounter with this
arrangement or with meeting the timetable as soon as any
problems arise.]20
Applicable law and jurisdiction
30. This arrangement letter shall be governed by, and construed
in accordance with the laws of India.
The Courts of India shall have exclusive jurisdiction in relation to
any claim, dispute or difference concerning the arrangement letter
20
It may not be appropriate to include this sentence if the arrangement
letter is signed contemporaneously with the comfort letter.
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Guidance Note on Reports in Company Prospectuses
or any comfort letter and any matter arising from them. Each
party irrevocably waives any right it may have to object to an
action being brought in any of those Courts, to claim that the
action has been brought in an inconvenient forum or to claim that
those Courts do not have jurisdiction.
Fees
31. Our fees will be the responsibility of and will be paid by the
Issuer.
Representations from the Issuer
32. We will ask the Board of Directors to provide us with
appropriate representations at the date of the comfort letter either
by means of a board minute or by letter of representation from a
duly authorised director of the Issuer. A draft will be provided
separately, which will reflect the specific issues on which we are
required to provide a comfort letter.
Other Terms and Conditions
33. In no circumstances shall we be liable, other than in the
event of our bad faith or wilful default, for any loss or damage, of
whatsoever nature, arising from information material to our work
being withheld or concealed from us or misrepresented to us by
the directors, employees, or agents of the Issuer or any other
person of whom we may make enquiries, unless detection of such
withholding, concealment or misrepresentation should reasonably
have been expected because the fact of such withholding,
concealment or misrepresentation was evident without further
enquiry from the information provided to us or required to be
considered by us pursuant to the procedures finally agreed upon
under this letter. This clause, and any assessment of our work
made pursuant to it, will have regard to the limited scope of
procedures agreed under this letter.
34. The terms and conditions, which are attached as Appendix
[this should be as per auditor's requirements], also form part of
this arrangement letter. These terms and conditions shall apply,
as indicated in such terms and conditions, to us, the Issuer and
the Managers (as the case may be).
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Guidance Note on Reports in Company Prospectuses
35. In the event of any inconsistency between this
arrangement letter and such terms and conditions, the terms of
this letter shall prevail as between the relevant parties.
Prohibition on Assignment
36. No party may assign any of its rights in relation to this
arrangement letter without the prior written consent of the others
against whom the rights may be asserted, save that any Manager
may assign any of such rights, or such rights may pass by
operation of law, to any successor to all or part of its business
without such consent, provided that notice is given to us prior to
any step being taken by you to enforce any rights hereunder.
Entire Agreement
37. This arrangement letter and the Appendices to it constitute
the entire agreement between us and, save as provided in this
arrangement letter, no change in the terms of our agreement will
be effective unless agreed in writing and signed by all parties to
this arrangement letter or their respective attorney.
For ABC and Co.
Chartered Accountants
Firm's Registration Number
Signature
[Name of the Member]
Designation@@@
Membership Number
Place of Signature:
Date:
Acknowledgement and Acceptance
[by the Issuer and Lead Manager]
I hereby confirm the agreement of the company stated below my
signature to the terms set out above.
Signed: .........................................................................................
@@@
Partner or proprietor, as the case may be.
85
Guidance Note on Reports in Company Prospectuses
(Director of [Issuer])
Name: ....................................................................
For and on behalf of Board of Directors of [Issuer]
:....................................................................
Date:............................................................................................
Signed: .........................................................................................
(Director of [Lead Manager)
Name: .....................................................................
For and on behalf of [Lead Manager] and the managers listed in
Appendix 2.5.1
Date: .............................................................................................
86
Guidance Note on Reports in Company Prospectuses
Appendix 2.5.1
21
Names of the Managers
(Subject always to compliance with the requirements
of Paragraph 2 of the arrangement letter22)
21
The legal name of each manager should be specified.
22
In the case of a change in the identity of a Manager, the procedure set out in
Paragraph 4 of this letter must be complied with.
87
Guidance Note on Reports in Company Prospectuses
Appendix 3
Illustrative Capitalisation Statement
[Refer Paragraph 2.3(iii)]
[Para 14 of sub-item (B) of item (IX) of Part A of Schedule VIII of
ICDR Regulations]
(Rupees in lacs)
Pre-issue as at Post-issue
30.06.20x6 position after
adjustments***
Short-Term Debt 1,870
Long Term Debt 4,370
Shareholders' Funds
Share Capital 4,000
Reserves 14,570
Total Shareholders' Funds 18,570
Long Term Debt/Equity 0.24:1
Note:
***
In case the issue price of share is not known at the time of bringing out the
prospectus (at initial stages) then post issue position cannot be presented. In
such case footnote explaining the same should be given. Auditors may issue a
report as per Standard on Related Services 4400, "Engagements to Perform
Agreed-upon Procedures Regarding Financial Information" on the revised
capitalisation statement to be inserted at the final Prospectus stage.
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Guidance Note on Reports in Company Prospectuses
Appendix 4
Illustrative Auditor's Report on
Financial Information in Relation to Prospectus
(on standalone financial information of the issuer Company)
(Refer paragraph 2.5)
To
The Board of Directors,
..............................Ltd.
Dear Sirs,
23
1) We have examined the attached Restated Standalone
Financial Information of .......................Ltd (name of the
Company), which comprise of the Restated Summary
Statement of Assets and Liabilities as at March 31, 20x6,
20x5, 20x4, 20x3 and 20x2, the Restated Summary
Statements of Profit and Loss and the Restated Summary
Statement of Cash Flows for each of the years ended March
31, 20x6, 20x5, 20x4, 20x3 and 20x2 and the Summary of
Significant Accounting Policies as approved by the Board of
Directors of the Company prepared in terms of the
requirements of :
a) Section 26 of Part I of Chapter III of the Companies Act,
2013 ("the Act") read with Rules 4 to 6 of Companies
(Prospectus and Allotment of Securities) Rules, 2014
("the Rules"); and
b) the Securities and Exchange Board of India (Issue of
Capital and Disclosure Requirements) Regulations, 2009
as amended from time to time in pursuance of provisions
of Securities and Exchange Board of India Act, 1992
("ICDR Regulations").
The preparation of the Restated Standalone Financial
Information [including the interim financial information
23
Auditors should refer examination of both Indian GAAP and Ind AS financials
(if applicable) in one examination report by providing appropriate references to
such financials.
89
Guidance Note on Reports in Company Prospectuses
mentioned in paragraph 4 below] is the responsibility of the
Management of the Company for the purpose set out in
paragraph 9 below. The Management's responsibility includes
designing, implementing and maintaining adequate internal
control relevant to the preparation and presentation of the
Restated Standalone Financial Information. The Management
is also responsible for identifying and ensuring that the
Company complies with the Rules and ICDR Regulations.
2) We have examined such Restated Standalone Financial
Information taking into consideration:
a) The terms of reference and terms of our engagement
agreed upon with you in accordance with our
engagement letter dated xx in connection with the
proposed issue of equity shares of the Company; and
b) The Guidance Note on Reports in Company
Prospectuses (Revised 2016) issued by ICAI ("The
Guidance Note").
3) These Restated Standalone Financial Information have been
compiled by the management from the Audited Financial
Statements as at March 31, 20x6, 20x5, 20x4, 20x3 and 20x2
and for each of the years ended March 31, 20x6, 20x5, 20x4,
20x3 and 20x2 which have been approved by Board of
directors at their meetings held on [dates] respectively.
Audit for the financial years ended 20x3 and 20X2 was
conducted by previous auditors, XYZ & Co., and accordingly
reliance has been placed on the financial information
examined by them for the said years@. The financial report
included for these years, i.e., 20x3 and 20X2 are based
solely on the report submitted by M/s XYZ & Co. M/s XYZ &
24
Co. have also confirmed that the restated standalone
financial information:
@
Applicable only when some of the reported financial years were audited by an auditor
other than the current auditor.
24
Generally, the examination of past periods should be performed by the previous auditors
and an examination report should be submitted to company/ current auditor based on their
work performed. The company should communicate the current policy and other required
information to previous auditors and previous auditors should consider such policies and
other information for their examination. In case the previous auditors are not in a position to
issue examination report for past periods due to practical issues, then the current auditors
should perform adequate procedures to be able to take responsibility of past periods.
90
Guidance Note on Reports in Company Prospectuses
(a) have been made after incorporating adjustments for
the changes in accounting policies retrospectively in
respective financial years to reflect the same
accounting treatment as per changed accounting
policy for all the reporting periods;
(b) have been made after incorporating adjustments for
the material amounts in the respective financial years
to which they relate; and
(c) do not contain any extra-ordinary items that need to
be disclosed separately [other than those presented]
in the Restated Standalone Financial Information] and
do not contain any qualification requiring adjustments.
(amend as applicable)
[4) We have also examined the financial information of the
Company for the period XX.XX.2XX6 to XX.XX.2XX6 [the
broken period ending not before 180 days from the date of
prospectus] prepared and approved by the Board of Directors
for the purpose of disclosure in the offer document of the
Company.
Based on the above, we report that in our opinion and
according to the information and explanations given to us, the
above interim financial information are in accordance with the
accounting principles generally accepted in India, including
the Accounting Standards prescribed under section 133 of the
Act, as applicable and the interim financial information are
presented with the Restated Standalone Financial Information
appropriately.]
5) In accordance with the requirements of Section 26 of Part I of
Chapter III of the Act read with, Rules 4 to 6 of Companies
(Prospectus and Allotment of Securities) Rules, 2014, the
ICDR Regulations and the Guidance Note, we report that:
a) The Restated Summary Statement of Assets and
Liabilities of the Company, including as at 20x3 and 20x2
examined and reported upon by M/s XYZ & Co., on which
reliance has been placed by us, and as at June 30, 20x6,
91
Guidance Note on Reports in Company Prospectuses
March 31, 20x6, 20x5 and 20x4 examined by us, as set
out in Annexure to this report, have been arrived at after
making adjustments and regrouping/reclassifications as
in our opinion were appropriate and more fully described
in Annexure Summary Statement of Adjustments to the
Audited Financial Statements.
b) The Restated Summary Statement of Profit and Loss of
the Company, including for the years ended 20x3 and
20x2 examined by XYZ & Co. and who have submitted
their report on which reliance has been placed by us, and
for the quarter ended June 30, 20x6 and each of the
years ended March 31, 20x6, 20x5 and 20x4 examined
by us, as set out in Annexure to this report, have been
arrived at after making adjustments and
regrouping/reclassifications as in our opinion were
appropriate and more fully described in Annexure
Summary Statement of Adjustments to the Audited
Financial Statements.
c) The Restated Summary Statement of Cash Flows of the
Company, including for the years ended 20x3 and 20x2
examined by XYZ & Co. and who have submitted their
report on which reliance has been placed by us, and for
the quarter ended June 30, 20x6 and each of the years
ended March 31, 20x6, 20x5 and 20x4 examined by us,
as set out in Annexure to this report, have been arrived at
after making adjustments and regrouping/reclassifications
as in our opinion were appropriate and more fully
described in Annexure Summary Statement of
Adjustments to the Audited Financial Statements.
d) Based on the above and according to the information and
explanations given to us, and also as per the reliance
placed on the reports submitted by the previous auditors,
XYZ & Co. for the respective years, we further report that
the Restated Standalone Financial Information:
(i) have been made after incorporating adjustments for
the changes in accounting policies retrospectively in
92
Guidance Note on Reports in Company Prospectuses
respective financial years to reflect the same
accounting treatment as per changed accounting
policy for all the reporting periods;
(ii) have been made after incorporating adjustments for
the material amounts in the respective financial
years to which they relate; and
(iii) do not contain any extra-ordinary items that need to
be disclosed separately [other than those presented]
in the Restated Standalone Financial Information]
and do not contain any qualification requiring
adjustments.
(amend as applicable)
6) We have also examined the following restated standalone
financial information of the Company set out in the Annexures
prepared by the management and approved by the Board of
Directors on [date] for the quarter ended June 30, 20x6 and
for the years ended March 31, 20x6, 20x5, 20x4, 20x3 and
20x2. In respect of the years ended March 31, 20x3 and 20x2
these information have been included based upon the reports
submitted by previous auditors, XYZ & Co. and relied upon by
us:
(amend as appropriate)
(a) Annexure 1 - Summary Statement of Adjustments to the
Audited Financial Statements
(b) Annexure 2- Summary Statement of Related Party
Transactions
(c) Annexure 3- Summary Statement of Net Worth
(d) Annexure 4 - Summary Statement of Secured and
Unsecured Loans
(e) Annexure 5- Summary Statement of Capitalisation
(f) Annexure 6- Summary Statement of Accounting Ratios
(g) Annexure 7- Summary Statement of tax shelter
93
Guidance Note on Reports in Company Prospectuses
(h) Annexure 8 Summary Statement of Dividend
paid/proposed
(i) Annexure 9- Others
(Amend as applicable)
According to the information and explanations given to us and
also as per the reliance placed on the reports submitted by
the previous auditors, XYZ & Co., in our opinion, the Restated
Standalone Financial Information and the above restated
financial information contained in Annexures xx to xx
accompanying this report, read with Summary of Significant
Accounting Policies disclosed in Annexure xx, are prepared
after making adjustments and regroupings as considered
appropriate and have been prepared in accordance with
Section 26 of Part I of Chapter III of the Companies Act, 2013
read with Rules 4 to 6 of Companies (Prospectus and
Allotment of Securities) Rules, 2014, ICDR Regulations and
the Guidance Note.
[According to the information and explanations given to us
and also as per the reliance placed on the reports submitted
by the previous auditors, XYZ & Co., in our opinion, the
25
Proforma Financial Information of the Company as at March
31, 20xX and for the year[s] ended March 31, 20xX, read with
Summary of Significant Accounting Policies disclosed in
Annexure xx, are prepared after making proforma
adjustments as mentioned in Note [xx] and have been
prepared in accordance with Section 26 of Part I of Chapter III
of the Companies Act, 2013 read with Rules 4 to 6 of
Companies (Prospectus and Allotment of Securities) Rules,
2014, ICDR Regulations and the Guidance Note.]
7) This report should not in any way be construed as a
reissuance or re-dating of any of the previous audit reports
issued by us, nor should this report be construed as a new
opinion on any of the financial statements referred to herein.
25
Pro forma Financial Information as mentioned in Questions 3 and 8 in
Appendix 6.1.
94
Guidance Note on Reports in Company Prospectuses
8) We have no responsibility to update our report for events and
circumstances occurring after the date of the report.
9) Our report is intended solely for use of the management for
inclusion in the offer document to be filed with Securities and
Exchange Board of India [relevant stock exchanges and
Registrar of Companies, [State]] in connection with the
proposed issue of equity shares of the Company. Our report
should not be used, referred to or distributed for any other
purpose except with our prior consent in writing.
For ABC and Co.
Chartered Accountants
Firm's Registration Number
Signature
[Name of the Member]
Designation@@
Membership Number
Place of Signature:
Date:
@@
Partner or proprietor, as the case may be.
95
Guidance Note on Reports in Company Prospectuses
Appendix 5
Illustrative Auditor's Report on
Financial Information in relation to Prospectus
(on consolidated financial information of the issuer Company)
(Refer paragraph 2.5)
To
The Board of Directors,
..............................Ltd.
Dear Sirs,
26
1) We have examined the attached Restated Consolidated
Financial Information of .......................Ltd (name of the
Company), and its subsidiaries and joint ventures (include as
applicable) (collectively known as "Group"), which comprise of
the Restated Consolidated Summary Statement of Assets
and Liabilities as at March 31, 20x6, 20x5, 20x4, 20x3 and
20x2, the Restated Consolidated Summary Statement of
Profit and Loss and the Restated Consolidated Summary
Statement of Cash Flows for each of the years ended March
31, 20x6, 20x5, 20x4, 20x3 and 20x2 and the Summary of
Significant Accounting Policies as approved by the Board of
Directors of the Company prepared in terms of the
requirements of:
a) Section 26 of Part I of Chapter III of the Companies Act,
2013 ("the Act") read with Rules 4 to 6 of Companies
(Prospectus and Allotment of Securities) Rules, 2014
("the Rules); and
b) the Securities and Exchange Board of India (Issue of
Capital and Disclosure Requirements) Regulations,
26
Auditors should refer examination of both Indian GAAP and Ind AS financials
(if applicable) in one examination report by providing appropriate references to
such financials.
