Tag: Talent Management & HRIS

Lack of financial expertise

Even as entrepreneurs keep devising new strategies and plan the expansion of their existing business, there are still a large number of entrepreneurs who lack the financial knowledge to steer the business in the right direction. Those entrepreneurs without sound financial knowledge may not be in a position to make crucial business decisions related to MSME loans. In absence of financial knowledge, you may end up taking wrong decisions that may cost the business unless you are seeking any external advice. Also, the knowledge about finance is important because you have to rely on an MSME loan to tide over crises that may knock at the door anytime. Hence, it is important to understand everything related to MSME loans, find out about the MSME loan interest rate and compare the same in the market before availing a loan.

Ease of doing business remains a bottleneck

Most start-ups in India face the problem in the initial stages because of too many regulations and approvals. Even as India managed to jump places in the World Bank’s Ease of Doing Business index, there are several loopholes in the system that keep businesses on the edge and prevent them from expanding or flourishing. Many times, entrepreneurs are demotivated to start up because of troubles relating to MSME loan, enforcing contracts and dealing with construction permits. In fact, the time taken by businesses to enforce a contract remains longer, at 1,445 days, than it was 15 years ago (1,420 days). There have been significant changes in terms of registering a new business which has come down to 30 days from 127 days, local entrepreneurs have to still wait and clear 12 procedures to start a business in Mumbai, whereas globally it takes just five procedures on an average.

Technical changes

There has been no dearth of technical changes over time, and most industries have undergone some form of change in order to remain competitive. As a result, Indian MSMEs have had to deal with some very important changes which have affected their growth potential. At first, there was a change in the ownership right of land, which has made the sector more prone to mismanagement and, with it, a fall in productivity.

Competition

Due to various factors, such as the rise of eCommerce and the advent of globalization, bigger firms have forced MSMEs out of their markets. However, this is not new because MSMEs were facing competition from year one, but they could fight it off successfully compared to professional firms. In fact, MSMEs continue to face competition in many areas, including agricultural machinery, garments, and tourism.

Lack of Access to Financing Solutions

Most businesses face perennial problems of accessing finance or availing an MSME loan even as the government has implemented measures to make credit for businesses readily available to foster entrepreneurship. The regulatory loopholes that cause a delay in getting licenses, insurance, and certifications also hamper the prospects of MSMEs. Most businesses face problems related to manufacturing, timely purchase of raw materials, or even access to new technologies or acquire new skills due to lack of funding. Another major problem is the economic slowdown that has led to liquidity crunch, but the government had given a breather to MSMEs by asking banks not to declare any stressed loan account of MSMEs as NPA till March 2020 and work on recasting their debt.

Labour issues

Most SMEs face frequent labour issues and especially in the new normal times, the ongoing migrant crises has manifested itself as one of the most difficult areas for industries to operate in such times of pandemic. Apart from labour problems, businesses also need to emphasize skill development, training, and ensuring market linkages to facilitate both urban and rural micro-entrepreneurs. The emphasis on skill development can benefit the sector substantially and more so at the time of crisis.

Technology remains a major deterrent

Most businesses fail to reap the benefits of the latest technological developments in their sector due to a lack of expertise and awareness. Hence MSMEs need to be apprised of the technological developments that are significant for the growth of their businesses. It is important for scientific research bodies to remain involved with the local MSME clusters, and take notice of their technology-related problems and issues. However, there have been concerted efforts to offer solutions to MSMEs on these issues as the government is working towards the launch of E-commerce portal ‘Bharat Craft’ that will act as a direct interface between sellers and buyers.

Lack of Trust

It is seen that banks refrain from extending MSME loan since the amount remains small and also, banks believe MSMEs lack the required repayment capacity. In such a situation, they end up implementing stricter regulations on these start-ups. Some businesses also fail to keep track of their credit rating that hampers the prospect of availing loans. Moreover, traditional lending options make it difficult for business owners to meet strict eligibility criteria besides the lengthy procedure of MSME loan approval further dampens their spirits.

