Exposure Draft
Guidance Note on Reports in
Company Prospectuses
(Revised 2018)
Readers may note that this Guidance Note supercedes the
Guidance Note on Reports in Company Prospectuses (Revised
2016) issued by the ICAI in November 2016.
(Last date for comments: December 21, 2018)
Issued by
Auditing and Assurance Standards Board
The Institute of Chartered Accountants of India
(Set up by an Act of Parliament)
New Delhi
Your comments on this Exposure Draft should reach us
by December 21, 2018. Comments are most helpful if
they indicate the specific paragraph(s) to which they
relate, contain a clear rationale and, where applicable,
provide a suggestion for alternative wording. The
comments should be sent to:
Secretary, Auditing and Assurance Standards Board
The Institute of Chartered Accountants of India
ICAI Bhawan, A-29, Sector-62,
NOIDA, Uttar Pradesh 201 309
Comments can also be e-mailed at: aasb@icai.in
CONTENTS
Paragraph Page
No. No.
Applicability of the Guidance Note 1.1 1
Overview of amendments in the ICDR 1.2 1
Regulations
Legal Aspects 1.3-1.7 7
Roles and Responsibilities 1.8-1.12 8
Who are Eligible to Make the Reports 1.13-1.15 10
Fees for Issuing the Reports 1.16 11
Signing the Report 1.17 12
Consent Letter 1.18 12
Comfort Letter 1.19 12
Liability for Misstatement in Prospectus 1.20-1.22 13
Reports and Certificates 1.23-1.27 14
Rights and Powers 1.28-1.29 27
Person to whom the Report should be 1.30 28
addressed
Financial Information of the Issuer 1.31-1.37 28
Company
Accounting and Auditing Aspects 2.1-2.8 33
Appendices 44-194
1. Illustrative Format of the Consent 44
Letter
2. Comfort Letter 47
3. Illustrative Capitalisation Statement 107
4. Illustrative Auditor's Examination 109
Report on Financial Information in
Relation to Prospectus
5. Restated Financial Information 122
Paragraph Page
No. No.
6. Illustrative Format of Independent 155
Auditor's Report on the promoters'
contribution received before opening
of the issue
7. Illustrative Format of Independent 159
Auditor's Report on the cash flow
statement and liquidity position of the
issuer company
8. Illustrative Format of Independent 163
Auditor's Report on the Compliance
with conditions of proposed
preferential issue
9. Illustrative Format of Independent 168
Auditor's Report on the receipt of
consideration of specified securities in
connection with proposed preferential
issue
10. Illustrative Format of Independent 172
Auditor's Report on the cash flow
statement disclosing the use of funds
received from promoters contribution
for the stated objects
11. Illustrative Format of Independent 176
Auditor's Report on the receipt of
consideration [paid]/[received] and
mode of financing in case of non-
material [acquisition]/[divestments]
12. Illustrative Format of the Engagement 180
Letter for the Entire Engagement to
Issue Report on the Prospectus
13. Illustrative Format of Representation 189
Letter from Management for Issuance
of Examination Report
Applicability of the Guidance Note
1.1 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) in accordance with Securities and
Exchange Board of India (Issue of Capital and Disclosure
Requirements) Regulations, 2018, as amended (hereinafter
referred to as the "ICDR Regulations"). 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 [Date]. Earlier application is
voluntary.
Overview of amendments in the ICDR Regulations
1.2 The SEBI has issued the ICDR Regulations which
amended the SEBI (Issue of Capital and Disclosure
Requirements) Regulations, 2009 ("ICDR 2009") with the aim of
simplifying the law, eliminating redundancies and inconsistencies
and updating references to the Companies Act, 2013. The
Chapters have been reorganised for various issues of securities
issues like IPO, further public offers, rights issues etc.
Some of the key amendments are given below:
1) Definitions:
Definition of promoter and relative made consistent with
the Companies Act, 2013.
Qualified institutions placement means issue of eligible
securities by a listed issuer to qualified institutional
buyers on a private placement basis and includes an
offer for sale of specified securities by the promoters
and/or promoter group on a private placement basis, in
terms of these regulations.
Group companies defined to include such companies
(other than promoter(s) and subsidiary/subsidiaries) with
which there were related party transactions, during the
period for which financial information is disclosed (three
years), as covered under the applicable accounting
standards, and also other companies as considered
material by the board of the issuer.
To identify promoter group, shareholding threshold
increased to 20 percent as against earlier requirement of
10 percent.
2) All entities whose promoters or directors are fugitive
economic offenders have been precluded from making any
offer of securities.
3) ICDR 2009 stipulated that an issuer may make an IPO only if
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. This
requirement has now been deleted.
4) Financial disclosure for public/right issue to be made for
preceding 3 years as against 5 years earlier.
5) In conditions for IPO, it has been stipulated that the net
tangible assets and net worth requirements of Rs. 3 crores
and 1 crore respectively, should be calculated on a restated
and consolidated basis. Also the average operating profit of
Rs. 15 crores has to be during the preceding three years and
not during the three most profitable years out of the
immediately preceding five years, with the additional
requirement that there should be an operating profit in each of
the three years.
6) If equity shares arising out of the conversion or exchange of
the fully paid-up compulsorily convertible securities are being
2
offered for sale, the conversion or exchange should be
completed prior to filing of the offer document (i.e. red herring
prospectus in the case of a book built issue and prospectus in
the case of a fixed price issue), provided full disclosures of
the terms of conversion or exchange are made in the draft
offer document.
7) For an issuer to be eligible to make an IPO of convertible debt
instruments, the issuer should not be in default of payment of
interest or repayment of principal amount in respect of debt
instruments issued by it to the public, if any, for a period of
more than six months.
8) One of the conditions for an IPO is that the specified
securities held by the promoters should be in dematerialised
form prior to filing of the offer document.
9) Where the value of the convertible portion of any listed
convertible debt instruments issued by an issuer exceeds Rs.
ten crore (earlier Rs. 50 lakhs) and the issuer has not
determined the conversion price of such convertible debt
instruments at the time of making the issue, the holders of
such convertible debt instruments should be given the option
of not converting the convertible portion into equity shares.
10) For issuing of warrants, the restriction of having one warrant
attached to one specified security has been done away with
and now a specified security may have one or more warrants
attached to it.
11) In case the exercise price of warrants is based on a formula,
25 percent of the consideration amount based on the cap
price of the price band determined for the linked equity shares
or convertible securities shall be received upfront. In case the
warrant holder does not exercise the option to take equity
shares against any of the warrants held by the warrant holder,
within three months from the date of payment of
consideration, such consideration made in respect of such
warrants shall be forfeited by the issuer.
12) Shortfall of up to 10 percent of minimum promoter's
contribution can now be met by institutional investors (foreign
venture capital investor, scheduled commercial banks, public
financial institution, alternate investment funds and registered
3
insurance companies) without being identified as promoters.
Contributions received from such institutional investors will be
locked in for a period of three years from the date of
commencement of commercial production or date of allotment
in the IPO, whichever is later.
13) The requirement of lock in of specified securities held by
persons other than promoters will not apply to equity shares
held by an employee stock option trust or transferred to the
employees by an employee stock option trust pursuant to
exercise of options by the employees, in accordance with the
employee stock option plan or employee stock purchase
scheme. Such equity shares allotted to the employees will be
subject to the provisions of lockin as specified under the
Securities and Exchange Board of India (Share Based
Employee Benefits) Regulations, 2014.
14) At least one lead manager to the issue should not be an
associate of the issuer.
15) Prior to making an IPO, the issuer should file three copies of
the draft offer document with the concerned regional office of
the Board under the jurisdiction of which the registered office
of the issuer company is located, in accordance with
Schedule IV, along with fees as specified in Schedule III,
through the lead manager(s).
16) Lock-in of pledged promoter securities shall continue
pursuant to the invocation of the pledge and the transferee
(scheduled commercial bank or a public financial institution or
a systemically important non-banking finance company or a
housing finance company) will not be eligible to transfer the
specified securities till the lock-in period stipulated in these
regulations has expired.
17) The regulation on determination of face value as stipulated in
the ICDR 2009 has been removed. The statement about the
issue price being "X" times of the face value) has also been
removed.
18) Where the issuer opts not to make the disclosure of the floor
price or price band in the red herring prospectus, the issuer
should announce the floor price or the price band at least two
working days (earlier five working days under ICDR 2009)
4
before the opening of the issue in the same newspapers in
which the preissue advertisement was released.
19) In case of differential pricing, discount, if any, should be
expressed in rupee terms in the offer document.
20) In an issue made through the book building process, it has
now been provided that the unsubscribed portion in the
categories `retail individual investors' and `non-institutional
investors' may be allocated to applicants in any other
category.
21) Reservation on a competitive basis in the case of
shareholders is now permitted only for shareholders (other
than promoters and promoter group) of listed subsidiaries
(earlier listed group companies) or listed promoter companies.
22) Requirement of reservation for persons who as on the date of
filing the draft offer document with SEBI, had business
association as depositors, bondholders or subscribers to
services of the issuer making an IPO, as was provided in
Reg. 42(1)(c) of ICDR 2009 has been removed.
23) In the event of non-receipt of minimum subscription, all
application monies received should be refunded to the
applicants forthwith, but not later than fifteen days from the
closure of the issue. Earlier there was a distinction between
non-underwritten issues and underwritten issues for refunds.
24) In case of force majeure, banking strike or similar
circumstances, the issuer may, for reasons to be recorded in
writing, extend the bidding (issue) period disclosed in the red
herring prospectus (in case of a book built issue) or the issue
period disclosed in the prospectus (in case of a fixed price
issue), for a minimum period of three working days, subject to
the restriction of 10 working days.
25) In case of oversubscription, an allotment of not more than one
percent (earlier ten percent) of the net offer to public may be
made for the purpose of making allotment in minimum lots.
26) The lead manager(s) or bankers shall ensure that the
allotment, credit of dematerialised securities and refund or
unblocking of application monies, as may be applicable, are
done electronically.
5
27) Threshold for submission of draft letter of offer for right issue
to SEBI has been increased to Rs. 10 crores as against Rs.
50 lakhs earlier.
28) The non-convertible portion of partly convertible debt
instruments issued by a listed issuer, the value of which
exceeds Rs. 10 crore (earlier Rs. 50 lakhs), may be rolled
over, subject to certain compliances.
29) Applicants in a rights issue will be eligible to make
applications through ASBA facility only if such applicant: (i) is
holding equity shares in dematerialised mode (ii) has not
renounced entitlement in part or in full and (iii) is not a
renouncee.
30) Financial disclosure for public/right issue to be made for
preceding 3 years as against 5 years.
31) An issuer can make a fast track rights issue only if it does not
have any audit qualifications on the audited accounts of the
issuer in respect of those financial years for which such
accounts are disclosed in the letter of offer.
32) A rights issue can be underwritten only to the extent of
entitlement of shareholders other than the promoters and
promoter group.
33) The price determined for a preferential issue shall be subject
to appropriate adjustments, if the issuer makes an issue of
equity shares after completion of a demerger wherein the
securities of the resultant demerged entity are listed on a
stock exchange.
34) Preliminary placement document to be prepared for qualified
institutions placement.
35) The requirement that the aggregate of the proposed qualified
institutions placement and all previous qualified institutions
placements made by the issuer in the same financial year
shall not exceed five times the net worth of the issuer as per
the audited balance sheet of the previous financial year has
been removed.
36) Minimum anchor investor size in SME IPO reduced to Rs. 2
crore from existing Rs. 10 crore.
6
37) For issue of Indian Depository Receipts, an issuer will be
eligible to make an issue of IDRs only if the issuing company
is listed in its home country for at least three immediately
preceding years.
38) The mode of allotment to institutional investors, i.e., whether
discretionary or proportionate, shall be disclosed prior to or at
the time of filing of the offer document.
39) There are incremental requirements from the auditors and
chartered accountants.
Legal Aspects
1.3 The purpose of this Guidance Note is to provide guidance
on compliance with the provisions of the Companies Act, 2013
(hereinafter referred to as "the Act" unless otherwise specified),
and the ICDR Regulations, relating to the reports required to be
issued by chartered accountants in prospectus issued by the
companies for the offerings made in India.
1.4 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; and
(f) Sections 387 to 393 relating to prospectus issued by
companies incorporated outside India.
The Guidance Note also deals with relevant aspects of the ICDR
Regulations.
1.5 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
7
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
shareholders of the company. In order to enable the potential
investors to take a well-informed decision in the matter, the Act
and various sections 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
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.
1.6 Section 26 of the Act, read with the ICDR Regulations,
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 the ICDR Regulations are to be complied with when
a company invites the public to subscribe for its shares or
debentures.
1.7 The ICDR Regulations deal with the reports to be set out in
a prospectus. Paragraphs (A) and (B) of clauses (11)(I) and
(11)(II) of Part A of Schedule VI to the ICDR Regulations require
the reports/certificates to be issued by auditors of the company,
containing the specified particulars.
Roles and Responsibilities
Bankers
1.8 As mentioned in the ICDR Regulations:
a) The lead manager(s) or bankers shall exercise due diligence
and satisfy themselves about all aspects of the issue including
the veracity and adequacy of disclosure in the draft offer
document and the offer document.
b) The lead manager(s) or bankers shall call upon the issuer, its
promoters and its directors or in case of an offer for sale, also
the selling shareholders, to fulfill their obligations as disclosed
8
by them in the draft offer document and the offer document
and as required in terms of these regulations.
c) The lead manager(s) or bankers shall ensure that the
information contained in the draft offer document and offer
document and the particulars as per restated audited financial
statements in the offer document are not more than six months
old from the issue opening date.
1.9 The term `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'.
1.10 Further, as per the ICDR Regulations, it is the
responsibility of lead manager(s) or bankers to confirm that:
a) the draft offer document/ draft letter of offer filed with the
Board is in conformity with the documents, materials and
papers which are material to the issue;
b) all material legal requirements relating to the issue as
specified by the SEBI, the Central Government and any other
competent authority in this behalf have been duly complied
with; and
c) the material disclosures made in the draft offer document/draft
letter of offer are true and adequate to enable the investors to
make a well informed decision as to the investment in the
proposed issue and such disclosures are in accordance with
the requirements of the Companies Act, 2013, these
regulations and other applicable legal requirements.
Auditors / Accountants
1.11 The auditors/accountants shall report / certify on matters
as required under the ICDR Regulations as per the guidance
provided in this guidance note.
1.12 Certain certificates required under the ICDR Regulations
9
involve consideration of legal matters. In such cases, the
auditors/accountants should be careful while issuing such
certificates and restrict their responsibility only towards accounting
matters and their work should be performed in accordance with
the Guidance Note on Reports or Certificates for Special
Purposes (Revised 2016) issued by ICAI. The
auditors/accountants should refrain from certifying any legal
matters.
Who are Eligible to Make the Reports
1.13 The reports to be included in a prospectus under
paragraphs (A) and (B) of clauses (11)(I) and (11)(II) of Part A of
Schedule VI to the ICDR Regulations should be made by the
auditors of the company in case of types of transactions covered
in Part A. Auditors may refer to Parts B, C and D of Schedule VI to
the ICDR Regulations for other type of issuances. In case the
company has joint auditors, the reports should be signed by all the
joint auditors in accordance with the principles enunciated in
Standard on Auditing (SA) 299(Revised), "Joint Audit of Financial
Statements". The reports under paragraphs (A) and (B) of clauses
(11)(I) and (11)(II) of Part A of Schedule VI to the ICDR
Regulations should be made by the chartered accountant(s) who
shall be named in the prospectus. According to paragraph A(i)
clauses (11)(I) and clause (11)(II) of Part A of Schedule VI to the
ICDR Regulations, the financial information specified in these
clauses 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 these clauses must be re-audited
for one full financial year and the stub period, by the chartered
accountants certifying them. The 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. In certain sections of the ICDR
10
Regulations, it has been mentioned that such reports/certificates
are required to be issued by statutory auditors/auditors. It is
hereby clarified that apart from these reports/certificates, any
other report/certificate required by the ICDR Regulations may be
issued by auditors or accountants, as the case may be. The word
"chartered accountants" has been interchangeably used as
"auditors" in the Guidance Note.
1.14 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, Section 141 of the Act provides requirements in relation
to eligibility, qualifications and disqualifications of auditors which
need to be considered as applicable.
1.15 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
1.16 Section 26 of the Act and paragraphs (A) and (B) of
clauses (11)(I) and (11)(II) of Part A of Schedule VI to the ICDR
Regulations state that the report shall be made by the auditor(s) of
the Company. An auditor appointed under Section 139 of the Act
read with Rule 3 of the Companies (Audit and Auditors) Rules,
2014, at the annual general meeting holds office until the
conclusion of the sixth 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 the fee of the auditor(s). The fee for issuance of the
reports in the company prospectus is a part of the remuneration of
11
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 issuing 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
1.17 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 (Revised),
"Forming An Opinion and Reporting on Financial Statements",
issued by the ICAI.
Consent Letter
1.18 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. 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 of the Act read with
the ICDR Regulations, 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 this
guidance note.
Comfort Letter
1.19 In certain circumstances, the issuer company may request
the auditor(s) to provide a comfort letter on the financial
12
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 or any other regulatory authorities. 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 this guidance note.
Liability for Misstatement in Prospectus
1.20 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
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
13
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.
1.21 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 of the Act read with the ICDR Regulations 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).
1.22 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 ICAI. Since such types of
engagements are subject to peer review requirements of the ICAI,
the auditor should properly document all the working papers
necessary to provide evidence of the procedures performed and
the basis of his conclusions therefrom as required under Standard
on Auditing (SA) 230, "Audit Documentation" issued by the ICAI.
The member would also need to ensure compliance with the
requirements of the Code of Ethics issued by the ICAI.
The reporting auditor/chartered accountant should use the
concepts of test checks and materiality to obtain reasonable
assurance while carrying out such engagements to issue
certificates/reports as required by the ICDR Regulations in
accordance with the guidance provided in "Guidance Note on
Reports or Certificates for Special Purposes (Revised 2016)" and
Standards on Auditing.
Reports and Certificates
1.23 As per the ICDR Regulations, below is the list of
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reports/certificates that may be required to be issued by the
auditors. Applicable reports/ certificates should be issued
considering the accounting standards (Ind AS or Indian GAAP, as
the case may be) used for preparation of restated financial
information. For sake of convenience, in this list, wherever
chapters of ICDR Regulations have been referenced, the terms
`para' and `sub-para' have been used instead of `regulation' and
`sub-regulation' and `clause' respectively.
