The judiciary may soon have a lesser role in dictating the way corporate houses show valuation of companies they acquire.
Come April 2011, the country is all set to adopt global accounting standards making it easier for India Inc to get large valuation M&A deals executed without the court breathing down their necks.
Even as the present rules put the courts at a higher pedestal over the prevalent accounting standards, the ministry of corporate affairs along with the apex accounting body ICAI are working on harmonising the legal and other regulatory requirements with the International Financial Reporting Standards (IFRS). IFRS does not recognise the judiciary prescribing accounting policies which are highly technical in nature.
Under the present regulatory mechanism, the companies which intend to enter into M&A agreements first apply before the concerned High Court seeking permission to hold a shareholder meeting and subsequently to execute the deal. The process could drag for several months before the courts approve such M&A agreements as it involves considering the interests of all stakeholders including lenders and minority shareholders.
Even as the courts have been given wide powers to examine the procedural formalities as well as for evaluating the financial position of the companies, on several occasions courts have taken a view divergent to the prevailing accounting standards.
The scenario wherein the existing accounting standards had to make way for judiciary prescribed accounting treatment is soon to change. IFRS has laid down extensive accounting regulations relating to business combinations including amalgamations and acquisitions.
In India, it is generally believed that law overrides accounting standards. Therefore, accounting is done based on treatment stipulated by the High Court in its approval, even though it may not be in accordance with Accounting Standards. However, IFRS does not recognise the principle of legal override, said an accounting expert.
The harmonisation of IFRS with Indian Accounting Standards is at a deliberative phase wherein the Institute of Chartered Accountants of India (ICAI) is formulating a work plan to ensure that the regulatory provisions of the globally accepted accounting norms are adopted in India from April 1, 2011.
With an increase in number of corporate entities taking the M&A route as a strategy for growth and expansion, ICAI had recently urged companies to adopt IFRS as early as possible as it would present a clearer and accurate picture of the companys financial health.