Skills

When it comes to skills, Indian MSMEs are far behind their counterparts in other countries because they depend heavily on the help of informal workers, who are not paid well and lack the technical skills which can help enhance productivity. As a result, smaller firms are forced to take up jobs that require low levels of skill and expertise, which further affects their growth prospects in the long term.

Absence of collateral in loan

Some businesses may find it difficult to avail MSME loan as a result of a strict collateral protocol. Since small companies may not have the property to substantiate the criteria to avail a loan, business owners may opt for unsecured business loans from lenders and not fret over offering collateral or assets to get the MSME loan approval.

Despite these challenges, the success in business is not elusive if you are determined and these problems can be easily addressed if you get the right support from the lender.

According to provisions of MSMED Act 2006, businesses which can come under the purview of the Act are based on their definition and categorization under either Manufacturing Enterprises or Service Enterprises; and the registration policy relevant to Central government and State governments.

Manufacturing Enterprises

• Engage in the manufacture and production of goods
• Defined with relevance to investment in plant and machinery
• Examples include energy-efficient pumps, engineering and fabrication, auto part components etc.

Service enterprises

• Engage for providing of services and defined in
• Defined with relevance to investment in equipment
• Examples include servicing for agricultural farm equipment, IT service provider etc.

List of MSME Businesses

• Leather products.
• Moulding: This includes products like combs, umbrella frames, plastic toys, etc
• Natural Fragrance and Flavours.
• Placement and Management Consultancy Services.
• Training and Educational Institute.
• Energy Efficient Pumps
• Beauty Parlour and crèches.
• Auto repair services and garages.
• X-Ray Clinics.
• Equipment Rental & Leasing.
• Photographic lab.
• Servicing of Agricultural Farm Equipment. This includes tractor, pump repairing, ring boring machine.
• Back Office Operation Relating to Computerised Data.
• STD/ISD booths.
• Retail Trade with low Capital.
• Multi Channels Dish cable T.V. with Dish Antenna.
• Laundry and Dry Cleaning.
• Toughened Metallic Ware.
• Automotive Electronic Component products.
• Electronic Surveillance and Security.
• Mechanical Engineering Excluding Transport Equipment. This is inclusive of steel almirahs, cocks, and valves, wire cutters, etc.
• Engineering and Fabrication.
• Recorders, VCRs, Radios, Transformer, Motors, Watches.
• Micronutrients For Plants.
• Active Pharmaceutical Ingredients and Ayurvedic Products.
• Khadi Products and Hosiery Products.
• Handicraft activities like Spinning, Weaving, Artisans.
• Printing and other products made of paper.
• Coir Industry.
• Furniture and wood products.
• Poultry Farm.
• Bicycle parts.
• Stationery Items.
• Call centre.
• Rubber Products.
• IT Solution Provider. Services include creating a server bank, application service provider, smart card customization, service provider, etc.
• Testing Labs for industries.
• Auto Parts Components. Which includes horn buttons, door channels, wiper blade components, battery cell tester.
• Ceramics and glass products include roofing tiles, glass flooring tiles, granite, etc.
• Retail and wholesale business

Services:

    Healthcare and hospitality

    IT Service Provider

MSMEs contribute nearly 8% of the country’s GDP, around 45% of the manufacturing output, and approximately 40% of the country’s exports. It won’t be wrong to refer them as the ‘Backbone of the country.’

The Government of India has introduced MSME or Micro, Small, and Medium Enterprises in agreement with Micro, Small and Medium Enterprises Development (MSMED) Act of 2006. These enterprises primarily engaged in the production, manufacturing, processing, or preservation of goods and commodities.

MSMEs are an important sector for the Indian economy and have contributed immensely to the country’s socio-economic development. It not only generates employment opportunities but also works hand-in-hand towards the development of the nation’s backward and rural areas. According to the annual report by the Government (2018-19), there are around 6,08,41,245 MSMEs in India.

A proposal was made to redefine MSMEs by the Micro, Small and Medium Enterprises Development (Amendment) Bill, 2018, to classify them as manufacturing or service-providing enterprises, based on their annual turnover.

