Corporate Governance Provisions of LODR Apply Regardless of Net-Worth Changes Due to Accounting Practice

The SEBI, through informal guidance, has clarified that the corporate governance provisions of Listing Regulations shall be applicable even if the company has stated that the increase in net worth is only on account of a change in the accounting practice.

Brief Facts

In the instant case, Mr. Gokul V Shenoy, Company Secretary and Compliance Officer of TCM Limited sought Informal guidance by way of an interpretive letter under the provisions of the SEBI (Informal Guidance) Scheme, 2003.

The company was listed on BSE and had been claiming exemption from applicability of the corporate governance provisions under Listing Regulations since the beginning of notification as the equity share capital was less than ? 10 crores and net worth was less than ? 25 crores.

As per the formula for the computation of the net worth of a company in terms of section 2(57) of the Companies Act, 2013 (“Companies Act”), the revaluation reserves are not required to be considered for calculating the net worth.

Till the year ended March 31, 2021, the reserves (other than equity) included revaluation reserves to the tune of? 60.78 crore pursuant to the option adopted by the Company on transition to IND AS. This amount was excluded from the computation of net worth and thus, the net worth was less than ? 25 crores for all these years.

As per IND AS 101 – ‘First-time adoption’, all the adjustments/impacts arising on the transition to IND AS, including the revaluation of land was supposed to be accounted as an adjustment to retained earnings.

Therefore, during the financial year ended March 31, 2022, in order to comply with the requirements of IND AS 101 and correct the previous period error of classification of the revaluation impact under Other Equity, the said revaluation impact to the tune of? 60.78 crores was reclassified and merged with the retained earnings, resulting in the aggregated retained earnings increasing to? 27.67 crore.

A question raised before the SEBI

Since Net worth exceeded the threshold limit, the company sought guidance on the applicability of corporate governance provisions of the LODR Regulations under the aforesaid circumstances, and the question was raised that whether the Company is eligible to claim exemptions from the provisions as availed till now.

SEBI’s reply

The SEBI clarified that since the net worth, as calculated by including equity capital and other equity, is greater than the threshold limit. Even though the Company has stated that the increase in net worth is only on account of change in the accounting practice, the same shall be immaterial in the context of the applicability of the provisions of the LODR Regulations. Corporate Governance of LODR Regulations shall be applicable to the Company.

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