ICDR Requirements Certificate/
Regulation Report format
reference
Sub para 9(d) a certificate from a Refer Appendix 6
of para 25 of statutory auditor, before
Part VI of opening of the issue,
chapter II certifying that promoters'
contribution has been
received in accordance
with the ICDR Regulations,
accompanying therewith
the names and addresses
of the promoters who have
contributed to the
promoters' contribution
and the amount paid and
credited to the issuer's
bank account by each of
them towards such
contribution
Sub- para 1(b) the issuer has, along with Refer Appendix 7
of para 64 of the notice for passing the
Part II of resolution, sent to all
chapter III holders of the convertible
debt instruments, an
auditors' certificate on the
cash flow of the issuer and
with comments on the
liquidity position of the
issuer
Sub- para (b) the issuer has, along with Refer Appendix 7
of para 108 of the notice for passing the
Part II of resolution, sent to all
15
ICDR Requirements Certificate/
Regulation Report format
reference
chapter IV holders of the convertible
debt instruments, an
auditors' certificate on the
cash flow of the issuer and
with comments on the
liquidity position of the
issuer
Sub- para 2 of The issuer shall place a Refer Appendix 8
para 163 of copy of the certificate of its
Part III of statutory auditors before
chapter V the general meeting of the
shareholders considering
the proposed preferential
issue, certifying that the
issue is being made in
accordance with the
requirements of the ICDR
Regulations
Sub- para (5) The issuer shall submit a Refer Appendix 9
of para 169 of certificate from the
Part VI of statutory auditors to the
chapter V stock exchanges where
the equity shares of the
issuer are listed stating
that the issuer is in
compliance of sub-
regulation (4) and the
relevant documents
thereof are maintained by
the issuer as on the date of
certification
Sub- para 3(b) the financial statements Refer guidance
of para 229 of are duly certified by provided in
Part I of auditors, who have paragraph 1.31 of
chapter IX subjected themselves to this guidance note
the peer review process of
the ICAI and hold a valid
certificate issued by the
Peer Review Board of the
16
ICDR Requirements Certificate/
Regulation Report format
reference
ICAI, stating that: (i) the
accounts and the
disclosures made are in
accordance with the
provisions of Schedule III
of the Companies Act,
2013; (ii) the accounting
standards prescribed
under the Companies Act,
2013 have been followed;
(iii) the financial
statements present a true
and fair view of the firm`s
accounts
Clause If one of the objects of the To be in line with
(9)(A)(2)(b) of issue is loan repayment: the Illustration 3 of
Part A of (a) details of loan the Guidance Note
Schedule VI proposed to be repaid on Reports or
such as name of the Certificates for
lender, brief terms and Special Purposes
conditions and amount (Revised 2016)
outstanding; issued by ICAI
(b) certificate from the
statutory auditor certifying
the utilization of loan for
the purpose availed.
Clause Details of the sources of To be in line with
(9)(F)(1) of funds and the deployment the Illustration 3 of
Part A of of these funds on the the Guidance Note
Schedule VI project (where the issuer is on Reports or
raising capital for a Certificates for
project), up to a date not Special Purposes
earlier than two months (Revised 2016)
from the date of filing of issued by ICAI
the offer document, as
certified by a statutory
auditor of the issuer and
the date of the certificate
17
ICDR Requirements Certificate/
Regulation Report format
reference
Clause Where the promoters' Refer Appendix 10
(9)(F)(2) of contribution has been
Part A of brought prior to the public
Schedule VI issue, which is utilised
towards means of finance
for the stated objects and
has already been deployed
by the issuer, a cash flow
statement from the
statutory auditor,
disclosing the use of such
funds received as
promoters' contribution.
Clause Consolidated Financial Refer Appendix 4
(11)(I)(A)(i) of Statements (CFS)
Part A of prepared in accordance
Schedule VI with Ind AS for three years
and the stub period (if
applicable) should be
audited and certified by the
statutory auditor(s) who
holds a valid certificate
issued by the Peer Review
Board of the ICAI.
Clause (11)(II) Consolidated Financial Refer Appendix 4
(A)(i) of Part A Statements (CFS)
of Schedule VI prepared in accordance
with Indian GAAP for three
years and stub period (if
applicable) should be
audited and certified by the
statutory auditor(s) who
holds a valid certificate
issued by the Peer Review
Board of the ICAI.
Clause (11)(I) The auditor shall issue an Refer Appendix 4
(A)(i)(d) of Part examination report on the
A of Schedule restated and audited
VI financial information in
18
ICDR Requirements Certificate/
Regulation Report format
reference
accordance with the
Guidance Note issued by
the ICAI from time to time.
Clause (11)(II) The auditor shall issue an Refer Appendix 4
(A)(i)(d) of Part examination report on the
A of Schedule restated and audited
VI financial information in
accordance with the
Guidance Note issued by
the ICAI from time to time
Clause The Issuer shall provide Refer format
(11)(I)(B)(iii) of Proforma financial provided in SAE
Part A of statements, as certified by 3420 Assurance
Schedule VI the statutory auditor, of all Engagement to
the subsidiaries or Report on the
businesses material to the Compliance of Pro
consolidated financial Forma Financial
statements where the Information
issuer or its subsidiaries Included in a
have made an acquisition Prospectus.
or divestment including
deemed disposal after the
latest period for which
financial information is
disclosed in the offer
document but before the
date of filing of the offer
document.
Clause The Issuer shall provide Refer format
(11)(II)(B)(iii) of Proforma financial provided in SAE
Part A of statements, as certified by 3420 Assurance
Schedule VI the statutory auditor, of all Engagement to
the subsidiaries or Report on the
businesses material to the Compliance of Pro
consolidated financial Forma Financial
statements where the Information
issuer or its subsidiaries Included in a
have made an acquisition Prospectus.
or divestment including
19
ICDR Requirements Certificate/
Regulation Report format
reference
deemed disposal after the
latest period for which
financial information is
disclosed in the offer
document but before the
date of filing of the offer
document.
Clause Further, in case of non- Refer Appendix 11
(11)(I)(B)(iii) of material acquisitions/
Part A of divestments disclosures in
Schedule VI relation to the fact of the
acquisition/ divestment,
consideration
paid/received and mode of
financing shall be certified
by the statutory auditor of
the issuer company.
Clause Further, in case of non- Refer Appendix 11
(11)(II)(B)(iii) of material acquisitions/
Part A of divestments disclosures in
Schedule VI relation to the fact of the
acquisition/divestment,
consideration
paid/received and mode of
financing shall be certified
by the statutory auditor of
the issuer company.
Clause A report by the auditors of Refer Standard on
(11)(III)(iii) of the issuer on a limited Review
Part A of review of the profit or loss Engagements
Schedule VI and assets and liabilities 2410, "Review of
(indicating changes in Interim Financial
accounting policies, if any), Information
as at a date not earlier Performed by the
than six months prior to the Independent
date of the opening of the Auditor of the
issue, where audited Entity".
accounts as at such date
20
ICDR Requirements Certificate/
Regulation Report format
reference
are not available.
Clause (15)(B) In case of an issue of To be in line with
(26)(b)(i) of convertible debt the Illustration 3 of
Part A of instruments, the issuer the Guidance Note
schedule VI shall also give an on Reports or
additional undertaking that
Certificates for
it shall forward the details
Special Purposes
of utilisation of the funds
raised through the (Revised 2016)
convertible debt issued by ICAI
instruments duly certified
by the statutory auditors of
the issuer, to the
debenture trustees at the
end of each half-year.
Clause In case of an issue of To be in line with
(5)(XIX)(g)(1) convertible debt the Illustration 3 of
of Part B of instruments, the issuer the Guidance Note
schedule VI shall also give an on Reports or
additional undertakings
Certificates for
that it shall forward the
Special Purposes
details of utilisation of the
funds raised through the (Revised 2016)
convertible debt issued by ICAI
instruments duly certified
by the statutory auditors of
the issuer, to the
debenture trustees at the
end of each half-year.
Clause Where the law of the home Reports issued on
(15)(2)(d) of country requires annual the annual
Part A of statutory audit of the statutory financial
Schedule VIII accounts of the issuing statements.
company, a report of the
statutory auditor on the
audited financial
21
ICDR Requirements Certificate/
Regulation Report format
reference
statements of the issuing
company for each of the
three financial years
immediately preceding the
date of the prospectus
including the profits or
losses, assets, liabilities
and cash-flow statement of
the issuing company at the
last date to which the
accounts of the issuing
company were made in the
specified form.
In addition to above, as per the ICDR Regulations, below is the list
of reports/certificates that may be required to be issued by the
accountant:
ICDR Regulation Requirements Certificate/
reference Report format
Sub- para 9(d) of a certificate from a To be in line with
para 123 of Part VI Chartered Accountant, Appendix 6
of chapter IV before opening of the
issue, certifying that
promoters' contribution
has been received in
accordance with the
ICDR Regulations,
accompanying therewith
the names and
addresses of the
promoters who have
contributed to the
promoters' contribution
and the amount paid and
credited to the bank
account of the issuer by
each of them towards
such contribution
22
ICDR Regulation Requirements Certificate/
reference Report format
Clause If any part of the Refer format
(5)(VIII)(B)(4) of proceeds of the issue is provided in
Part B of Schedule to be applied directly or Standard on
VI indirectly: Auditing (SA)
(A) in the purchase of 800 "Special
any business; or Considerations--
(B) in the purchase of an Audits of
interest in any business Financial
and by reason of that Statements
purchase, or anything to Prepared in
be done in consequence Accordance with
thereof, or in connection Special Purpose
therewith; the issuer will Frameworks"
become entitled to an and Guidance
interest in respect to Note on
either the capital or Combined and
profits and losses or Carve-Out
both, in such business Financial
exceeding fifty per cent. Statements, as
thereof; the case may be
a report made by
accountants (who shall
be named in the letter of
offer) upon:
(i) the profits or losses of
the business of each of
the five financial years
immediately preceding
the issue of the letter of
offer; and
(ii) the assets and
liabilities of the business
at the last date to which
the accounts of the
business were made,
being a date not more
than six months before
the date of the issue of
the letter of offer.
23
ICDR Regulation Requirements Certificate/
reference Report format
Clause Details of the sources of To be in line with
(5)(VIII)(B)(5)(H)(1) funds and the the Illustration 3
of Part B of deployment of these of the Guidance
Schedule VI funds on the project Note on Reports
(where the issuer is or Certificates for
raising capital for a Special
project), up to a date not Purposes
earlier than two months (Revised 2016)
from the date of filing the issued by ICAI
letter of offer with the
designated stock
exchange, as certified by
a Chartered Accountant,
along with the name of
the chartered accountant
and the date of the
certificate.
Clause (15)(2)(c) In case the financial Refer format
of Part A of results are prepared as provided in
Schedule VIII per IFRS or US GAAP, Standard on
the financial results shall Auditing (SA)
be audited by a 800 "Special
professional accountant Considerations--
or certified public Audits of
accountant or equivalent Financial
(by whatever name Statements
called in the home Prepared in
country in accordance Accordance with
with the International Special Purpose
Standards on Auditing Frameworks" or
(ISA)). similar
International
Standards on
Auditing
Clause 15(2)(h) of Where the law of the Refer format
Part A of Schedule home country does not provided in
VIII require annual statutory Standard on
audit of the accounts of Auditing (SA)
the issuing company, a 800 "Special
report, prepared in Considerations--
24
ICDR Regulation Requirements Certificate/
reference Report format
accordance with Indian Audits of
accounting standards Financial
certified by Chartered Statements
Accountant in practice Prepared in
within the terms and Accordance with
meaning of the Special Purpose
Chartered Accountants Frameworks"
Act, 1949 on the financial
statements/ results of the
issuing company for
each of the three
financial years
immediately preceding
the date of prospectus
including the profits or
losses, assets, liabilities
and cash-flow statement
of the issuing company
at the last date to which
the accounts of the
issuing company were
made in the specified
form
Clause (20)(b) of If the subsidiaries and Refer format
Part A of Schedule associates of the issuing provided in
VIII company are not Standard on
required to prepare Auditing (SA)
audited statements as 800 "Special
per the laws prevailing in Considerations--
those countries (home Audits of
countries of the Financial
subsidiaries/ associates), Statements
the same may be Prepared in
certified as true and Accordance with
correct by the Board of Special Purpose
Directors and the Frameworks" or
management of such similar
companies, provided a International
certificate from a certified Standards on
public accountant or Auditing
25
ICDR Regulation Requirements Certificate/
reference Report format
equivalent practicing in
the concerned country is
submitted to the Board.
In certain cases, other regulators (e.g. securities market
participants, such as National Stock Exchange of India Limited
and BSE Limited regulated by SEBI) may require certain
reports/certificates. In such cases, auditors or accountants should
follow the guidance provided in paragraphs 1.24 and 1.25 of this
guidance note.
1.24 Apart from above, bankers may request auditors to issue
certificates in respect of Non-GAAP measures or other financial
information (items which 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 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
26
Procedures Regarding Financial Information" and submit such
agreed-upon reports to the company and address to the board of
directors of the company.
1.25 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.
1.26 It is the company's responsibility to ensure that all the
information included in the prospectus is accurate and factually
correct. The auditor's should read the information (to the extent it
relates to the information obtained during audit or review for
reporting) and ensure that such information is properly included.
1.27 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.
Rights and Powers
1.28 The next point for consideration is the rights and powers
which a chartered accountant enjoys for performing his onerous
duties in such engagement. Refer paragraph 1.23 of this guidance
note for reports/certificates to be issued by auditor or chartered
accountant.
1.29 In cases falling under paragraphs (A) and (B) of clauses
(11)(I) and (11)(II) of Part A of schedule VI to ICDR Regulations,
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.
27
Person to whom the Report should be addressed
1.30 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.
Financial Information of the Issuer Company
1.31 Clauses (11)(I) and (11)(II) of Part A of schedule VI to the
ICDR Regulations require the financial information section of the
offer document to be divided into two parts, viz., restated financial
information and other financial information. As required under the
ICDR Regulations, auditors are required to issue examination
report on the first part i.e. restated financial information. It is
clarified that other financial information required under ICDR
Regulation shall not form part of restated financial information.
Paragraph (A)(i) of clauses (11)(I) and (11)(II) of Part A of
schedule VI to the ICDR Regulations requires that restated
consolidated financial information is required to be prepared in
accordance with Schedule III to the Companies Act, 2013 (as
amended) for a period of three years and the stub period (if
applicable). It also states that the above mentioned restated
consolidated financial information should be audited and certified
by the statutory auditor(s) who holds a valid certificate issued by
the Peer Review Board of the ICAI. If the issuer company does
not have a subsidiary, associate or joint venture, in any financial
year, the issuer company shall present separate restated financial
information for that financial year by following the applicable
requirements of restated consolidated financial information. The
issuer company will be required to prepare special purpose
consolidated financial statements in accordance with Ind AS 34
`Interim Financial Reporting' or AS 25 `Interim Financial
Reporting', as applicable, specified under section 133 of the Act
and other accounting principles generally accepted in India for the
stub period, if financial statements for latest full financial year
included in the offer document are older than six months from the
date of filing of the draft offer document/offer document. Such
financial statements for stub period should include all those
28
disclosures required to be presented for annual financial
statements to the extent applicable. Refer paragraph 2.4 for more
details on the preparation of financial statements for the stub
period.
Further, the ICDR Regulations clarify that the issuer company is
exempted from presenting comparatives for the stub period.
However, the issuer company has an option to present
comparatives for the stub period. Auditor should hold a valid peer
review certificate issued by the Peer Review Board of the ICAI as
on the date of singing the restated financial information. If a new
auditor holding a valid peer review certificate is appointed for the
stub period, and the predecessor auditor did not hold a valid peer
review certificate at the date of signing the last annual financial
statements, then the last annual financial statement would need to
be re-audited by the new auditor in accordance with applicable
standards. The report on the special purpose consolidated
financial statements for the stub period and for the period re-
audited shall be issued in accordance with SA 800 "Special
Considerations--Audits of Financial Statements Prepared in
Accordance with Special Purpose Frameworks", issued by the
ICAI, and hence, may exclude report on internal financial controls
over financial reporting, Companies (Auditor's Report) Order,
2016 and other pure regulatory matters. However, It is clarified in
the ICDR Regulations that where auditor earlier held a valid peer
review certificate, but did not hold a valid certificate at the date of
signing the restated financial information, the earlier certificate
shall be considered valid provided there is no express refusal by
the peer review board to renew the certificate and the process to
renew the peer review certificate was initiated by the auditor.
1.32 In general, the requirement is to give the figures of profits
and losses for the three financial years preceding the issue of the
prospectus. If the entity has been carrying on business for less
than three financial years, the figures are to be given for the actual
period of its existence. Where the three financial years
immediately preceding the issue of the prospectus cover a period
less than three years, i.e., 36 months (this can happen if the
company has changed its accounting period), the report should
29
cover as many financial years as may be necessary, so that the
aggregate period covered is not less than three years, i.e., 36
months.
1.33 To illustrate, suppose a company's accounting year ends
on March 31, 2018 and it issues a prospectus when its accounts
for the year ended March 2018 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 September 30, 2018. The auditor
is required to give his report on simple three years, equivalent to
thirty six 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 2016- March 2017 : 12 months
II June 2015- March 2016 : 10 months
III October 2014- May 2015 : 8 months
IV April 2014- September 2014 : 6 months
1.34 In the present case, immediately preceding three financial
years end on with the period starting April 2014, the report should
take into account another accounting year to complete period
equivalent to 36 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 2013
(exceeding period of 36 months), the auditor will have to report for
the entire accounting period i.e., upto October, 2013, and not
restrict to the fraction of the year.
1.35 However, if the financial statements for the year ended
March 2018 have not been made up, then, if the prospectus is
issued, say on June 30, 2018, the company would be required to
give a statement of accounts made up to at least December 31,
2017 and if the prospectus is issued on or after July 1, 2018, say
on July 31, a statement of accounts made up to, at least, January
31, 2018 is required to be given.
1.36 Paragraph (B)(ii) of clauses (11)(I) and (11)(II) of Part A of
Schedule VI to the ICDR Regulations also requires that in case
30
the proceeds, fully or partly, directly or indirectly, are to be used
for acquisition of one or more material businesses or entities, the
audited statements of balance sheets, profit and loss and cash
flow for the latest three financial years and stub period (if
available) prepared as per the framework applicable to the
business or subsidiary proposed to be acquired shall be included
in the draft offer document or offer document. As per the ICDR
Regulations, business acquisition or subsidiary is considered
material if it will make 20% or more contribution in aggregate to
either turnover, or net worth or profit before tax in the latest annual
consolidated financial statements of the issuer company. As
clarified by the ICDR Regulations, the issuer company may
voluntarily choose to provide financial statements of above
mentioned acquisitions even if they are below the materiality
threshold. As mentioned in the ICDR Regulations, such 20% or
more contribution threshold should be considered in aggregate if
there are multiple acquisitions. In such case, the issuer company
should provide the audited statements of balance sheets, profit
and loss and cash flow for the latest three financial years and stub
period (if available) as mentioned above, for each acquisition
separately.