96
Guidance Note on Reports in Company Prospectuses
2009 as amended from time to time in pursuance of
provisions of Securities and Exchange Board of India
Act, 1992 ("ICDR Regulations").
The preparation of the Restated Consolidated Financial
Information [including the interim financial information
mentioned in paragraph 4 below] is the responsibility of the
Management of the Company for the purpose set out in
paragraph 10 below. The Management's responsibility
includes designing, implementing and maintaining adequate
internal control relevant to the preparation and presentation of
the Restated Consolidated Financial Information. The
Management is also responsible for identifying and ensuring
that the Company complies with the Rules and ICDR
Regulations.
2) We have examined such Restated Consolidated Financial
Information taking into consideration:
a) The terms of reference and terms of our engagement
agreed upon with you in accordance with our
engagement letter dated xx in connection with the
proposed issue of equity shares of the Company; and
b) The Guidance Note on Reports in Company
Prospectuses (Revised 2016) issued by ICAI ("The
Guidance Note").
3) These Restated Consolidated Financial Information have
been compiled by the management from the audited
consolidated financial statements as at March 31, 20x6, 20x5,
20x4, 20x3 and 20x2 and for each of the years ended March
31, 20x6, 20x5, 20x4, 20x3 and 20x2 which have been
approved by Board of directors at their meetings held on
[dates] respectively.
Audit for the financial years ended 20x3 and 20x2 was
conducted by previous auditors, XYZ & Co., and accordingly
reliance has been placed on the consolidated financial
information examined by them for the said years. The
financial report included for these years are based solely on
the report submitted by them.
97
Guidance Note on Reports in Company Prospectuses
4) [We have also examined the consolidated financial
information of the Company and its subsidiaries, joint
ventures and associates (as applicable) for the period
XX.XX.2XX6 to XX.XX.2XX6 [the broken period ending not
before 180 days from the date of prospectus] prepared and
approved by the Board of Directors for the purpose of
disclosure in the offer document of the Company.
Based on the above, we report that in our opinion and
according to the information and explanations given to us, the
above interim financial information are in accordance with the
accounting principles generally accepted in India, including
the Accounting Standards prescribed under section 133 of the
Act, as applicable and the interim financial information are
presented with the Restated Consolidated Financial
Information appropriately.
We did not audit the financial statements of the subsidiaries,
joint ventures and associates (as applicable) for the period
ended XX.XX.2XX6 whose Financial Statements reflect total
assets of Rs. XXX, total revenue of Rs. XXX and net cash
flows of Rs. XXX and Group's share of net profit/loss of Rs.
XXX. These financial statements have been audited by
another firm of Chartered Accountants, M/s ABC & Co.,
whose reports have been furnished to us and our opinion in
so far as it relates to the amounts included in these
Consolidated Summary Statement of Asset and Liabilities and
Summary Statement of Profit and Loss Account are based
solely on the report of other auditors.]
5) We did not audit the financial statements of certain
subsidiaries, joint ventures and associates (as applicable) for
the financial years ended March 31, 20x5, 20x4, 20x3 and
20x2 whose share of total assets, total revenues, and net
cash flows and Group's share of net profit/loss, included in
the Restated Consolidated Financial Information, for the
relevant years is tabulated below: (amend as applicable)
98
Guidance Note on Reports in Company Prospectuses
(Amounts)
Particulars March 31, March 31, March March
20x5 20x4 31, 20x3 31, 20x2
Total Assets
Revenues
Net Cash Inflows
Group's share of
net profit/loss
These financial statements have been audited by another firm
of Chartered Accountants ABC & Co., whose reports have
been furnished to us and our opinion in so far as it relates to
the amounts included in these Restated Consolidated
Financial Information are based solely on the report of other
auditors.
These other auditors, as mentioned in paragraphs 3, 4 and 5
(of the Company/Group, Subsidiaries, Joint Ventures and
27
associates), have confirmed that the restated consolidated
financial information:
(a) have been made after incorporating adjustments for the
changes in accounting policies retrospectively in
respective financial years to reflect the same accounting
treatment as per changed accounting policy for all the
reporting periods;
27
Generally, the examination of past periods of the group and of the material
subsidiaries/joint ventures/ associates should be performed by the previous
auditors and other auditors of such subsidiaries, joint ventures and associates
and an examination report should be submitted to company/ current auditor
based on their work performed. The company should communicate the current
policy and other required information to previous auditors/ other auditors and
previous auditors/ other auditors should consider such policies and other
information for their examination. In case the previous auditors are not in a
position to issue examination report for past periods due to practical issues, then
the current auditors should perform adequate procedures to be able to take
responsibility of past periods.
99
Guidance Note on Reports in Company Prospectuses
(b) have been made after incorporating adjustments for the
material amounts in the respective financial years to
which they relate; and
(c) do not contain any extra-ordinary items that need to be
disclosed separately [other than those presented] in the
Restated Consolidated Financial Information] and do not
contain any qualification requiring adjustments.
(amend as applicable)
6) Based on our examination in accordance with the
requirements of Section 26 of Part I of Chapter III of the Act
read with, Rules 4 to 6 of Companies (Prospectus and
Allotment of Securities) Rules, 2014, the ICDR Regulations
and the Guidance Note, we report that:
a) The Restated Consolidated Summary Statement of
Assets and Liabilities of the Group, including as at 20x3
and 20x2 examined and reported upon by M/s XYZ &
Co., on which reliance has been placed by us, and as at
June 30, 20x6, March 31, 20x6, 20x5 and 20x4 examined
by us, as set out in Annexure to this report, have been
arrived at after making adjustments and
regrouping/reclassifications as in our opinion were
appropriate and more fully described in Annexure
Summary Statement of Adjustments to the Audited
Consolidated Financial Statements.
b) The Restated Consolidated Summary Statement of Profit
and Loss of the Group, including for the years ended
20x3 and 20x2 examined by XYZ & Co. and who have
submitted their report on which reliance has been placed
by us, and for the quarter ended June 30, 20x6 and each
of the years ended March 31, 20x6, 20x5 and 20x4
examined by us, as set out in Annexure to this report,
have been arrived at after making adjustments and
regrouping/reclassifications as in our opinion were
appropriate and more fully described in Annexure
Summary Statement of Adjustments to the Audited
Consolidated Financial Statements.
c) The Restated Consolidated Summary Statement of Cash
Flows of the Group, including for the years ended 20x3
100
Guidance Note on Reports in Company Prospectuses
and 20x2 examined by XYZ & Co. and who have
submitted their report on which reliance has been placed
by us, and for the quarter ended June 30, 20x6 and each
of the years ended March 31, 20x6, 20x5 and 20x4
examined by us, as set out in Annexure to this report,
have been arrived at after making adjustments and
regrouping/reclassifications as in our opinion were
appropriate and more fully described in Annexure
Summary Statement of Adjustments to the Audited
Consolidated Financial Statements.
d) Based on the above, and according to the information
and explanations given to us, and also as per the reliance
placed on the reports submitted by the previous auditors,
XYZ & Co. for the respective years, we further report that
the Restated Consolidated Financial Information:
i. have been made after incorporating adjustments for
the changes in accounting policies retrospectively in
respective financial years to reflect the same
accounting treatment as per changed accounting
policy for all the reporting periods;
ii. have been made after incorporating adjustments for
the material amounts in the respective financial
years to which they relate; and
iii. do not contain any extra-ordinary items that need to
be disclosed separately [other than those presented]
in the Restated Consolidated Financial Information]
and do not contain any qualification requiring
adjustments.
(amend as applicable)
7) We have also examined the following restated consolidated
financial information of the Group set out in the Annexures
prepared by the management and approved by the Board of
Directors on [date] for the quarter ended June 30, 20x6 and
for the years ended March 31, 20x6, 20x5, 20x4, 20x3 and
20x2.In respect of the years ended March 31, 20x3 and 20x2
these information have been included based upon the reports
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Guidance Note on Reports in Company Prospectuses
submitted by previous auditors, XYZ & Co. and relied upon by
us:
(Amend as applicable)
(a) Annexure 1 - Summary Statement of Adjustments to
Audited Financial Statements
(b) Annexure 2- Summary Statement of Related Party
Transactions
(c) Annexure 3- Summary Statement of Net Worth
(d) Annexure 4 - Summary Statement of Secured and
Unsecured Loans
(e) Annexure 5- Summary Statement of Capitalisation
(f) Annexure 6- Summary Statement of Accounting Ratios
(g) Annexure 7 Summary Statement of Dividend
paid/proposed
(h) Annexure 8 - Others
(Amend as applicable)
According to the information and explanations given to us and
also as per the reliance placed on the reports submitted by
the previous auditors, XYZ & Co., in our opinion, the Restated
Consolidated Financial Information and the above restated
consolidated financial information contained in Annexures xx
to xx accompanying this report, read with Summary of
Significant Accounting Policies disclosed in Annexure xx, are
prepared after making adjustments and regroupings as
considered appropriate and have been prepared in
accordance with Section 26 of Part I of Chapter III of the
Companies Act, 2013 read with Rules 4 to 6 of Companies
(Prospectus and Allotment of Securities) Rules, 2014, ICDR
Regulations and the Guidance Note.
[According to the information and explanations given to us
and also as per the reliance placed on the reports submitted
by the previous auditors, XYZ & Co., in our opinion, the
102
Guidance Note on Reports in Company Prospectuses
28
Proforma Financial Information of the Group as at March 31,
20xX and for the year[s] ended March 31, 20xX, read with
Summary of Significant Accounting Policies disclosed in
Annexure xx, are prepared after making proforma
adjustments as mentioned in Note [xx] and have been
prepared in accordance with Section 26 of Part I of Chapter III
of the Companies Act, 2013 read with Rules 4 to 6 of
Companies (Prospectus and Allotment of Securities) Rules,
2014, ICDR Regulations and the Guidance Note.]
8) This report should not in any way be construed as a
reissuance or re-dating of any of the previous audit reports
issued by us, nor should this report be construed as a new
opinion on any of the financial statements referred to herein.
9) We have no responsibility to update our report for events and
circumstances occurring after the date of the report.
10) Our report is intended solely for use of the management for
inclusion in the offer document to be filed with Securities and
Exchange Board of India [relevant stock exchanges and
Registrar of Companies, [State]] in connection with the
proposed issue of equity shares of the Company. Our report
should not be used, referred to or distributed for any other
purpose except with our prior consent in writing.
For ABC and Co.
Chartered Accountants
Firm's Registration Number
Signature
[Name of the Member]
Designation@@
Membership Number
Place of Signature:
Date:
28
Pro forma Financial Information as mentioned in Questions 3 and 8 in
Appendix 6.1.
@@
Partner or proprietor, as the case may be.
103
Guidance Note on Reports in Company Prospectuses
Appendix 6
Restated Financial Information
(Refer Paragraph 2.5)
Existing reporting requirements under ICDR Regulations
Securities and Exchange Board of India ("SEBI") (Issue of Capital
and Disclosure Requirements ("ICDR")) Regulations, 2009, as
amended (hereinafter referred to as the "ICDR Regulations")
require issuer companies to disclose financial information for
historical five financial years immediately preceding the filing of
their offer documents, while following uniform accounting policies
for each of the financial years.
Schedule VIII. Part A.IX.B.9 of ICDR Regulations further requires
that Statements of Assets and Liabilities and Profit and Loss or
any other financial information shall be incorporated after making
the following adjustments, wherever quantification is possible:
a) Adjustments/rectification for all incorrect accounting practices
or failures to make provisions or other adjustments which
resulted in audit qualifications. Audit qualifications, which have
not been given effect to, if any, shall be highlighted along with
the management comments. If the impact of non-provisions is
not considered ascertainable, then a statement to that effect
by the auditors;
b) Material amounts relating to adjustments for previous years
shall be identified and adjusted in arriving at the profits of the
years to which they relate irrespective of the year in which the
event triggering the profit or loss occurred;
c) Where there has been a change in accounting policy, the
profits or losses of the earlier years (required to be shown in
the offer document) and of the year in which the change in the
accounting policy has taken place shall be recomputed to
reflect what the profits or losses of those years would have
been if a uniform accounting policy was followed in each of
these years;
104
Guidance Note on Reports in Company Prospectuses
d) If an incorrect accounting policy is followed, the re-
computation of the financial statements shall be in accordance
with correct accounting policies; and
e) Statement of profit or loss shall disclose the profit or the loss
arrived at before considering extraordinary items and after
considering the profit or loss from extraordinary items.
Before applicability of Ind AS, a company in the process of listing
is required to disclose financial information for historical five
financial years in accordance with Indian GAAP.
Applicability of Ind AS to disclosures in offer documents
On February 16, 2015, the Ministry of Corporate Affairs ("MCA")
notified the Companies (Indian Accounting Standards) Rules,
2015 (the `Rules'), as amended that set out the text of 39 Indian
Accounting Standards (Ind AS) applicable to certain class of
companies and set out the dates of applicability. The Rules as
amended in March 2016 set out 40 Ind ASs.
In response to applicability of Ind AS, on March 31, 2016, SEBI
issued circular (reference no. SEBI/HO/CFD/DIL /CIR/P/2016/47)
(the "circular") clarifying the applicability of Ind AS to the financial
statements to be included in the offer document. The circular
specifies the following requirements:
Applicability on Phase I and Phase II companies
The circular is applicable to companies falling under either Phase I
or Phase II of the MCA roadmap for implementation of Ind AS
("Ind AS roadmap"), and are filing offer document on or after April
1, 2016.
PHASE I COMPANIES
For companies falling under Phase I, i.e. companies that will
prepare Ind AS financial statements for accounting periods
beginning on or after April 1, 2016, the following framework of
accounting shall be applicable for disclosing financial information**
in their offer document:
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Period of Latest Second Third Second Earliest
filing of financial latest financial earliest financial
offer year financial year financial year
document # year year
Upto March Indian Indian Indian Indian Indian
31, 2017$ GAAP GAAP GAAP GAAP GAAP
(FY (FY 2014- (FY (FY (FY
2015-16) 15) 2013-14) 2012-13) 2011-12)
Between Ind AS Ind AS Ind AS* Indian Indian
April 1, 2017 GAAP GAAP
(FY (FY 2015- (FY
and March
2016-17) 16) 2014-15) (FY (FY
31, 2018
2013-14) 2012-13)
Between Ind AS Ind AS Ind AS Indian Indian
April 1, 2018 GAAP GAAP
(FY (FY 2016- (FY
and March
2017-18) 17) 2015-16) (FY (FY
31, 2019
2014-15) 2013-14)
Between Ind AS Ind AS Ind AS Ind AS Indian
April 1, 2019 GAAP
(FY (FY 2017- (FY (FY
and March
2018-19) 18) 2016-17) 2015-16) (FY
31, 2020
2014-15)
On or after Ind AS Ind AS Ind AS Ind AS Ind AS
April 1, 2020
(FY (FY 2018- (FY (FY (FY
2019-20) 19) 2017-18) 2016-17) 2015-16)
*To be disclosed by making suitable restatement adjustments to
the accounting heads from their values as on the date of transition
following accounting policies consistent with that used at the date
of transition to Ind AS.(Refer Questions 3 and 5 of "Key reporting
considerations while preparing financial statements to be included
in offer documents" in Appendix 6.1)
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**(Refer Question 4 of "Key reporting considerations while
preparing financial statements to be included in offer documents"
in Appendix 6.1)
#(Refer Question 7 of "Key reporting considerations while
preparing financial statements to be included in offer documents"
in Appendix 6.1)
$(Refer Question 1 of "Key reporting considerations while
preparing financial statements to be included in offer documents"
in Appendix 6.1)
PHASE II COMPANIES
For companies falling under Phase II, i.e. companies that will
prepare Ind AS financial statements for accounting periods
beginning on or after April 1, 2017, the following framework of
accounting shall be applicable for disclosing financial information**
in their offer document:
Period of Latest Second Third Second Earliest
filing of financial latest financial earliest financial
offer year financial year financial year
document year year
#
Upto Indian Indian Indian Indian Indian
March 31, GAAP GAAP GAAP GAAP GAAP
2018$
(FY (FY (FY (FY (FY
2016-17) 2015-16) 2014-15) 2013-14) 2012-13)
Between Ind AS Ind AS Ind AS* Indian Indian
April 1, GAAP GAAP
(FY (FY (FY
2018 and
2017-18) 2016-17) 2015-16) (FY (FY
March 31,
2014-15) 2013-14)
2019
Between Ind AS Ind AS Ind AS Indian Indian
April 1, GAAP GAAP
(FY (FY (FY
2019 and
2018-19) 2017-18) 2016-17) (FY (FY
March 31,
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Guidance Note on Reports in Company Prospectuses
2020 2015-16) 2014-15)
Between Ind AS Ind AS Ind AS Ind AS Indian
April 1, GAAP
(FY (FY (FY (FY
2020 and
2019-20) 2018-19) 2017-18) 2016-17) (FY
March 31,
2015-16)
2021
On or after Ind AS Ind AS Ind AS Ind AS Ind AS
April 1,
(FY (FY (FY (FY (FY
2021
2020-21) 2019-20) 2018-19) 2017-18) 2016-17)
*To be disclosed by making suitable restatement adjustments to
the accounting heads from their values as on the date of transition
following accounting policies consistent with that used at the date
of transition to Ind AS.(Refer Questions 3 and 5 of "Key reporting
considerations while preparing financial statements to be included
in offer documents" in Appendix 6.1)
**(Refer Question 4 of "Key reporting considerations while
preparing financial statements to be included in offer documents"
in Appendix 6.1)
#(Refer Question 7 of "Key reporting considerations while
preparing financial statements to be included in offer documents"
in Appendix 6.1)
$(Refer Question 1 of "Key reporting considerations while
preparing financial statements to be included in offer documents"
in Appendix 6.1)
Additional guidance for Phase I and Phase II companies:
DISCLOSURE IN CASE OF INTERIM PERIODS
Disclosures of the interim financial information in the offer
document (if any), shall be made in line with the accounting
policies followed for the latest financial year. (Refer Question 2 of
"Key reporting considerations while preparing financial stateme nts
to be included in offer documents" in Appendix 6.1)
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Guidance Note on Reports in Company Prospectuses
VOLUNTARY USE OF FRAMEWORK FOR THE PREPARATION AND
PRESENTATION OF FINANCIAL STATEMENTS UNDER IND AS ("IND
AS FRAMEWORK")
SEBI has permitted companies to voluntarily prepare financial
statements for all historical five financial years preceding the filing
in accordance with Ind AS framework. (Refer Question 8 of "Key
reporting considerations while preparing financial statements to be
included in offer documents" in Appendix 6.1)
Additional disclosures
Companies in the process of listing shall clearly disclose the fact
that the financial information has been disclosed in accordance
with Ind AS while suitably explaining the difference between Ind
AS and the previously applicable accounting standards, and the
impact of transition to Ind AS.