Since its formation, the MSME segment has proven to be a highly dynamic Indian economy sector. MSMEs produce and manufacture a variety of products for both domestic as well as international markets. They have helped promote the growth and development of khadi, village, and coir industries. They have collaborated and worked with the concerned ministries, state governments, and stakeholders towards the upbringing of rural areas.

MSMEs have played an essential role in providing employment opportunities in rural areas. They have helped in the industrialization of these areas with a low capital cost compared to the large industries. Acting as a complementary unit to large sectors, the MSME sector has enormously contributed to its socio-economic development.

MSMEs also contribute and play an essential role in the country’s development in different areas like the requirement of low investment, flexibility in operations, mobility through the locations, low rate of imports, and a high contribution to domestic production.

With the capability and capacity to develop appropriate local technology, provide fierce competition in domestic and international markets, technology-savvy industries, a contribution towards creating defense materials, and generating new entrepreneurs by providing knowledge, training, and skill up-gradation through specialized training centers.

Importance of MSMEs to Indian Economy

• MSMEs employ about 12 crore people, making them the second-largest source of jobs after agriculture.
• It contributes about 6.11% of GDP from manufacturing and 24.63% of GDP from service activities, with about 45 lakh units across the country.
• As India strives to become a $5 trillion economy, the MSME ministry aims to raise its contribution to GDP by up to 50% by 2025.
• They account for approximately 45% of India’s total exports.
• MSMEs promote inclusive growth by creating job opportunities, especially for people from lower socioeconomic backgrounds in rural areas.
• MSMEs in tier-2 and tier-3 cities contribute to the creation of opportunities for people to use banking services and goods, which can result in the final accounting of MSMEs’ contribution to the economy.
• MSMEs encourage creativity by assisting aspiring entrepreneurs in developing innovative goods, thereby increasing market competitiveness and fueling growth.

MSME stands for Micro, Small and Medium Enterprises. In a developing country like India, MSME industries are the backbone of the economy. When these industries grow, the economy of the country grows as a whole and flourishes. These industries are also known as small-scale industries or SSI’s. MSME registration helps these industries to obtain the various benefits provided by the government to MSMEs.

Even if the company is in the manufacturing line or the service line, MSME registration for both these industry sectors can be obtained as per the MSME Act. The MSME registration is not yet made mandatory by the Government of India but it is beneficial to get one’s business registered under this because it provides a lot of benefits in terms of taxation, setting up the business, credit facilities, loans etc.

The MSME Act became operational in 2006. It aims to promote, facilitate and develop the competitiveness of micro, small and medium enterprises in India.

MSME Online Registration Process on Udyam

MSME registration is completely online. MSME online registration is to be done in the government portal of udyamregistration.gov.in. The registration of MSMEs can be done under the following two categories in the portal:

• For New Entrepreneurs who are not Registered yet as MSME or those with EM-II
• For those having registration as UAM and for those already having registration as UAM through Assisted filing.

For New Entrepreneurs who are not Registered yet as MSME or those with EM-II

New entrepreneurs and entrepreneurs having EM-II registration need to click the button “For New Entrepreneurs who are not Registered yet as MSME or those with EM-II” shown on the home page for registering MSME. New registration of MSME is done by entering the Aadhaar card number and PAN number.

When clicked on the “For New Entrepreneurs who are not Registered yet as MSME or those with EM-II” button on the homepage of the government portal, it opens the page for registration and asks to enter the Aadhaar number and the name of the entrepreneur. After entering these details, “Validate and Generate OTP Button” is to be clicked. Once, this button is clicked and OTP is received and entered, the PAN Verification page opens.

Registration for Entrepreneurs Already Having UAM

For those already having registration as UAM, they need to click the button “For those having registration as UAM” or “For those already having registration as UAM through Assisted filing” shown on the home page of the government portal. This will open a page where Udyog Aadhaar Number is to be entered and an OTP option should be selected.