The definition of "business" provided in Ind AS 103 "Business
Combinations" should be used to determine business for
complying with above mentioned requirements irrespective
whether the issuer company presents restated financial
information under Ind AS or Indian GAAP. Further to clarify, above
requirement for preparation of proforma financial statements
should not be applicable in case of acquisition of shareholdings in
joint ventures or associates.
In cases where the general purpose financial statements of the
businesses/entities to be acquired/divested are not available,
combined/carved-out financial statements for that business/entity
shall be prepared in accordance with "Guidance Note on
Combined and Carve-Out Financial Statements" issued by the
ICAI.
These combined/carved-out financial statements shall be audited
by the auditor of the seller in accordance with applicable
framework.
31
1.37 Further, in terms of the requirements of paragraph B(iii) of
clauses (11)(I) and (11)(II) of Part A of schedule VI to the ICDR
Regulations, the issuer company shall provide proforma financial
statements, as certified by the statutory auditor, of all the
subsidiaries or businesses material to the consolidated financial
statements, where the issuer company or its subsidiaries have
made an acquisition or divestment including deemed disposal
after the latest period for which financial information is disclosed in
the offer document but before the date of filing of the offer
document. Deemed disposal may be considered as losing control
(as defined under Ind AS 103 "Business Combinations"). For this
purpose, the acquisition/divestment would be considered as
material if acquired/ divested business or subsidiary in aggregate
contributes 20% or more to turnover, net worth or profit before tax
in the latest annual consolidated financial statements of the issuer.
The Proforma financial statements shall be prepared for the period
covering last completed financial year and the stub period (if any).
The Proforma financial statements shall be prepared in
accordance with "Guide to Reporting on Proforma Financial
Statements" issued by ICAI and statutory auditor will report on it.
The issuer company may voluntarily choose to provide proforma
financial statements of acquisitions even when they are below the
above materiality threshold. In case of one or more acquisitions or
divestments, one combined set of Proforma financial statements
should be presented. If the issuer company chooses to provide
proforma financial information voluntarily, then such proforma
financial information is not required to be certified by the statutory
auditors. Where the businesses acquired/ divested does not
represent a separate entity, general purpose financial statement
may not be available for such business. In such cases, combined/
carved-out financial statements for such businesses shall be
prepared in accordance with "Guidance Note on Combined and
Carve-Out Financial Statements" issued by the ICAI.
Further, in case of non-material acquisitions/divestments
disclosures in relation to the fact of the acquisition/divestment,
consideration paid/received and mode of financing shall be
certified by the statutory auditor of the issuer company.
32
In case of Carved-Out financial statements, generally the auditors
of the acquiree entity should issue such report on the acquiree's
financial information. The auditors of the acquirer entity should
place reliance on the report issued by auditors of the acquiree
entity. Reporting mentioned in paragraphs 1.36 and 1.37 can be
done with the guidance as mentioned under SA 600 "Using the
Work of Another Auditor" and in accordance with Guidance Note
on Audit of Consolidated Financial Statements (Revised 2016)
issued by ICAI. In case, the combined/carved-out financial
statements have been prepared in accordance with generally
accepted accounting principles other than Ind AS or Indian GAAP,
the auditor of the issuer company or accountants may perform
additional procedures to conform the generally accepted
accounting principles as per Ind AS or Indian GAAP, as
applicable.
Accounting and Auditing Aspects (read with
Appendix 5 and Appendix 5.1)
2.1 As stated earlier in preceding paragraphs, the statutory
auditors are required to report on the restated consolidated
financial information for the preceding three years, after making
such restatements as explained in paragraph 2.2 below.
2.2 The Statement of Assets and Liabilities and Statement of
Profit and Loss or any other financial information needs to be
restated in the following manner.
(a) Adjustments for all incorrect accounting practices or failure to
make provisions or other adjustments, which resulted in
qualified opinion, adverse opinion or disclaimer of opinion. It
is relevant to note here that in case of prospectus, the
statutory auditors reports on the Statement of Assets and
Liabilities and the Statement of Profit and Loss extracted from
the audited financial statements 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. If the qualification cannot be quantified or
estimated, appropriate disclosure should be made in the
33
notes to the restated financial information, explaining why the
qualification cannot be quantified or estimated. Any non-
quantifiable qualification should, however, be dealt with in the
auditor's report appropriately in accordance with the
provisions of SA 705 (Revised),"Modifications to the Opinion
in the Independent Auditor's Report".
(b) As per ICDR Regulations, significant errors, non-provisions,
regrouping, other adjustments, if any, relating to previous years
should be adjusted in corresponding period while arriving at the
profits or losses for the years to which they relate. The
correction of errors, should be disclosed in accordance with the
requirements of Ind AS 8 "Accounting Policies, Changes in
Accounting Estimates and Errors" or AS 5 "Net Profit or Loss
for the Period, Prior Period Items and Changes in Accounting
Policies", as applicable. It has been clarified that changes in
estimates, if any, need not be restated, as they are events of
that corresponding year. Further it is to be noted if the restated
financial information is prepared in accordance with the "Indian
GAAP", the ICDR Regulations require that significant errors,
non-provisions, regrouping, other adjustments, if any, should
be reflected in the corresponding period. Other adjustments
may include items like merger or similar transactions. In such
cases, the issuer company should account for such
transactions in the restated financial information as accounted
in the annual statutory financial statements.
(c) As required under the ICDR Regulations, the restated
financial information (including for the stub period if
applicable) should be restated to ensure consistency of
presentation, disclosures and the accounting policies for all
the periods presented in line with that of the latest financial
year/stub period presented. Where there has been a change
in accounting policy, the profits or losses of the earlier years
(forming part of restated financial information) 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 is likely that the companies
34
would have changed accounting policies to comply with
several of the Accounting Standards or amendments that
have become mandatory in the recent past. The standards or
amendments become applicable from a particular date
specified in the standards or amendments and some
standards or amendments have transitional provisions as
well. In this regard, the date when the standards or
amendments 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
for the preparation of restated financial information (e.g. in
case where issuer company has adopted Ind AS 115
"Revenue from Contracts with Customers" with modified
approach). However, in certain cases like hedge accounting
for which retrospective application is not allowed, the financial
information should not be restated retrospectively if hedge
accounting is followed from a specific date.
Further, it should be noted that as mentioned above, assume
an issuer company has applied modified approach for
adopting the new accounting standards or amendments from
a particular date (say April 1, 2018) for the purpose of
preparation of annual statutory financial statements for the
year ending March 31, 2019 and it applies the requirements
of new accounting standards or amendments retrospectively
for the purpose of preparation of restated financial information
for the years ended March 31, 2018 and 2017 (assuming
these two years are presented as restated financial
information with the latest financial statements for the year
ending March 31, 2019). In this situation, there may be a
possibility where restated equity balance as at the balance
sheet date immediately prior to the date of adoption (i.e.
March 31, 2018) of new accounting standards or
amendments compared to the opening equity balance (as at
April 1, 2018) of the annual statutory financial statements may
be different due to applying transition provisions at different
dates. In such case, the closing equity balance as at March
31, 2018 of the restated financial information should not be
carried forward to opening equity balance as at transition date
35
(i.e. April 1, 2018) used for adopting modified approach for
annual statutory financial statement reporting purpose.
However, issuer company should provide appropriate
disclosures in the offer document to explain the differences
between the two.
It should be noted that, if for any of these years, the change is
not quantifiable, appropriate disclosure should be made in the
notes to the restated financial information, explaining why the
impact due to change in accounting policies cannot be
quantified or estimated. Any non-quantifiable impact due to
change in accounting policies should, however, be dealt with
in the auditor's report appropriately in accordance with the
provisions of SA 705 (Revised), "Modifications to the Opinion
in the Independent Auditor's Report". The changes in
accounting policy should be disclosed in accordance with the
requirements of Ind AS 8 "Accounting Policies, Changes in
Accounting Estimates and Errors" or AS 5 "Net Profit or Loss
for the Period, Prior Period Items and Changes in Accounting
Policies", as applicable.
Similarly, if there is any change in disclosure as per the
requirements of any Ind AS or Indian GAAP, as applicable,
such disclosures should be made for all the periods presented
in the restated financial information to ensure consistency.
(d) The ICDR Regulations require a reconciliation explaining the
differences between:
i. the total equity as per the audited consolidated financial
statements and total equity as per the restated
consolidated financial information presented in a columnar
format; and
ii. profit/(loss) after tax or total comprehensive income for the
year as per audited consolidated financial statements and
profit/(loss) after tax or total comprehensive income as per
the restated consolidated financial information presented in
a columnar format.
(e) Restated consolidated financial information should also
disclose list of related parties and all related party
transactions of the consolidated entities (whether eliminated
36
on consolidated or not), which are required to be disclosed as
per Ind AS 24 / AS 18 "Related Party Disclosures" and/or
covered under section 188(2) of the Companies Act, 2013 (as
amended), as disclosed in the separate financial statements
of the consolidated entities. Issuer company should disclose
the list of related parties and all related party transactions
covered under both Ind AS 24 and section 188 (2) of the Act.
It is further clarified in the ICDR Regulations that all funding
arrangements including inter-se guarantees among the
entities consolidated, except contribution to equity share
capital, shall be disclosed. The important terms and
conditions of the funding arrangement and fund transfer
restrictions, if any, should be disclosed in the restated
financial information. Generally, in consolidated financial
statements, transactions which are eliminated at the time of
consolidation are not disclosed in the related party
disclosures. However, as per the ICDR Regulations, all such
eliminated transactions are also required to be included as
additional disclosure in the restated financial information.
Further, the term `funding arrangements' is not defined in the
ICDR Regulations or the Act. The issuer company should
apply judgement in identifying the transactions that will fall
within the term "Funding Arrangements" and to present those
transactions which are, in substance, in the nature of Funding
Arrangements such as borrowings, debentures, working
capital funding, etc. which form part of financing activities in
cash flow statement. The issuer company should also
disclose details of undrawn facilities, if any.
(f) The following disclosures shall be made in the restated
financial information (where prepared in accordance with
Indian GAAP) on the basis of amounts recognised and
measured as per Indian GAAP and in accordance with the
Guidance Note of the ICAI issued from time to time:
i. Disclosures as per AS 13 "Accounting for Investments".
ii. Disclosures as per AS 14 "Accounting for
Amalgamations".
37
2.3 In addition to above, paras (A), (B) and (D) of clause (11)(I)
and (11)(II) of Part A of schedule VI to the ICDR Regulations
requires the following other information also to be disclosed by the
issuer company:
(i) The separate audited financial statements for past three full
financial years immediately preceding the date of filing of offer
document of the issuer company and all its material
subsidiaries should be made available on issuer's website in
accordance with the materiality thresholds in (b) below.
Alternatively, relevant link should be provided to the financial
statements of subsidiaries on the issuer's website. The link to
the issuer's separate financial statements should be specified
in the offer document. For this purpose, subsidiaries shall be
identified based on definitions in the Act. The above
requirements shall apply for the periods of existence of the
parent-subsidiary relationship.
a. A certified English translated copy of the financial
statements should be made available on the company's
website for every entity consolidated whose financial
statements are not presented in English.
b. The financial statements reported in any currency other
than Indian Rupee shall be translated into Indian Rupee
in accordance with Ind AS 21 "The Effects of Changes in
Foreign Exchange Rates". (In para A(ii)(b) of clause
(11)(II) of Schedule VI, relevant for Indian GAAP,
reference to Ind AS 21 should read as reference to AS
11, "The Effects of Changes in Foreign Exchange
Rates"). The financial statements of all foreign
consolidated entities should be audited, unless they are
not material to the Consolidated Financial Statements
and the local regulation does not mandate audit. For this
purpose, a consolidated entity shall be considered
`material' if it contributes 10% or more to the turnover or
net-worth or profits before tax in the annual consolidated
financial statements of the respective year. Additionally,
total unaudited information included in the Consolidated
Financial Statements shall not exceed 20% of the
38
turnover or net-worth or profits before tax of the
Consolidated Financial Statements of the respective
year. For the purpose of this clause, definition of
turnover, net-worth and profits before tax should be as
per the Act.
c. The financial statements of foreign entities consolidated
may be audited as per the requirements of local
regulation applicable in the respective jurisdiction.
However, in cases where the local regulation does not
mandate audit, financial statements should be audited as
per the auditing standards/ requirements applicable in
India.
d. The financial statements of foreign subsidiaries may be
acceptable in a GAAP other than Ind AS, if local laws
require application of local GAAP.
(ii) The accounting and other ratios for each of the accounting
periods, for which the financial information is presented.
These ratios, as explained below are computed on the basis
of restated financial information. Some of the items are Non-
GAAP measures and should be defined appropriately in the
offer document and reconciled with the line items used in the
restated financial information.
a. Earnings Per Share (Basic and Diluted): These ratios are
calculated as per the provisions of Ind AS 33 "Earnings
Per Share" or Accounting Standard (AS) 20, "Earnings
Per Share", as applicable.
b. Return on Net Worth: 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,
securities premium account and debit or credit balance of
profit and loss 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. Return can be
39
considered as profit after tax line item. Both return and
net worth should be computed before giving impact for
non-controlling interest.
c. Net Asset Value Per Share: Net asset means total assets
minus total liabilities. Generally, this ratio is calculated
excluding revaluation reserves. Further, this ratio should
be presented for both existing outstanding number of
shares and considering dilutive number of shares as
denominators.
(iii) EBIDTA: EBITDA stands for earnings before interest, taxes,
depreciation and amortization. Issuer company should ensure
that the term `EBITDA' is appropriately defined in the offer
document and reconciled with the line items used in the
restated financial information.
(iv) A Capitalisation Statement showing total borrowings, total
equity, total capital and the non-current borrowings/ total
equity ratio before and after the issue is made shall be
incorporated. It shall be prepared on the basis of the restated
financial information for the latest financial year or when
applicable at the end of the stub period.
In case of any change in the share capital since the date as of
which the financial information has been disclosed in the offer
document, a note explaining the nature of the change shall be
given.
As given in the ICDR Regulations, an illustrative format of the
capitalisation statement is given in Appendix 3 to this
guidance note.
(v) As the figures to be given in the financial information are to be
given for three financial years (minimum of 36 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 36
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
40
the procedures stated in the Standard on 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.
(vi) Similar disclosure as in (v) 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 those issuing the report in the prospectus.
(vii) Report given by the accountant would also disclose reliance,
if any, on the accounts audited by other auditor(s) as the
accountant may not be the auditor of the company or the
business/body corporate being purchased/acquired.
2.4 As explained in paragraph 1.31, 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/stub period and for their audit. In preparation of accounts
for the broken/stub period, the principles laid down in 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/stub period if, and only if, it is also appropriate to
41
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 in 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/stub period
but also for the years being reported upon by the auditor/
accountant in line with the principles as set out in paragraph 2.2
above.
2.5 Refer Appendix 5 to this guidance note also for guidance
on restated financial information. An illustrative format of the
report of auditors on restated financial information in company
prospectuses is provided in Appendix 4 to this guidance note.
2.6 In the interest of both issuer company 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 SA 210, "Agreeing the Terms of Audit
Engagements" issued by the ICAI. An illustrative format of the
Engagement Letter is provided in Appendix 12 to this guidance
note.
2.7 The auditor should obtain evidence that management
acknowledges its responsibility for the appropriate preparation and
presentation of restated financial information and that
management has approved the restated financial information
including the restatement as detailed in paragraph 2.2 above. In
this regard, the restated financial information should be 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 ICAI. 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 and context in
which it is so included. For this purpose, he should study the
prospectus carefully and also take note of:
42
(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 provided in Appendix 13 to this 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.
43
Appendix 1
Illustrative Format of the Consent Letter
(Refer paragraph 1.18)
[Date]
The Board of Directors
[Name and Address of the Company]
Dear Sirs / Madam,
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]1 of
[name of the issuer] (the "Issuer") prepared under the Securities
and Exchange Board of India (Issue of Capital and Disclosure
Requirements) Regulations, 2018, as amended (the "ICDR
Regulations") 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.) [restated financial information, 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] and references to us
as required under Section 26 of the Companies Act, 2013 ( the
"Act") read with the Regulations and as "Experts" as defined
under Section 2(38) of the Act to the extent and in our capacity
1
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.
as an auditor and in respect of our reports issued by us
included in the DRHP of the Issuer. The following information in
relation to us may be disclosed:
Statutory Auditors' Name:
Address:
Telephone Number:
Firm Registration Number:
E-mail:
Peer Review Certificate Number:
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,
ROC, the stock exchanges or any other regulatory authorities
as required by law.
45
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.
46
Appendix 2
Comfort Letter
(Refer Paragraph 1.19)
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
can affect the underwriter's ability to place the shares with the
2
buyers.
2
Source: SEBI.
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 nobody 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 three
financial years and the broken/stub 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
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
48
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
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
49
(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
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
50
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, 2018, 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, 2018, 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,
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
51
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 guidance note.
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 ICAI 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
3
statement items during a period, known as the "change period,"
3
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.
52
subsequent to the date and period of the latest financial
statements included in the Prospectus. These comments4 would
also address such matters as subsequent changes in the amounts
of (a) share capital and (b) long term borrowing (including current
maturities). 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
(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
4
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.
53
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
(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
54
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
days5 or more subsequent to the end of the most recent period for
which the auditors have performed an audit or a review, the
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
5
It is expected that generally a company should be able to prepare its interim
financial statements within 45 days of end of last quarter, hence 135 days (90
days plus 45 days) is prescribed.
55
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 three 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
such significant divisions, branches, or subsidiaries/joint
ventures/associates audited by them. In other situation, the
past auditors or auditors of such significant divisions,
56
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. Further, while issuing such comfort letter to
the requesting parties, the other auditors and previous auditors
should state that their letters can be used by the [current] statutory
auditors of the issuer in furnishing their letter to the requesting
parties. 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
57
as the consolidated financial information include the 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.
The previous auditor may request the current auditors to issue a
letter confirming that no subsequent event has come to the notice
of current auditor during the course of their audit or review which
might have an impact on the reports issued for previous periods
by previous auditor. The current auditors based on its professional
judgement and facts and circumstances may issue such letter of
confirmation.
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;
58
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
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.
59
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 that audited / reviewed financials are appropriately
reproduced in the prospectus.