SEBI has mandated the compliance with the requirements of
paragraphs 22 to 26 and paragraph 32 of Ind AS 101 - First time
adoption of the Indian Accounting Standards ("Ind AS 101") for
this purpose which has been detailed below:
a) When historical or comparative financial information in
accordance with Indian GAAP is presented in any Ind AS
financial statements, the company in the process of listing
shall:
i. Label the previous GAAP information prominently as not
being prepared in accordance with Ind AS; and
ii. Disclose the nature of the main adjustments that would
make it comply with Ind AS, although quantification of such
adjustments is not required.
b) The company in the process of listing is required to explain
how the transition from the previous GAAP to Ind AS affected
its balance sheet, financial performance and cash flows and to
comply with the same, annual financial statements presented
in the offer document shall include:
i. Reconciliation of its equity reported in accordance with the
previous GAAP to its equity in accordance with Ind AS;
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Guidance Note on Reports in Company Prospectuses
ii. Reconciliation of its total comprehensive income/profit or
loss under the previous GAAP to its total comprehensive
income in accordance with Ind AS;
iii. Disclosures required under Ind AS 36 Impairment of
Assets ("Ind AS 36") if the company has recognised or
reversed any impairment losses for the first time in
preparing its opening Ind AS Balance Sheet;
iv. Explanation of the material adjustments to the statement of
cash flows if presented under the previous GAAP; and
v. The company should distinguish errors (if any under
previous GAAP) from the change in accounting policies
while providing the above reconciliations.
c) Similar transitional disclosures are required in the interim
financial statements presented in the offer document.
OTHER REQUIREMENTS
a) All the financial information disclosed in the offer document for
any particular year should be in accordance with consistent
accounting policies (whether Ind AS or Indian GAAP). (Refer
Question 6 of "Key reporting considerations while preparing
financial statements to be included in offer documents" in
Appendix 6.1).
b) All other requirements of ICDR Regulations for disclosure of
financial information in the offer documents, including the
audit/review requirements shall remain the same.
Issuer companies under transition phase to Ind AS may face
certain practical challenges with regard to preparation of historical
financial statements to be included in offer documents. Some of
the key reporting considerations have been discussed in
Appendix 6.1.
Requirements of SEBI in general for preparation of restated
historical financial statements
While preparing the Restated Financial Information, the Company
should consider the following:-
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Guidance Note on Reports in Company Prospectuses
1. Presentation of Restated Financial Information
In absence of the specific requirements in relation to
Restated Financial Information, the companies should
follow the presentation requirements as mentioned in
Schedule III to the Companies Act, 2013 `General
instructions for preparation of balance sheet and statement
of profit and loss of a Company as applicable to the
respective accounting standards (existing accounting
standards or Ind AS) to be followed.
2. Notes to the Restated Financial Information
In absence of the specific requirements in relation to
Restated Financial Information, at a minimum, the
companies should present notes for the line items
appearing in the balance sheet, Statement of profit and
loss and Cash Flow Statement as reported for annual
reporting.
3. Disclosures to the Restated Financial Information
In absence of the specific requirements in relation to
Restated Financial Information, at a minimum, the
companies should present disclosures as required by the
applicable accounting standards.
4. Principles to be used while preparing Restated
financial Information
The companies should use the principles enumerated
in Indian Accounting Standard 8, `Accounting Policies,
Changes in Accounting Estimates and Errors' as
notified by Companies (Indian Accounting Standards)
Rules, 2015 (`Ind AS 8') in relation to the accounting
treatment for change in accounting policies, estimates
and errors;
Any re-classification for the periods covered by the re-
stated financial statements needs to be assessed in
accordance with the principles enumerated in Ind AS 8;
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Guidance Note on Reports in Company Prospectuses
Any material re-classification and material prior period
adjustment needs to be disclosed separately as a note
in the Restated Financial Information; and
Any item qualified in auditors' report and Companies
Auditors' Report Order, 2016 (including the Orders
applicable for previous periods) report for the periods
covered by the re-stated financial statements needs to
be assessed in accordance with the principles
enumerated in Ind AS 8. Companies should explain the
adjustments being made to the Restated Financial
Information in relation to the items qualified in auditors'
report and Companies Auditors' Report Order, 2016
(including the Orders applicable for previous periods)
report in the notes to Restated Financial Information.
5. Signing of restated financial information
The preparation of restated financial information in
accordance with the requirements of the ICDR regulations,
which is to be included in the offer document is the
responsibility of the management of the company and
should be approved by the board of directors of the issuer
company. Therefore, the restated financial information
should be signed by the persons authorised by the board
of directors of the issuer company to sign on behalf of
them.
6. Deferred tax implication in relation to adjustments
made in preparation of restated financial information
Issuer companies should make suitable deferred tax
adjustments in relation to adjustments made in preparation
of restated financial information in accordance with the
applicable accounting standards.
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Guidance Note on Reports in Company Prospectuses
Appendix 6.1
Key reporting considerations while preparing
financial statements to be included in offer
documents
Question 1: Which framework of accounting to be followed by
companies for furnishing financial information for five years
in offer documents?
Response:
Phase I companies
Companies covered in Phase I of Ind AS roadmap are required to
prepare Ind AS financial statements for the accounting period
beginning on or after April 1, 2016 (i.e. for the financial year ended
March 31, 2017) for filing under Companies Act, 2013. In
accordance with Ind AS roadmap and Ind AS 101, these
companies would require their first Ind AS financial statements for
the year ending March 31, 2017 and present the comparative
financial information for the preceding financial year ending March
31, 2016 and an opening Ind AS transition balance sheet as at the
transition date i.e. April 1, 2015.
For Phase I issuer companies which are in the process of listing
upto March 31, 2017, the circular requires presentation of
historical five years financial statements in accordance with Indian
GAAP as mentioned below:
Period of Latest Second Third Second Earliest
filing of financial latest financial earliest financial
offer year financial year financial year
document year year
Upto Indian Indian Indian Indian Indian
March 31, GAAP GAAP GAAP GAAP GAAP
2017
(FY (FY (FY (FY (FY
2015-16) 2014-15) 2013-14) 2012-13) 2011-12)
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Guidance Note on Reports in Company Prospectuses
Phase II companies
For issuer companies falling under Phase II of Ind AS roadmap,
the similar principles should be followed with time lag of one year.
Question 2: Which framework of accounting to be followed by
companies for preparing interim financial information?
Response:
Phase I companies
Scenario 1 Period of filing of offer document upto March 31,
2017
The circular states that the disclosures of an interim period
financial information (if any), in the offer document shall be made
in line with the accounting policies followed for the latest financial
year. This means that companies that discloses interim financial
information for an interim period ending prior to March 31, 2017
shall be required to disclose interim financial information as per
Indian GAAP, being the accounting framework followed for the
latest financial year i.e. year ended March 31, 2016.
As per Ind AS roadmap issued by MCA, companies which are
covered in Phase I are required to adopt Ind AS for financial
statements for the accounting periods beginning on or after April
1, 2016 (i.e. year ended March 31, 2017). MCA does not require
interim financial statements and Ind AS is applicable for full
financial year. For smooth transition to Ind AS, SEBI requires
companies that discloses financial information for an interim
period ending prior to March 31, 2017 to prepare interim period
financial information in accordance with Indian GAAP. Although, it
may lead to duplication of efforts for companies which have
already adopted Ind AS accounting principles from April 1, 2016
and started reporting internally.
In case a company disclose financial information for an interim
period ending prior to March 31, 2017, it should be prepared in
accordance with Indian GAAP.
Example: XYZ Ltd. is an issuer company and is covered under
Phase I of Ind AS roadmap. The Company is planning to file offer
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Guidance Note on Reports in Company Prospectuses
document on July 31, 2016 and intends to present financial
information for interim period (quarter ended June 30, 2016) and
for historical five financial years. The accounting framework
applicable for the preparation of financial statements for the
interim period and historical five financial years shall be as follows:
Period of Interim Latest Second Third Second Earliest
filing of period financ latest financ earliest financi
offer ial financia ial financi al year
document year l year year al year
Upto Indian Indian Indian Indian Indian Indian
March 31, GAAP GAAP GAAP GAAP GAAP GAAP
2017
(Quarter (FY (FY (FY (FY (FY
ended 2015- 2014- 2013- 2012- 2011-
June 30, 16) 15) 14) 13) 12)
2016)
Scenario 2 Period of filing of offer document after March 31,
2017
In case a company discloses financial information for an interim
quarter ending after March 31, 2017 (for example, in financial year
2017-18), it should be prepared in accordance with Ind AS, being
the accounting framework followed for the latest financial year i.e.
year ended March 31, 2017.
Example: XYZ Ltd. is an issuer company and is covered under
Phase I of Ind AS roadmap. The Company is planning to file offer
document on July 31, 2017 and intends to present financial
information for interim period (quarter ended June 30, 2017) and
for historical five financial years. The accounting framework
applicable for the preparation of financial statements for the
interim period and historical five financial years shall be as follows:
Period Interim Latest Second Third Second Earliest
of filing period financi latest financi earliest financi
of offer al year financi al year financi al year
docume al year al year
nt
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Guidance Note on Reports in Company Prospectuses
Between Ind AS Ind AS Ind AS Ind AS Indian Indian
April 1, GAAP GAAP
(Quart (FY (FY (FY
2017 and
er 2016- 2015- 2014- (FY (FY
March
ended 17) 16) 15) 2013- 2012-
31, 2018
June 14) 13)
30,
2017)
Phase II companies
For issuer companies falling under Phase II of Ind AS roadmap,
the similar principles should be followed with time lag of one year.
Question 3: How should the Ind AS financials for the earliest
of the three years be prepared by companies?
Response:
Phase I companies
Assuming that Phase I issuer companies which are in the process
of listing during the period from April 1, 2017 to March 31, 2018
would have prepared Ind AS financial statements for FY 2016-17
and FY 2015-16 for filing under Companies Act, 2013. Also, these
companies would have prepared Indian GAAP financial
statements for FY 2014-15 for filing under Companies Act, 2013.
But, the circular requires these companies to prepare an
additional Ind AS financial statements for FY 2014-15 for inclusion
in the offer document.
For the purpose of preparing Ind AS financial statements for the
FY 2014-15, the circular requires suitable restatement
adjustments (both re-measurements and reclassifications) to be
made in accounting heads from their values as on the date of
transition (i.e. April 1, 2015) following accounting policies
consistent with that used at the date of transition to Ind AS (i.e.
April 1, 2015). It seems that the intent of the circular is not to push
back the transition date (i.e. April 1, 2015) to April 1, 2014 and re-
adopt Ind AS 101 provisions again. Therefore, these companies
are required to follow the same accounting policy choices ( both
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Guidance Note on Reports in Company Prospectuses
mandatory exceptions and optional exemptions availed as per Ind
AS 101) as initially adopted on transition date (i.e. April 1, 2015)
while preparing financial statements for the FY 2014-15 and
accordingly suitable restatement adjustments in the accounting
heads need to be made. The financial statements for the FY 2014-
15 should be prepared on proforma basis (i.e. "Proforma Ind AS
financial statements") for the purpose of inclusion in the offer
document.
The same is summarised in the table below:
Period of Latest Second Third Second Earliest
filing of financial latest financial earliest financial
offer year financial year financial year
document year year
Between Ind AS Ind AS Proforma Indian Indian
April 1, Ind AS GAAP GAAP
(FY (FY
2017 and financial
2016-17) 2015-16) (FY (FY
March 31, statements
2013-14) 2012-13)
2018
(FY 2014-
15)
There may be a possibility where equity balance computed under
Proforma Ind AS financial statements for the year ended March
31, 2015 (i.e. equity under Indian GAAP as at April 1, 2014
adjusted for impact of Ind AS 101 items as suggested later in this
section and after considering profit or loss for the year ended
March 31, 2015 with adjusted impact due to Ind- AS principles
applied on proforma basis) and equity balance computed in
opening Ind AS Balance sheet as at transition date (i.e. April 1,
2015), prepared for filing under Companies Act, 2013, differs due
to restatement adjustments made as at April 1, 2014. In such
case, the closing equity balance as at March 31, 2015 of the
Proforma Ind AS financial statements should not be carried
forward to opening Ind AS Balance sheet as at transition date
already adopted for reporting under Companies Act, 2013.
However, companies should provide appropriate disclosures in
the offer document to explain the differences between the two.
Companies should include all disclosures as required by Ind AS
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Guidance Note on Reports in Company Prospectuses
for the Proforma Ind AS financial statements unless it is
impracticable. Companies should also include details of proforma
adjustments (including the basis)made as at April 1, 2014 and for
the year ended March 31, 2015 as part of the notes in the restated
financial information.
Recommendations while preparing the Proforma Ind AS
Financial Statements
For the purpose of preparing Proforma Ind AS Financial
statements, the companies would have to evaluate how the
adjustments should be made in some areas such as items that are
measured at fair value (e.g. derivative or revalued assets, where
such fair value information is not available at the earlier dates),
items of property plant and equipment that took deemed cost
exemption (using the fair value option), or the transactions that
were exempt from the retrospective restatement on first time
adoption of Ind AS (e.g. business combinations that occurred
during the period from April 1, 2014 to March 31, 2015).