The options provided are to obtain OTP on mobile as filled in UAM or obtain OTP on email as filled UAM. After choosing the OTP Options, “Validate and Generate OTP” is to be clicked. After entering OTP, registration details are to be filled on the MSME registration form and Udyam registration will be complete.

Documents Required for MSME Registration

Aadhaar Card and PAN Card are the only documents required for MSME registration. MSME registration is fully online and no proof of documents is required. PAN and GST linked details on investment and turnover of enterprises will be taken automatically by the Udyam Registration Portal from the Government databases. The Udyam Registration Portal is fully integrated with Income Tax and GSTIN systems.

GST is not compulsory for enterprises that do not require a GST registration under the GST law. However, the enterprises that need to compulsorily obtain GST registration under the GST regime need to have GST registration for obtaining Udyam Registration.

Those who have UAM registration or any other registration issued by any authority under the Ministry of MSME, will have to re-register themselves in the Udyam Registration Portal by clicking on the “For New Entrepreneurs who are not Registered yet as MSME or those with EM-II”.

The enterprises having UAM registration need to migrate to Udyam Registration by 30/06/2022. If the entrepreneurs having UAM registration do not migrate to Udyam Registration by 30/06/2022, the UAM registration will be invalid and they will not be able to receive the benefits provided to the MSMEs.

MSME Registration Fees

The enterprises having UAM registration need to migrate to Udyam Registration by 30/06/2022. If the entrepreneurs having UAM registration did not migrate to Udyam Registration by 30/06/2022, the UAM registration is invalid and they will not be able to receive the benefits provided to the MSMEs. They will have to re-register themselves for Udyam registration to obtain MSME benefits.

MSME Registration Certificate

After submitting the MSME registration form online, a message of successful registration with a reference number will appear. The Ministry of MSME will issue the Udyam Registration certificate or MSME certificate to the email ID of the entrepreneur after verification of the registration form submitted on the portal.

The Ministry will issue the MSME certificate after a few days from the submission of the registration form. The MSME registration certificate validity is for a lifetime. Thus, it requires no renewal.

How to Get MSME Certificate Online

To get MSME Certificate Online entrepreneur needs to download the MSME certificate online by visiting the Udyam Registration portal. The process to get the MSME registration certificate online is as follows:

• On the homepage of the portal, the entrepreneurs have to click on the ‘Print/Verify’ tab and click on the ‘Print Udyam Certificate’ option.
• The next page will open where the entrepreneurs have to enter the Udyam Registration Number, mobile number, choose the OTP option and click on the ‘Validate and Generate OTP’ button.
• Enter the OTP received on the mobile number or email ID and click on the ‘Validate OTP and Print’ button.

Raw Material Assistance Scheme aims at helping MSMEs by way of financing the purchase of Raw Material (both indigenous & imported). This gives an opportunity to MSMEs to focus better on manufacturing quality products.

The following benefits are provided under the scheme:

• Financial assistance (Credit) for procurement of raw material up to 90 days.
• Materials facilitated under Bulk supplies arrangements are provided at bulk supplier’s rate by eliminating the middlemen and thus goods are procurred at a lower price.
• Discounts received under bulk supplies arrangements are shared with MSMEs, enabling them to reduce cost of purchase of materials (Economies of Scale).
• Availability of raw material on credit and enabling MSMEs to execute the orders in hand.

Any manufacturing MSME having Udyog Aadhaar Memorandum (UAM) can apply for the assistance under the Scheme.

The The Entrepreneurs and any MSME needs raw material through NSIC may apply to any of the NSIC field office for Raw Material Assistance in the prescribed application forms, which can be downloaded from NSIC’s web site (www.nsic.co.in) or may be obtained free of cost from any of the field offices. The duly filled in application form along with prescribed documents can be submitted with the nearest branch office of NSIC. Details of NSIC offices are available on www.nsic.co.in.

Process of Disbursement

NSIC will make a visit to the applicant’s unit for the purpose of preliminary appraisal after submitting the form. Then, the agency will sanction a limit for the unit post inspection. After getting the sanction, the prospective beneficiary will be required to sign the agreement with NSIC. After signing the agreement, NSIC will disburse the assistance for the unit, provided that a security in the form of Bank Guarantee from approved or nationalized banks is furnished by the applicant.