If the comparative financial information are audited by
previous auditor and restated as per Ind AS 8 "Accounting
Policies, Changes in Accounting Estimates and Errors", the
current auditor may provide appropriate circle up comfort
(tracing to accounting records). However, in this case, the
current auditor should highlight the fact that previous year
financial information are audited by previous auditor and the
current auditor has performed procedures relating to the
restatement adjustments only. This guidance will not be
applicable in case where restated financial information is
prepared for initial public offer or similar purpose, in which
case, the previous auditors will take the responsibility of
restated financial information.
The circle up comfort should be provided by the respective
auditors/ accountants for the periods audited or reviewed by
them.
Issuer company may include non-GAAP financial measures
or alternate performance measures in an offering document.
Auditor should consider the following when requested to
provide comfort on such measures. In situations where there
are no regulations or guidance with regards to non-GAAP
financial measures, auditors expectation is that offering
documents not give more prominence to non-GAAP financial
measures over GAAP measures and will include:
a) Definitions
b) Reconciliations to the most directly comparable GAAP
measure
c) Explanations on the use of the non-GAAP measure in
order to allow users to understand their relevance and
reliability
60
Auditors should not provide negative assurance, or any other
form of assurance, that the disclosure of a non-GAAP financial
measures complies with regulation or guidance.
Auditor should expect there to be a reconciliation of a non-
GAAP financial measure to the most directly comparable GAAP
measure. Auditors may provide tick mark comfort on any
element of the reconciliation that can be agreed to (a) financial
statements that are audited or reviewed (b) the issuer
company's accounting records that are subject to the issuer
company's internal controls over financial reporting, or analysis
prepared by the issuer company based on amounts from those
financial statements or records.
Auditors should not prove the arithmetic accuracy of the
reconciliation of a non-GAAP financial measure unless they
have provided tick mark comfort on every component of the
non-GAAP financial measure.
When auditors provide tick mark comfort on any elements of
the reconciliation of a non-GAAP financial measure and/or non-
GAAP measures included in the financial statements, comfort
letter should include appropriate caveats. Refer Appendix 2.3
of this guidance note.
Notwithstanding such caveat in the comfort letter, auditor
should consider the context and manner in which the non-
GAAP financial measure is presented and whether such
presentation contains a material omission or is misleading, in
which case the auditor may consider to decline to be
associated with the securities offering.
In certain circumstances, underwriters may request that
auditors provide tick mark comfort that a non-GAAP financial
measure presented in an offering document outside the
reconciliation of the non-GAAP financial measure agrees to the
non-GAAP financial measure within the reconciliation (i.e., an
internal cross-reference of a non-GAAP financial measure
within the offering document). If auditors have provided comfort
on the arithmetic accuracy of the reconciliation (having
provided comfort on every component of the non-GAAP
61
financial measure), auditor may provide tick mark comfort that
the non-GAAP financial measure presented else-where in the
offering document agrees to the non-GAAP financial measure
within the reconciliation. Otherwise, the auditor should not
agree any internal cross-reference of a non-GAAP financial
measure within an offering document.
If appropriate, auditor should use a separate tick mark when it
agrees the non-GAAP financial measure within the offering
document to the reconciliation of that non-GAAP financial
measure. Refer Appendix 2.3 of this guidance note.
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.
62
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 (for information purposes only) and the party
requesting the comfort letter (for example, the underwriters).
ii) A statement as to the independence of the auditors.
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
63
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 Review
Engagement2410, 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
64
updated comfort letter (Bring Down Comfort Letter) (Refer
Appendix 2.4).
Proforma Financial Statements/Information
23. The ICDR Regulations lay down the certain requirements
in relation to proforma financial statements as stated in paragraph
1.37 of this guidance note.
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.
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
65
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, 20X8,
financial statements and have conducted a SRE 2410 review of
the June 30, 20X8, interim financial information of the acquiring
company. Other auditors conducted a review of the June 30,
20X8, 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
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, 20X8, and the unaudited pro forma
condensed statements of profit and loss for the year
66
ended March 31, 20X8, and the three-month period
ended June 30, 20X8(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. Had we
performed additional procedures or had we made an examination
or review of the pro forma financial information, other matters
might have come to our attention that would have been reported
to you."
67
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
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2.3. This section assumes that the auditors have previously not
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, 20X8, 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."
69
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.
70
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
71
additional interim period, if any, then such fact shall be
clearly disclosed in the offer document/placement
memorandum, along with all pertinent details.
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.
72
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 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.
73
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 / Madam,
[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, 2018, 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
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
75
Appendix 2.2
Illustrative Format of Representation Letter from
Management6 for issuance of comfort letter
[Name and Address of the Chartered Accountant]
Dear Sirs / Madam,
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 unaudited financial information as at and for the
[three/six/nine] month period ended [June/September/December
XX, 20XX] are stated on a basis substantially consistent with that
of the audited financial statements as of and for the year ended
March 31, 20XX included in the [Draft Red Herring Prospectus/
Red Herring Prospectus/ Prospectus] and that no financial
statements as of any date or for any period subsequent to [date]
are available.
3. 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 [.],
6
Such management representation letter to be obtained at each stage of
issuance of comfort letter.
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.
4. 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:
Particulars As at XX XXX, As at the Cut- Increase/
20xX 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)
5. 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.
6. 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.
7. 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 of the Company/Group in
77
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.
8. 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]
78
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 / Madam,
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, 20XX].
(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 [consolidated] financial information of the Company as of
[dates] and 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, together with the annexures thereto,
the "Restated [Consolidated] Financial Information") each restated
in accordance with the requirements of the Companies Act, 2013
(the "Companies Act") and the Securities and Exchange Board of
India (Issue of Capital and Disclosure Requirements) Regulations,
80
2018 (the "ICDR Regulations") and the "Guidance Note on
Reports in Company's Prospectuses (Revised 2018)" issued by
the Institute of Chartered Accountants of India (ICAI), to the extent
applicable, as amended from time to time ("Guidance Note"). The
Audited [Consolidated] Financial Statements and our reports
thereon form the basis of the Restated [Consolidated] Financial
Information. The Restated [Consolidated] Financial Information
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 Information for these entities is 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, 2018, 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
under Securities and Exchange Board of India(Issue of
Capital and Disclosure Requirements) Regulations, 2018, 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.]
81
[This letter is being furnished in accordance with the terms of the
arrangement letter dated [XX XXX, 20XX] (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.]7
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
/ [As at [insert date of the auditors/ accountants' most recent
report on the standalone/consolidated financial statements] and
during the period covered by the financial statements on which we
reported, we were independent firm of Chartered Accountants with
respect to the Issuer pursuant to the rules promulgated under
Clause 4, Part I, The Second Schedule of The Code of Conduct of
the Institute of Chartered Accountants of India]8.
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].
7
The auditor may provide a reference to arrangement letter.
8
Applicable in case of previous auditor
82
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"9) 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]
9
These financials should be approved by the Board of Directors of the Company
and should be attached to the comfort letter.
83
of both [latest year] and [previous year] furnished to us by
the Company, officials of the Company having advised us
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 read10 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 Information) as
it 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
representations regarding the sufficiency of the foregoing
procedures for your purposes.
10
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.
84
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]11, 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 (agreed (decrease)
balance month(s) (Rs. in
sheet date)] period end)] million)
(Rs. in (Rs. in
million) million)
Paid up share
capital
Long-term debt
(including current
maturities)
11
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.
85
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 debt12 of the
Company as compared with amounts shown on the [latest interim
review date] unaudited [standalone]/ [consolidated]13balance 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:
Particulars As at [date As at [date Increase /
(last balance (cut-off (decrease)
sheet date)] date)]
(Rs. in
(Rs. in million) (Rs. in million)
million)
Paid up share
capital
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.
13
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.
86
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 [Consolidated] Financial
Information, 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
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
87
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. Compared the specific components of [insert non-GAAP
measure(s)] (in each case, as defined in the [DRHP / RHP/
Prospectus]) ("Non-GAAP measures") to either (i) the Restated
[Consolidated] Financial Information of the Company as described
in the introductory paragraph above, (ii) a schedule or report
prepared by the Company using information derived from the
accounting records as described in tick mark D above which we
agreed to the accounting records, and found them to be in
agreement, and proved the arithmetic accuracy of the calculation
used to compute the Non-GAAP measure(s).
It should be understood that (1) we make no representations
regarding the Company's determination and presentation of the
Non-GAAP measures of financial performance and (2) we provide
no assurance that the adjustments to arrive at these Non-GAAP
measures reflect non-underlying costs or similar adjustments of
the business, (3) the Non-GAAP measures presented may not be
comparable to similarly titled measures reported by other
companies and (4) we do not provide any assurance as to the
completeness, accuracy or appropriateness of the adjustments
used to arrive at these Non-GAAP measures. Further, it should be
noted that [insert name of non-GAAP measure(s)] is not a
measure of operating performance or liquidity 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 definition, calculation or
presentation of [in-sert name of non-GAAP measure(s)], its
88
manner of presentation or its appropriateness or usefulness for
any purposes.
G. 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 (G) 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.
· 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 / [examination] 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.
89
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
entity/associate and they are not also accountants for the parent
company or if the comfort letter is issued by the previous statutory
auditor of the issuer company, the comfort letter should include
the following phrase at this point: "and for the use of the [current]
statutory 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
90
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]
Designation14
Membership Number
Place of Signature:
Date:
14
Partner or proprietor, as the case may be.
91
Appendix 2.4
Illustrative Format of Bring Down 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.]
[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 / Madam,
We refer to our letter of [Insert Date], relating to the Prospectus of
[Company] involving the sale of _________________ [securities]
of _____________. We reaffirm15 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
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 or if the comfort letter is issued by the previous statutory
auditor of the issuer company, the comfort letter should include
the following phrase at this point: "and for the use of the [current]
statutory 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
15
The auditors should read the comfort letters in respect of (i) entities audited by
other auditors and (ii) periods audited by previous auditors while issuing bring
down comfort letter.
93
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]
Designation16
Membership Number
Place of Signature:
Date:
16
Partner or proprietor, as the case may be.
94
Appendix 2.5
Illustrative Format of Arrangement Letter
(to be drafted / 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 / Madam,
[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, 2018, 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
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
96
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. Our comfort letter will not be 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 our
comfort letter in connection with an offer or sale of securities
outside India.
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.
10. Our comfort letter will be provided solely for your private
information and should not be used for any purpose other than as
97
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 prior to [date of the 1st day of
the financial year which was audited by current auditor] and
subsequent to [date of last audited balance sheet]. The
procedures we will use to perform the work set out in this
98
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
99
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.]17
17
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.
100
[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
current overall financial position of the Issuer.18
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
18
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).
101
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.]19
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
19
It may not be appropriate to include this sentence if the arrangement letter is
signed contemporaneously with the comfort letter.
102
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).
103
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.
104
(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: .............................................................................................
105
Appendix 2.5.1
Names of the Managers20
(Subject always to compliance with the requirements
of Paragraph 2 of the arrangement letter21)
20
The legal name of each manager should be specified.
21
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.
106
Appendix 3
Illustrative Capitalisation Statement
[Refer Paragraph 2.3(iv)]
[Para (D) of clause (11)(I) of Part A of Schedule VI to ICDR
Regulations]
(Rupees in crores)
Pre-issue as at As adjusted
(latest financial for the
year or stub proposed
period, as issue*
applicable)
Total borrowings
Current borrowings#
Non-current borrowings
(including current maturity)#
Total equity
Equity share capital#
Other equity#
Total Capital
Ratio: Non-current
borrowings/ Total equity
# These terms shall carry the meaning as per Schedule III to the
Companies Act, 2013 (as amended).
*
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.
Note:
The above is the illustrative capitalisation statement where Ind AS
is applicable for the latest period presented in the restated
financial information. In the illustrative capitalisation statement
given in para (D) of clause (11)(II) of part A of Schedule VI to
ICDR Regulations which is relevant when Indian GAAP is
applicable.
108
Appendix 4
Illustrative Auditor's Examination Report on
Financial Information in Relation to Prospectus
(on financial information of the issuer Company)
(Refer paragraph 2.5)
INDEPENDENT AUDITOR'S/[PRACTICIONER'S]22
EXAMINATION REPORT ON RESTATED [CONSOLIDATED]
FINANCIAL INFORMATION
The Board of Directors
[ABC Limited]/[Component name]
Dear Sirs,
1. We have examined the attached Restated [Consolidated]
Financial Information of [ABC Limited] (Formerly known as
[company's old name]) (the "Company" [or the "Issuer"]) and
its subsidiaries (the Company and its subsidiaries together
referred to as the "Group"), its associates and its joint
ventures, comprising the Restated [Consolidated] Statement of
Assets and Liabilities as at [June/September/December XX,
20XX, March 31, 20XX, 20XX and 20XX], the Restated
[Consolidated] Statements of Profit and Loss (including other
comprehensive income), the Restated [Consolidated]
Statement of Changes in Equity, the Restated [Consolidated]
Cash Flow Statement for the [three/six/nine month period
ended June/September/December XX, 20XX and for the years
ended March 31, 20XX, 20XX and 20XX], the Summary
Statement of Significant Accounting Policies, and other
explanatory information (collectively, the "Restated
[Consolidated] Financial Information"), as approved by the
Board of Directors of the Company at their meeting held on
[Date] [for the purpose of inclusion in the [Draft Red Herring
Prospectus/Red Herring Prospectus/ Prospectus
("DRHP/RHP/Prospectus")] prepared by the Company in
connection with its proposed Initial Public Offer of equity
22
In case of previous auditors.
shares ("IPO")]23 prepared in terms of the requirements of:
a) Section 26 of Part I of Chapter III of the Companies Act,
2013 (the "Act");
b) The Securities and Exchange Board of India (Issue of
Capital and Disclosure Requirements) Regulations, 2018,
as amended ("ICDR Regulations"); and
c) The Guidance Note on Reports in Company Prospectuses
(Revised 2018) issued by the Institute of Chartered
Accountants of India ("ICAI"), as amended from time to
time (the "Guidance Note").
2. The Company's Board of Directors is responsible for the
preparation of the Restated [Consolidated] Financial
Information for the purpose of inclusion in the
[DRHP/RHP/Prospectus] to be filed with Securities and
Exchange Board of India, [relevant stock exchanges and
Registrar of Companies, [State]] in connection with the
proposed IPO. The Restated [Consolidated] Financial
Information have been prepared the management of the
Company on the basis of preparation stated in note [.] to the
Restated [Consolidated] Financial Information. The
[respective] Board of Directors of the [companies included in
the Group and of its associates and joint ventures]/[Company]
responsibility includes designing, implementing and
maintaining adequate internal control relevant to the
preparation and presentation of the Restated [Consolidated]
Financial Information. The [respective] Board of Directors are
also responsible for identifying and ensuring that the [Group
and its associates and joint ventures]/[Company] complies with
the Act, ICDR Regulations and the Guidance Note.
3. We have examined such Restated [Consolidated] Financial
Information taking into consideration:
a) The terms of reference and terms of our engagement
23
When the examination report is furnished by the auditors for a
branch/subsidiary/joint venture entity/associate or if examination report is issued
by the previous auditors of the Issuer, the examination report should include the
following phrase at this point: "for the purpose of providing information to [ABC
Limited (the "Issuer") to enable them to prepare the Restated [Consolidated]
Financial Information in connection with the Issuer's proposed Initial Public Offer
of equity shares ("IPO")."
110
agreed upon with you in accordance with our engagement
letter dated [Date] in connection with the proposed IPO of
equity shares of the Issuer/[Company];
b) The Guidance Note. The Guidance Note also requires that
we comply with the ethical requirements of the Code of
Ethics issued by the ICAI;
c) Concepts of test checks and materiality to obtain
reasonable assurance based on verification of evidence
supporting the Restated [Consolidated] Financial
Information; and
d) The requirements of Section 26 of the Act and the ICDR
Regulations. Our work was performed solely to assist you
in meeting your responsibilities in relation to your
compliance with the Act, the ICDR Regulations and the
Guidance Note in connection with the IPO.
4. These Restated [Consolidated] Financial Information have
been compiled by the management from:
a) [Audited special purpose interim [consolidated] Ind AS
financial statements of the Group and its associates and
joint ventures as at and for the [three/six/nine] month
period ended [June/September/December XX, 20XX]
prepared in accordance with Indian Accounting Standard
(Ind AS) 34 "Interim Financial Reporting", specified under
section 133 of the Act and other accounting principles
generally accepted in India (the "Special Purpose Interim
[Consolidated] Ind AS Financial Statements") which have
been approved by the Board of Directors at their meeting
held on [Date]].
b) Audited [Consolidated] Ind AS financial statements of the
Group and its associates and joint ventures as at and for
the year ended March 31, 20XX, prepared in accordance
with the Indian Accounting Standards (referred to as "Ind
AS") as prescribed under Section 133 of the Act read with
Companies (Indian Accounting Standards) Rules 2015, as
amended, and other accounting principles generally
accepted in India, which have been approved by the Board
of Directors at their meeting held on [Date]. [The
comparative information for the year ended March 31,
20XX included in such financial statements have been
111
prepared by making Ind AS adjustments to the audited
[consolidated] financial statements of the Company as at
and for the year ended March 31, 20XX, prepared in
accordance with the accounting standards notified under
the section 133 of the Act ("Indian GAAP") which was
approved by the Board of directors at their meeting held on
[Date]]24.
OR
Audited [Consolidated] Ind AS financial statements of the
[Group and its associates and joint ventures]/[Company] as
at and for the years ended March 31, 20XX, 20XX [and
20XX] prepared in accordance with the Indian Accounting
Standards (referred to as "Ind AS") as prescribed under
Section 133 of the Act read with Companies (Indian
Accounting Standards) Rules 2015, as amended, and
other accounting principles generally accepted in India,
which have been approved by the Board of Directors at
their meeting held on [Date].
c) [The Restated [Consolidated] Financial Information also
contains the proforma [consolidated] Ind AS financial
information as at and for the year ended March 31, 20XX.
The proforma [consolidated] Ind AS financial information
have been prepared by making Ind AS adjustments to the
audited Indian GAAP financial statements as at and for the
year ended March 31, 20XX which have been approved by
the Board of Directors at their meeting held on [Date] as
described in Note [.] to the Restated [Consolidated]
Financial Information.]25
5. [We have audited the special purpose [consolidated] financial
information of the [Group and its associates and joint
ventures]/[Company] for the year ended March 31, 20XX
prepared by the Company in accordance with the Ind AS for
the limited purpose of complying with the requirement of
getting its financial statements audited by an audit firm holding
a valid peer review certificate issued by the "Peer Review
Board" of the ICAI as required by ICDR Regulations in relation
24
Applicable when comparative year's underlying financial statements were
prepared under Indian GAAP by the management.
25
Applicable when the earliest third financial year's financial statements were
prepared under Indian GAAP.
