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As per the modifications made to the comprehensive guidelines on derivatives issued by the Reserve Bank of India in early August 2011, banks cannot sell derivatives to corporates without getting approval from the board of directors of such corporates. It is significant to note that banks would be allow to deal with derivatives with any corporate only if the company has a risk management policy approved by its Board in place among several other conditions.

As per the modifications the Banks are required to obtain Board resolution from the corporate that states the following:
1. The corporate has in place a Risk Management Policy approved by its Board which contains the following:

  • Guidelines on risk identification, measurement and control
  • Guidelines and procedures to be followed with respect to revaluation and monitoring of positions
  • Names and designation of officials authorized to undertake transactions and limits assigned to them
  • A requirement that the assignment of limits to an official would be specific and in case the limits assigned are not quantified, then the bank should offer derivative products to that client only after getting appropriate documents certifying assignment of specific limits
  • Accounting policy and disclosure norms to be followed in respect of derivative transactions
  • A requirement to disclose the MTM valuations appropriately
  • A requirement to ensure separation of duties between front, middle and back office
  • Mechanism regarding reporting of data to the Board including financial position of transaction etc

2. The corporate has laid down clear guidelines for conducting the transactions and institutionalised the arrangements for a periodical review of operations and annual audit of transactions to verify compliance with the regulations.

3. Market-makers should not undertake derivative transaction with users till they provide a Board or equivalent forum resolution stating that they have in place a Board approved Risk Management Policy which contains the details as mentioned above.

Source: Comprehensive Guidelines on Derivatives: Modifications

RBI to introduce new 10-yr govt bond on 4-Nov-2011


The Reserve Bank of India (RBI) is to auction a new government security of 10-year maturity this Friday. The government will issue Rs 6,000 crore under the new security at a coupon rate to be decided in the auction.

The government is set to borrow Rs 2.2 lakh crore in the period from October 2011 to March 2012. This is Rs 52,800 crore more as compared to the Rs 1.67 lakh crore budgeted earlier. The higher than planned borrowing programme pushed yields on the current 10-year benchmark above three-year highs. As a result, all the three auctions conducted so far in the second half have seen devolvement on underwriters in at least one government security.

Source: Business Standard

Transitioning to IFRS in India


The Institute of Chartered Accountants of India has sent out recently 35 near-final Indian Accounting Standards (Ind-AS) — the Indian version of IFRS – to the National Committee on Accounting Standards (NACAS) for deliberation and finalisation, to emable transition to International Financial Reporting Standards. Over the past year, it has trained accountants on IFRS and issued a draft of the revised Schedule XIV to the Companies Act. It is now left to the regulators to take this forward and legislate on them.

Source: Business Line

India to go ahead with IFRS implementation plans as scheduled

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The Indian government will stick to its April 1, 2011 deadline for 300 large companies to align their accounts with global financial reporting norms as per the report appearing in Economic Times dated 5th Jan 2011. This is inspite of the concerns raised by an industry lobby. Earlier the government sought fresh comments from the top 300 companies that will converge their accounts with international financial reporting standards (IFRS) from the next financial year before rolling out the new norms.

Indian companies will be asked to follow the norms, which will be rolled out in a phased manner. All BSE-Sensex 30 and NSE-Nifty 50 companies will start following IFRS from April 1 along with all listed companies having a net worth of INR 1,000 crore and above. The Indian government had made a commitment at the G20 summit in 2009 to converge to IFRS from April 1, 2011. Accounting experts welcomed the government’s decision to go ahead with the April 1 deadline.

Full report: Economic Times

Accounting of repurchase agreements comes under scanner


The Securities and Exchange Commission has started an inquiry into about two dozen financial companies to determine whether they followed accounting practices similar to those recently disclosed in an investigation of Lehman Brothers.

Repurchase agreements, which are a common way that investment banks provide funds for trading activities. The commission wants to know whether other Wall Street players used tactics like those that Lehman used to mask their debt levels from investors.

This inquiry is part of its duties to review the financial filings of public companies and any irregularities will be sent to its enforcement wing to eventually bring charges on such errant companies.

As per the news item appearing in New York Times, “Since Lehman was accused of using a transaction known as Repo 105 in 2008 to hide about $50 billion in debt, analysts have said there should be a widespread inquiry of accounting on wall Street before the financial crisis.

The commission is focusing on all sorts of repurchase agreements, not just those Lehman used. The commission asked the companies if they had classified the transactions, which are often considered loans, as sales. The commission also asked whether those transactions affected data provided to investors, analysts, regulators or ratings agencies.”

See the full report here: http://www.nytimes.com/2010/03/30/business/30sec.html

FII income from hedging not liable to tax, rules AAR


Income of foreign institutional investors (FIIs) from derivatives trading will not be liable to tax in India, the Authority for Advance Rulings has said, clearing the air on taxability of the income of foreign investors trading in Indian securities.

The ruling will help FIIs undertaking similar transactions subject to the provisions of the tax treaties with their respective countries, say tax experts. The AAR’s ruling comes in response to a plea by Royal Bank of Canada, registered with market regulator Securities and Exchange Board of India as a FII, seeking clarity on whether profit or loss from trading in securities, including derivatives, will be treated as business income and be liable to tax in respect of India-Canada Double Taxation Avoidance Agreement.