Scheme for Assistance in Rent to MSMEs

Micro, Small and Medium Enterprises (MSEs) play a significant role in the economic growth of the country owing to their contribution to production and employment. In the recent years, there is a sharp increase in the cost of land and building in the country and therefore Micro, and Small Enterprises having minimal financial resources could not able to start their manufacturing enterprises. Government of Gujarat has decided to provide financial assistance through Scheme for assistance in Rent to MSMEs for shed and plot developed by private developers for the generation of employment and development of MSMEs in the state. The task of administering and implementing this Scheme is entrusted with the Gujarat Industries Commissionerate. In this article, we will look at the Scheme for Assistance in Rent to MSEs

Features of the Scheme

Under this Scheme, the Government provides financial assistance to Private Developer for developing readymade sheds in Mini Estate.

Gujarat Government has felt that there is a need for small estates having a small row house type (Gala type) shed for MSEs which will provide basic infrastructure to set up MSEs. This type of mini Estate can be developed by a private developer for MSEs.

The government also offers financial Assistance in rent to MSEs

The Government felt that the MSE Industrial units have to keep more margins for purchase of land and building while approving the loan from the financial Institution/ bank. This will affect the working capital requirement and also adversely affect the overall viability of the entire project. In view of above, the government has decided to assist MSEs units in rent which will improve the initial liquidity of the project and also help the financial institution/bank to sanction the term loan on plant and machinery required for the project.

Note on Private Developer

Private Developer

Private Developer means any registered Private, Public Limited Company or Industrial Association, Individual industries, Group of industries or Cluster

Mini Estate

Mini Estate is an industrial estate having necessary infrastructure facilities like developed plot, water distribution facilities, internal roads, power distribution and such other facilities or services as may be required designed for the establishment of MSEs in manufacture any product

Eligibility Criteria

The eligibility criteria to obtain the financial benefit under the Scheme for Assistance in Rent to MSEs for Shed and Plot developed By Private Developer are explained in detail below:

The New Micro and Small Enterprise registered as an industrial unit under the MSME Development Act, 2006 with respective Director of Industries Commerce (DIC) as a manufacturing enterprise and obtained term loan from the Financial Institution.

Eligible new unit

For availing the grant under the Scheme for Assistance for in Rent to MSEs, the new unit has to commence production during the operative period of this Scheme.

Eligible Fixed Capital Investment

The eligible fixed Capital investment of the project will be decided based on the following criteria:

Cost of Land

The cost of land will be decided on the basis of prevailing jantri price of the area or the actual price paid by the private Developer, including the stamp duty and registration charges.

Cost of Building

The cost of the building is fixed up by SLEC for the industrial building and SOR of the Roads and Building Department.

Other Infrastructure Facilities

The cost of other infrastructure facilities will be as decided by the SLEC.

Assistance in Rent to MSEs

The Government felt that the MSE Industrial units have to keep more margins for purchase of land and building while approving the loan from the Financial Institution. This will affect the working capital requirement and also adversely affect the overall viability of the entire project. In view of above, the government has decided to assist MSEs units in rent which will improve the initial liquidity of the project and also help the financial Institution or bank to sanction the term loan on plant and machinery required for the project.

Quantum of assistance

The Scheme intends to provide assistance to set up MSEs by small entrepreneurs having limited financial resourced, the Government will assist with rent to strengthen the MSEs in the initial period of establishment.

• The assistance at 50% of rent paid or Rs.50000/- per annum, whichever is less in Municipal Corporation area and areas under the Urban Development Authority
• The assistance at 50% of rent paid or Rs.25000/- per annum, whichever is less except mentioned above
• The financial assistance will be provided for three years

Not all entrepreneurs are from a sound financial background. Most will need initial loans on reasonable interest rate in order to generate capital to start their venture or enterprise. It is self-explanatory but without funds, entrepreneurs cannot grow, and this is where banks, particularly commercial banks play a significant role in the lives of entrepreneurs. Once an enterprise or business is set-up, then comes the important part, funding the cash cycle.