112
to proposed IPO. We have issued our report dated [Date] on
these special purpose [consolidated] financial information to
the Board of Directors who have approved these in their
meeting held on [Date].]26
6. For the purpose of our examination, we have relied on:
a) Auditors' reports issued by us dated [date] and [date] on
the [consolidated] financial statements of the Group as at
and for the [three / six / nine month period ended June /
September / December XX, 20XX] and as at and for the
year ended March XX, 20XX as referred in Paragraph [4]
above; and
b) Auditors' Report issued by the Previous Auditors dated
[date] and [date] on the [consolidated] financial statements
of the Group as at and for the years ended March 31,
20XX and 20XX, as referred in Paragraph [4] above.
The audits for the financial years ended March 31, 20XX
and 20XX were conducted by the Company's previous
auditors, [XYZ1 & Co.], (the "Previous Auditors"), and
accordingly reliance has been placed on the restated
[consolidated] statement of assets and liabilities and the
restated [consolidated] statements of profit and loss
(including other comprehensive income), statements of
changes in equity and cash flow statements, the Summary
Statement of Significant Accounting Policies, and other
explanatory information and (collectively, the "20XX and
20XX Restated [Consolidated] Financial Information")
examined by them for the said years. The examination
report included for the said years is based solely on the
report submitted by the Previous Auditors. They have also
confirmed that the 20XX and 20XX Restated
[Consolidated] Financial Information:
a) [have been prepared after incorporating adjustments
for the changes in accounting policies, material errors
and regrouping/reclassifications retrospectively in the
26
This paragraph is applicable if underlying latest audited financial year
presented is required to be re-audited by an auditor holding a valid peer review
certificate to comply with ICDR Regulations.
113
financial year ended March 31, 20XX to reflect the
same accounting treatment as per the accounting
policies and grouping/classifications followed as at and
for the [three/six/nine month period ended
June/September/December XX, 20XX];
b) [have been prepared after incorporating proforma Ind
AS adjustments to the audited Indian GAAP financial
statements as at and for the year ended March 31,
20XX as described in Note [.] to the Restated
[Consolidated] Financial Information];
c) [have been made after giving effect to the matter(s)
giving rise to modifications mentioned in paragraph [7]
below] / [do not require any adjustments for the
matter(s) giving rise to modifications mentioned in
paragraph [7] below]; and
d) have been prepared in accordance with the Act, ICDR
Regulations and the Guidance Note.]
7. The audit reports on the [consolidated] financial statements
issued by [us]/[Previous Auditors] were modified and
included following matter(s) giving rise to modifications on
the financial statements as at and for the years ended March
31, 20XX, 20XX and 20XX:
[include matter(s) giving rise to modifications here]
8. [As indicated in our audit reports referred above:
a) we did not audit the financial statements of [.] branches
and [.] joint operations included in the [consolidated]
financial statements of the companies included in the
Group whose financial statements share of total assets
and total revenues included in the [consolidated] financial
statements, for the relevant years is tabulated below,
which have been audited by other auditors, [XYZ2 & Co.
and XYZ3 & Co.], and whose reports have been furnished
to us by the Company's management and our opinion on
the [consolidated] financial statements, in so far as it
relates to the amounts and disclosures included in respect
114
of these components, is based solely on the reports of the
other auditors:
(Rs in million)
Particulars As at/ for the [three/six/nine] As at/ for
month period ended [June/ the year
September/December XX, ended
20XX] March 31,
20XX
Total assets [.] [.]
Total [.] [.]
revenues
b) we did not audit financial statements of [.] subsidiaries, [.]
associates and [.] joint ventures whose share of total
assets, total revenues, net cash inflows / (outflows) and
share of profit/ loss in its associates and joint ventures
included in the consolidated financial statements, for the
relevant years is tabulated below, which have been
audited by other auditors, [XYZ4 & Co. and XYZ5 & Co.],
and whose reports have been furnished to us by the
Company's management and our opinion on the
consolidated financial statements, in so far as it relates to
the amounts and disclosures included in respect of these
components, is based solely on the reports of the other
auditors:
(Rs in million)
Particulars As at/ for the As at/ for the
[three/six/nine] month year ended
period ended [June/ March 31, 20XX
September/ December XX,
20XX]
Total [.] [.]
assets
Total [.] [.]
revenue
Net cash [.] [.]
inflow/
(outflows)
115
Particulars As at/ for the As at/ for the
[three/six/nine] month year ended
period ended [June/ March 31, 20XX
September/ December XX,
20XX]
Share of [.] [.]
profit/ loss
in its
associates
Share of [.] [.]
profit/ loss
in its joint
ventures
c) [The comparative financial information of the Company for
the year ended March 31, 20XX and the transition date
opening balance sheet as at April 1, 20XX prepared in
accordance with Ind AS included in these [consolidated]
Ind AS financial statements have been audited by the
previous auditors. The report of the previous auditors on
the comparative financial information and the said opening
balance sheet dated [Date] expressed an unmodified
opinion.]
Our opinion on the consolidated Ind AS financial
statements is not modified in respect of these matters.
[amend as applicable]
These other auditors of the branches, joint operations,
subsidiaries, associates and joint ventures, as mentioned
above, have examined the restated [consolidated] financial
information and have confirmed that the restated [consolidated]
financial information:
a) [have been prepared after incorporating adjustments for
the changes in accounting policies, material errors and
regrouping/reclassifications retrospectively in the financial
year ended March 31, 20XX to reflect the same accounting
treatment as per the accounting policies and
grouping/classifications followed as at and for the
[three/six/nine month period ended June/
116
September/December XX, 20XX];
b) [have been prepared after incorporating proforma Ind AS
adjustments to the audited Indian GAAP financial
statements as at and for the year ended March 31, 20XX
as described in Note [.] to the Restated [Consolidated]
Financial Information];
c) [have been made after giving effect to the matter(s) giving
rise to modifications mentioned in paragraph [7] above] /
[do not require any adjustments for the matter(s) giving rise
to modifications mentioned in paragraph [7] above]; and
d) have been prepared in accordance with the Act, ICDR
Regulations and the Guidance Note.]
9. Based on examination report dated [Date] provided by the
Previous Auditors, the audit reports on the [consolidated]
financial statements issued by the Previous Auditors
included following other matters:
a) We did not audit the financial statements of [.] branches
and [.] joint operations included in the [consolidated]
financial statements of the companies included in the
Group whose financial statements share of total assets
and total revenues included in the [consolidated] financial
statements, for the relevant years is tabulated below,
which have been audited by other auditors, [XYZ2 & Co.
and XYZ3 & Co.], and whose reports have been furnished
to us by the Company's management and our opinion on
the [consolidated] financial statements, in so far as it
relates to the amounts and disclosures included in respect
of these components, is based solely on the reports of the
other auditors:
(Rs in million)
Particulars As at/ for the year As at/ for the
ended March 31, year ended March
20XX 31, 20XX
Total assets [.] [.]
Total revenues [.] [.]
117
b) We did not audit financial statements of [.] subsidiaries, [.]
associates and [.] joint ventures whose share of total
assets, total revenues, net cash inflows / (outflows) and
share of profit/ loss in its associates and joint ventures
included in the Consolidated Financial Statements, for the
relevant years is tabulated below, which have been
audited by other auditors, [XYZ4 & Co. and XYZ5 & Co.],
and whose reports have been furnished to us by the
Company's management and our opinion on the
consolidated financial statements, in so far as it relates to
the amounts and disclosures included in respect of these
components, is based solely on the reports of the other
auditors:
(Rs in million)
Particulars As at/ for the year As at/ for the year
ended March 31, ended March 31,
20XX 20XX
Total assets [.] [.]
Total revenues [.] [.]
Net cash [.] [.]
inflows/
(outflows)
Share of profit/ [.] [.]
loss in its
associates
Share of profit/ [.] [.]
loss in its joint
ventures
Our opinion on the consolidated Ind AS financial statements is not
modified in respect of these matters.
[amend as applicable]
10. Based on our examination and according to the information
and explanations given to us [and also as per the reliance
placed on the examination report submitted by the Previous
118
Auditors and other auditors27 for the respective periods/years],
we report that the Restated [Consolidated] Financial
Information:
a) [have been prepared after incorporating adjustments for
the changes in accounting policies, material errors and
regrouping/reclassifications retrospectively in the financial
years ended March 31, 20XX and 20XX to reflect the same
accounting treatment as per the accounting policies and
grouping/classifications followed as at and for the
[three/six/nine month period ended
June/September/December XX, 20XX];
b) [have been prepared after incorporating proforma Ind AS
adjustments to the audited Indian GAAP financial
statements as at and for the year ended March 31, 20XX
as described in Note [.] to the Restated [Consolidated]
Financial Information];
c) [have been made after giving effect to the matter(s) giving
rise to modifications mentioned in paragraph [7] above] /
[do not require any adjustments for the matter(s) giving rise
to modifications mentioned in paragraph [7] above]; and
d) have been prepared in accordance with the Act, ICDR
Regulations and the Guidance Note.]
11. The Restated [Consolidated] Financial Information do not reflect
the effects of events that occurred subsequent to the respective
dates of the reports on the special purpose interim [consolidated]
Ind AS financial statements and audited [consolidated] financial
statements mentioned in paragraph [4] above.
27
Generally, the examination of past periods of the group and of the material
branches/joint operations/subsidiaries/joint ventures/ associates should be
performed by the previous auditors and other auditors of such branches, joint
operations, 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 and other auditors are not in a
position to issue examination report for past periods and for components due to
practical issues, then the current auditors should perform adequate procedures
to be able to take responsibility of past periods and for components.
119
12. 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 [or the Previous Auditors], nor should this report
be construed as a new opinion on any of the financial
statements referred to herein.
13. We have no responsibility to update our report for events and
circumstances occurring after the date of the report.
14. Our report is intended solely for use of the Board of Directors
for inclusion in the [DRHP/RHP/Prospectus] to be filed with
Securities and Exchange Board of India, [relevant stock
exchanges and Registrar of Companies, [State]] in connection
with the proposed IPO. Our report should not be used, referred
to, or distributed for any other purpose except with our prior
consent in writing. Accordingly, we do not accept or assume
any liability or any duty of care for any other purpose or to any
other person to whom this report is shown or into whose hands
it may come without our prior consent in writing.
OR
Our report is solely for the purpose set forth in the first
paragraph of this report and for your information and for the
use of [current] statutory auditors of the Issuer in connection
with their examination of the restated [consolidated] financial
information in connection with the Issuer's proposed IPO. As a
result, the special purpose restated [consolidated] financial
information may not be suitable for any other purpose. Our
report should not be used, referred to or distributed for any
other purpose except with our prior consent in writing.
Accordingly, we do not accept or assume any liability or any
duty of care for any other purpose or to any other person to
whom this report is shown or into whose hands it may come
without our prior consent in writing.28
For XYZ and Co.
Chartered Accountants
Firm's Registration Number
28
This paragraph to be used when the report is issued by previous auditor or
components' auditors.
120
Signature
[Name of the Member]
Designation29
Membership Number
Place of Signature:
Date:
29
Partner or proprietor, as the case may be.
121
Appendix 5
Restated Financial Information
(Refer Paragraph 2.5)
Reporting requirements under ICDR Regulations
Securities and Exchange Board of India ("SEBI") (Issue of Capital
and Disclosure Requirements ("ICDR")) Regulations, 2018, as
amended (hereinafter referred to as the "ICDR Regulations")
require issuer companies to disclose restated consolidated
financial information for three financial years immediately
preceding the filing of their offer documents, while following
uniform accounting policies, presentation and disclosures for each
of the financial years.
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, as amended that set out the text of Indian Accounting
Standards (Ind AS) applicable to certain class of companies and
set out the dates of applicability.
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 "SEBI 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. The SEBI Circular had provided reporting requirements
for Phase I and Phase II companies based on the reporting
requirements applicable as on the date of issuance of this circular.
Subsequently, on September 11, 2018, SEBI revised the reporting
requirements for issuer companies. In the revised ICDR
regulations, SEBI clarified that in case where Ind AS are not
applicable to the company for any of the years the principles laid
down in Circular No SEBI/HO/CFD/DIL/CIR/P/2016/47 of March
31, 2016 or any other relevant circular issued by the Board from
time to time, shall apply. Accordingly, the guidance included in this
guidance note is updated assuming the revised requirements of
the ICDR Regulations are applicable to the SEBI Circular.
The insurance companies, banking companies and non-banking
finance companies should follow similar guidance, as applicable.
Phase I companies
Companies falling under Phase I, i.e. companies that have
prepared Ind AS financial statements for accounting periods
beginning on or after April 1, 2016, shall be required to present all
the three years and the stub period (if applicable) in accordance
with Ind AS for filing of offer documents on or after November 10,
2018.
Phase II Companies
For companies falling under Phase II with a transition date as at
April 1, 2016, i.e. companies that have prepared 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 filing of Latest Second latest Third
offer document $ financial year financial year financial year
Upto March 31, 2019 Ind AS Ind AS Proforma Ind
(FY 2017-18) (FY 2016-17) AS*
(FY 2015-16)
On or after April 1, Ind AS Ind AS Ind AS
2019 (FY 2018-19)# (FY 2017-18) (FY 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 4 and 5 of "Key reporting
considerations while preparing financial statements to be included
in offer documents" in Appendix 5.1)
123
$(Refer Question 1 of "Key reporting considerations while
preparing financial statements to be included in offer documents"
in Appendix 5.1)
#Ind AS financial information for the year 2018-19 to be presented
assuming, the issuer company will not present interim stub period
financial information for financial year 2018-19. If the issuer
company plans to present interim stub period (say, nine month
period ended December 31, 2018) financial information for
financial year 2018-19, the following framework of accounting
shall be applicable for disclosing financial information in their offer
document:
Period of Interim Latest Second Third
filing of offer period financial latest financial
document year financial year
year
On or after Ind AS Ind AS Ind AS Proforma
April 1, 2019 (FY 2017- (FY 2016- Ind AS
(Nine
(including Stub 18) 17) (FY 2015-
month
period) 16)
period
ended
December
31, 2018)
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 statements
to be included in offer documents " in Appendix 5.1)
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 three financial years preceding the filing in
124
accordance with Ind AS framework. (Refer Question 8 of "Key
reporting considerations while preparing financial statements to be
included in offer documents" in Appendix 5.1)
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) 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;
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.
b) Similar transitional disclosures are required in the interim
financial statements presented in the offer document.
125
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 paragraph 2.2 of this guidance note).
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 5.1.
Requirements of SEBI in general for preparation of restated
historical financial statements
While preparing the Restated Financial Information, the issuer
companies should consider the following:-
1. Disclosures in the Restated Financial Information
The ICDR Regulations require that the issuer companies
should prepare the restated financial information as per
Companies Act, 2013 (as amended). Accordingly, the issuer
companies should present disclosures as required by the
applicable accounting standards and Schedule III of the
Companies Act, 2013 (as amended) as presented in the
statutory financial statements of the issuer company.
2. Matters relating to Companies Auditors' Report Order,
2016 while preparing Restated financial Information
Any item qualified in auditors' report and report under the
Companies Auditors' Report Order, 2016 (including the
Orders applicable for previous periods) for the periods
covered by the restated financial statements needs to be
assessed in accordance with the principles enumerated
in Ind AS 8. Companies should explain the adjustments
made in the Restated Financial Information in relation to
the items qualified in auditors' report and the report under
126
the Companies Auditors' Report Order, 2016 (including
the Orders applicable for previous periods) in the notes to
Restated Financial Information.
3. 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.
4. 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.
127
Appendix 5.1
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 three 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 and subsequent financial years) for filing under
Companies Act, 2013. In accordance with Ind AS roadmap and
Ind AS 101, these companies were required to prepare their first
Ind AS financial statements for the year ended March 31, 2017
and present the comparative financial information for the
preceding financial year ended March 31, 2016 and an opening
Ind AS transition balance sheet as at the transition date i.e. April
1, 2015.
Companies falling under Phase I, i.e. companies that have
prepared Ind AS financial statements for accounting periods
beginning on or after April 1, 2016 shall be required to present all
the three years and the stub period (if applicable) in accordance
with Ind AS for filing of offer documents on or after November 10,
2018.
Phase II companies (transition date on April 1, 2016)
Scenario 1 - Period of filing of offer document after March 31,
2019
In case a company plans to file after March 31, 2019 (for example,
in financial year 2019-20), 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, 2019.
Example: XYZ Ltd. is an issuer company and is covered under
Phase II of Ind AS roadmap with a transition date April 1, 2016.
The company is planning to file offer document on May 31, 2019
and intends to present financial information for three financial
years. The accounting framework applicable for the preparation of
financial statements for the three financial years shall be as
follows:
Period of filing Latest Second Third
of offer financial latest financial
document year financial year
year
Between April 1, Ind AS Ind AS Ind AS
2019 and March
(FY 2018-19) (FY 2017-18) (FY 2016-17)
31, 2020
Phase II companies (transition date after April 1, 2016, say April 1,
2018)
Scenario 1 - Period of filing of offer document between April 1,
2019 to March 31, 2020
In case a company plans to file after March 31, 2019 (for example,
in financial year 2019-20), it should be prepared in accordance
with Indian GAAP, being the accounting framework followed for
the latest financial year i.e. year ended March 31, 2019.
Example: XYZ Ltd. is an issuer company and is covered under
Phase II of Ind AS roadmap with a transition date April 1, 2018.
The company is planning to file offer document on May 31, 2019
and intends to present financial information for three financial
years. The accounting framework applicable for the preparation of
financial statements for the three financial years shall be as
follows:
Period of filing Latest Second Third
of offer financial latest financial
document year financial year
year
Between April 1, Indian GAAP Indian GAAP Indian GAAP
129
2019 and March (FY 2018-19) (FY 2017-18) (FY 2016-17)
31, 2020
Scenario 2 - Period of filing of offer document between April 1,
2020 and March 31, 2021
In case a company plans to file after March 31, 2020 (for example,
in financial year 2020-21), 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, 2020.
Example: XYZ Ltd. is an issuer company and is covered under
Phase II of Ind AS roadmap with a transition date April 1, 2018.
The company is planning to file offer document on May 31, 2020
and intends to present financial information for historical three
financial years. The accounting framework applicable for the
preparation of financial statements for the historical three financial
years shall be as follows:
Period of filing Latest Second Third
of offer financial latest financial year
document year financial
year
Between April Ind AS Ind AS Proforma Ind
1, 2020 and AS financial
(FY 2019-20) (FY 2018-19) statements
March 31, 2021
(FY 2017-18)
Scenario 3 - Period of filing of offer document after March 31,
2021
Refer guidance provided under Scenario 1 under section "Phase II
companies (transition date on April 1, 2016)" mentioned under this
question.
