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Home » » Companies (Auditor's Report)(Amendment) Order, 2004 - Clause 4(xx)

Companies (Auditor's Report)(Amendment) Order, 2004 - Clause 4(xx)

Written By Admin on Sunday, 1 April 2012 | Sunday, April 01, 2012

Clause 4(xx)

whether the management has disclosed on the end use of money raised by public issues and the same has been verified.

1) In case the company has made a public issue of any of its securities like shares, preference shares, debentures and other securities, the auditor is required to report upon the disclosure of end-use of the money by the management in the financial statements. The auditor is also required to state whether he has verified the disclosure made by the management in this regard.

2) Currently, there is no legal requirement under the Act to disclose the end use of money raised by public issues in the financial statements. The companies, however, make such a disclosure in the Board’s Report. Schedule VI to the Act requires that only unutilized amount of any public issue made by the company should be disclosed in the financial statements of a company. In the absence of any legal requirement of such disclosure, it appears that the clause envisages that the companies should disclose the end use of money raised by the public issue in the financial statements by way of notes and the auditor should verify the same.

3) It may also be noted that according to the SEBI (Disclosure & Investor Protection) Guidelines, 2000, in case the issue exceeds Rs. 500 crores, the issuer company is required to make arrangements for the use of proceeds of the issue to be monitored by financial institutions. The monitoring agency so appointed is required to submit its report to the SEBI, on a half-yearly basis, till the completion of the project. In case, the company has appointed a monitoring agency for the purpose of the issue, reports of the monitoring agency would also be helpful to the auditor while reporting under the clause.

4) During construction phase, companies, generally, temporarily invest the surplus funds to reduce the cost of capital or for other business reasons. However, subsequently the same are utilised for the stated objectives. In such cases, the auditor should mention the fact that pending utilisation of the funds raised through public issues for the stated purpose, the funds were temporarily used for the purpose other than for which they were raised but were ultimately utilised for the stated end-use.

5) Normally, the companies do mention the end-use of the money proposed to be raised through the public issues in the prospectus. An examination of the prospectus would provide the auditor an understanding of the proposed end-use of money raised from public. The auditor should verify that the amount of end-use of money disclosed in the financial statements by the management is not significantly different from the proposed and actual end use. The auditor should obtain a representation from the management as to the completeness of the disclosure with regard to the end-use of money raised by public issues. If the auditor is of the opinion that adequate disclosure with regard to end use of money raised by public issue has not been made in the financial statements, the auditor should state the fact in his audit report. If, for any reason, the auditor is not able to verify the end-use of money raised from public issues, he should state that he is not able to comment upon the disclosure of end-use of money by the company since he could not verify the same. He should also mention the reasons which resulted in the auditor’s inability to verify the disclosure.

6) It may be noted that while reporting under this clause, the auditor should also have regard to the SEBI (Disclosure and investor Protection) Guidelines, which contain a number of disclosure requirements in the balance sheet with respect toutilization of proceeds of monies raised from public, whether by shares or debentures, as also disclosure requirements in respect of unutilized monies from such proceeds. From a perusal of the above mentioned Guidelines of SEBI, it would be apparent that the details have to be given of both ‘utilised’ and ‘unutilised’ monies. Since the purpose is to provide a picture to the reader of ‘utilisation of issue proceeds’, it is only logical that the sum total of utilised and unutilised portions equal the total issue size. This implies that the figure of ‘utilised’ money should be cumulative. A company can, however, present greater details by showing the break-up of year-end cumulative figures into opening figures and monies utilised during the year.

7) Another point to consider with respect to this clause is whether it applies to monies raised from capital markets through ADR route. It may be noted that neither the Order nor the Act contains the definition of ‘public issue’.
 
SEBI (Disclosure and Investor Protection) Guidelines define a public issue as “an invitation to public to subscribe to the securities offered through a prospectus”.  

It seems that strictly in terms of the above guidelines, monies raised from foreign capital markets may not fall within the scope of the term ‘public issue’ as defined above. The Guidelines seem to be in the context of issues to Indian public. For example, one of the mandatory requirements is to have collection centres in the four metropolitan cities. It can be argued that for a company raising funds on a foreign capital market, this requirement would be redundant or out of context.
 
On the other hand, it can also be argued that since depository receipts issued pursuant to capital issue in a foreign market are convertible into normal listed securities of the company, effectively their issuance is equivalent of issuance of securities to public in India. Further in case a project is financed partly from Indian public issue and partly from ADR, it would be difficult to argue that the utilisation of only Indian issue proceeds should be given. The auditor should adopt this view as, in any case, that would result in meeting the intent behind the clause.
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