There will be a delay in cash after selling products due to credit period provided to customers. But entrepreneurs will have to make payments upfront to service providers. Banks will help in providing working capital assistance that becomes the lifeline of companies. Apart from that, banks will also provide financial help on regular basis like during expansion or play the role of middleman to connect entrepreneurs. Banks can connect people with huge pockets to people with great ideas. Banks are great advisers as well, they can suggest young entrepreneurs invest their money on shares or commodities to earn more and without any interest rate.

Ethical manufacturing is a holistic approach to the manufacturing process that focuses on good health for all involved. This means that a product’s design, creation, and use maintain sustainable standards and that the item and the process of making these have a positive impact on communities.

An ethical manufacturer has oversight and cares about each section of their business and their own supply chain, prioritising the well-being of both customers and staff, as well as the environment in which they work, shop, and source materials.

Ethical businesses want to operate in the best interest of workers. The health and happiness of staff become priorities, going beyond the standard legal requirements. This means that safety is not sacrificed, and workers are treated fairly. In turn, this can benefit a business through a boost in productivity and staff retention.

Ethics in production is a subset of business ethic that is meant to ensure that the production function or activities are not damaging to the consumer or the society. Like other ethics there is a certain code of conduct or standards to be followed, however ensuring that the ethics are complied with is often difficult.

One of the most important characteristic of the business today is that there is a great degree of interdependence between various business functions. Production cannot happen without marketing and sales and vice versa.

In order to survive in the competitive sphere organizations try to reduce the costs involved in production processes. This cost efficiency is sometimes achieved at the cost of quality. Poor processes and technology is used to keep the cost down, this is especially true for small players who cannot afford economies of scale. Having said this there are also examples of industry giants that compromised on certain production processes, cola companies make up for a good example.

All the production functions are governed by production ethics but there are certain that are severely harmful or deleterious which need to be monitored continuously. The following are worth mentioning:

1. There are ethical problems arising out of use of new technologies that are deleterious to health, safety and environment. Technological advancements like genetically modified food, radiations from mobile phones, medical equipment etc are less problems are more of dilemmas.
2. Defective services and products or products those are innately deleterious like alcohol, tobacco, fast motor vehicles, warfare, chemical manufacturing etc.
3. Animal testing and their rights or use of economically or socially deprived people for testing or experimentation is another area of production ethics.
4. Ethics of transactions between the organization and the environment that lead to pollution, global warming, increase in water toxicity and diminishing natural resources.

Dilemma of Ethics in Production

There are certain processes involved in the production of goods and a slight error in the same can degrade the quality severely. In certain products the danger is greater i.e. a slight error can reduce the quality and increase the danger associated with consumption or usage of the same exponentially. The dilemma therefore lies in defining the degree of permissibility, which in turn depends on a number of factors. Bhopal gas tragedy is one example where the poisonous gas got leaked out due to negligence on the part of the management.

Usually many manufactures are involved in the production of same good. They may use similar or dissimilar technologies for the same. Setting a standard in case of dissimilar technologies is often very difficult. There are many other factors that contribute to the dilemma, for example, the involvement of the manpower, the working conditions, the raw material used etc.

Social perceptions also create an impasse sometimes. For example the use of some fertilizer by cola companies in India recently created a national debate. The same cold drinks which were consumed till yesterday became noxious today because of a change in the social perception that the drinks are not fit for consumption.

A Subsidiary must be excluded from the consolidation when:

• Control is planned to be temporary since the subsidiary was taken over and was held exclusively for disposal in the near future, or
• The subsidiary is operating under severe long-standing restrictions that considerably impair the subsidiary’s ability to transfer funds to its parent

In a consolidated financial statement, investments in such subsidiaries must be accounted for as per AS 13 Accounting for Investments.

Reasons for which a subsidiary isn’t included in the consolidation must be disclosed in such consolidated financial statements.