Question 2: Which framework of accounting to be followed by
companies for preparing interim financial information?
Response:
Phase I companies
130
Period of filing of offer document after March 31, 2018
The SEBI 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. In case a company discloses financial information for an
interim six month period ending after March 31, 2018 (for
example, in financial year 2018-19), 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,
2018.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 January 31, 2019 and intends to present
financial information for interim period (six month period ended
September 30, 2018) and for historical three financial years. The
accounting framework applicable for the preparation of financial
statements for the interim period and historical three financial
years shall be as follows:
Period of Interim Latest Second Third
filing of period financial latest financial
offer year financial year
document year
Between Ind AS Ind AS Ind AS Ind AS
April 1,
(Six month (FY 2017- (FY 2016- (FY 2015-
2018 and
period 18) 17) 16)
March 31,
ended
2019
September
30, 2018)
Phase II companies (transition date on April 1, 2016)
Scenario 1 - Period of filing of offer document upto March 31,
2019
In case a company discloses financial information for an interim
six month period ended after March 31, 2018 (for example, in
financial year 2018-19), it should be prepared in accordance with
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Ind AS, being the accounting framework followed for the latest
financial year i.e. year ended March 31, 2018.
Example: XYZ Ltd. is an issuer company and is covered under
Phase II of Ind AS roadmap with a transition date April 1, 2016.
The company is planning to file offer document on January 31,
2019 and intends to present financial information for interim period
(six month period ended September 30, 2018) and for historical
three financial years. The accounting framework applicable for the
preparation of financial statements for the interim period and
historical three financial years shall be as follows:
Period of Interim Second
Latest Third
filing of period latest
financial financial
offer year financial year
document year
Between Ind AS Ind AS Ind AS Proforma
April 1, (Six month (FY 2017- (FY 2016- Ind AS
2018and period 18) 17) financial
March 31, ended statements
2019 September (FY 2015-
30, 2018) 16)
Scenario 2 - Period of filing of offer document after March 31,
2019
In case a company discloses financial information for an interim
six month period ended after March 31, 2019 (for example, in
financial year 2019-20), 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, 2019.
Example: XYZ Ltd. is an issuer company and is covered under
Phase II of Ind AS roadmap with a transition date April 1, 2016.
The company is planning to file offer document on January 31,
2020 and intends to present financial information for interim period
(six month period ended September 30, 2019) and for historical
three financial years. The accounting framework applicable for the
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preparation of financial statements for the interim period and
historical three financial years shall be as follows:
Period of Interim LatestSecond Third
filing of period latest
financial financial
offer year financial year
document year
Between Ind AS Ind AS Ind AS Ind AS
April 1, (Six month (FY 2018- (FY 2017- (FY 2016-
2019 and period 19) 18) 17)
March 31, ended
2020 September
30, 2019)
Phase II companies (transition date after April 1, 2016, say April 1,
2017)
Scenario 1 -Period of filing of offer document upto March 31, 2019
In case a company discloses financial information for an interim
six month period ended after March 31, 2018 (for example, in
financial year 2018-19), it should be prepared in accordance with
Indian GAAP, being the accounting framework followed for the
latest financial year i.e. year ended March 31, 2018.
Example: XYZ Ltd. is an issuer company and is covered under
Phase II of Ind AS roadmap with a transition date April 1, 2017.
The company is planning to file offer document on January 31,
2019 and intends to present financial information for interim period
(six month period ended September 30, 2018) and for historical
three financial years. The accounting framework applicable for the
preparation of financial statements for the interim period and
historical three financial years shall be as follows:
Period of Interim LatestSecond Third
filing of period latest
financial financial
offer year financial year
document year
Between Indian Indian Indian Indian
April 1, GAAP GAAP GAAP GAAP
2018 and (Six month (FY 2017- (FY 2016- (FY 2015-
March 31, period 18) 17) 16)
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2019 ended
September
30, 2018)
Scenario 2 - Period of filing of offer document between April 1,
2019 and March 31, 2020
Refer guidance provided under Scenario 1 under section "Phase II
companies (transition date on April 1, 2016)" mentioned under this
question.
Scenario 3 - Period of filing of offer document after March 31,
2020
Refer guidance provided under Scenario 2 under section "Phase II
companies (transition date on April 1, 2016)" mentioned under this
question.
Question 3: If the company has presented Indian GAAP
restated financial information during the listing process,
which accounting framework is required to be followed by the
company for the subsequent interim reporting after the
listing?
Response:
Example: XYZ Ltd. is an issuer company and has reported under
Indian GAAP for latest financial year. The company is planning to
file offer document on May 31, 2019 with Indian GAAP financial
statements and completes the listing process by August 31, 2019.
In this case, since Ind AS will become applicable for the company
from financial year 2019-20 onwards, the company is required to
file interim financial results with SEBI for the quarter and half year
ended September 30, 2019 in accordance with applicable Ind AS
framework.
Question 4: How should the proforma Ind AS financial
information be prepared by companies?
Response:
Phase I companies
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Refer the guidance provided under Question 1. Phase I
companies will not be required to present proforma Ind AS
financial information as these companies have already reported
under Ind AS for historical three financial years.
Phase II companies
Assuming that Phase II issuer companies are in the process of
listing during the period from April 1, 2018 to March 31, 2019 and
would have prepared Ind AS financial statements for interim
period 2018-19 and FY 2017-18 with comparatives for FY 2016-17
for filing under Companies Act, 2013. Also, these companies
would have prepared Indian GAAP financial statements for FY
2015-16 and 2016-17 for filing under Companies Act, 2013. But,
the circular requires these companies to prepare an additional Ind
AS financial statements for FY 2015-16 for inclusion in the offer
document (in addition to using Ind AS comparatives for FY 2016-
17).
For the purpose of preparing Ind AS financial statements for the
FY 2015-16, 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, 2016) following accounting policies
consistent with that used at the date of transition to Ind AS (i.e.
April 1, 2016). It seems that the intent of the circular is not to push
back the transition date (i.e. April 1, 2016) to April 1, 2015 and re-
adopt Ind AS 101 provisions again. Therefore, these companies
are required to follow the same accounting policy choices (both
mandatory exceptions and optional exemptions availed as per Ind
AS 101) as initially adopted on transition date (i.e. April 1, 2016)
while preparing financial statements for the FY 2015-16 and
accordingly suitable restatement adjustments in the accounting
heads need to be made. The financial statements for the FY 2015-
16 should be prepared on proforma basis (i.e. "Proforma Ind AS
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financial statements") for the purpose of inclusion in the offer
document.
The same is summarised in the table below:
Period of Interim Latest Second Third
filing of period financial latest financial
offer year financial year
document year
Between Ind AS Ind AS Ind AS Proforma
April 1, (FY 2017- (FY 2016- Ind AS
2018 and 18) 17) financial
March 31, statements
2019 (FY 2015-
16)
There may be a possibility where equity balance computed under
Proforma Ind AS financial statements for the year ended March
31, 2016 (i.e. equity under Indian GAAP as at April 1, 2015
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, 2016 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,
2016), prepared for filing under Companies Act, 2013, differs due
to restatement adjustments made as at April 1, 2015. In such
case, the closing equity balance as at March 31, 2016 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
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, 2015 and for
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the year ended March 31, 2016as 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, 2015 to March 31, 2016).
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. For cases
where there are no exemptions (e.g. functional currency) available
under Ind AS 101, companies are required to Ind AS principles
retrospectively and make necessary adjustments as at transition
date (i.e. April 1, 2016). 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
combinations (like acquisition method accounting using fair values
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
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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, 2016), or
ii) Re-state all the business combinations that occurred before
the transition date (i.e. April 1, 2016), 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, 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):
The 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,
2016). Therefore, 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, 2015 and March 31, 2016. 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, 2016).
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
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to be able to apply the new accounting requirements
retrospectively 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, 2016) and use that fair
value as deemed cost as at April 1, 2016;
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, 2016) 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, 2016) as
per Indian GAAP and use that carrying amount as deemed
cost as at April 1, 2016. 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.
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
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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, 2015. Considering
the practical challenges in determining the independent fair value
at April 1, 2015, the company should arrive at the carrying value at
April 1, 2015 using the fair value as at April 1, 2016 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 = Rs. 100 crore).
Scenario 2 Revalued amount as deemed cost:
Assume a company acquires a factory building for Rs. 360 crore
on April 1, 2011 with an expected remaining useful life of 40 years
at that date. The building is revalued on April 1, 2013 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) on April 1, 2015 and Rs. 359.21 crore (i.e.
390 less 390/38*3) on April 1, 2016. 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.
Therefore, the company should adopt the carrying value of Rs.
369.47 crore (on April 1, 2015) as the opening value for preparing
Proforma Ind AS financial statements.
Scenario 3 Previous GAAP carrying amount as deemed cost:
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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, 2016 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, 2016).
Therefore, the company should adopt the carrying value of Rs.
364 crore (i.e. 350/25*26) as the opening value (i.e. on April 1,
2015) 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, 2016), 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, 2016), but during the period
covered by the first Ind AS financial statements (i.e. from April 1,
2017 to March 31, 2018), 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, 2018. Its date
of transition is April 1, 2016. At June 30, 2017, in producing
financial information for an initial public offering (IPO), Company
ABC establishes fair values for property, plant and equipment.
The following information is relevant.
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Fair value of assets established at March Rs. 750 crore
31, 2013 with remaining useful life of 30
years (recognised under Indian GAAP)
Fair value of assets at March 31, 2013 Rs. 675 crore (Rs. 750
less accumulated depreciation to April 1, less 750/30*3 years)
2016 (determined in accordance with Ind
AS)
Fair value of assets at March 31, 2013 Rs. 637.50 crore (Rs.
less accumulated depreciation to June 750 less 750/30*4.5
30, 2017(determined in accordance with years)
Ind AS)
Fair value of assets at June 30, 2017 Rs. 1,000 crore
Under paragraph D8(b) of Ind AS 101, the fair value at June 30,
2017 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, 2016), and
account for the assets under Ind AS from the transition date (i.e.
April 1, 2016) to June 30, 2017. 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
31, 2013 recognised under previous GAAP as the deemed cost at
that date and establish the carrying amount at April 1, 2016 by
adjusting the March 31, 2013 fair value for subsequent
depreciation. When this option is taken, in the first Ind AS financial
statements, depreciation recognised from April 1, 2016 to June
30, 2017 will be based on the deemed cost at March 31, 2013
(Rs. 750 crore).
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If the fair value at June 30, 2017 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, 2017 (Rs. 637.50 crore) and the fair
value of the assets at June 30, 2017 (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,
2017) is based on the uplifted value. No adjustment is made to the
depreciation recognised under Ind AS for the period from April 1,
2016 to June 30, 2017.
For preparation of Proforma Ind AS financial statements for the
year ended March 31, 2016, 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,
2015 (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, 2016) as well as on April 1, 2015. 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
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
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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. 2015-16), the
company should follow the same accounting principles as adopted
at transition date (i.e. April 1, 2016) 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, 2016. 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, 2015) and
the reporting date (i.e. March 31, 2016) for preparing Proforma Ind
AS financial statements.
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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, 2016 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
as adopted initially at transition date and accordingly set the
amount appearing under FCTR account at April 1, 2015 as zero
and recognise the translation differences arising for the year
ended March 31, 2016 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 retrospectively
and hence it will not pose any challenge.
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Question 5: Which accounting policies should be followed
while preparing the Ind AS financials (i.e. "Proforma Ind AS
financials")?
Response:
Phase II companies
The Phase II 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, 2018 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, 2016) and adopted
revaluation model for the first Ind-AS financial statements for the
year ended March 31, 2016. In this case, the company should
follow revaluation model while preparing Proforma Ind AS financial
statements for the year ended March 31, 2016.
Question 6: Which framework of accounting should be
followed by companies if DRHP and RHP are filed in different
financial years?
Response:
Companies with transition date on or after April 1, 2017
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 three 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 2018-19, company is required to
prepare historical three year financial statements as per the
accounting framework as mentioned below:
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Period of Interim Latest Second Third
filing of offer period* financial latest financial
document year financial year
year
Between April Indian Indian Indian Indian
1, 2018 and GAAP GAAP GAAP GAAP
March 31, (FY 2017- (FY 2016- (FY 2015-
2019 18) 17) 16)
* Assuming that DRHP will be filed after September 30, 2018.
If the same company files RHP in FY 2019-20, company needs to
file historical three year financial statements as per the accounting
framework as mentioned below:
Period of filing Latest Second Third financial
of offer financial latest year
document year financial
year
Between April Ind AS Ind AS Proforma Ind
1, 2019 and (FY 2018-19) (FY 2017-18) AS financial
March 31, 2020 statements
(FY 2016-17)
The preparation of historical three 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 7: How should the last three years' financials be
presented by companies for which Ind AS accounting
framework is not applicable till latest reported financial year
and is in the process of listing in the subsequent year?
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.
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Assuming if an issuer company having net worth of Rs. 230 crore,
currently reporting under Indian GAAP and is in the process of
listing during the financial year 2021-22. Based on MCA
Roadmap, the company's transition date for Ind AS adoption
would be April 1, 2020 as the company is in the process of listing.
In this case, the company should apply the same principles as
applicable for Phase II companies (as discussed in this appendix).
Question 8: How should the last three years' financials be
presented by companies for which Ind AS accounting
framework is not applicable till latest reported financial year
but choose to voluntarily present under Ind AS for all the
historical periods?
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. SEBI has permitted companies to voluntarily prepare
financial statements for all historical three financial years
preceding the filing in accordance with Ind AS.
Example: XYZ Ltd. is an issuer company and currently Ind AS is
not applicable. The company has reported under Indian GAAP till
March 31, 2019 for statutory reporting purpose. The company is
planning to file offer document on May 31, 2019 and intends to
voluntarily present financial information for historical three
financial years under Ind AS. In this case, the company should
prepare special purpose financial statements for latest financial
year (financial year 2018-19) under Ind AS. Based on MCA
Roadmap, the company's transition date for Ind AS adoption
would be April 1, 2018 as the company is in the process of listing.
While preparing the special purpose financial statement for the
latest financial year (financial year 2018-19) under Ind AS, the
company should use April 1, 2018 as transition date (which is the
same transition date that will be applicable for statutory reporting
purposes). The accounting framework applicable for the
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preparation of financial statements for the historical three financial
years shall be as follows:
Period of Latest Second latest Third
filing of offer financial financial year financial
document year* year
Between April Ind AS Proforma Ind AS Proforma Ind
1, 2019 and financial AS financial
(FY 2018- statements
March 31, statements(FY
19) (FY 2016-17)
2020 2017-18)
* These financials will be used as comparative financials for the
financial year 2019-20 which will be used for statutory filings by
the company.
Question 9: The ICDR Regulations require the issuer
company to present restated consolidated financial
information. In this case, whether the issuer company is
required to prepare restated standalone financial
information?
Response:
Though the ICDR Regulations require the issuer companies to
present only restated consolidated financial information in the offer
document, the issuer company should prepare special purpose
restated standalone financial information as well to enable them to
prepare restated consolidated financial information. Also, the
branches, subsidiaries, associates, joint ventures and joint
operations should prepare special purpose financial information
which will be used to prepare restated consolidated financial
information. The respective auditors should also report on such
standalone and components' special purpose restated financial
information. In this case, the principal auditor should use
requirements of Standard on Auditing (SA) 600 "Using the Work
of Another Auditor" for relying on reporting done by components'
auditors.
149
Question 10: Whether the financial information of material
businesses or entities to be acquired from the proceeds
should be provided as per audited financial statements or
restated financial information?
Response:
Paragraph B(ii) of clauses (11)(I) and 11(II) of Part A of Schedule
VI to the ICDR Regulations requires that in case the proceeds,
fully or partly, directly or indirectly, are to be used for acquisition of
one or more material businesses or entities, the audited
statements of balance sheets, profit and loss and cash flow for the
latest three financial years and stub period (if available) prepared
as per the framework applicable to the business or subsidiary
proposed to be acquired shall be included in the draft offer
document or offer document.
The issuer company should present only audited statements of
balance sheets, statement of profit and loss and cash flow
statement which can be extracted from the financial statements
audited for statutory purposes or otherwise. However, the issuer
company may voluntarily present complete set of audited financial
statements of such businesses or entities for the benefit of
readers.
Also, if the above audited statements are not available for the
Stub period, the issuer company may not provide such information
for stub period even if the latest full financial year included in the
offer document is older than six months from the date of filing of
the draft offer document/offer document. However, it is
recommended to provide the above mentioned statements for
stub period as well for the benefit of readers.
Question 11: Can the foreign entity consolidated in the
restated consolidated financial information of the issuer
company get its financial statement audited in accordance
with International Standards on Auditing ("ISA") or other
similar standards, if local regulations of that foreign entity
does not mandate the audit?
Response:
The ICDR Regulations require the financial statements of foreign
entities consolidated may be audited as per the requirements of
local regulation applicable in the respective jurisdiction. However,
150
in cases where the local regulation does not mandate audit,
financial statements should be audited as per the auditing
standards/ requirements applicable in India ("Indian GAAS").
It is recommended that if the auditor is not conversant with Indian
GAAS then should be performed as per the GAAS of that
jurisdiction if similar to Indian GAAS. If there are differences
between Indian GAAS and GAAS of that jurisdiction, then the
auditor of holding company in India should discuss with
management of the holding company and follow the principles of
the Guidance Note on Audit of Consolidated Financial Statements
and SA 600.
Question 12: Whether the information related to the Earnings
per share (Basic and Diluted), Return on net worth, Net Asset
Value per share and Earnings before interest, tax,
depreciation and amortization be presented on the basis of
audited financial statements or restated consolidated
financial information?
Response:
These information should be presented based on the restated
consolidated financial information in the manner specified in
section 2.3 of this guidance note.
Question 13: If the issuer company has already filed its
DRHP/RHP in accordance with Securities and Exchange
Board of India (Issue of Capital and Disclosure Requirements)
Regulations, 2009, as amended, can such issuer company
continue to follow Securities and Exchange Board of India
(Issue of Capital and Disclosure Requirements) Regulations,
2009 after November 10, 2018?
Response:
There could be certain issuer companies who have filed the
DRHP/RHP before November 10, 2018 in accordance with
Securities and Exchange Board of India (Issue of Capital and
Disclosure Requirements) Regulations, 2009, as amended and
plans to file RHP/Prospectus on or after November 10, 2018. In
these situations, the issuer company may file the
RHP/Prospectus in accordance with Securities and Exchange
Board of India (Issue of Capital and Disclosure Requirements)
Regulations, 2009, as amended to ensure consistency in the
151
DRHP/RHP/Prospectus. Additionally, the statutory auditor may
issue reports in accordance with the Guidance Note on Reports
in Company Prospectuses (Revised 2016) as followed during
previous filings.
