Statutory Audit of Money Received Against Share Warrants in India [Company Law]

written by ADMIN | June 27, 2024

Introduction

Money received against share warrants is a significant item in the balance sheet of an Indian company. This refers to the funds collected from investors for the share warrants issued, which are convertible into equity shares at a future date. This guide provides a comprehensive overview of the statutory audit procedures for this balance sheet item, addressing common queries and potential areas of confusion, ensuring compliance with Indian laws.

 

Understanding Share Warrants

What are Share Warrants?

Share warrants are financial instruments issued by a company that give the holder the right, but not the obligation, to subscribe to the company’s shares at a predetermined price within a specified period. The funds received upon issuance of these warrants are recorded under the “Money Received Against Share Warrants” heading in the balance sheet.

 

Legal Framework Governing Share Warrants in India

Key Regulations Governing Share Warrants in India

The issuance and management of share warrants in India are subject to various regulations and guidelines to ensure transparency, fairness, and compliance with legal standards. Here’s an expanded overview of the key regulations:

Companies Act, 2013

The Companies Act, 2013, is the primary legislation governing corporate affairs in India. It contains several sections that directly impact the issuance and management of share warrants.

  1. Section 62 – Further Issue of Share Capital:
    • Provisions for Share Warrants: This section details the conditions under which a company can issue further shares, including share warrants. It specifies that a company can issue warrants to its existing shareholders in proportion to their current holdings (rights issue) or through a preferential allotment, which must be authorized by a special resolution passed at a general meeting.
    • Special Resolution Requirement: For issuing share warrants through a preferential allotment, the company must pass a special resolution, and the offer must comply with the conditions laid out in the Companies Act, 2013, and related rules.
  2. Section 42 – Private Placement:
    • Private Placement Procedure: This section outlines the procedure for issuing securities (including share warrants) through private placement. The company must make an offer to a select group of persons and adhere to strict guidelines regarding the number of offers and the identity of offerees. The company must file a private placement offer letter with the Registrar of Companies (RoC) and obtain approval from its Board and shareholders.
    • Compliance and Reporting: Detailed records of the private placement must be maintained, and the company must file a return of allotment with the RoC within 30 days of allotment.

 

SEBI Regulations

The Securities and Exchange Board of India (SEBI) is the regulatory body overseeing the securities market in India. SEBI’s regulations are critical for companies issuing share warrants, particularly those listed on stock exchanges.

  1. SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR):
    • Eligibility and Conditions for Issue: SEBI ICDR regulations provide a comprehensive framework for the issue of share warrants. It specifies eligibility criteria for companies, the pricing of warrants, and the conversion terms. The company must adhere to the minimum price guidelines and ensure the warrants are issued at a fair value.
    • Disclosure Requirements: SEBI mandates extensive disclosures regarding the terms and conditions of the warrants, the purpose of the issue, the identity of the allottees, and their relationship with the company. These disclosures must be included in the offer document and filed with SEBI.
    • Conversion Timeline: SEBI regulations stipulate that the conversion of share warrants into equity shares must occur within 18 months from the date of allotment. If the warrants are not converted within this period, they lapse, and the money received against them may need to be refunded or forfeited based on the company’s policy and regulatory provisions.

 

Accounting Standards

The Institute of Chartered Accountants of India (ICAI) prescribes accounting standards that companies must follow while preparing their financial statements. For share warrants, the relevant standards are:

 

Ind AS 32 – Financial Instruments: Presentation:

    • Classification and Measurement: These standards provide guidelines on classifying and measuring financial instruments, including share warrants. They require companies to distinguish between equity and liability components and to account for the fair value of warrants at the time of issuance.
    • Disclosure: Companies must disclose detailed information about share warrants, including the number issued, the amount received, conversion terms, and any conditions attached to the warrants.

 

Ministry of Corporate Affairs (MCA) Guidelines

The MCA oversees corporate governance and compliance in India. It issues guidelines and circulars that provide additional clarity on the application of the Companies Act and other regulations.

Circulars and Notifications:

    • Clarifications and Amendments: The MCA regularly issues circulars and notifications to clarify the provisions of the Companies Act and related rules. These may include specific instructions on the issuance and accounting treatment of share warrants, ensuring that companies remain compliant with the evolving regulatory framework.

 

Objectives of Auditing Money Received Against Share Warrants

  1. Accuracy and Completeness: Ensuring all transactions are accurately recorded and reported.
  2. Compliance: Verifying adherence to relevant statutory requirements and accounting standards.
  3. Disclosure: Assessing the adequacy of disclosures in the financial statements.

 

Audit Procedures for Money Received Against Share Warrants

1. Verification of Authorization and Documentation

Audit Steps:

  • Review Board Resolutions: Examine the board’s resolution authorizing the issuance of share warrants.
  • Inspect Prospectus/Offer Documents: Check the terms and conditions of the share warrants as mentioned in the prospectus or offer documents.
  • Verify Compliance: Ensure that the issuance complies with Sections 42 and 62 of the Companies Act, 2013, and SEBI ICDR Regulations.