Companies are required to analyse all mandatory exceptions and
optional exemptions available under Ind AS 101 on case to case
basis for the first-time adoption (including comparatives) and
accordingly need to make restatement adjustments in line with the
same in the Proforma Ind AS financial statements. Cases where
there are no exemptions (e.g. amortised cost accounting using
effective rate of interest method and functional currency, etc.)
available under Ind AS 101, companies are required to Ind AS
principles retrospectively and make necessary adjustments as at
transition date (i.e. 1 April, 2015). Similar adjustments should be
made to prepare opening balance sheet of Proforma Ind AS
financial statements to be in line with the requirements of
paragraph 10 of Ind 101. Some of the major challenges on
application of certain mandatory exceptions and optional
exemptions have been discussed below:
I. Business combination:
Ind AS 103 - Business combinations ("Ind AS 103") provides for
the accounting principles to be applied in case of business
combination (like acquisition method accounting using fair values
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Guidance Note on Reports in Company Prospectuses
of the assets transferred, liabilities incurred to the previous owners
of the acquire, equity interests issued and contingent
consideration). Considering the complexities involved in
application of Ind AS 103 and for providing relaxation to the first
time adopters of Ind AS, Ind AS 101 provides for following options
to be made at transition date:
i. Not to apply Ind AS 103 retrospectively to past business
combinations that occurred before the transition date (i.e.
April 1, 2015), or
ii. Re-state all the business combinations that occurred before
the transition date (i.e. April 1, 2015), or that occurred from a
particular date (pre-transition date) till the date of transition
and accordingly apply Ind AS 103.
Reporting consideration:
To comply with the requirement of the circular for preparation of
Proforma Ind AS financial statements, the companies are required
to consider the roll-back restatement adjustments to be made
depending upon the option availed at transition date. Different
scenarios have been discussed below:
Scenario 1 Where the company has availed Ind AS 101
exemption at transition date (i.e. not to apply Ind AS 103
retrospectively):
Company has opted for optional exemption for not applying
retrospectively Ind AS 103 accounting principles for business
combinations that occurred before the transition date (i.e. April 1,
2015). Therefore as per the circular, the company should adopt
the same accounting policy choice for preparing Proforma Ind AS
financial statements as adopted initially at the transition date and
accordingly not to apply Ind AS 103 for business combinations
that have occurred between the period April 1, 2014 and March
31, 2015. However, the company has to consider the adjustments
required by paragraph C4 of Appendix C `Exemptions for business
combinations) to Ind AS 101 for business combinations that have
occurred during the said period which the company have already
evaluated on transition date (i.e. April 1, 2015).
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Scenario 2 Where the company has not availed Ind AS 101
exemption at transition date (i.e. apply Ind AS 103
retrospectively):
As the company has applied Ind AS 103 principles retrospectively,
it is assumed that the company would have necessary information
to be able to apply the new accounting requirements as at April 1,
2014 and hence it will not pose any challenge.
II. Deemed cost:
Ind AS 101 includes an optional exemption that relieves first-time
adopters from the requirement to recreate cost information for
property, plant and equipment ("PP&E"), investment property
(other than option based on fair value or revaluation) and
intangible assets. When the exemption is applied, deemed cost is
the basis for subsequent depreciation and impairment tests.
Following are the options available under Ind AS 101 at transition
date:
i) Fair value as "Deemed Cost" - Measure an item of PP&E at
fair value at transition date (i.e. April 1, 2015) and use that fair
value as deemed cost as at April 1, 2015;
ii) Revalued amount as "Deemed Cost" - Value an item of PP&E
arrived on revaluation on the date of revaluation and use the
carrying value as at transition date (i.e. April 1, 2015) based
on that revaluation as deemed cost;
iii) Carrying amount as "Deemed Cost" - Carry an item of PP&E
at carrying amount as at transition date (i.e. April 1, 2015) as
per Indian GAAP and use that carrying amount as deemed
cost as at April 1, 2015. However, this carrying amount needs
to be adjusted to make necessary adjustments in relation to
decommissioning liability. This option, if availed, should be
extended to all items of PP& E;
iv) Event driven fair value as "Deemed Cost" Carry an item of
PP&E as deemed cost measured in previous GAAP based on
fair value at the date of events such as privatisation or initial
public offerings; and
v) Apply Ind AS 16 retrospectively.
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Guidance Note on Reports in Company Prospectuses
Reporting consideration:
To comply with the requirements of the circular for preparation of
Proforma Ind AS financial statements, companies are required to
consider the roll-back restatement adjustments to be made
depending upon the option availed at transition date. Different
scenarios have been discussed below:
Scenario 1 Fair value as deemed cost:
Assume a company had measured an item of its property, plant
and equipment (say, building) at transition date at its fair value
(say, Rs. 90 crore with remaining useful life of 9 years) and use
that fair value as deemed cost at that date.
As per the circular, the company should adopt the same
accounting policy choice for preparing Proforma Ind AS financial
statements as adopted at transition date and accordingly
determine fair value of the building at April 1, 2014. Considering
the practical challenges in determining the independent fair value
at April 1, 2014, the company should arrive at the carrying value at
April 1, 2014 using the fair value as at 1 April, 2015 as a base.
Therefore, the company should consider the same fair value as
considered at transition date subject to adjustment of depreciation
for one year (i.e. 90/9*10 years = Rs. 100 crore).
Scenario 2 Revalued amount as deemed cost:
Assume a company acquires a factory building for Rs. 360 crore
on April 1, 2010 with an expected remaining useful life of 40 years
at that date. The building is revalued on April 1, 2012 to Rs. 390
crore and the resulting adjustment is recognised in equity. The
building has a depreciated carrying amount of Rs. 369.47 crore
(i.e. 390 less 390/38*2 years) on April 1, 2014 and Rs. 359.21
crore (i.e. 390 less 390/38*3 years) on April 1, 2015. Assuming
the depreciation method under previous GAAP is acceptable
under Ind AS 16 and the revaluation is broadly comparable to fair
value at the date of revaluation. The Company has opted to adopt
revalued carrying amount as deemed cost at transition date.
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Guidance Note on Reports in Company Prospectuses
Therefore, the Company should adopt the carrying value of Rs.
369.47 crore (on April 1, 2014) as the opening value for preparing
Proforma Ind AS financial statements.
Scenario 3 Previous GAAP carrying amount as deemed cost:
Assume that the company has adopted cost model under previous
GAAP and the carrying amount of the factory building is Rs. 350
crore as at April 1, 2015 with remaining useful life of 25 years.
Assuming the depreciation method under previous GAAP is
acceptable under Ind AS 16. The company has opted to adopt
previous GAAP carrying amount as deemed cost at transition date
(i.e. April 1, 2015).
Therefore, the Company should adopt the carrying value of Rs.
364 crore (i.e. 350/25*26 years) as the opening value (i.e. on April
1, 2014) for preparing Proforma Ind AS financial statements. If this
options is availed, previous GAAP carrying amount of all items of
PP & E on the date of transition should be treated as their deemed
cost on that date.
Scenario 4 Event driven fair value as deemed cost
The option to use an event-driven value is only available if that
value was recognised in the company's financial statements under
Indian GAAP. If the measurement date is at or before the
transition date (i.e. April 1, 2015), the company may use such
event-driven fair value measurements as deemed cost for Ind AS
at the date of that measurement. If the measurement date is after
the transition date (i.e. April 1, 2015), but during the period
covered by the first Ind AS financial statements (i.e. from April 1,
2016 to March 31, 2017), the event-driven value may be used as
deemed cost when the event occurs. A company should recognise
the resulting adjustments directly in retained earnings (or if
appropriate, another category of equity) at the measurement date.
However, on the date of transition, the company should measure
the deemed cost by applying other options permitted in Ind AS
101.
Example: Company ABC is adopting Ind AS for the first time in its
financial statements for the year ending March 31, 2017. Its date
of transition is April 1, 2015. At June 30, 2016, in producing
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financial information for an initial public offering (IPO), Company
ABC establishes fair values for property, plant and equipment.
The following information is relevant.
Fair value of assets established Rs. 750 crore
at March 31, 2012 with
remaining useful life of 30 years
(recognised under Indian
GAAP)
Fair value of assets at March Rs. 675 crore (Rs. 750 less
31, 2012 less accumulated 750/30*3 years)
depreciation to April 1, 2015
(determined in accordance with
Ind AS)
Fair value of assets at March Rs. 637.50 crore (Rs. 750 less
31, 2012 less accumulated 750/30*4.5 years)
depreciation to June 30, 2016
(determined in accordance with
Ind AS)
Fair value of assets at June 30, Rs. 1,000 crore
2016
Under paragraph D 8(b) of Ind AS 101, the fair value at June 30,
2016 may be used as the deemed cost of the assets at that date
for the purposes of the entity's first Ind AS financial statements.
However, Company ABC would still need to establish the carrying
amount of the assets at the transition date (i.e. April 1, 2015), and
account for the assets under Ind AS from the transition date (i.e.
April 1, 2015) to June 30, 2016. For this purpose, Company ABC
has the usual options to establish the carrying amount of the
assets by applying Ind AS 16 retrospectively or by reference to a
deemed cost in accordance with paragraphs D5 to D7 of Ind AS
101.
For example, using the exemption available under paragraph D6
of Ind AS 101, Company ABC could use the fair value at March
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31, 2012 recognised under previous GAAP as the deemed cost at
that date and establish the carrying amount at April 1, 2015 by
adjusting the March 31, 2012 fair value for subsequent
depreciation. When this option is taken, in the first Ind AS financial
statements, depreciation recognised from April 1, 2015 to June
30, 2016 will be based on the deemed cost at March 31, 2012
(Rs. 750 crore).
If the fair value at June 30, 2016 is used as deemed cost for the
assets at that date, the difference of Rs. 362.50 crore between the
carrying amount at June 30, 2016 (Rs. 637.50 crore) and the fair
value of the assets at June 30, 2016 (Rs. 1,000 crore) is
recognised in retained earnings. This is not considered to be a
revaluation of the property, plant and equipment for the purposes
of Ind AS 16 (and does not result in a requirement for subsequent
regular revaluations). Subsequent depreciation (after June 30,
2016) is based on the uplifted value. No adjustment is made to the
depreciation recognised under Ind AS for the period from April 1,
2015 to June 30, 2016.
For preparation of Proforma Ind AS financial statements for the
year ended March 31, 2015, Entity ABC should adopt the same
accounting policy choice for preparing Proforma Ind AS financial
statements as adopted at transition date and accordingly,
determine the value at opening balance sheet date as at April 1,
2014 (i.e. Rs. 750 less 750/30*2 years = Rs. 700 crore).
Scenario 5 Apply Ind AS 16 principles retrospectively.
Since the company has already applied Ind AS 16 principles
retrospectively, the company must be having the requisite
information and documentation as considered at transition date
(i.e. April 1, 2015) as well as on April 1, 2014. Therefore, in this
scenario the company should not have any challenge.
III. Hedge accounting:
A first-time adopter is not permitted to retrospectively designate
transactions as hedges for hedge accounting in accordance with
Ind AS 109 Financial Instruments "Ind AS 109". The basis for
this exception is that the retrospective designation of a transaction
as a hedge with the benefit of hindsight might be used by an entity
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in order to achieve a specific result. The exception therefore
requires an entity to apply hedge accounting prospectively only.
Under the exception, a first-time adopter is required in its opening
Ind AS balance sheet to recognise all derivatives at fair value and
to eliminate against retained earnings all deferred gains and
losses arising on derivatives that were reported under previous
GAAP as assets and liabilities. The designation and
documentation of the hedging relationship must be completed on
or before the date of transition if it is to qualify under Ind AS 109
for hedge accounting. Designation and documentation of a hedge
relationship under previous GAAP that is compliant with the
hedging requirements of Ind AS 109 would be considered
acceptable.
If, before the date of transition to Ind ASs, a transaction had been
designated as a hedge but the hedge is not a relationship type
that would qualify for hedge accounting under Ind AS 109, or it
does not meet that Standard's conditions for hedge accounting
(i.e. documentation, designation and assessment of
effectiveness), the requirements of Ind AS 109 should be applied
to discontinue hedge accounting.
Accounting for hedges designated under previous GAAP on first-
time adoption is dependent on the classification of the hedge as
either a fair value hedge or a cash flow hedge.
Reporting consideration:
Assume a company has designated a hedging instrument and a
hedged item in a hedging relationship under previous GAAP (i.e.
Indian GAAP) and the documentation and designation made
under Indian GAAP are in compliance with the requirements of Ind
AS 109. It is further assumed, that the Company has not followed
hedge accounting under Indian GAAP. The company has followed
the mandatory exception provided under Ind AS 101 and
accordingly applied the principles of hedge accounting
prospectively with regard to that relationship. Considering the
requirement of the circular for preparation of proforma Ind AS
financial statements for third financial year (i.e. 2014-15), the
company should follow the same accounting principles as adopted
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at transition date (i.e. April 1, 2015) and accordingly cannot apply
hedge accounting for the transactions designated as hedge under
Indian GAAP in line with principles of Ind AS 109 for the year
ended March 31, 2015. However, the company should measure
the hedging instrument at fair value for the third financial year and
accordingly account for the gain/losses arising at the opening
balance sheet date of third financial year (i.e. April 1, 2014) and
the reporting date (i.e. March 31, 2015) for preparing Proforma Ind
AS financial statements.
IV.Cumulative translation differences:
Foreign currency translation differences, such as those arising on
a monetary item that forms part of reporting entity's net investment
in a foreign operation, are recognised in other comprehensive
income under Ind AS 21, 'The Effects of Changes in Foreign
Exchange Rates'. The exemption in Ind AS 101 allows the
cumulative translation difference to be set to zero at the date of
transition for all foreign operations and the gain or loss on a
subsequent disposal of any foreign operation shall exclude
translation differences that arose before the transition date and
shall include later translation differences.
Reporting consideration:
To comply with the requirement of the circular for preparation of
Proforma Ind AS financial statements, Companies are required to
consider the roll-back restatement adjustments to be made
depending upon the option availed at transition date. Different
scenarios have been discussed below:
Scenario 1 Where the company has availed Ind AS 101
exemption at transition date:
Example: Company Y has translated its net investment in foreign
subsidiary under Indian GAAP and the cumulative translation
difference appearing in the Balance sheet as at March 31, 2015 is
Rs. 10 crore. At transition date, the Company Y has opted for the
exemption and accordingly set the amount appearing under
foreign currency translation reserve (`FCTR') account as zero. As
per the circular, the Company should adopt the same accounting
policy choice for preparing Proforma Ind AS financial statements
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Guidance Note on Reports in Company Prospectuses
as adopted initially at transition date and accordingly set the
amount appearing under FCTR account at April 1, 2014 as zero
and recognise the translation differences arising for the year
ended March 31, 2015 as FCTR under the head Equity.
Scenario 2 Where the company has not availed Ind AS 101
exemption at transition date:
As the company has applied Ind AS 21 principles retrospectively,
it is assumed that the company would have necessary information
to be able to apply the accounting requirements as at April 1, 2014
and hence it will not pose any challenge.
Phase II companies
For issuer companies falling under Phase II of Ind AS roadmap,
the similar principles should be followed with time lag of one year.
Question 4: How should the Ind AS and Indian GAAP
financials for last five years be presented by Phase I
companies when filing is between 1 April 2017 and 31 March
2018?
Assume that a Phase I company is filing its offer document
between April 1, 2017 and March 31, 2018 and it is required to
present following financial information. A practical presentation
consideration needs to be looked into i.e. whether Ind AS
financials and Indian GAAP financials should be presented
together or separately in offer document as the presentation and
classification of financial statements line items (e.g. extraordinary
items, classification of financial assets and financial liabilities and
presentation of equity vs. liability etc.) may differ significantly
under both the GAAPs.
Period of Latest Second Third Second Earliest
filing of financial latest financial earliest financial
offer year financial year financial year
docume year year
nt
Between Ind AS Ind AS Proforma Indian Indian
April 1, Ind AS GAAP GAAP
(FY (FY
2017 and financial
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Guidance Note on Reports in Company Prospectuses
March 2016-17) 2015-16) statements (FY 2013- (FY
31, 2018 14) 2012-13)
(FY 2014-
15)
Further, there will be challenges in presenting two sets of
accounting policies and notes (i.e. Ind AS and Indian GAAP)
together, as they may differ significantly. Considering such
classification and presentation issues and presentation of two sets
of accounting policies and notes, it is recommended that the
company should present its 5 years financial statements in two
sections (one for Ind AS financials and second for Indian GAAP
financials).
Phase II companies
For issuer companies falling under Phase II of Ind AS roadmap,
the similar principles should be followed with time lag of one year.
Question 5: Which accounting policies to be followed while
preparing the Ind AS financials (i.e. "Proforma Ind AS
financials")?