Question 14: Which eliminated related party transactions
should be disclosed in the restated consolidated financial
information?
Response:
The ICDR Regulations require that list of the related parties and
all related party transactions of the consolidated entities (whether
eliminated on consolidation or not), which require disclosure under
Ind AS 24 and/ or covered under section 188(2) of the Companies
Act, 2013 (as amended), as disclosed in the separate financial
statements of the consolidated entities, should be disclosed in the
restated financial information.
It is clarified that for meeting above requirement, the issuer
company should provide details of all eliminated entries for
transactions/balances (including elimination entries for
consolidation of step down entities) considered for preparing
restated consolidated financial information to its auditor so that
they can examine the details resulting in related party disclosures
including eliminated transactions in the restated consolidated
financial information. Elimination entries considered for entities
accounted with equity method should also be disclosed. The
respective auditors of components of the issuer company should
examine details of above eliminated entries while examining the
restated financial information of such entities. The auditors of the
issuer company should place reliance on such reports issued by
the component auditors.
Question 15: How should the translated financial information
of the material foreign entities be presented on the issuer
company's website?
Response:
In relation to material foreign entities, the ICDR Regulations
require that the financial statements reported in any currency
other than Indian Rupee shall be translated into Indian Rupee in
152
accordance with Ind AS 21 "The Effects of Changes in Foreign
Exchange Rates". It is clarified that the issuer company may also
translate such financial statements using the closing exchange
rate of a particular financial year for convenience of the readers.
Further, the issuer company should present the audited financial
statements of material foreign entities for which financial
statements are reported in a currency other than Indian Rupee on
the issuer company's website.
Question 16: Can an auditor use a lower level of threshold i.e.
below 20% for the purpose of issuing report on restated
consolidated financial information?
Response:
As specified in the ICDR Regulations, total unaudited information
included in the Consolidated Financial Statements shall not
exceed 20% of the turnover or net-worth or profits before tax of
the consolidated financial statements of the respective year.
It is clarified that an auditor, based on its professional judgement,
may use a lesser threshold i.e. below 20% to be able to report on
restated consolidated financial information to comply the guidance
provided in "Guidance Note on Audit of Consolidated Financial
Statements (Revised 2016)" issued by ICAI.
Question 17: If a subsidiary is acquired or disposed during a
financial year and parent-subsidiary relationship exist for a
part of the year, whether the financial statements of such
subsidiary be presented for complete financial year in
accordance with the requirements of the ICDR Regulations?
Response:
As specified in the ICDR Regulations, the separate audited
financial statements for past three full financial years
immediately preceding the date of filing of offer document of the
issuer company and all its material subsidiaries should be
made available on issuer's website in accordance with the
materiality thresholds mentioned in the ICDR Regulations.
Alternatively, relevant link should be provided to the financial
statements of subsidiaries on the issuer's website. The link to
the issuer's separate financial statements should be specified
153
in the offer document. For this purpose, subsidiaries shall be
identified based on definitions in the Act. The above
requirements shall apply for the periods of existence of the
parent-subsidiary relationship.
It is clarified that, in cases where parent-subsidiary relationship
exist for a part of the year during past three completed years,
subsidiary's financial statements should be made available for
the full financial years if the subsidiary existed for three years
or for lesser period if the subsidiary existed for a period less
than three years.
154
Appendix 6
Illustrative Format of Independent Auditor's Report on the
promoters' contribution received before opening of the issue
The Board of Directors
[Name of the Company]
[Company Address]
Dear Sirs / Madam,
1. This report is issued in accordance with the terms of our
agreement dated [].
2. In connection with the proposed Initial Public Offer (IPO) of
[Name of the Company] (the "Company"), the Company is
required to obtain a certificate from the Statutory Auditors, with
regard to receipt of the promotors contribution, as required by
Securities and Exchange Board of India (Issue of Capital and
Disclosure Requirements) Regulations, 2018, as amended
(the "ICDR Regulations").
3. The accompanying statement of promoters' contribution
contains details of promoters' contribution received by the
Company as per the requirement of the ICDR Regulations (the
"Statement") is prepared by the Management of the Company,
which we have initialed for identification purposes only.
Managements' Responsibility for the Statement
4. The preparation of the accompanying Statement is the
responsibility of the Management of the Company. This
responsibility includes designing, implementing and
maintaining internal control relevant to the preparation and
presentation of the Statement, and applying an appropriate
basis of preparation.
5. The Management is also responsible for ensuring:
a) identification and completeness of listing of promoters;
b) determining the amount of contribution required to be
received from each promoter;
c) receipt of promoters' contributions;
d) the accuracy of the names and addresses of the promoters
who have contributed to the promoters' contribution;
e) that the amount has been paid and credited to the
Company's bank account by each of these promoters
towards such contribution; and
f) compliance with the requirements of the ICDR
Regulations.
Auditor's Responsibility
6. Pursuant to the requirements of Sub para 9(d) of para 25 of
Part VI of chapter II of the ICDR Regulations, it is our
responsibility to obtain limited assurance and conclude as to
whether the details provided in the Statement is in agreement
with the [audited]/[unaudited] books of accounts and other
records for the period from [date] to [date].
7. The audited books of accounts referred to in paragraph [6]
above, have been audited by us/audited by another firm of
chartered accountants on which we/ the other auditors issued
an unmodified/modified audit opinion vide our/their reports
dated [Date]. Our/Their audits of these financial statements
were conducted in accordance with the Standards on Auditing
specified under Section 143(10) of the Companies Act, 2013.
Those standards require that we/the other auditors plan and
perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. Our /Their audits were not planned/required to
be planned and performed in connection with any transactions
to identify matters that may be of potential interest to third
parties.
8. We conducted our examination of the Statement in
accordance with the Guidance Note on Reports or Certificates
for Special Purposes issued by the Institute of Chartered
Accountants of India. The Guidance Note requires that we
comply with the ethical requirements of the Code of Ethics
issued by the Institute of Chartered Accountants of India.
9. We have complied with the relevant applicable requirements of
the Standard on Quality Control (SQC) 1, Quality Control for
Firms that Perform Audits and Reviews of Historical Financial
156
Information, and Other Assurance and Related Services
Engagements.
10. A limited assurance engagement includes performing
procedures to obtain sufficient appropriate evidence that vary
in nature, timing and extent than a reasonable assurance.
Consequently, the level of assurance obtained in a limited
assurance engagement is substantially lower than the
assurance that would have been obtained had we performed a
reasonable assurance engagement. Accordingly, we have
performed the following procedures in relation to the
Statement:
a. Obtained certified list of promoters of the Company from
the management/ Company secretary;
b. Obtained the bank statements of the Company for the
period [Date] to [Date] and traced the amounts received
into the bank accounts of the Company from the bank
statements to the Statement; and
c. Obtained the shareholders' register and other records for
the period [Date] to [Date] and traced the name of
promoters as mentioned in the Statement to the
shareholders' register and other records.
[amend as applicable]
Conclusion
11. Based on our examination as above, and the information and
explanations given to us, nothing has come to our attention
that causes us to believe that the details provided in the
Statement are not in agreement with the [audited]/[unaudited]
books of accounts and other records for the period from [date]
to [date].
Restriction on Use
12. This report is addressed to and provided to the Board of
Directors of the Company solely for the purpose of further
submission to the Securities and Exchange Board of India
and should not be used by any other person or for any other
purpose. Accordingly, we do not accept or assume any liability
or any duty of care for any other purpose or to any other
157
person to whom this report is shown or into whose hands it
may come without our prior consent in writing.
For XYZ and Co.
Chartered Accountants
Firm's Registration Number
Signature
(Name of the Member Signing the Assurance Report)
(Designation30)
Membership Number
Place of Signature
Date
30
Partner or Proprietor, as the case may be.
158
Appendix 7
Illustrative Format of Independent Auditor's Report on the
cash flow statement and liquidity position of the issuer
company
The Board of Directors
[Name of the Company]
[Company Address]
Dear Sirs / Madam,
1. This report is issued in accordance with the terms of our
agreement dated [].
2. In connection with the proposed issue of Convertible Debt
Instruments and Warrants of [Name of the Company] (the
"Company"), the Company is required to obtain a certificate
from the Statutory Auditors, with regard to cash flow statement
and liquidity position, as required by Securities and Exchange
Board of India (Issue of Capital and Disclosure Requirements)
Regulations, 2018, as amended (the "ICDR Regulations").
3. The accompanying statement of cash flow for the period from
[date] to [last date of latest audited period] and liquidity
position as at [last date of latest audited period] of the
Company as per the requirement of the Securities and
Exchange Board of India (Issue of Capital and Disclosure
Requirements) Regulations, 2018, as amended (the "ICDR
Regulations") (the "Statement") is prepared by the
Management of the Company, which we have initialed for
identification purposes only.
Managements' Responsibility for the Statement
4. The preparation of the accompanying Statement is the
responsibility of the Management of the Company. This
responsibility includes designing, implementing and
maintaining internal control relevant to the preparation and
presentation of the Statement, and applying an appropriate
basis of preparation; and making estimates that are
reasonable in the circumstances.
5. The Management is also responsible for ensuring:
a) preparation of the cash flow statement for the period from
[date] to [last date of latest audited period];
b) preparation of the liquidity position31 as at [last date of
latest audited period]; and
c) compliance with the requirements of the ICDR
Regulations.
Auditor's Responsibility
6. Pursuant to the requirements of [Sub- para 1(b) of para 64 of
Part II of chapter III]/[Sub- para (b) of para 108 of Part II of
chapter IV] of the ICDR Regulations, it is our responsibility to
obtain reasonable assurance and form an opinion as to
whether the details provided in the Statement are in
agreement with the audited financial statements as at and for
the period from [date] to [last date of latest audited period] and
whether liquidity position32 as at [last date of latest audited
period] is positive or negative.
7. The audited financial statements referred to in paragraph [6]
above, have been audited by us on which we issued an
unmodified audit opinion vide our reports dated
[month][date][year]. Our audits of these financial statements
were conducted in accordance with the Standards on Auditing
specified under Section 143(10) of the Companies Act, 2013.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. Our audits were
not planned and performed in connection with any transactions
to identify matters that may be of potential interest to third
parties.
31
Liquidity position may be considered as "current assets minus current
liabilities".
32
Liquidity position may be considered as "current assets minus current
liabilities".
160
8. We conducted our examination of the Statement in
accordance with the Guidance Note on Reports or Certificates
for Special Purposes issued by the Institute of Chartered
Accountants of India. The Guidance Note requires that we
comply with the ethical requirements of the Code of Ethics
issued by the Institute of Chartered Accountants of India.
9. We have complied with the relevant applicable requirements of
the Standard on Quality Control (SQC) 1, Quality Control for
Firms that Perform Audits and Reviews of Historical Financial
Information, and Other Assurance and Related Services
Engagements.
10. We have performed the following procedures with respect to
the Statement:
a. Traced the amounts appearing in the Statement to the
audited financial statements as at and for the period ended
[date]; and
b. Verified the arithmetical accuracy of the Statement.
[amend as applicable]
Opinion
11. Based on our examination as above, and the information and
explanations given to us, we are of the opinion that the details
provided in the Statement are in agreement with the audited
financial statements as at and for the period from [date] to [last
date of latest audited period] and the liquidity position of the
Company as at [last date of latest audited period] is
[positive]/[negative].
Restriction on Use
12. This report is addressed to and provided to the Board of
Directors of the Company solely for the purpose of further
submission to the Securities and Exchange Board of India
and should not be used by any other person or for any other
purpose. Accordingly, we do not accept or assume any liability
or any duty of care for any other purpose or to any other
161
person to whom this report is shown or into whose hands it
may come without our prior consent in writing.
For XYZ and Co.
Chartered Accountants
Firm's Registration Number
Signature
(Name of the Member Signing the Assurance Report)
(Designation33)
Membership Number
Place of Signature
Date
33
Partner or Proprietor, as the case may be.
162
Appendix 8
Illustrative Format of Independent Auditor's Report on the
compliance with conditions of proposed preferential issue
The Board of Directors
[Name of the Company]
[Company Address]
Dear Sirs / Madam,
1. This report is issued in accordance with the terms of our
agreement dated [].
2. In connection with the proposed preferential issue of [Name of
the Company] (the "Company"), the Company is required to
obtain a certificate from the Statutory Auditors, with regard to
compliance with the conditions of the proposed preferential
issue, as required by Securities and Exchange Board of India
(Issue of Capital and Disclosure Requirements) Regulations,
2018, as amended (the "ICDR Regulations").
3. The accompanying statement contains details of proposed
preferential issue being made (the "Statement"), as required
by the Securities and Exchange Board of India (Issue of
Capital and Disclosure Requirements) Regulations, 2018, as
amended (the "ICDR Regulations") is prepared by the
Management of the Company, which we have initialed for
identification purposes only.
Managements' Responsibility for the Statement
4. The preparation of the accompanying Statement is the
responsibility of the Management of the Company. This
responsibility includes designing, implementing and
maintaining internal control relevant to the preparation and
presentation of the Statement, and applying an appropriate
basis of preparation; and making estimates that are
reasonable in the circumstances.
5. The Management is also responsible for ensuring that the
Company complies with the below requirements of the ICDR
Regulations:
i) Determine the relevant date, being the date thirty days
prior to the date on which the meeting of shareholders is
held to consider the proposed preferential issue;
OR
Determine the relevant date, being either of the date thirty
days prior to the date on which the holders of the
convertible securities become entitled to apply for the
equity shares / the date thirty days prior to the date on
which the meeting of shareholders is held to consider the
proposed preferential issue;
ii) Determination of the minimum price of equity shares:
Higher of:
a. the average of the weekly high and low of the volume
weighted average price of the related equity shares
quoted on the recognised stock exchange during the
twenty six weeks preceding the relevant date; or
b. the average of the weekly high and low of the volume
weighted average prices of the related equity shares
quoted on a recognised stock exchange during the two
weeks preceding the relevant date34;
OR
a. the price at which equity shares were issued by the
issuer in its initial public offer or the value per share
arrived at in a scheme of compromise, arrangement
and amalgamation under sections 391 to 394 of the
Companies Act, 1956 or sections 230 to 234 the
Companies Act, 2013, as applicable, pursuant to which
the equity shares of the issuer were listed, as the case
may be; or
b. the average of the weekly high and low of the volume
weighted average prices of the related equity shares
34
If the equity shares of the issuer have been listed on a recognised stock
exchange for a period of twenty six weeks or more as on the relevant date
164
quoted on the recognised stock exchange during the
period the equity shares have been listed preceding
the relevant date; or
c. the average of the weekly high and low of the volume
weighted average prices of the related equity shares
quoted on a recognised stock exchange during the two
weeks preceding the relevant date35; and
iii) compliance with the requirements of the ICDR
Regulations.
Auditor's Responsibility
6. Pursuant to the requirements of Sub para 2 of para 163 of Part
III of chapter V of the ICDR Regulations, it is our responsibility
to obtain limited assurance and conclude as to whether the
details of the proposed preferential issue provided in the
Statement is in accordance with the requirements of the ICDR
Regulations.
7. We conducted our examination of the Statement in
accordance with the Guidance Note on Reports or Certificates
for Special Purposes issued by the Institute of Chartered
Accountants of India. The Guidance Note requires that we
comply with the ethical requirements of the Code of Ethics
issued by the Institute of Chartered Accountants of India.
8. We have complied with the relevant applicable requirements of
the Standard on Quality Control (SQC) 1, Quality Control for
Firms that Perform Audits and Reviews of Historical Financial
Information, and Other Assurance and Related Services
Engagements.
9. A limited assurance engagement includes performing
procedures to obtain sufficient appropriate evidence that vary
in nature, timing and extent than a reasonable assurance.
Consequently, the level of assurance obtained in a limited
assurance engagement is substantially lower than the
35
If the equity shares of the issuer have been listed on a recognised stock
exchange for a period of less than twenty six weeks as on the relevant date
165
assurance that would have been obtained had we performed a
reasonable assurance engagement. Accordingly, we have
performed the following procedures in relation to the
Statement:
a. Ensured the relevant date, being the date thirty days prior
to the date on which the meeting of shareholders is held to
consider the proposed preferential issue;
OR
Ensured the relevant date, being either of the date thirty
days prior to the date on which the holders of the
convertible securities become entitled to apply for the
equity shares / the date thirty days prior to the date on
which the meeting of shareholders is held to consider the
proposed preferential issue;
b. Verified the calculation of the minimum price of the equity
shares to be allotted in preferential issue;
c. Obtained and verified statutory registers of the Company to
note equity shares are fully paid up;
d. Obtained and read copy of shareholders resolution; and
e. Obtained confirmation from the registrar of the Company
confirming all shares are held in dematerialized form.
[amend as applicable]
Conclusion
10. Based on our examination as above, and the information and
explanations given to us, nothing has come to our attention
that causes us to believe that the details of the proposed
preferential issue provided in the Statement are not in
accordance with the requirements of the ICDR Regulations.
Restriction on Use
11. This report is addressed to and provided to the Board of
Directors of the Company solely for the purpose of further
submission to the [stock exchanges] and should not be used
by any other person or for any other purpose. Accordingly, we
166
do not accept or assume any liability or any duty of care for
any other purpose or to any other person to whom this report
is shown or into whose hands it may come without our prior
consent in writing.
For XYZ and Co.
Chartered Accountants
Firm's Registration Number
Signature
(Name of the Member Signing the Assurance Report)
(Designation36)
Membership Number
Place of Signature
Date
36
Partner or Proprietor, as the case may be.
167
Appendix 9
Illustrative Format of Independent Auditor's Report on the
receipt of consideration of specified securities in connection
with proposed preferential issue
The Board of Directors
[Name of the Company]
[Company Address]
Dear Sirs / Madam,
1. This report is issued in accordance with the terms of our
agreement dated [].
2. In connection with the proposed preferential issue of [Name of
the Company] (the "Company"), the Company is required to
obtain a certificate from the Statutory Auditors, with regard to
receipt of consideration of specified securities proposed
preferential issue, as required by Securities and Exchange
Board of India (Issue of Capital and Disclosure Requirements)
Regulations, 2018, as amended (the "ICDR Regulations").
3. The accompanying statement contains details of receipt of
consideration against allotment of specified securities as
required by Sub para (4) of para 169 of Part VI of chapter V of
Securities and Exchange Board of India (Issue of Capital and
Disclosure Requirements) Regulations, 2018, as amended
(the "ICDR Regulations") in respect of the proposed
preferential issue (the "Statement") is prepared by the
Management of the Company, which we have initialed for
identification purposes only.