Consolidation Procedures

While preparing a consolidated financial statement, the parent company’s financial statements and its subsidiaries must be combined line by line by totaling together similar items such as assets, liabilities, income, and expenses.

For consolidating financial statements in a way to present financial information about a group as that of a lone enterprise, the below-motioned steps must be taken:

1. Eliminate the cost to the parent of its investment made in each of its subsidiaries and such parent’s equity portion of each of its subsidiaries, at the date when the investment in such subsidiaries are made
2. any additional cost to the parent company of the investment in the subsidiary over the parent company’s share of the equity of subsidiary, at the date on which the investment in such subsidiary is done, must be shown as goodwill for recognizing as the asset in its consolidated financial statements
3. when the cost to the parent of the investment in the subsidiary is lower than the parent company’s share of the equity of subsidiary, a date on which the investment in such subsidiary is done, the difference must be treated as the capital reserve in its consolidated financial statements
4. a portion of minority interests in net income of the consolidated subsidiary for reporting period must be recognized and adjusted against income of the group for arriving at the net income which is attributable to owners of such parent company; and
5. a portion of minority interests in net assets of the consolidated subsidiaries must be recognized and provided for in consolidated balance sheet distinctly from the equity and liabilities of the parent company.
6. Minority interests in net assets comprise of:

• amount of equity which is attributable to the minorities at the date on which such investment in the subsidiary is done; and
• minorities’ share of the movements in equity from the date the relationship of parent-subsidiary came in to force

1. Where carrying investment amount in a subsidiary is different from the cost, such carrying amount is to be considered for the above calculations.

Accounting for Investments in the Subsidiaries in Separate Financial Statement of the Parent

In a parent company’s separate financial statements, the investments made in subsidiaries must be accounted for as per AS 13 – Accounting for Investments.

Disclosures in the Financial Statements

Following disclosures must be made w.r.t. AS 21 Consolidated Financial Statements:

1. in the consolidated financial statements the list of all the subsidiaries of the parent company which includes the name, country of residence or incorporation, the share of ownership interest and, in case different, the share of voting power held
2. In case the consolidation of a particular subsidiary hasn’t been made according to the grounds permissible in the accounting standard, reasons for which such subsidiary isn’t included in the consolidation must be disclosed in such consolidated financial statements
3. in the consolidated financial statements, where valid:

• type of relationship between a parent and its subsidiary, whether direct control or indirect control through the subsidiaries
• effect of acquisition and disposal of the subsidiaries on the financial position at the date of reporting results for the reporting period and on corresponding amounts for the preceding period; and
• Name of the subsidiary(s) of which reporting date(s) is different

IAS 27 Consolidated and Separate Financial Statements outlines when an entity must consolidate another entity, how to account for a change in ownership interest, how to prepare separate financial statements, and related disclosures. Consolidation is based on the concept of ‘control’ and changes in ownership interests while control is maintained are accounted for as transactions between owners as owners in equity.

IAS 27 was reissued in January 2008 and applies to annual periods beginning on or after 1 July 2009, and is superseded by IAS 27 Separate Financial Statements and IFRS 10 Consolidated Financial Statements with effect from annual periods beginning on or after 1 January 2013.

Objectives of IAS 27

IAS 27 has the twin objectives of setting standards to be applied:

• In the preparation and presentation of consolidated financial statements for a group of entities under the control of a parent;
• In accounting for investments in subsidiaries, jointly controlled entities, and associates when an entity elects, or is required by local regulations, to present separate (non-consolidated) financial statements.

Definitions [IAS 27.4]

Consolidated financial statements: the financial statements of a group presented as those of a single economic entity.

Subsidiary: an entity, including an unincorporated entity such as a partnership that is controlled by another entity (known as the parent).

Parent: an entity that has one or more subsidiaries.

Control: the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

Scope

This Standard shall be applied in the preparation and presentation of consolidated financial statements for a group of entities under the control of a parent.

This Standard does not deal with methods of accounting for business combinations and their effects on consolidation, including goodwill arising on a business combination (see Ind AS 103 Business Combinations).