Response:
Phase I companies
The Phase I issuer companies should adopt the same accounting
policies, as adopted for the preparation of first Ind AS financial
statements, for the preparation of Proforma financial statements.
Example: An issuer company which has prepared its first Ind-AS
financial statements for the year ended March 31, 2017 should
apply the same accounting policies for the preparation of
Proforma Ind AS financial statements as adopted for the
preparation of the first Ind-AS financial statements. Assume a
company has opted for previous GAAP carrying amount as
deemed cost at transition date (i.e. April 1, 2015) and adopted
revaluation model for the first Ind-AS financial statements for the
year ended March 31, 2017. In this case, the company should
follow revaluation model while preparing Proforma Ind AS financial
statements for the year ended March 31, 2015.
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Phase II companies
For issuer companies falling under Phase II of Ind AS roadmap,
the similar principles should be followed with time lag of one year.
Question 6: How should the change in accounting policies,
estimates and errors be accounted for preparation of restated
past five years of financial statements?
Response:
Ind AS 8 requires material prior period errors to be corrected
retrospectively by restating the comparative amounts for prior
period presented in which the error occurred or if the error
occurred before the earliest prior period presented, by restating
the opening balance sheet and, if relevant, statement of changes
in equity.
The issuer companies should follow the following principles while
preparing historical five year financial statements (including
presentation of Indian GAAP financial statements):
i. The companies should use the principles prescribed in Ind
AS 8 in relation to the accounting treatment for change in
accounting policies, estimates and errors.
The companies should not apply hind sight while
accounting estimates and any change in accounting
estimates should be treated prospectively for the purpose
of preparation of restated financial information to be
included in the offer documents. This is also applicable for
restated Indian GAAP financials that need to be presented
as part of the historical 5 years of financial information.
ii. Any re-classification for the periods covered by the re-
stated financial statements needs to be assessed in
accordance with the principles prescribed in Ind AS 8;
iii. Any material re-classification and material prior period
adjustment needs to be disclosed separately as a note in
the restated Financial Information; and
iv. Any item qualified in auditors' report and Companies
Auditors' Report Order, 2015 report for the periods
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Guidance Note on Reports in Company Prospectuses
covered by the re-stated financial statements needs to be
assessed in accordance with the principles enumerated in
Ind AS 8.
Question 7: Which framework of accounting to be followed by
companies if DRHP and RHP are filed in different financial
years?
Response:
Phase I companies
There may be a scenario that the period of filing Draft Red Herring
Prospectus ("DRHP") and Red Herring Prospectus ("RHP") falls in
two different financial years. In such case, the company is
required to prepare historical five year financial statements under
different accounting frameworks for the purpose of inclusion in
DRHP and RHP. It has been further elaborated below.
If a company files DRHP in FY 2016-17, company is required to
prepare historical five year financial statements as per the
accounting framework as mentioned below:
Period of Latest Second Third Second Earliest
filing of financial latest financial earliest financial
offer year financial year financial year
document year year
Upto Indian Indian Indian Indian Indian
March 31, GAAP GAAP GAAP GAAP GAAP
2017
(FY (FY (FY (FY (FY
2015-16) 2014-15) 2013-14) 2012-13) 2011-12)
If the same company files RHP in FY 2017-18, company needs to
file historical five year financial statements as per the accounting
framework as mentioned below:
Period of Latest Second Third Second Earliest
filing of financial latest financial earliest financial
offer financial financial
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Guidance Note on Reports in Company Prospectuses
document year year year year year
Between Ind AS Ind AS Proforma Indian Indian
April 1, Ind AS GAAP GAAP
(FY (FY
2017 and financial
2016-17) 2015-16) (FY (FY
March 31, statements
2013-14) 2012-13)
2018
(FY 2014-
15)
The preparation of historical five year financial statements under
different accounting frameworks for the purpose of inclusion in
DRHP and RHP may require undue cost and effort. Therefore, it is
recommended that the companies planning for listing should plan
the timings of filing the DRHP and RHP.
Question 8: How should the financials be prepared if a
company which has adopted Ind AS as per roadmap chooses
to present past five years' financials under Ind AS framework
of accounting as allowed under the Circular?
Response:
Phase I companies
SEBI has permitted companies to voluntarily prepare financial
statements for all historical five financial years preceding the filing
in accordance with Ind AS. Companies covered in Phase I will
have to prepare Ind AS financial statements for the FY 2015-16
and FY 2016-17 for filing under Companies Act, 2013 and
similarly Phase II companies will have to prepare Ind AS financial
statements for FY 2016-17 and FY 2017-18. Companies which
chose to present historical five year financial statements in
accordance with Ind AS, should prepare Proforma Ind AS financial
statements for the remaining years prior to the date of transition
(i.e. remaining three years).
Example: Company covered in Phase I is planning to file offer
document in FY 2017-18 and voluntarily prepares financial
statements for all the historical five years in accordance with Ind
AS. Assuming, company would have prepared Ind AS financial
statements for the FY 2015-16 and FY 2016-17 for filing under
Companies Act, 2013, for remaining three years, company should
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prepare Proforma Ind AS financial statements by making suitable
restatement adjustments that are consistent with the accounting
policies used on transition i.e. April 1, 2015.
The same has been summarised below:
Period of Latest Second Third Second Earliest
filing of financia latest financial earliest financial
offer l year financia year financial year
documen l year year
t
Between Ind AS Ind AS Proforma Proforma Proforma
April 1, Ind AS Ind AS Ind AS
(FY (FY
2017 and financial financial financial
2016- 2015-
March 31, statement statement statement
17) 16)
2018 s s (FY s
2013-14)
(FY 2014- (FY 2012-
15) 13)
Between Ind AS Ind AS Ind AS Proforma Proforma
April 1, Ind AS Ind AS
(FY (FY (FY 2015-
2018 and financial financial
2017- 2016- 16)
March 31, statement statement
18) 17)
2019 s s
(FY 2014- (FY 2013-
15) 14)
Between Ind AS Ind AS Ind AS Ind AS Proforma
April 1, Ind AS
(FY (FY (FY 2016- (FY 2015-
2019 and financial
2018- 2017- 17) 16)
March 31, statement
19) 18)
2020 s
(FY 2014-
15)
On or Ind AS Ind AS Ind AS Ind AS Ind AS
after
(FY (FY (FY 2017- (FY 2016- (FY 2015-
April 1,
2019- 2018- 18) 17) 16)
2020
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Guidance Note on Reports in Company Prospectuses
20) 19)
It has been assumed that the companies filing offer document
upto March 31, 2017 may not voluntarily adopt to prepare
historical five year Ind AS financial statements as the company
will have Indian GAAP financial statements prepared for filing
under Companies Act, 2013. It may involve undue cost and effort
to prepare the Ind AS financial statements for the historical five
financial years. However, it is recommended that the company
filing offer document upto March 31, 2017 should provide
reconciliations as required by paragraph 24 of Ind AS 101 while
filing offer document (as discussed earlier).
Further, companies must consider the key reporting
considerations (as discussed earlier) while preparing Proforma Ind
AS financial statements.
Phase II companies
For issuer companies falling under Phase II of Ind AS roadmap,
the similar principles should be followed with time lag of one year.
Question 9: How should the last five years' financials be
presented by companies for which Ind AS accounting
framework is not applicable but choose to early adopt Ind
AS?
Response:
As per Ind AS roadmap, companies which are unlisted and having
net worth less than Rs. 250 crore are not covered in either of the
phases. However, Ind AS roadmap allows companies to
voluntarily adopt Ind AS for filing under Companies Act, 2013.
Assuming if an issuer company having net worth of Rs. 230 crore,
voluntarily adopts Ind AS in FY 2017-18 and is in the process of
listing in the said financial year, it is recommended that the
company should apply the same principles as applicable for
Phase I companies (as discussed in this appendix) since going
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forward after getting listed the company will be required to prepare
Ind AS financial statements for filing under Companies Act, 2013.
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Appendix 7
Illustrative Format of the Engagement Letter
for the Entire Engagement to Issue Report on
the Prospectus
(refer paragraph 2.6)
Date
Name of Company
Address
Letter of Engagement
Dear Sirs,
We are writing to confirm our understanding of the scope and
limitations of the work to be performed by us in connection with
____________[Draft Red Herring Prospectus/Red Herring
Prospectus/Prospectus("DRHP/RHP/Prospectus")(collectively, the
"Offer Document"), dated ____________[Date] prepared in
connection with the filing of an offer document a proposed issue of
________________[Insert name and type of security] (the "Equity
Shares/Notes/Security") by _________________ (name of the
company) (the "Company") with the Securities and Exchange
Board of India ("SEBI") and the Registrar of Companies,
_______________ [Insert name of the State].
This letter is not to be used in connection with the sale of
securities in the ____________________ (name of the Country).
We accept no duty or responsibility to and deny any liability to any
party in respect of any use of this letter in connection with the sale
of securities in the ________________________ (name of the
country).
As part of the offer document, the Company will prepare financial
information for each of the five years ended March 31, 20x6, 20x5,
20x4, 20x3 and 20x2 along with the adjusted profits (i.e., after
adjustments as required by the Securities and Exchange Board of
India (Issue of Capital and Disclosure Requirements) Regulations,
2009, as amended (the " ICDR Regulations") for each of the five
years ended March 31, 20x6, 20x5, 20x4, 20x3 and 20x2 in a
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Guidance Note on Reports in Company Prospectuses
manner consistent with the accounting policies being adopted for
the year ended March 31, 20x6. Further, the Company will
prepare Consolidated Financial Information of the Company, its
subsidiaries and associates (together referred to as the "Group")
for each of the five years ended March 31, 20x6, 20x5, 20x4, 20x3
and 20x2 along with the restated financial information (as per the
ICDR Regulations) for each of the 5 years ended March 31, 20x6,
20x5, 20x4, 20x3 and 20x2 in a manner consistent with the
accounting policies being adopted for the year ended March 31,
20x6.The Company will prepare other financial information to be
included in the offer document as required by the ICDR
Regulations.
A. Accordingly, we will examine the following information to be
included in the offer document of the Company (together
with the `Financial Information') as required by Sub-clauses
(i) and (iii) of clause (b) of sub-section (1) of section 26 of
the Companies Act, 2013 ("the Act") read with Rule 4 of
Companies (Prospectus and Allotment of Securities) Rules,
2014 ("the Rules):
(a) The Summary Statements of Restated Standalone
Assets and Liabilities of the Company as at March 31,
20x6, 20x5, 20x4, 20x3 and 20x2 and significant
accounting policies and notes/annexures thereto;
(b) The Summary Statements of Restated Standalone
Profit and Loss of the Company for the years ended
March 31, 20x6, 20x5, 20x4, 20x3 and 20x2 and
significant accounting policies and notes/annexures
thereto;
(c) The Summary Statements of Restated Standalone
Cash Flows of the Company for the years ended March
31, 20x6, 20x5, 20x4, 20x3 and 20x2 and significant
accounting policies and notes/annexures thereto;
(d) Summary Statement of Related Party Transactions;
(e) Summary Statement of Net Worth;
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Guidance Note on Reports in Company Prospectuses
(f) Summary Statement of Secured and Unsecured
Loans;
(g) Summary Statement of Capitalisation ;
(h) Summary Statement of Dividend Paid / Proposed on
Equity Shares;
(i) Summary Statement of Accounting Ratios;
(j) Summary Statement of Tax Shelters; and
(k) [include others]
[We will also examine the similar information (as listed above)
prepared on consolidation basis for each of the five years ended
March 31, 20x6.]
[Additionally, we would also issue following certificates/reports:
(i) Certificate on Tax Benefits as required under ICDR
Regulations; and
(ii) Comfort letters (will enter into a separate arrangement
letter)] (amend as applicable)
In connection with the offering of Equity Shares/Notes/Security,
we will perform all necessary procedures, in order to issue an
auditors' report to the Company, in accordance with the Guidance
Note on Reports in Company Prospectuses (Revised 2016),
issued by the ICAI ('the Guidance Note').
Our work and findings shall not in any way constitute advice or
recommendations (and we accept no liability in relation to any
advice or recommendations) regarding any commercial decisions
associated with the issue of the _________________(name of the
security).
B. Upon completion of our examination, we will provide you
with our report on the adjusted Financial Information
referred to above, and bring to your attention any material
errors of which we become aware during our examination.
C. It should be understood that we make no representation
regarding questions of legal interpretation or regarding the
sufficiency for your purposes of the procedures enumerated
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Guidance Note on Reports in Company Prospectuses
above; also, such procedures would not necessarily reveal
any material misstatement of the amounts or percentages
listed above. Further, we will address ourselves solely to
the foregoing data as set forth in the offer document and will
make no representation regarding the adequacy of
disclosure or regarding whether any material facts have
been omitted or appropriateness of comparative information
for evaluation.
D. We will conduct our examination in accordance with the
Guidance Note. We will plan and perform our engagement
to obtain reasonable assurance that the Financial
Information, are free of material misstatement whether
caused by errors or fraud. However, having regard to the
test nature of our examination, persuasive rather than
conclusive nature of audit evidence together with any
inherent limitations of any accounting and internal control
system, there is an unavoidable risk that even some
material misstatements of the Financial Information,
resulting from fraud, and to a lesser extent error, if either
exists, may remain undetected. Also, our examination is not
designed to detect error or fraud that is immaterial to the
Financial Information.
As part of our examination, we will consider, solely for the purpose
of planning our work and determining the nature, timing, and
extent of our audit procedures, the Company's internal control
environment. This consideration will not be sufficient to enable us
to provide assurance on internal control or to identify all reportable
conditions.
We will determine that appropriate members of management are
informed of fraud and illegal acts, unless they are clearly
inconsequential, of which we become aware in the regular course
of our examination focused on the Financial Information.In
addition, we will inform appropriate members of management of
significant adjustments and of reportable conditions noted during
our examination.
E. For our examination, we will place reliance on the following:
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Guidance Note on Reports in Company Prospectuses
i) The financial statements of ABC Ltd for the financial years
ended -------------------------, which have been audited and
reported upon by us, vide our reports dated --------------,
respectively.
ii) The financial statements of ABC Ltd for the financial years
ended -----------, which have been audited and reported upon
by -------------------- , Chartered Accountants hereafter
referred as ---------------. {if required}
iii) The financial statements of below mentioned subsidiaries/
joint ventures/ associates for the year ended -----------, which
have been audited and reported by us, vide our reports
mentioned there against, hereafter referred as the ------------
Subsidiaries Financial Statements:
Name of subsidiaries Audit report's date
Name of joint ventures
Name of associates
iv) The financial statements of the below mentioned
subsidiaries/ joint ventures/ associates of ABC Ltd which
have been audited and reported upon by their auditors, the
names of which and the period of their audit are mentioned
there against.
Name of subsidiaries Name of the Auditors
Name of Joint Ventures
Name of Associates
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Guidance Note on Reports in Company Prospectuses
v) The un-audited financial statements of below mentioned
subsidiaries/ joint ventures/ associates of ABC Ltd. for the
quarter ended -----------.
Name of subsidiaries
Name of Joint Ventures
Name of Associates
Our audit of the financial statements for the period referred to in
paragraphs E (i) and E(iii) of this letter comprises such audit tests
and procedures as deemed necessary for the purpose of
expressing an opinion on such financial statements taken as a
whole. For none of the other periods referred to in paragraph E
we will perform audit tests for the purpose of expressing an
opinion on individual balances of accounts or summaries of
selected transactions such as those enumerated above and
accordingly, we express no opinion thereon.
F. Consent Letters
We will issue consent letters to act as an auditor and to permit the
inclusion of our report in the offer document.
In connection with the issuance of our consent, we will perform
certain procedures as required by professional standards. These
include, but are not limited to, the following:
(a) Reading the offer document; and
(b) Obtaining a representation letter from management (and
other matters as appropriate)
Based on the results of our procedures, we will consider whether
the Financial Information referred above and/or our auditors'
report needs to be modified in order to consent to the inclusion of
our reports in the offer document.
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Guidance Note on Reports in Company Prospectuses
G. Management's responsibilities and representations
The Financial Information are the responsibility of the
management of the Company, which is also responsible for
establishing and maintaining effective internal control, for properly
recording transactions in the accounting records, for safeguarding
assets, for prevention and detection of fraud and error, for
complying with accounting standards and for the overall fair
presentation of the Financial Information and Other Financial
Information. Management of the Company is also responsible for
identifying and ensuring that the Company complies with the laws
and regulations applicable to its activities.
