20 November 2007
Dear sir/madam, My query is as follows:- 1.X Ltd.got the approval of a BOT Project from State govt. agency in sept.2005.
2.X Ltd.formed a SPV Y Ltd. in Nov. 2005 having 70% share and rest 30% held by other entity. Agreement executed between SPV and govt. agency for contract cost maximum of Rs. 150 crore in Nov. 2005.
3.X ltd. made an agreement with SPV Y Ltd. for taking the same contract on 202.00 Crores in Sept.2006. In between the period of sept.2005 to sept.2006 X ltd. was doing all formalities for the project.
4. For Dec. 2006 quarter X Ltd. shows contract completed 35% and books profit of Rs.60.00 crores in compliance with AS-7.
Here my question is that can X lTD.show such profit in short term where the BOT Project taken by SPV is for 20 years and SPV can earn revenue after completion of project by charging toll charges etc?
Here 70% funds of SPV financed by X ltd itself,so in reality X Ltd is showing inflow of revenue from SPV which is nothing but its own fund invested in SPV. Is it possible ?
20 November 2007
1. X LTD. GOT THE AGRREEMENT FOR TRANSFER OF CONTRACT FROM SPV LTD. IN SEPT 2006 . 2. IT IS TRUE THAT X LTD. HAS 70% SHARE IN THE SPECIAL PURPOSE VEHICLE LIKE A HOLDING COMPANY INVESTING IN SUBSIDIARY. THIS ALONE CANNOT BE CONCLUDED AS INFLOW OF REVENUE FROM SPV TO X LTD. INVESTMENT AND INCOME (OR REVENUE) ARE ENTIRELY DIFFERENT. THE 35 % CONTRACT COMPLETION AND PROFIT BOOKING BEING AS PER AS-7 AND EARNED BY X LTD AFTER AGREEMENT FOR TRANSFER IS MADE IN SEPT.06 DOES NOT LEAD TO ANY WRONG INFERENCE. AS LONG THE INCOME IS OFFERED FOR TAX AND ACCOUNTED AS YOU SAY AS PER ICAI STANDARDS, AND THE GOVT. AGENCY WHO AWARDED THE CONTRACT AND SATISFIED ON THE PROJECT AND MADE REQUIRED CERTIFICATIONS TO DRAW MONEY AS PER MILESTONES AND PERIODICAL PROGRESS, FROM WHOM DO WE EXPECT ANY QUESTIONS ON THE ISSUE? NONE INFACT. R.V.RAO
20 November 2007
Thanks for your attention sir, its true that investment in subsidiary and entering into contract with subsidiary is altogether different and there is no prohobition on it.But here attention is required on the contract cost for SPV(max. 150 crores) and contract price(202 crores) for X Ltd. isn't it possible here that X Ltd. has acquired the contract on abnormally high price so that it can show inflated revenue and defraud the shareholder(as 30% of inflated contract price will obviously be higher. Here one thing is to be noted that no tender was invited BY SPV while granting contract to X LTD. Also AS-7 deals about only recognition of contract revenue, it doesn't take care about setting of contract price between related parties. Waiting again for valuable suggestions. Thanks
20 November 2007
REFERENCE IS INVITED HERE FOR TRANSFER PRICING -PRICING BETWEEN ENTITIES AT ARMS LENGTH PRICE OR AT MARKET OR FAIR AND PREVALANT MARKET PRICES IN THIS PARTICULAR SECTOR OR LINE OF BUSINESS.FAIR ENOUGH IF YOU CAN PROVE THAT TIMING DIFFERENCE BETWEEN WHEN SPV WAS AWARDED THE CONTRACT AND AFTER WHAT TIME LAPSE X LTD GOT THE SAME. TIME GAP ALWAYS LEADS TO APPRECIATION LIKE LAND PRICES OR REAL ESTATE MARKET. IN CONTRACTS MARKETING IT ALWAYS HAPPENS WHEN THEY CHANGE HANDS, IT LEADS TO SIGNIFICANT MARK UP BY THE SELLER . AS FOR INVESTMENTS UNDER SEC 372A REFERED BY YOU AS TO POWER OF DIRECTORS TO INVEST/LEND/GUARANTEE FOR AND ONBEHALF OF THE COMPANY, THE LAW IS DAID DOWN IN COMPANY'S ACT . IAM SURE YOU COMPLY WITH 372A OF COMPANY'S ACT PROVISIONS SO THAT THE INVESTMENT MADE BY THE COMPANY ARE CLEAN AND CLEAR.(ALSO NOTE HOLDING COMPANY' ACQUISITION OF SECURITIES OF WHOLLY OWNED SUBSIDIARY ARE NOT ATTRACTING PROVISIONS OF SEC 372A IF SUCH IS YOUR CASE.) . ANY WAY AS THE TRANSACTION IS ALREADY THROUGH,PL. TAKE YOUR AUDITORS INTO CONFIDENCE AND AM SURE THEY WILL HELP IN BAILING YOU OUT. NOT TO WORRY ON A DEAL ALREADY DONE. NOW ONLY ISSUE IS SUPPORT ALL YOUR ACTIONS WITH PROPER DOCUMENTATION AND PROPER SANCTIONS ETC.. TO STEER CLEAR. GOODLUCK. R.V.RAO
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