This Standard shall also be applied in accounting for investments in subsidiaries, jointly controlled entities and associates when an entity elects, or is required by law, to present separate financial statements.

Definitions

The following terms are used in this Standard with the meanings specified:

Consolidated financial statements are the financial statements of a group presented as those of a single economic entity.

Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

A group is a parent and all its subsidiaries.

Non-controlling interest is the equity in a subsidiary not attributable, directly or indirectly, to a parent.

A parent is an entity that has one or more subsidiaries.

Separate financial statements are those presented by a parent, an investor in an associate or a venturer in a jointly controlled entity, in which the investments are accounted for on the basis of the direct equity interest rather than on the basis of the reported results and net assets of the investees.

A subsidiary is an entity, including an unincorporated entity such as a partnership, that is controlled by another entity (known as the parent).

A parent or its subsidiary may be an investor in an associate or a venturer in a jointly controlled entity. In such cases, consolidated financial statements prepared and presented in accordance with this Standard are also prepared so as to comply with Ind AS 28 Investments in Associates and Ind AS 31 Interests in Joint Ventures.

6 For an entity described in paragraph 5, separate financial statements are those prepared and presented in addition to the financial statements referred to in paragraph 5. Separate financial statements need not be appended to, or accompany, those statements, unless required by law.

The financial statements of an entity that does not have a subsidiary, associate or venturers interest in a jointly controlled entity are not separate financial statements.

8 [Refer to Appendix 1]

A parent shall present consolidated financial statements in which it consolidates its investments in subsidiaries in accordance with this Standard. Where a parent is a company, the consolidated financial statements shall be in the form set out in Appendix C to this Standard or as near thereto as circumstances admit.

A parent presents separate financial statements in compliance with paragraphs 3843.

Scope of Consolidated Financial Statements

Consolidated financial statements shall include all subsidiaries of the parent.

Control is presumed to exist when the parent owns, directly or indirectly through subsidiaries, more than half of the voting power of an entity unless, in exceptional circumstances, it can be clearly demonstrated that such ownership does not constitute control. Control also exists when the parent owns half or less of the voting power of an entity when there is:

Footnotes:

If on acquisition a subsidiary meets the criteria to be classified as held for sale in accordance with Ind AS 105 Non-current Assets Held for Sale and Discontinued Operations, it shall be accounted for in accordance with that Indian Accounting Standard.

See also Appendix A Consolidation Special Purpose Entities.

(a) power over more than half of the voting rights by virtue of an agreement with other investors;

(b) power to govern the financial and operating policies of the entity under a statute or an agreement;

(c) power to appoint or remove the majority of the members of the board of directors or equivalent governing body and control of the entity is by that board or body; or

(d) power to cast the majority of votes at meetings of the board of directors or equivalent governing body and control of the entity is by that board or body.

An entity may own share warrants, share call options, debt or equity instruments that are convertible into ordinary shares3, or other similar instruments that have the potential, if exercised or converted, to give the entity voting power or reduce another partys voting power over the financial and operating policies of another entity (potential voting rights). The existence and effect of potential voting rights that are currently exercisable or convertible, including potential voting rights held by another entity, are considered when assessing whether an entity has the power to govern the financial and operating policies of another entity. Potential voting rights are not currently exercisable or convertible when, for example, they cannot be exercised or converted until a future date or until the occurrence of a future event.

In assessing whether potential voting rights contribute to control, the entity examines all facts and circumstances (including the terms of exercise of the potential voting rights and any other contractual arrangements whether considered individually or in combination) that affect potential voting rights, except the intention of management and the financial ability to exercise or convert such rights.

A subsidiary is not excluded from consolidation simply because the investor is a venture capital organisation, mutual fund, unit trust or similar entity.

A subsidiary is not excluded from consolidation because its business activities are dissimilar from those of the other entities within the group. Relevant information is provided by consolidating such subsidiaries and disclosing additional information in the consolidated financial statements about the different business activities of subsidiaries. For example, the disclosures required by Ind AS 108 Operating Segments help to explain the significance of different business activities within the group.