Management is responsible for adjusting the Financial Information
to correct material misstatements and for affirming to us in its
representation letter that the effects of any unadjusted differences
identified by us during the work are immaterial, both individually
and in the aggregate, to the Financial Information taken as a
whole.
As an integral part of our procedures and as required by auditing
standards generally accepted in India, and the Guidance Note, we
will request letters of representation from officers and other
executives, including the chief executive, financial, and
accounting officers, responsible for financial and accounting
matters of the Company. This includes making specific inquiries of
management about the representations contained in the Financial
Information and the effectiveness of the internal control structure.
The responses to those inquiries, written representations and the
results of our examination tests comprise the evidential matter we
intend to rely upon in forming an opinion on the Financial
Information. Because of the importance of management's
representations to effective examination and review, the Company
agrees to release [Auditor's Name], chartered accountants and its
personnel from any liability and costs relating to our services
under this letter attributable to any misrepresentations by
management.
In order to enable us to fulfil our responsibilities, you agree on
request, to provide us with complete, accurate and timely
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Guidance Note on Reports in Company Prospectuses
information and to carry out any obligations ascribed to or
undertaken by you or others under your control. Management's
failure to provide requisite information on a timely basis may
cause us to delay our report, modify our procedures, or even
terminate our engagement.
You agree that any commercial decisions that you make, are not
within the scope of our duty of care and in taking such decisions
you should take into account the restrictions on the scope of our
work and other factors, commercial and otherwise, of which you
and your other advisers are, or should be, aware from sources
other than our work.
H. Other Terms
(a) If you intend to publish or otherwise reproduce the Financial
Information together with our report (or otherwise make
reference to our firm) in a document other than that which
contains other information, you agree to (i) provide us with a
draft of the document to read, and (ii) obtain our approval for
inclusion of our report, before it is printed and distributed.
(b) Under this arrangement, we have no responsibility to update
our reports for events and circumstances occurring after the
date of our report.
(c) The working papers prepared in conjunction with our
examinations are the property of our firm, constitute
confidential information and will be retained by us in
accordance with our firm's policies and procedures.
(d) We shall inform you separately on our scope of work as may
be required for the interim period subsequent to March 31,
20xx.
I. Fees and Billing arrangements
Our fees for the engagement covered under this letter of
engagement will be ___________________ [insert amount]. We
will also charge for any expenses incurred during the engagement
and we will add applicable taxes to charges and expenses.
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Guidance Note on Reports in Company Prospectuses
Any fee estimate agreed with you is necessarily based on the
assumption that the information required for our work is made
available in accordance with agreed timetables, and that your key
executives and personnel are available during the course of our
work. If delays or other unanticipated problems which are beyond
our control occur this may result in additional fees for which
invoices will be raised.
Should the scope of our work require any modification, including
reporting on the financial statements or financial information for
any broken period subsequent to [insert period-end date], we will
discuss the matter with you immediately and only proceed to incur
additional fees with your prior approval.
We will be entitled to submit invoices for services provided and
expenses incurred on an interim basis as the work progresses.
Invoices are payable upon presentation. We reserve the right,
where fees have been invoiced and payment is outstanding to us,
to exercise a lien in respect of those outstanding fees over any
documents belonging to you which may be in our possession.
Our billing is payable upon the presentation of our fee note. Our
fees, expenses and applicable taxes are payable by the
Company.
We shall be grateful if you will acknowledge receipt of this letter by
signing and returning to us the duplicate copy of this letter, which
is enclosed. If the contents are not in accordance with your
understanding of our agreement, we shall be pleased to receive
your further observations and to give you any further information
you require.
For ABC and Co.
Chartered Accountants
Firm's Registration Number
Signature
[Name of the Member]
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Designation@@@
Membership Number
Place of Signature:
Date:
By: ______________________
[Name]
__________________________
[Title]
__________________________
[Date]
@@@
Partner or proprietor, as the case may be.
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Appendix 8
Illustrative Format of Representation Letter from
Management for Issuance of Examination Report
(Refer Paragraph 2.7)
[Name and Address of the Chartered Accountant]
Dear Sirs:
Proposed Offering by [.] (the "Issuer" or the "Company") of [.] (the
"Securities")
This representation letter is provided in connection with your
examination of restated standalone financial information of
[company's name] (the `Company') and the restated consolidated
financial information of the Company, its subsidiaries and
associates (together referred to as the `Group' ) as at March 31,
20x6, 20x5, 20x4, 20x3 and 20x2 and each of the years ended
March 31, 20x6, 20x5, 20x4, 20x3 and 20x2 (the restated
standalone and consolidated financial information is together
referred to as `Restated Financial Statements') contained in
Annexures xx to xx and Annexure x to xx respectively, read with
significant accounting policies and notes annexed to the Restated
Financial Statements, which as approved by the Board of
Directors of the Company at their meeting held on [date] for the
purpose of inclusion in the offer document prepared by the
Company in connection with the proposed initial public offering
(IPO) of its equity shares, prepared in terms of the requirements of
Part I of Chapter III of the Companies Act, 2013 ("the Act") read
with Rule 4 of Companies (Prospectus and Allotment of
Securities) Rules, 2014 ("the Rules) and the Securities and
Exchange Board Of India (Issue of Capital and Disclosure
Requirements) Regulations, 2009, as amended ("SEBI-ICDR
Regulations"). In particular we confirm that we are responsible for
the following:
1. designing, implementing, and maintaining internal controls
relevant to the preparation and fair presentation of restated
financial information which are free from material
misstatements, whether due to fraud or error.
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2. Restated financial information contained in the above
mentioned Annexures have been prepared by the Company in
accordance with the requirements of Section 26 of the
Companies Act, 2013, to the extent applicable, read with the
applicable provisions within Rule 4 and 6 of the Companies
(Prospectus and Allotment of Securities) Rules, 2014, to the
extent applicable, (together, the "Companies Act"), read with
the general circular 15/2013 dated 13 September 2013 of the
Ministry of Corporate Affairs in respect of Section 133 of the
Companies Act, 2013, the SEBI ICDR Regulations and the
Guidance Note on Reports in Company Prospectuses
(Revised 2016) issued by ICAI, amended from time to time
(the "Guidance Note").
3. Restated Financial Statements have been compiled from the
audited standalone and consolidated financial statements as
at March 31, 20x6, 20x5, 20x4, 20x3 and 20x2 and each of the
years ended March 31, 20x6, 20x5, 20x4, 20x3 and 20x2
which have been approved by Board of directors at their
meetings held on [dates], respectively. We confirm that there
have been no events and circumstances for which the financial
statements for the respective years need to be changed, other
than the adjustments and regrouping as more fully described
in Annexure xx to Restated Financial Statements. Also
confirmed that there is no need to change our representation
letters provided to you for the audit of respective financial
years and they are still valid as of the date of the signing of
this letter.
4. Restated Summary Statement of Assets and Liabilities of the
Company and the Group as at March 31, 20x6, 20x5, 20x4,
20x3 and 20x2, as set out in Annexure-xx, have been arrived
at after making adjustments and regrouping as appropriate
and more fully described in Annexure xx Restated Summary
Statement of adjustments to audited financial statements.
5. Restated Summary Statement of Profit and Loss of the
Company and the Group for each of the years ended March
31, 20x6, 20x5, 20x4, 20x3 and 20x2, as set out in Annexure-
xx, have been arrived at after making adjustments and
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regrouping as appropriate and more fully described in
Annexure xx Restated Summary Statement of adjustments
to audited financial statements.
6. Restated Summary Statement of Cash Flows of the Company
and the Group for each of the years ended March 20x6, 20x5,
20x4, 20x3 and 20x2, as set out in Annexure-xx, have been
arrived at after making adjustments and regrouping as
appropriate and more fully described in Annexure xx
Restated Summary Statement of adjustments to audited
financial statements.
7. The Summary of Significant Accounting Policies and Notes to
Accounts of the Company and the Group for each of the years
ended March 31, 20x6, 20x5, 20x4, 20x3 and 20x2, as set out
in Annexure-xx, have been arrived at after making adjustments
and regrouping as appropriate and more fully described in
Annexure xx Restated Summary Statement of adjustments
to audited financial statements.
8. Restated Financial Statements have been made after
incorporating adjustments for the material amounts in the
respective financial years/period to which they relate.
9. There are no changes in the accounting policies adopted by
the Company which would require adjustment in the Restated
Financial Statements, other than the adjustments and
regrouping as more fully described in Annexure xx to Restated
Financial Statements.
10. There are no extra-ordinary items that need to be disclosed
separately in the accounts requiring adjustments. [modify as
applicable]
11. There are no qualifications in auditor's reports which would
require an adjustment in the Restated Financial Statements,
other those disclosed in the Restated Financial Statements.
[modify as applicable]
12. Restated Financial Statements are free of material
misstatements, including omissions. We have considered the
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errors and have determined that they are individually and
collectively not material to the Restated Financial Statements.
13. In the statement of tax shelter (Annexure xx to Restated
Standalone Financial Statements), the permanent/ timing
differences for the years ended 31 March [modify as
applicable] have been computed based on the acknowledged
copies of income-tax returns of the respective years.
14. Contingencies and Commitments
a. We have disclosed in the Annexure xx to the Restated
Financial Statements all guarantees which we have given
to third parties and all other contingent liabilities and
commitments.
b. Contingent liabilities disclosed in the Annexure xx to the
Restated Financial Statements do not include any
contingencies which are likely to result in a loss and which,
therefore, require adjustment of assets or liabilities.
c. We confirm that for each class of contingent liability, the
estimated financial effect, the uncertainties relating to any
outflow, the possibility of any reimbursement and any asset
recognised therefor have been appropriately disclosed in
the financial statements except in respect of cases where
the Company is unable to disclose this information
because it is not practicable to do so, which fact has also
been disclosed in the financial statements.
d. There are no significant claims for which the Company
would be contingently liable in respect of litigation, if any,
which may be pending against the Company except those
disclosed in Annexure xx to the Restated Financial
Statements. There is no litigation pending against any of
the employees of the Company for which the Company
would be contingently liable either directly or indirectly.
e. The Company is not involved in any litigation or arbitration
proceedings relating to claims or amounts which are
material. So far as the Management is aware, no such
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litigation or arbitration proceedings are pending or
threatened.
f. There were no outstanding commitments for capital
expenditure excepting those disclosed in note to the
financial statements.
g. There were no other outstanding commitments for the
Company excepting those disclosed in Annexure xx to the
Restated Financial Statements. We confirm that, in making
this disclosure, all significant commitments have been
compiled duly considering all the contractual/other
arrangements that the Company has entered into as at the
Balance Sheet date.
h. Except as provided for or disclosed in the accounts.
(a) There were no commitments for the purchase or
sale of investments.
(b) There were no other commitments or obligations
which might adversely affect the Company.
(c) There were no defaults in principal, interest, sinking
fund or redemption provisions with respect to any
issue of share or loan capital or credit arrangement,
or any breach of covenant of an agreement.
15. Fraud:
a. We are not aware of any significant facts relating to any
frauds or suspected frauds known that may have involved (i)
Management; (ii) Employees who have significant roles in
internal control; or (iii) Others where the fraud could have a
material effect on the financial statements, other than those
already disclosed in the audited financial statements as at
and for each of the five years ended March 31, 20x6, 20x5,
20x4, 20x3 and 20x2 and Restated Financial Information.
b. We have disclosed to you our knowledge of any
allegations of fraud, or suspected fraud, affecting the
Restated Financial Statements that have been
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Guidance Note on Reports in Company Prospectuses
communicated to us by employees, former employees,
analysts, regulators or others.
16. We have made available to you minutes of all meetings of the
shareholders and the board of directors and committees of the
board up to [date] and summaries of actions of recent
meetings for which minutes have not yet been prepared.
17. No events have occurred subsequent to [date] which requires
adjustment of or disclosure in the Restated Financial
Statements.
Yours faithfully,
[For and on behalf of Board of Directors of XYZ Limited]
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Appendix 9
Some Frequently Asked Questions on Public
Issues
(refer paragraph 2.9)
Note: The following questions and answers have been
extracted from the website of the Securities and Exchange
Board of India (SEBI) and have been included in this
publication for the ease of understanding and knowledge of
the readers. The Institute of Chartered Accountants of India is
not liable for any action taken or not taken on the basis of
these questions and answers. The complete text of the
following and other related questions can be found at the
website of SEBI (www.sebi.gov.in).
1. Different kinds of issues
What are the different kinds of issues which can be made by
an Indian company in India?
Primarily, issues made by an Indian company can be classified as
Public, Rights, Bonus and Private Placement. While right issues
by a listed company and public issues involve a detailed
procedure, bonus issues and private placements are relatively
simpler. The classification of issues is as illustrated below:
a) Public issue
(i) Initial Public offer (IPO)
(ii) Further Public offer (FPO)
b) Rights issue
c) Composite Issue
d) Bonus issue
e) Private placement
(i) Preferential issue
(ii) Qualified institutional placement
(iii) Institutional Placement Programme
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(a) Public issue: When an issue / offer of shares or convertible
securities is made to new investors for becoming part of
shareholders' family of the issuer (Entity making an issue is
referred as "Issuer") it is called a public issue. Public issue
can be further classified into Initial public offer (IPO) and
Further public offer (FPO). The significant features of each
type of public issue are illustrated below:
(i) Initial public offer (IPO): When an unlisted company
makes either a fresh issue of shares or convertible
securities or offers its existing shares or convertible
securities for sale or both for the first time to the public, it
is called an IPO. This paves way for listing and trading of
the issuer's shares or convertible securities on the Stock
Exchanges.
(ii) Further public offer (FPO) or Follow on offer: When an
already listed company makes either a fresh issue of
shares or convertible securities to the public or an offer
for sale to the public, it is called a FPO.
(b) Rights issue (RI): When an issue of shares or convertible
securities is made by an issuer to its existing shareholders as
on a particular date fixed by the issuer (i.e. record date), it is
called a rights issue. The rights are offered in a particular ratio
to the number of shares or convertible securities held as on
the record date.
(c) Composite issue: When the issue of shares or convertible
securities by a listed issuer on public cum-rights basis,
wherein the allotment in both public issue and rights issue is
proposed to be made simultaneously, it is called composite
issue.
(d) Bonus issue: When an issuer makes an issue of shares to its
existing shareholders without any consideration based on the
number of shares already held by them as on a record date it
is called a bonus issue. The shares are issued out of the
Company's free reserve or share premium account in a
particular ratio to the number of securities held on a record
date.
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(e) Private placement: When an issuer makes an issue of shares
or convertible securities to a select group of persons not
exceeding 49, and which is neither a rights issue nor a public
issue, it is called a private placement. Private placement of
shares or convertible securities by listed issuer can be of
three types:
(i) Preferential allotment: When a listed issuer issues shares
or convertible securities, to a select group of persons in
terms of provisions of Chapter VII of Securities and
Exchange Board of India (Issue of Capital and Disclosure
Requirements) Regulations, 2009, it is called a
preferential allotment. The issuer is required to comply
with various provisions which interalia include pricing,
disclosures in the notice, lockin etc, in addition to the
requirements specified in the Companies Act.
(ii) Qualified institutions placement (QIP): When a listed
issuer issues equity shares or non-convertible debt
instruments along with warrants and convertible
securities other than warrants to Qualified Institutions
Buyers only, in terms of provisions of Chapter VIII of
Securities and Exchange Board of India (Issue of Capital
and Disclosure Requirements) Regulations, 2009, it is
called a QIP.
(iii) Institutional Placement Programme (IPP): When a listed
issuer makes a further public offer of equity shares, or
offer for sale of shares by promoter/promoter group of
listed issuer in which the offer, allocation and allotment of
such shares is made only to qualified institutional buyers
in terms of Chapter VIIIA of Securities and Exchange
Board of India (Issue of Capital and Disclosure
Requirements) Regulations, 2009 for the purpose of
achieving minimum public shareholding, it is called an
IPP.
2. Types of Offer Documents (ODs)
(a) What is an offer document?
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`Offer document' is a document which contains all the relevant
information about the company, promoters, projects, financial
details, objects of raising the money, terms of the issue, etc. and
is used for inviting subscription to the issue being made by the
issuer.