“Its been a long pending debate between tax authorities and tax payers, especially foreign investors whether the income arising in respect of securities derivative transactions is in the nature of business income or capital gains…lots of cases have been filed on these issues and the current judgement clarifies, based on the facts of Royal Bank of Canada, that in the absence of a permanent establishment the income arising from such transaction will not be subject to tax,” said Vikas Vasal, partner, KPMG.

The revenue department’s contention that the income from such activities was capital gains and hence liable to tax in India was rejected by the Authority. The authority said the profit and loss was earned by the applicant out of trading activity.

Also, the Royal Bank of Canada does not have a permanent establishment or fixed place of business in India and as per the provisions of the India-Canada tax treaty its income could not be taxed here.

It may be pointed that most FIIs in India invest via Mauritius route to enjoy the capital gains tax exemption available under Indo-Mauritius tax treaty. In such a case profits and loss from such trading are treated as capital gains or loss. However, when an entity comes from any other country the provisions of the tax treaty with that country comes into play and investors usually treat income from such activity as business income which does not have to face tax if there is no PE.

Therefore facts of each case need to be examined in detail in order to determine whether the activity per se is to be treated as a business transaction or an investment transaction. In case its is determined that these are in nature of business income the next issue to be examined is whether the foreign investor has a business connection or a permanent establishment in India for taxability of the same. If it is established that there is now PE in India then generally the business income arising there from would not be subject to tax subject to provision of relevant tax treaty. If it the PE exists then profit attributed to such PE only will be subject to tax in India.

The AAR is a quasi-judicial body, set up to give opinion to guide companies on their potential tax liabilities. While rulings by the AAR are case-specific, they have a persuasive impact on tax assessment in cases of other firms under similar circumstances.

Source: Economic Times

Accounting professionals can form LLPs in India soon


The Indian government is set to introduce Bills to amend existing laws governing chartered accountants, cost accountants and company secretaries in the current Budget session, a senior government official said. The proposed amendments will allow registration of large size consultancy firms in India.

The amendments will remove the hurdles that come in way for members of ICAI, ICSI and ICWAI to jointly form Limited Liability Partnerships (LLPs). These amendments will enable formation of LLPs comprising professionals from different fields. Right now professional bodies are not able to form LLPs because of certain clauses in respective Acts.

Source: http://economictimes.indiatimes.com/news/economy/policy/Bill-letting-accounting-pros-form-LLPs-soon/articleshow/5613711.cms

No decision taken about the timing of a possible conversion to IFRS


While the SEC approved a statement supporting the adoption of global accounting standards for U.S. companies, the Chairman Mary Schapiro cautioned that, “Incorporating International Financial Reporting Standards (IFRS) into our financial reporting system would involve a significant undertaking. We must carefully consider and deliberate whether such a change is in the best interest of U.S. investors and markets.

“The Commission also voted to approve a Work Plan developed by SEC staff that would gather information to aid the Commission as it evaluates the impact that the use of IFRS by U.S. companies would have on our securities market,” Schapiro said. The Work Plan will be completed in 2011, the target date set by the 2008 Proposed Roadmap.

Schapiro said, however, that no decision had been made about the timing of a possible conversion to IFRS. “We must still determine what this means for U.S. companies and markets; should we incorporate IFRS into our reporting system and, if so, when and how?

Source: http://www.accountingweb.com/topic/cfo/sec-approves-work-plan-assess-us-adoption-global-accounting-standards

Sri T.N. Manoharan

Sri T.N. Manoharan

The Government of India named Sri T.N. Manoharan the first accountancy professional from Tamil Nadu to be conferred with the Padma Shri award. Manoharan is based out of Chennai, India and was recently appointed as a board member of the scam-hit Satyam Computer Services and later made as its chairman before the company was taken over by the Mahindra group. He is a distinguished professional and has several acheivements to his credit. Son of T.L. Narayana Chowdhry, a 93-year-old a freedom fighter, Manoharan, 52, is a partner in Manoharan Chowdhry Associates. He is also the past president of the Institute of Chartered Accountants of India (ICAI).

Padma Shri is an award given by the Government of India generally to Indian citizens to recognize their distinguished contribution in various spheres of activity including the Arts, Education, Industry, Literature, Science, Sports, Medicine, Social Service and public life. It stands fourth in the hierarchy of civilian awards after the Bharat Ratna, the Padma Vibhushan and the Padma Bhushan. On its obverse, the words “Padma”, meaning lotus in Sanskrit and “Shri”, in Devanagari script, appear above and below the lotus flower. The geometrical pattern on either side is in burnished bronze. All embossing is in white gold.

‘Accounting for Investments’ blog congratulates Sri T. N. Manoharan on being conferred with the Padma Shri award.

I F R S to be mandatory only for big corporates in the first phase


The much-anticipated International Financial Reporting Standards (IFRS) is likely to be rolled out only partially in India from April 1, 2011.That’s because a core group on IFRS implementation, set up by the ministry of company affairs and headed by renowned chartered accountant Y H Malegam, is set to recommend that it be made mandatory only for big corporates in the first phase.

Source: DNA India