Common Queries and Confusions:

  • Query: Is a special resolution required for the issuance of share warrants?
    • Clarification: Yes, a special resolution is typically required, and it should be passed at a general meeting of the shareholders.

 

2. Examination of Money Received

Audit Steps:

  • Verify Bank Statements: Cross-check the amounts received against share warrants with bank statements.
  • Reconcile Amounts: Ensure the amounts recorded in the books match the amounts deposited in the bank.
  • Check Allotment Register: Ensure entries in the allotment register correspond with the money received.

Common Queries and Confusions:

  • Query: How should partial payments be recorded?
    • Clarification: Partial payments should be recorded as liabilities until the full amount is received.

 

3. Accounting Treatment and Compliance

Audit Steps:

  • Check Ledger Entries: Verify that the money received is correctly recorded under the appropriate account.
  • Review Accounting Policies: Ensure that the accounting policies adopted are consistent with AS 18/Ind AS 32.
  • Examine Compliance with Standards: Ensure compliance with relevant accounting standards regarding the classification and disclosure of financial instruments.

Common Queries and Confusions:

  • Query: How should the money received against share warrants be classified in the balance sheet?
    • Clarification: It should be classified as a separate line item under equity and liabilities until conversion.

 

4. Conversion and Forfeiture of Share Warrants

Audit Steps:

  • Verify Conversion Terms: Check that the conversion of share warrants into equity shares complies with the terms and conditions outlined during issuance.
  • Review Forfeiture Policies: Ensure that the company’s policies regarding the forfeiture of warrants (if applicable) are clearly defined and followed.

Common Queries and Confusions:

  • Query: What happens to the amount received if the warrants are not converted?
    • Clarification: If warrants are not converted, the company should follow its forfeiture policy and adjust the amount accordingly in its financial statements.

 

5. Disclosure in Financial Statements

 

Audit Steps:

  • Review Notes to Accounts: Ensure adequate disclosure of the terms, conditions, and status of share warrants.
  • Check Compliance with SEBI and MCA Guidelines: Ensure that disclosures meet the regulatory requirements of SEBI and the Ministry of Corporate Affairs.

Common Queries and Confusions:

  • Query: What specific disclosures are required for share warrants?
    • Clarification: Disclosures should include the number of warrants issued, the amount received, conversion terms, and any outstanding warrants.

 

Practical Case Studies and Examples

 

Case Study 1: ABC Ltd. Issues Share Warrants

Scenario: ABC Ltd. issued 10,000 share warrants at ₹100 each, giving the holder the right to subscribe to one equity share per warrant at a future date.

Audit Steps:

1. Authorization Verification:

    • Reviewed board resolution and shareholder approval.
    • Verified compliance with the Companies Act, 2013, and SEBI ICDR Regulations.

2. Money Received:

    • Cross-checked bank statements for ₹10,00,000 received.
    • Reconciled amounts with the allotment register.

3. Accounting Treatment:

    • Ensured ₹10,00,000 was correctly recorded under “Money Received Against Share Warrants.”
    • Verified compliance with AS 18/Ind AS 32.

4. Conversion Terms:

    • Checked terms of conversion and ensured all conditions were met.

5. Disclosure:

Verified adequate disclosures in the notes to accounts, including the number of warrants issued, amount received, and conversion terms.

 

Case Study 2: XYZ Ltd. Forfeits Unconverted Warrants

Scenario: XYZ Ltd. issued share warrants but several holders did not exercise their right to convert them.

Audit Steps:

1. Review Forfeiture Policy:

    • Checked the company’s forfeiture policy for unconverted warrants.
    • Verified that the policy was followed.

2. Accounting Adjustment:

    • Ensured the amount received for unconverted warrants was transferred to a suitable reserve or other account as per company policy.

3. Disclosure:

    • Verified disclosure of forfeiture details in the financial statements.

 

Conclusion

Auditing money received against share warrants involves a detailed examination of authorization, receipt, accounting treatment, conversion, and disclosure processes. By following the structured audit steps outlined and addressing common queries and confusions, auditors can ensure accurate reporting and compliance with Indian laws. Incorporating practical case studies enhances understanding and provides real-world context, making the audit process more comprehensive and informative.

 

Author

 

 

 

 

 

CA Sourabh Kothari (C.A., B.Com)
He is currently working as Partner – Risk and Transaction advisory with a renowned firm in Jaipur having experience in Internal Audit, IFC Audit, Business consultancy, Due Diligence and Management consultancy.
E-mail: Sourabh.kothari@jainshrimal.in | LinkedIn: Sourabh Kothari

 

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