`Offer Document' is called "Prospectus" in case of a public issue
and "Letter of Offer" in case of a rights issue.
(b) I hear various terms like draft offer document, Red Herring
prospectus, etc, what are they and how are they different
from each other?
Terms used for offer documents vary depending upon the stage or
type of the issue where the document is used. The terms used for
offer documents are defined below:
(i) Draft offer document is an offer document filed with SEBI for
specifying changes, if any, in it, before it is filed with the
Registrar of companies (ROCs). Draft offer document is made
available in public domain including websites of SEBI,
concerned stock exchanges, or concerned Merchant Banker
for enabling public to give comments, if any, on the draft offer
document.
(ii) Red herring prospectus is an offer document used in case of
a book built public issue. It contains all the relevant details
except that of price or number of shares being offered. It is
filed with RoC before the issue opens.
(iii) Prospectus is an offer document in case of a public issue,
which has all relevant details including price and number of
shares or convertible securities being offered. This document
is registered with RoC before the issue opens in case of a
fixed price issue and after the closure of the issue in case of a
book built issue.
(iv) Letter of offer is an offer document in case of a Rights issue
of shares or convertible securities and is filed with Stock
exchanges before the issue opens.
(v) Abridged prospectus is an abridged version of offer
document in public issue and is issued along with the
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application form of a public issue. It contains all the salient
features from the prospectus.
(vi) Abridged letter of offer is an abridged version of the letter of
offer. It is sent to all the shareholders along with the
application form.
(vii) Shelf prospectus is a prospectus which enables an issuer to
make a series of issues within a period of 1 year without the
need of filing a fresh prospectus every time. This facility is
available to public sector banks, scheduled banks and Public
Financial Institutions.
(viii) Placement document is an offer document for the purpose
of Qualified Institutional Placement and contains all the
relevant and material disclosures.
3. Issue Requirements
(a) Are there any entry requirements for an issuer to make an
issue / offer to public? If yes, what are these?
SEBI has laid down entry norms for entities making a public issue/
offer. The same are detailed below
Entry Norms: Entry norms are different routes available to an
issuer for accessing the capital market by way of a public issue.
They are meant for protecting the investors by restricting fund
raising by companies if they do not satisfy the entry requirements.
(i) An unlisted issuer making a Public Issue (i.e. IPO) is required
to satisfy the following provisions:
Entry Norm I (commonly known as "Profitability Route")
The Issuer Company shall meet the following requirements:
(a) Net Tangible Assets of at least Rs. 3 crores in each of the
preceding three full years of which not more than 50%
are held in monetary assets. However, the limit of fifty
percent on monetary assets shall not be applicable in
case the public offer is made entirely through offer for
sale.
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(b) Minimum of Rs. 15 crores as average pre-tax operating
profit in at least three of the immediately preceding five
years.
(c) Net worth of at least Rs. 1 crore in each of the preceding
three full years.
(d) If the company has changed its name within the last one
year, at least 50% revenue for the preceding 1 year
should be from the activity suggested by the new name.
(e) The aggregate of the proposed issue and all previous
issues made in the same financial year in terms of issue
size does not exceed five times its pre-issue net worth as
per the audited balance sheet of the preceding financial
year
To provide sufficient flexibility and also to ensure that genuine
companies are not limited from fund raising on account of strict
parameters, SEBI has provided the alternative route to the
companies not satisfying any of the above conditions, for
accessing the primary Market, as under:
Entry Norm II (Commonly known as "QIB Route")
Issue shall be through book building route, with at least 75% of net
offer to the public to be mandatory allotted to the Qualified
Institutional Buyers (QIBs). The company shall refund the
subscription money if the minimum subscription of QIBs is not
attained.
(ii) A listed issuer making a public issue (i.e. FPO) is required to
satisfy the following requirements:
(a) If the company has changed its name within the last one
year, at least 50% revenue for the preceding 1 year
should be from the activity suggested by the new name.
(b) The aggregate of the proposed issue and all previous
issues made in the same financial year in terms of issue
size does not exceed five times its pre-issue net worth as
per the audited balance sheet of the preceding financial
year
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Guidance Note on Reports in Company Prospectuses
Any listed company not fulfilling these conditions shall be
eligible to make a public issue (i.e. FPO) by complying
with QIB Route as specified for IPOs i.e. issue shall be
through book building route, with at least 75% to be
mandatory allotted to the Qualified Institutional Buyers
(QIBs).
(b) Is a listed company making a rights issue required to
satisfy any entry norm?
No, there is no entry norm for a listed company making a rights
issue
(c) Besides entry norms, are there any mandatory provisions
which an issuer is expected to comply before making an
issue?
An issuer making a public issue is required to interalia comply
with the following provisions:
Minimum Promoter's contribution and lockin: In a public issue by
an unlisted issuer, the promoters shall contribute not less than
20% of the post issue capital which should be locked in for a
period of 3 years. "Lockin" indicates a freeze on the shares. The
remaining pre issue capital of the promoters should also be locked
in for a period of 1 year from the date of listing. In case of public
issue by a listed issuer [i.e. FPO], the promoters shall contribute
not less than 20% of the post issue capital or 20% of the issue
size. In cases where the promoters contribution has been brought
in and utilized, then a cash flow statement disclosing the use of
funds in the offer document should be included. This provision
ensures that promoters of the company have some minimum
stake in the company for a minimum period after the issue or after
the project for which funds have been raised from the public is
commenced.
IPO Grading: IPO grading is the grade assigned by a Credit
Rating Agency registered with SEBI, to the initial public offering
(IPO) of equity shares or other convertible securities. The grade
represents a relative assessment of the fundamentals of the IPO
in relation to the other listed equity securities. Disclosure of "IPO
Grades", so obtained is mandatory for companies coming out with
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Guidance Note on Reports in Company Prospectuses
an IPO. For more details on IPO Grading please refer to the
subsection on "IPO Grading".
(d) Whether I will get allotment of shares/convertible
securities in case sufficient number of prospective allottees
is not found?
No, the company cannot allot any shares or convertible securities
unless there are at least 1000 prospective allottees in the public
issue.
(e) Can I be entitled to make an application for convertible
securities in the company, if the company has not issued
shares to the public and get it listed in stock exchange?
Yes, you can make application for public issue of convertible
securities even if the company has not listed its shares.
3A. Transfer equity shares to employees
Can the Trusts meant for implementing the employee stock
option schemes (ESOS) or employee stock purchase
schemes (ESPS) transfer equity shares to employees in
pursuance of Page 10 of 32 of such schemes, during the said
lock-in period?
In terms of regulation 37 of the SEBI (Issue of Capital and
Disclosure Requirements) Regulations, 2009, the entire pre-issue
capital held by persons other than promoters needs to be locked-
in for a period of one year, subject to certain exemptions provided
thereunder including that for equity shares allotted to employees
under an employee stock option or employee stock purchase
scheme of the issuer prior to the initial public offer. The Trusts
meant for implementing the aforesaid schemes may transfer the
equity shares to employees, upon exercise of vested option or
under an ESPS, during the period of lock-in. However, the equity
shares so received by the employees shall be subject to lock-in
provisions as specified under the SEBI (Share Based Employee
Benefits) Regulations, 2014.
4. Pricing of an Issue
(a) Who fixes the price of securities in an issue?
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Guidance Note on Reports in Company Prospectuses
Indian primary market ushered in an era of free pricing in 1992.
SEBI does not play any role in price fixation. The issuer in
consultation with the merchant banker on the basis of market
demand decides the price. The offer document contains full
disclosures of the parameters which are taken into account by
Merchant Banker and the issuer for deciding the price. The
Parameters include EPS, PE multiple, return on net worth and
comparison of these parameters with peer group companies.
(b) What is the difference between "Fixed price issue" and
"Book Built issue"?
On the basis of Pricing, an issue can be further classified into
Fixed Price issue or Book Built issue.
Fixed Price Issue: When the issuer at the outset decides the issue
price and mentions it in the Offer Document, it is commonly known
as "Fixed price issue".
Book built Issue: When the price of an issue is discovered on the
basis of demand received from the prospective investors at
various price levels, it is called "Book Built issue".
(c) Where can I see the price and price band?
Issuer may disclose them in draft prospectus in case of a fixed
price issue and floor price or price band in the red herring
prospectus in case of a book built issue. The issuer is required to
announce the floor price or price band at least five working days
before the opening of the issue (in case of an initial public offer)
and at least one working day before the opening of the issue (in
case of a further public offer), in all the newspapers in which the
pre issue advertisement was released.
(d) How many days before the opening of issue, price band
should be published by the issuer?
Issuers are required to disclose information pertaining to the price
band at least 5 working days prior to opening of an issue.
(e) How does it aid in decision making by the investors?
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Guidance Note on Reports in Company Prospectuses
By providing the price band information sufficient number of days
before issue opening, the market gets adequate time to absorb
the same and factor that in the decision making process.
(f) I came across an offer from the Issuer at initial public offer
stating that it is issuing shares/ convertible securities to retail
individual investors and employees of the company at a price
10% lesser than the price offered to others, Can I apply?
Yes you can apply, if the company has offered so.
5. Understanding book building
(a) What is Book Building?
Book building is a process of price discovery. The issuer discloses
a price band or floor price before opening of the issue of the
securities offered. On the basis of the demands received at
various price levels within the price band specified by the issuer,
Book Running Lead Manager (BRLM) in close consultation with
the issuer arrives at a price at which the security offered by the
issuer, can be issued.
(b) What is a price band?
The price band is a range of price within which investors can bid.
The spread between the floor and the cap of the price band shall
not be more than 20%. The price band can be revised. If revised,
the bidding period shall be extended for a further period of three
days, subject to the total bidding period not exceeding ten days.
(c) How does Book Building work?
Book building is a process of price discovery. A floor price or price
band within which the bids can move is disclosed at least five
working days before opening of the issue in case of an IPO and at
least one day before opening of the issue in case of an FPO. The
applicants bid for the shares quoting the price and the quantity
that they would like to bid at.
After the bidding process is complete, the `cutoff' price is arrived
at based on the demand of securities. The basis of Allotment is
then finalized and allotment/refund is undertaken. The final
prospectus with all the details including the final issue price and
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Guidance Note on Reports in Company Prospectuses
the issue size is filed with ROC, thus completing the issue
process. Only the retail investors have the option of bidding at
`cutoff'.
(d) How does "cutoff" option works for investors?
"Cutoff" option is available for only retail individual investors i.e.
investors who are applying for securities worth up to Rs 2,00,000/
only. Such investors are required to tick the cutoff option which
indicates their willingness to subscribe to shares at any price
discovered within the price band. Unlike price bids (where a
specific price is indicated) which can be invalid, if price indicated
by applicant is lower than the price discovered, the cutoff bids
always remain valid for the purpose of allotment
(e) Can I (retail investor) change/revise my bid?
Yes, you can change or revise the quantity or price in the bid
using the form for changing/revising the bid that is available along
with the application form. However, the entire process of changing
or revising the bids shall be completed within the date of closure
of the issue.
(f) Can I (retail investor) cancel my Bid?
Yes, you can cancel your bid anytime before the finalization of the
basis of allotment by approaching/ writing/ making an application
to the registrar to the issue.
(g) What proof can I request from a trading member or a
syndicate member for entering bids?
The syndicate member returns the counterfoil with the signature,
date and stamp of the syndicate member. You can retain this as a
sufficient proof that the bids have been accepted by the trading /
syndicate member for uploading on the terminal.
(h) When is the company mandated to go for compulsory
book building issue?
If the company does not satisfy any of the conditions stipulated in
Chapter III, Part I, Clause 26 (I) of the ICDR Regulations 2009,
then it has to compulsorily go through the book built route.
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6. Categories of Investors
(a) What are the categories of investors in primary market?
How the allotment is made to different categories of
investors?
Investors are broadly classified under following categories:
(i) Retail individual Investor (RIIs)
(ii) NonInstitutional Investors (NIIs)
(iii) Qualified Institutional Buyers (QIBs)
"Retail individual investor" means an investor who applies or bids
for securities for a value of not more than Rs. 2,00,000.
"Qualified Institutional Buyer" shall mean:
(i) a mutual fund, venture capital fund and foreign venture capital
investor registered with the Board;
(ii) a foreign institutional investor and sub-account (other than a
sub-account which is a foreign corporate or foreign
individual), registered with the Board;
(iii) a public financial institution as defined in Section 4A of the
Companies Act, 1956;
(iv) a scheduled commercial bank;
(v) a multilateral and bilateral development financial institution;
(vi) a state industrial development corporation;
(vii) an insurance company registered with the Insurance
Regulatory and Development Authority;
(viii) a provident fund with minimum corpus of twenty five crore
rupees;
(ix) a pension fund with minimum corpus of twenty five crore
rupees;
(x) National Investment Fund set up by resolution no. F. No.
2/3/2005-DDII dated November 23, 2005 of the Government
of India published in the Gazette of India;
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(xi) insurance funds set up and managed by army, navy or air
force of the Union of India;
(xii) insurance funds set up and managed by the Department of
Posts, India
Investors who do not fall within the definition of the above two
categories are categorized as "NonInstitutional Investors"
Allotment to various investor categories is detailed below:
In case of Book Built issue
1. In case an issuer company makes an issue of 100% of the
net offer to public through voluntary book building process under
profitability route:
a) Not less than 35% of the net offer to the public shall be
available for allocation to retail individual investors;
b) Not less than 15% of the net offer to the public shall be
available for allocation to noninstitutional investors i.e.
investors other than retail individual investors and Qualified
Institutional Buyers;
c) Not more than 50% of the net offer to the public shall be
available for allocation to Qualified Institutional Buyers.
2. In case of compulsory BookBuilt Issues
a) at least 75% of net offer to public being allotted to the
Qualified Institutional Buyers (QIBs), failing which the full
subscription monies shall be refunded.
b) Not more than 15% of the net offer to the public shall be
available for allocation to noninstitutional investors
c) Not more than 10% of the net offer to the public shall be
available for allocation to retail individual investors In case of
fixed price issue
The proportionate allotment of securities to the different investor
categories in a fixed price issue is as described below:
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1. A minimum 50% of the net offer of securities to the public
shall initially be made available for allotment to retail
individual investors.
2. The balance net offer of securities to the public shall be made
available for allotment to:
a. Individual applicants other than retail individual investors,
and
b. Other investors including corporate bodies/ institutions
irrespective of the number of securities applied for.
(b) Which are the investor categories to whom reservations
can be made in an initial public issue on competitive basis?
Reservation on competitive basis can be made in a public issue to
the following categories:
i. Employees of the company
ii. Shareholders of the promoting companies in the case of a
new company and shareholders of group companies in the
case of an existing company
iii. persons who, as on the date of filing the draft offer document
with the Board, are associated with the issuer as depositors,
bondholders or subscribers to services of the issuer
In a public issue by a listed company, the reservation on
competitive basis can be made for retail individual
shareholders and in such cases the allotment to such
shareholders shall be on proportionate basis
(c) Is there any discretion while doing the allotment amongst
various investor categories as per the permissible
allocations?
No, there is no discretion in the allotment process.
All allotees except anchor investors and retail individual investors
are allotted shares on a proportionate basis within their respective
investor categories. The allotment to each retail individual investor
shall not be less than the minimum bid lot, subject to availability of
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shares in retail individual investor category, and the remaining
available shares, if any, shall be allotted on a proportionate basis.
7. Investment in public Issues/ rights issues
(a) Where can I get application forms for applying/ bidding for
the shares?
Application forms for applying/bidding for shares are available with
all syndicate members, collection centers, the brokers to the
issue, stock exchange website and the bankers to the issue. In
case you intend to apply through APPLICATIONS SUPPORTED
BY BLOCKED AMOUNT (ASBA), you may get the ASBA
application forms from the Self Certified Syndicate Banks. For
more details on "ASBA process" please refer to the subsection
titled "Understanding Applications Supported by Blocked Amount
(ASBA) Process"
(b) Whom should I approach if the information disclosed in
the offer document appears to be factually incorrect?
Merchant Banker(s), are required to do the due diligence while
preparing an offer document. The draft offer document submitted
to SEBI is put on website for public comments. In case, you find
any instance of incorrect information/ lack of information, you may
send your complaint to Lead Manager to the issue and/ or to SEBI
at http://scores.gov.in/.
(c) Is it compulsory for me to have a Demat Account?