Managements' Responsibility for the Statement
4. The preparation of the accompanying Statement is the
responsibility of the Management of the Company. This
responsibility includes designing, implementing and
maintaining internal control relevant to the preparation and
presentation of the Statement, and applying an appropriate
basis of preparation; and making estimates that are
reasonable in the circumstances.
5. The Management is also responsible for ensuring:
a) the consideration of specified securities is received from
respective allottee's bank account;
b) the consideration of specified securities is received from
the bank account of the person whose name appears first
in the application;
c) maintenance of relevant records in relation to point (a) and
(b) above; and
d) compliance with the requirements of the ICDR
Regulations.
Auditor's Responsibility
6. Pursuant to the requirements of Sub para (5) of para 169 of
Part VI of chapter V of the ICDR Regulations, it is our
responsibility to obtain limited assurance and conclude as to
whether the details provided in the Statement is in accordance
with by Sub para (4) of para 169 of Part VI of chapter V of the
ICDR Regulations and the relevant documents thereof are
maintained by the Company as on [date of certification].
7. We conducted our examination of the Statement in
accordance with the Guidance Note on Reports or Certificates
for Special Purposes issued by the Institute of Chartered
Accountants of India. The Guidance Note requires that we
comply with the ethical requirements of the Code of Ethics
issued by the Institute of Chartered Accountants of India.
8. We have complied with the relevant applicable requirements of
the Standard on Quality Control (SQC) 1, Quality Control for
Firms that Perform Audits and Reviews of Historical Financial
Information, and Other Assurance and Related Services
Engagements.
169
9. A limited assurance engagement includes performing
procedures to obtain sufficient appropriate evidence that vary
in nature, timing and extent than a reasonable assurance.
Consequently, the level of assurance obtained in a limited
assurance engagement is substantially lower than the
assurance that would have been obtained had we performed a
reasonable assurance engagement. Accordingly, we have
performed the following procedures in relation to the
Statement:
a) Obtained listing of allottees and verified that the
consideration of specified securities is received from the
bank account of the person whose name appears first in
the application; and
b) Obtained bank statement of the Company for the period
[date] to [date] and traced the amounts appearing in the
Statement to the bank statements.
[amend as applicable]
Conclusion
10. Based on our examination as above, and the information and
explanations given to us, nothing has come to our attention
that causes us to believe that the details provided in the
Statement are not in accordance with the requirements of Sub
para (4) of para 169 of Part VI of chapter V of the ICDR
Regulations and the relevant documents thereof are
maintained by the Company as on [date of certification].
Restriction on Use
11. This report is addressed to and provided to the Board of
Directors of the Company solely for the purpose of further
submission to the [stock exchanges] and should not be used
by any other person or for any other purpose. Accordingly, we
do not accept or assume any liability or any duty of care for
any other purpose or to any other person to whom this report
170
is shown or into whose hands it may come without our prior
consent in writing.
For XYZ and Co.
Chartered Accountants
Firm's Registration Number
Signature
(Name of the Member Signing the Assurance Report)
(Designation37)
Membership Number
Place of Signature
Date
37
Partner or Proprietor, as the case may be.
171
Appendix 10
Illustrative Format of Independent Auditor's Report on the
cash flow statement disclosing the use of funds received
from promoters contribution for the stated objects
The Board of Directors
[Name of the Company]
[Company Address]
Dear Sirs / Madam,
1. This report is issued in accordance with the terms of our
agreement dated [].
2. In connection with the proposed offer of [Name of the
Company] (the "Company"), the Company is required to obtain
a certificate from the Statutory Auditors, with regard to the
cash flow statement disclosing the use of funds received from
promoters contribution for the stated objects, as required by
Securities and Exchange Board of India (Issue of Capital and
Disclosure Requirements) Regulations, 2018, as amended
(the "ICDR Regulations").
3. The accompanying statement of cash flow disclosing the use
of funds received during the period from [date] to [date] from
promoters contribution for the stated objects of the Company
as per the requirement of the Securities and Exchange Board
of India (Issue of Capital and Disclosure Requirements)
Regulations, 2018, as amended (the "ICDR Regulations") (the
"Statement") is prepared by the Management of the Company,
which we have initialed for identification purposes only.
Managements' Responsibility for the Statement
4. The preparation of the accompanying Statement is the
responsibility of the Management of the Company. This
responsibility includes designing, implementing and
maintaining internal control relevant to the preparation and
presentation of the Statement, and applying an appropriate
basis of preparation; and making estimates that are
reasonable in the circumstances.
5. The Management is also responsible for ensuring:
a) preparation of the cash flow statement for the period from
[date] to [date]; and
b) compliance with the requirements of the ICDR
Regulations.
Auditor's Responsibility
6. Pursuant to the requirements of Clause (9)(F)(2) of Part A of
Schedule VI of the ICDR Regulations, it is our responsibility to
obtain limited assurance and conclude as to whether the
details provided in the Statement is in agreement with the
[audited]/[unaudited] books of accounts and other records for
the period from [date] to [date].
7. The audited financial statements referred to in paragraph [6]
above, have been audited by us on which we issued an
unmodified audit opinion vide our reports dated
[month][date][year]. Our audits of these financial statements
were conducted in accordance with the Standards on Auditing
specified under Section 143(10) of the Companies Act, 2013.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. Our audits were
not planned and performed in connection with any transactions
to identify matters that may be of potential interest to third
parties.
8. We conducted our examination of the Statement in
accordance with the Guidance Note on Reports or Certificates
for Special Purposes issued by the Institute of Chartered
Accountants of India. The Guidance Note requires that we
comply with the ethical requirements of the Code of Ethics
issued by the Institute of Chartered Accountants of India.
9. We have complied with the relevant applicable requirements of
the Standard on Quality Control (SQC) 1, Quality Control for
Firms that Perform Audits and Reviews of Historical Financial
173
Information, and Other Assurance and Related Services
Engagements.
10. A limited assurance engagement includes performing
procedures to obtain sufficient appropriate evidence that vary
in nature, timing and extent than a reasonable assurance.
Consequently, the level of assurance obtained in a limited
assurance engagement is substantially lower than the
assurance that would have been obtained had we performed a
reasonable assurance engagement. Accordingly, we have
performed the following procedures in relation to the
Statement:
a. Obtained list of promoters and contribution made by such
promoters and traced the contribution amount mentioned
in the Statement to the bank statement of the Company for
the period [Date] to [Date];
b. Obtained details of application of funds out of contribution
received from promoters and traced the amount of
application of funds mentioned in the Statement to the
books of accounts for the period [Date] to [Date]; and
c. Obtained certified copy of board of directors resolution
stating the object for which promoter contribution has been
received.
[amend as applicable]
Conclusion
11. Based on our examination as above, and the information and
explanations given to us, nothing has come to our attention
that causes us to believe that the details provided in the
Statement are not in agreement with the [audited]/[unaudited]
books of accounts and other records for the period from [date]
to [date].
Restriction on Use
12. This report is addressed to and provided to the Board of
Directors of the Company solely for the purpose of further
submission to the Securities and Exchange Board of India
174
and should not be used by any other person or for any other
purpose. Accordingly, we do not accept or assume any liability
or any duty of care for any other purpose or to any other
person to whom this report is shown or into whose hands it
may come without our prior consent in writing.
For XYZ and Co.
Chartered Accountants
Firm's Registration Number
Signature
(Name of the Member Signing the Assurance Report)
(Designation38)
Membership Number
Place of Signature
Date
38
Partner or Proprietor, as the case may be.
175
Appendix 11
Illustrative Format of Independent Auditor's Report on the
receipt of consideration [paid]/[received] and mode of
financing in case of non-material [acquisition]/[divestments]
The Board of Directors
[Name of the Company]
[Company Address]
Dear Sirs / Madam,
1. This report is issued in accordance with the terms of our
agreement dated [].
2. In connection with the proposed Initial Public Offer (IPO) of
[Name of the Company] (the "Company"), the Company is
required to obtain a certificate from the Statutory Auditors, with
regard to [payment]/[receipt] of consideration and mode of
financing for such non-material [acquisition]/[divestments], as
required by Securities and Exchange Board of India (Issue of
Capital and Disclosure Requirements) Regulations, 2018, as
amended (the "ICDR Regulations").
3. The accompanying statement contains details of
[payment]/[receipt] of consideration in respect of non-material
[acquisition]/[divestments] of [subsidiary/business] (the
"Statement") is prepared by the Management of the Company,
which we have initialed for identification purposes only.
Managements' Responsibility for the Statement
4. The preparation of the accompanying Statement is the
responsibility of the Management of the Company. This
responsibility includes designing, implementing and
maintaining internal control relevant to the preparation and
presentation of the Statement, and applying an appropriate
basis of preparation; and making estimates that are
reasonable in the circumstances.
5. The Management is also responsible for ensuring:
a) the [payment]/[receipt] of consideration amount with
respect to [acquisition]/[divestment] is [made]/[received]
from [Company's]/[acquirer's] bank account;
b) the mode of financing such consideration paid with respect
to acquisition; and
c) compliance with the requirements of the ICDR
Regulations.
Auditor's Responsibility
6. Pursuant to the requirements of Clause (11)[(I)/(II)](B)(iii) of
Part A of Schedule VI of the ICDR Regulations, it is our
responsibility to obtain limited assurance and conclude as to
whether the details provided in the Statement is in agreement
with the unaudited books of accounts and other records for the
period from [date] to [date].
7. We conducted our examination of the Statement in
accordance with the Guidance Note on Reports or Certificates
for Special Purposes issued by the Institute of Chartered
Accountants of India. The Guidance Note requires that we
comply with the ethical requirements of the Code of Ethics
issued by the Institute of Chartered Accountants of India.
8. We have complied with the relevant applicable requirements of
the Standard on Quality Control (SQC) 1, Quality Control for
Firms that Perform Audits and Reviews of Historical Financial
Information, and Other Assurance and Related Services
Engagements.
9. A limited assurance engagement includes performing
procedures to obtain sufficient appropriate evidence that vary
in nature, timing and extent than a reasonable assurance.
Consequently, the level of assurance obtained in a limited
assurance engagement is substantially lower than the
assurance that would have been obtained had we performed a
reasonable assurance engagement. Accordingly, we have
performed the following procedures in relation to the
Statement:
177
a) [Obtained the details of acquisition and verified that the
consideration amount has been paid from the bank
account of the Company];
b) [Obtained the details of divestment and verified that the
consideration amount has been received in the bank
account of the Company];
c) Obtained details of mode of financing of such
consideration paid with respect to acquisition; and
d) Obtained bank statement of the Company for the period
[date] to [date] and traced the amounts appearing in the
Statement to the bank statement.
[amend as applicable]
Conclusion
10. Based on our examination as above, and the information and
explanations given to us, nothing has come to our attention
that causes us to believe that the details provided in the
Statement are not in agreement with the [unaudited books] of
accounts and other records for the period from [date] to [date].
Restriction on Use
11. This report is addressed to and provided to the Board of
Directors of the Company solely for the purpose of further
submission to the [ Securities and Exchange Board of India]
and should not be used by any other person or for any other
purpose. Accordingly, we do not accept or assume any liability
or any duty of care for any other purpose or to any other
person to whom this report is shown or into whose hands it
may come without our prior consent in writing.
For XYZ and Co.
Chartered Accountants
Firm's Registration Number
Signature
(Name of the Member Signing the Assurance Report)
178
(Designation39)
Membership Number
Place of Signature
Date
39
Partner or Proprietor, as the case may be.
179
Appendix 12
Illustrative Format of the Engagement Letter for the
Entire Engagement to Issue Report on the
Prospectus
(refer paragraph 2.5)
Date
Name of Company
Address
Letter of Engagement
Dear Sirs / Madam,
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"), 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 the [six] month period ended September 30, 20XX
and for each of the three years ended March 31, 20XX, 20XX and
20XX (after adjustments as required by the Securities and
Exchange Board of India (Issue of Capital and Disclosure
Requirements) Regulations, 2018, as amended (the " ICDR
Regulations") in a manner consistent with the accounting policies
being adopted for the latest financial period/year presented.
Further, the Company will prepare Consolidated Financial
Information of the Company and its subsidiaries (together referred
to as the "Group") and share of profit /(loss) of associates and joint
ventures for [six] month period ended September 30, 20XX and
for each of the three years ended March 31, 20XX, 20XX and
20XX (after adjustments as required by the ICDR Regulations) in
a manner consistent with the accounting policies being adopted
for the latest financial period/year presented. 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 restated [consolidated]
financial information to be included in the offer document of
the Company as required by the ICDR Regulations
[Additionally, we would also issue following
certificates/reports:
i) [mention details of certificates]; 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 2018), 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 Restated [Consolidated] Financial
Information referred to above, and bring to your attention any
181
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
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
182
of management of significant adjustments and of reportable
conditions noted during our examination.
E. For our examination, we will place reliance on the following:
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
183
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.
184
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.
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.
185
In order to enable us to fulfil our responsibilities, you agree on
request, to provide us with complete, accurate and timely
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
examinationsare 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
186
engagement and we will add applicable taxes to charges and
expenses.
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/stub 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
187
Signature
[Name of the Member]
Designation@
Membership Number
Place of Signature:
Date:
By: ______________________
[Name]
__________________________
[Title]
__________________________
[Date]
@
Partner or proprietor, as the case may be.
188
Appendix 13
Illustrative Format of Representation Letter from
Management for Issuance of Examination Report
(Refer Paragraph 2.6)
[Name and Address of the Chartered Accountant]
Dear Sirs / Madam,
Proposed Offering by [.] (the "Issuer" or the "Company") of [.] (the
"Securities")
This representation letter is provided in connection with your
examination of the restated [consolidated] financial information of
[company's name] (the `Company'), its subsidiaries (together
referred to as the `Group' ) and share of profit of associates and
joint ventures comprising the Restated [Consolidated] Statement
of Assets and Liabilities as at [June/September/December XX,
20XX, March 31, 20XX, 20XX and 20XX], the Restated
[Consolidated] Statements of Profit and Loss (including other
comprehensive income), the Restated [Consolidated] Statement
of Changes in Equity, the Restated [Consolidated] Cash Flow
Statement for the [three/six/nine month period ended
June/September/December XX, 20XX and for the years ended
March 31, 20XX, 20XX and 20XX], the Summary Statement of
Significant Accounting Policies, and other explanatory information
(collectively, the "Restated [Consolidated] Financial Information")
prepared in terms of the requirements of Section 26 of Part I of
Chapter III of the Companies Act, 2013 ("the Act"), the Securities
and Exchange Board Of India (Issue of Capital and Disclosure
Requirements) Regulations, 2018 ("ICDR Regulations") and the
Guidance Note on Reports in Company Prospectuses (Revised
2018) (the "Guidance Note"), as approved by the Board of
Directors of the Company at the 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. In particular we confirm that we are
responsible for the following:
1. we have fulfilled our responsibilities, as set out in the terms of
the audit engagement dated [date], for the preparation of the
Restated Financial Information in accordance with the
requirements of the Act, ICDR Regulations and the Guidance
Note.
2. 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.
3. Restated [Consolidated] Financial Information have been
compiled from (i) the audited special purpose interim
[consolidated] Ind AS financial statements of the Group and its
associates and joint ventures as at and for the [three/six/nine]
month period ended [June/September/December XX, 20XX]
and (ii) the audited [consolidated] financial statements as at
March 31, 20XX, 20XX and 20XX and for each of the years
ended March 31, 20XX, 20XX, and 20XX 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 Note
[xx] to Restated Financial Information. Also confirmed that
there is no need to change our representation letters provided
to you for the audit of respective financial periods/ years and
they are still valid as of the date of the signing of this letter.
4. There are no changes in the accounting policies adopted by
the Company which would require adjustment in the Restated
Financial Information, other than the adjustments and
regrouping as more fully described in Note [xx] to Restated
Financial Information.
5. The Restated [Consolidated] Financial Information have been
prepared after incorporating adjustments for the changes in
accounting policies, material errors and
regrouping/reclassifications retrospectively in the financial
years ended March 31, 20XX and 20XX to reflect the same
accounting treatment as per the accounting policies and
190
grouping/classifications followed as at and for the
[three/six/nine month period ended June/September/
December XX, 20XX.
6. The Restated [Consolidated] Financial Information have been
prepared after incorporating proforma Ind AS adjustments to
the audited Indian GAAP financial statements as at and for the
year ended March 31, 20XX as described in Note [.] to the
Restated [Consolidated] Financial Information.
7. There are no matter(s) which require modifications in auditor's
reports which would require adjustments in the Restated
Financial Information, other than those disclosed in the
Restated Financial Information. [modify as applicable]
8. Restated Financial Information are free of material
misstatements, including omissions. We have considered the
errors and have determined that they are individually and
collectively not material to the Restated Financial Information.
9. Contingencies and Commitments
a. We have disclosed in the Annexure xx to the Restated
Financial Information 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 Information 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.
191
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
Information. 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
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 Information. 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 Restated
[Consolidated] Financial Information:
(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.
10. Fraud:
192
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 three years ended March 31, 20XX, 20XX
and 20XX and Restated Financial Information.
b. We have disclosed to you our knowledge of any
allegations of fraud, or suspected fraud, affecting the
Restated Financial Information that have been
communicated to us by employees, former employees,
analysts, regulators or others.
11. 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.
12. No events have occurred subsequent to [date] which requires
adjustment of or disclosure in the Restated Financial
Information.
13. We have disclosed to you all known instances of non-
compliance or suspected non-compliance with laws and
regulations whose effects should be considered when
Restated [Consolidated] Financial Information.
14. We have disclosed to you the identity of the company's related
parties and all the related party relationships and transactions
(including funding arrangements) in accordance with the
requirements of the ICDR Regulations.
15. We have provided you with:
Access to all information of which we are aware that is
relevant to the preparation of the Restated [Consolidated]
Financial Information such as records, documentation and
other matters;
Additional information that you have requested from us for
the purpose of the examination; and
193
Unrestricted access to persons within the entity from whom
you determined it necessary to obtain audit evidence.
16. [Proforma Financial Information:
We are responsible for preparation of Proforma Financial
Information as required under ICDR Regulations;
In compiling the Proforma Financial Information, we are
responsible for the basis of determination of the proforma
adjustments;
In compiling the Proforma Financial Information, we have
identified all appropriate proforma adjustments necessary
to illustrate the impact of the event or transaction at the
date or for the period of the illustration; and
The Proforma Financial Information has been compiled, in
all material respects, on the basis of proforma adjustments
as described in Note [xx] to the Proforma Financial
Information.]
[amend as applicable]
Yours faithfully,
[For and on behalf of Board of Directors of XYZ Limited]
194
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