As per the requirement, all the public issues of size in excess of
Rs.10 crore, are to be made compulsorily in demat mode. Thus, if
you intend to apply for an issue that is being made in a
compulsory demat mode, you are required to have a demat
account and also have the responsibility to put the correct DP ID
and Client ID details in the bid/application forms.
(d) Is it compulsory to have PAN?
Yes, it is compulsory to have PAN. Any investor who wants to
invest in an issue should have a PAN which is required to be
mentioned in the application form. It is to be distinctly understood
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that the photocopy of the PAN is not required to be attached along
with the application form at the time of making an application.
(e) For how many days an issue is required to be kept open?
The period for which an issue is required to be kept open is:
For Fixed price public issues: 310 working days
For Book built public issues: 37 working days extendable by 3
days in case of a revision in the price band
For Rights issues : 1530 days.
(f) When do I get the refund of money?
Companies are required to refund the money within 15 days from
the closure of the issue. In case of any delay the issuer company
is required to pay interest at the rate of 15%.
(g) How can I know about the demand for an issue at any
point of time?
The status of bidding in a book built issue is available on the
website of BSE/NSE on a consolidated basis. The data regarding
bids is also available investor category wise. After the price has
been determined on the basis of bidding, the public advertisement
containing, inter alia, the price as well as a table showing the
number of securities and the amount payable by an investor,
based on the price determined, is issued.
However, in case of a fixed price issue, information is available
only after the closure of the issue through a public advertisement,
issued within 10 days of dispatch of the certificates of allotment/
refund orders.
(h) How will I get my refund in an issue?
You can get refunds in an issue through various modes viz.
registered/ordinary post, Direct Credit, RTGS (Real Time Gross
Settlement), ECS (Electronic Clearing Service) and NEFT
(National Electronic Funds Transfer).
As stated above, if you are residing in one of the specific centers
as specified by Reserve Bank of India, then you will get refunds
through ECS only except where you are otherwise disclosed
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eligible under Direct Credit and RTGS. If you are residing at any
other center, then you will continue to get refunds through
registered/ordinary post. You are therefore advised to read the
instructions given in the prospectus/ abridged prospectus/
application form about centers. For more details, you may read
subsection on "Electronic Clearing Scheme for Refunds".
(i) When will the shares allotted to me get listed?
Listing of shares will be done within 12 days after the closure of
the issue.
(j) How will I know which issues are coming to the market?
The information about the forthcoming issues may be obtained
from the websites of Stock Exchanges. Further the issuer coming
with an issue is required to give issue advertisements in an
English national Daily with wide circulation, one Hindi national
newspaper and a regional language newspaper with wide
circulation at the place where the registered office of the issuer is
situated.
(k) Where do I get the copies of the offer document?
The soft copies of the offer documents are put up on the website
of Merchant banker and on the website of SEBI under Offer
Documents section at the following link:
http://www.sebi.gov.in/sebiweb/home/list/3/15/0/1/Public-Issues
Copies of the offer documents in hard form may be obtained from
the merchant banker.
(l) How do I find the status of offer documents filed by issuers
with SEBI?
SEBI updates the processing status of offer documents on its
website every week under the section Offer Documents on SEBI
website at the following link:
http://www.sebi.gov.in/sebiweb/home/list/3/14/8/0/Issues.
The draft offer documents are put up on the website under
Reports/Documents section. The final offer documents that are
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filed with SEBI/ROC are also put up for information under the
same section.
(m) Whom do I approach if I have grievances in respect of
non-receipt of shares, delay in refund etc.?
You can approach the compliance officer of the issue, whose
name and contact number is mentioned on the cover page of the
Offer Document. You can also address your complaints to SEBI at
http://scores.gov.in/. Alternately, you may write to SEBI at the
following address: Office of Investor Assistance & Education,
Securities & Exchange Board of India, C4-A, G Block, Bandra
Kurla Complex, Bandra (E), Mumbai 400051.
8. Intermediaries involved in the Issue Process
(a) Which are the intermediaries involved in an issue?
Intermediaries which are registered with SEBI are Merchant
Bankers to the issue (known as Book Running Lead Managers
(BRLM) in case of book built public issues), Registrars to the
issue, and Bankers to the issue & Underwriters to the issue who
are associated with the issue for different activities. Their
addresses, telephone/fax numbers, registration number, and
contact person and email addresses are disclosed in the offer
documents.
(i) Merchant Banker: Merchant banker does the due diligence to
prepare the offer document which contains all the details about
the company. They are also responsible for ensuring compliance
with the legal formalities in the entire issue process and for
marketing of the issue.
(ii) Registrars to the Issue: They are involved in finalizing the basis
of allotment in an issue and for sending refunds, allotment details,
etc.
(iii) Bankers to the Issue: The Bankers to the Issue enable the
movement of funds in the issue process and therefore enable the
registrars to finalize the basis of allotment by making clear funds
status available to the Registrars.
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(iv) Underwriters: Underwriters are intermediaries who undertake
to subscribe to the securities offered by the company in case
these are not fully subscribed by the public, in case of an
underwritten issue.
9. Guide to understand an Offer Document
This subsection attempts to inform the structure of presentation of
the content in an offer document. The basic objective is to help the
reader to navigate through the content of an offer document.
(a) Cover Page
Under this head, full contact details of the Issuer Company, lead
managers and registrars, the type of issue, number of shares
offered, price and issue size, and the particulars regarding listing.
Other details such as IPO Grading, risks in relation to the first
issue, etc. are also disclosed, if applicable.
(b) Risk Factors
Under this head the management of the issuer company gives its
view on the Internal and external risks envisaged by the company
and the proposals, if any, to address such risks.
This information is disclosed in the initial pages of the document
and also in the abridged prospectus. It is generally advised that
the investors should go through all the risk factors of the company
before making an investment decision.
(c) Introduction
Under this head a summary of the industry in which the issuer company
operates, the business of the Issuer Company, offering details in brief,
summary of consolidated financial statements and other data relating to
general information about the company, the merchant bankers and
their responsibilities, the details of brokers/syndicate members to
the Issue, credit rating (in case of debt issue), debenture trustees
(in case of debt issue), monitoring agency, book building process
in brief, IPO Grading in case of First Issue of Equity capital and
details of underwriting Agreements are given. Important details of
capital structure, objects of the offering, funds requirement,
funding plan, schedule of implementation, funds deployed,
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sources of financing of funds already deployed, sources of
financing for the balance fund requirement, interim use of funds,
basic terms of issue, basis for issue price, tax benefits are also
covered in this section.
(d) About us
Under this head a review of the details of business of the
company, business strategy, competitive strengths,
industryregulations (if applicable), history and corporate structure,
main objects, subsidiary details, management and board of
directors, compensation, corporate governance, related party
transactions, exchange rates, currency of presentation and
dividend policy are given.
(e) Financial Statements
Under this head financial statement and restatement as per the
requirement of the Guidelines and differences between any other
accounting policies and the Indian Accounting Policies (if the
Company has presented its Financial Statements also as per
either US GAAP/IFRS) are presented.
(f) Legal and other information
Under this head outstanding litigations and material
developments, litigations involving the company, the promoters of
the company, its subsidiaries, and group companies are
disclosed. Also material developments since the last balance
sheet date, government approvals/licensing arrangements,
investment approvals (FIPB/RBI etc.), technical approvals, and
indebtedness, etc. are disclosed.
(g) Other regulatory and statutory disclosures
Under this head, authority for the Issue, prohibition by SEBI,
eligibility of the company to enter the capital market, disclaimer
statement by the issuer and the lead manager, disclaimer in
respect of jurisdiction, distribution of information to investors,
disclaimer clause of the stock exchanges, listing, impersonation,
minimum subscription, letters of allotment or refund orders,
consents, expert opinion, changes in the auditors in the last 3
years, expenses of the issue, fees payable to the intermediaries
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involved in the issue process, details of all the previous issues, all
outstanding instruments, commission and brokerage on, previous
issues, capitalisation of reserves or profits, option to subscribe in
the issue, purchase of property, revaluation of assets, classes of
shares, stock market data for equity shares of the company,
promise visàvis performance in the past issues and mechanism
for redressal of investor grievances is disclosed.
(h) Offering information
Under this head Terms of the Issue, mode of payment of dividend,
face value and issue price, rights of the equity shareholder,
market lot, nomination facility to investor, issue procedure, book
building procedure in details along with the process of making an
application, signing of underwriting agreement and filing of
prospectus with SEBI/ROC, announcement of statutory
advertisement, issuance of confirmation of allocation note("can")
and allotment in the issue, designated date, general instructions,
instructions for completing the bid form, payment instructions,
submission of bid form, other instructions, disposal of application
and application moneys, interest on refund of excess bid amount,
basis of allotment or allocation, method of proportionate allotment,
dispatch of refund orders, communications, undertaking by the
company, utilization of issue proceeds, restrictions on foreign
ownership of Indian securities, are disclosed.
(i) Other Information
This covers description of equity shares and terms of the Articles
of Association, material contracts and documents for inspection,
declaration, definitions and abbreviations, etc.
10. SEBI's Role in an Issue
What is SEBI's role in an issue?
Any company making a public issue or a rights issue of securities
of value more than Rs 50 lakhs is required to file a draft offer
document with SEBI for its observations. The validity period of
SEBI's observation letter is twelve months only i.e. the company
has to open its issue within the period of twelve months starting
from the date of issuing the observation letter.
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There is no requirement of filing any offer document / notice to
SEBI in case of preferential allotment and Qualified Institution
Placement (QIP). In QIP, Merchant Banker handling the issue has
to file the placement document with Stock Exchanges for making
the same available on their websites.
Given below are few clarifications regarding the role played by
SEBI:
(a) Till the early nineties, Controller of Capital Issues used to
decide about entry of company in the market and also about the
price at which securities should be offered to public.
However, following the introduction of disclosure based regime
under the aegis of SEBI, companies can now determine issue
price of securities freely without any regulatory interference, with
the flexibility to take advantage of market forces.
(b) The primary issuances are governed by SEBI in terms of Issue
of Capital and Disclosure Requirements) Regulations, 2009.
SEBI framed its Disclosures and Investor Protection (DIP)
guidelines initially for public offerings which were later converted
into Regulations i.e. in 2009 by way of ICDR Regulations. The
SEBI DIP Guidelines, and subsequently ICDR Regulations, over
the years have gone through many amendments in keeping pace
with the dynamic market scenario. It provides a comprehensive
framework for issuing of securities by the companies.
(c) Before a company approaches the primary market to raise
money by the fresh issuance of securities it has to make sure that
it is in compliance with all the requirements of Issue of Capital and
Disclosure Requirements) Regulations, 2009. The Merchant
Banker are those specialised intermediaries registered with SEBI,
who perform the due diligence and ensures compliance with ICDR
Regulations before the document is filed with SEBI.
(d) Officials of SEBI at various levels examine the compliance with
ICDR Regulations and ensure that all necessary material
information is disclosed in the draft offer documents.
Still there are certain misconceptions prevailing in the mind of
investors about the role of SEBI which are clarified hereinunder:
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(a) Does SEBI recommend any Issue?
It should be distinctly understood that SEBI does not recommend
any issue nor does it take any responsibility either for the financial
soundness of any scheme or the project for which the issue is
proposed to be made.
(b) Does SEBI approve the contents of an issue?
Submission of offer document to SEBI should not in any way be
deemed or construed that the same has been cleared or approved
by SEBI. The Lead manager certifies that the disclosures made in
the offer document are generally adequate and are in conformity
with SEBI guidelines for disclosures and investor protection in
force for the time being. This requirement is to facilitate investors
to take an informed decision for making investment in the
proposed issue.
(c) If SEBI has issued observations on the offer document,
does it mean that my investment is safe?
The investors should make an informed decision purely by
themselves based on the contents disclosed in the offer
documents. SEBI does not associate itself with any issue/issuer
and should in no way be construed as a guarantee for the funds
that the investor proposes to invest through the issue. However,
the investors are generally advised to study all the material facts
pertaining to the issue including the risk factors before considering
any investment.
11. Other Terms
(a) Greenshoe Option
Green Shoe Option is a price stabilizing mechanism in which
shares are issued in excess of the issue size, i.e. a maximum of
15%. It is a mechanism to stabilize the issue price post listing.
(b) Safety Net
In a safety net scheme or a buy back arrangement the issuer
company in consultation with the lead merchant banker discloses
in the RHP that if the price of the shares of the company post
listing goes below a certain level the issuer will purchase back a
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specific number of shares from original resident retail individual
allottees at the issue price.
(c) Open book/closed book
In an open book building system the merchant banker along with
the issuer ensures that the demand for the securities is displayed
online on the website of the Stock Exchanges.
Here, the investor can be guided by the movements of the bids
during the period in which the bid is kept open. Indian Book
building process provides for an open book system.
In the closed book building system, the book is not made public
and the bidders will have to take a call on the price at which they
intend to make a bid without having any information on the bids
submitted by other bidders.
(d) Hard underwriting
Hard underwriting is when an underwriter agrees to buy his
commitment of shares before the issue opens. The underwriter
guarantees a fixed amount to the issuer. Thus, in case the shares
are not subscribed by investors, the issue is devolved on
underwriters and they have to bring in the amount by subscribing
to the shares. The underwriter bears a risk which is much higher
than soft underwriting.
(e) Soft underwriting
Soft underwriting is when an underwriter agrees to buy the shares
at stage after the issue is closed. The risk faced by the underwriter
as such is reduced to a small window of time.
(f) Differential pricing
When one category of investors is offered shares at a price
different from the other category it is called differential pricing.
The following are the different categories of investors to whom
shares can be issued at differential pricing:
a) Retail investors: An issuer company can allot the shares to
retail individual investors at a discount of maximum 10% to the
price at which the shares are offered to other categories of public.
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b) Employees: An issuer company can offer the shares to
employees at a discount of maximum 10% to the floor price at
which the shares are offered to other categories of public.
(g) Basis of Allocation/Basis of Allotment
After the closure of the issue, the bids received are aggregated
under different categories i.e., firm allotment, Qualified Institutional
Buyers (QIBs), NonInstitutional Investors (NIIs), Retail Individual
Investors (RII), etc. Allotment to QIBs and NIIs is done on a
proportionate basis. However, the allotment to each retail
individual investor shall not be less than the minimum bid lot,
subject to availability of shares in retail individual investor
category, and the remaining available shares, if any, shall be
allotted on a proportionate basis.
(h) Fast Track Issues (FTI)
SEBI has introduced FTI in order to enable wellestablished and
compliant listed companies satisfying certain specific entry
norms/conditions to access Indian Primary Market in a time
effective manner. Such companies can proceed with FPOs / Right
Issues by filing a copy of RHP / Prospectus with the RoC or the
Letter of Offer with designated Stock Exchanges and SEBI. Such
companies are not required to file Draft Offer Document for SEBI
comments and to Stock Exchanges. Entry Norms for companies
seeking to access Primary Market through Fast track route:
(i) The shares of the company have been listed on any stock
exchange having nationwide terminals for a period of at least
three years immediately preceding the date of filing of offer
document with RoC/ SE.
(ii) The "average market capitalisation of public shareholding" of
the company is at least Rs.3000 crores;
(iii) The annualized trading turnover of the shares of the company
during six calendar months immediately preceding the month
of filing of offer document with RoC/ SE has been at least two
percent of the weighted average number of shares listed
during the said six months period:
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Provided that for issuers, whose public shareholding is less
than fifteen per cent of its issued equity capital, the
annualised trading turnover of its equity shares has to be at
least two per cent of the weighted average number of equity
shares available as free float during such six months' period
(iv) The company has redressed at least 95% of the total
shareholder / investor grievances or complaints received till
the end of the quarter immediately preceding the month of the
date of filing of offer document with RoC/ SE.
(v) The company has complied with the listing agreement for a
period of at least three years immediately preceding the filing
of offer document with RoC/ SE.
(vi) The impact of auditors' qualifications, if any, on the audited
accounts of the company in respect of the financial years for
which such accounts are disclosed in the offer document
does not exceed 5% of the net profit/ loss after tax of the
company for the respective years.
(vii) No prosecution proceedings or show cause notices issued by
the Board are pending against the company or its promoters
or whole time directors as on the date of filing of offer
document with RoC/ SE and (viii) The entire shareholding of
the promoter group is held in dematerialised form as on the
reference date.
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