Introduction

In corporate reporting, consistency between statutory requirements and accounting standards is essential for ensuring transparency and accurate classification. However, in some situations, differences often arise due to the treatment under Indian Accounting Standards (Ind AS) vis-à-vis the requirements of the Companies Act, 2013.

One such important area of divergence is the presentation of share capital in the financial statements, which directly affects company classification, compliance thresholds, and regulatory perception. In this article, we have discussed the impact of said treatment of share capital in the following two key scenarios:

• Classification of Preference Shares (other than Compulsory Convertible Preference Shares), and
• Deduction of equity shares held by ESOP Trusts.

Both scenarios lead to practical issues while filing returns with the Ministry of Corporate Affairs (MCA), particularly in Form AOC-4 XBRL and Form MGT-7.

Share Capital under Companies Act, 2013:

While Section 2 (84) defines the “share" as a share in the share capital of a company and includes stock, Section 43 specifies the two kinds of share capital i.e. Equity Share Capital and Preference Share Capital. In other words, the Companies Act, 2013 recognizes share capital as comprising both equity share capital and preference share capital.

Section 2(64) defines “paid-up share capital as the aggregate amount of money credited as paid-up as is equivalent to the amount received as paid-up in respect of shares issued……..”.

This statutory definition does not provide for adjustments, except in cases of corporate actions such as buy-back, redemption, or capital reduction approved by the Tribunal.

Paid-up share capital forms the basis for determining thresholds under the Companies Act, 2013, such as appointment of whole- time Key Managerial Personnel, internal audit and secretarial audit provisions, and classification as a small company.

Differences on account of treatment under Ind AS

1. Preference Shares

Under Ind AS 32 – Financial Instruments Presentation,  the classification of a financial instrument depends on its substance:

• If it represents a residual interest, it is equity.
• If it carries a contractual obligation for repayment or fixed dividend, it is classified as   a financial liability (borrowings).

Based on this principle, Non-Convertible Preference Shares and Optionally Convertible Preference Shares (OCPS) in many cases, are not considered equity. Since they carry features of a financial liability (e.g., redemption or fixed return), they are presented as borrowings in the financial statements prepared as per applicable Ind AS. As a result, the total share capital as appearing in the financial statements stands reduced to the said extent.

Equity Shares Held by ESOP Trusts

As per ICAI Guidance note on for Share-based Payment, the amount representing the grant date fair value (or intrinsic value) of the options yet to be exercised by the employees (originally recorded as a debit on issue of shares to ESOP Trust even before the exercise of options by the employees), to the extent of face value of the shares, reduction from the ‘Share Capital’.

Illustration

• A company has issued INR 12 crore equity shares. Out of this, shares worth INR 2 crore are held by its ESOP Trust.
• Issued, Subscribed and Paid-up share capital:

As per Companies Act,2013, full issued i.e. INR 12 crore is considered while as per Ind AS presentation, share capital is shown as INR10 crore (INR 12 crore – INR 2 crore deducted for shares held by ESOP trust).

Share Capital for the purpose of Companies Act,2013

As discussed, the treatment of shares under the aforementioned situations leads to reduction of the paid-up share capital in the financial statements prepared in accordance with the Ind AS. The question that needs to be asked as to what should then be treated as a paid-up share capital of a company. This needs to be answered considering the context. For the purpose of Companies Act, 2013, paid-up share capital for all purposes includes equity shares and preference shares, to the extent they have been subscribed and paid-up.
For determining the eligibilities, voting rights etc., based on the paid-up share capital under the Companies Act, 2013 is considered, the paid-up share capital shall include both equity shares and preferences.

MCA filing

The divergence between the definition under the Companies Act, 2013 and Ind AS treatment also leads to challenges in reconciling MCA data with audited financials. While Ind AS rightly emphasizes substance over form, the MCA system currently does not reconcile this treatment with the statutory framework of the Companies Act, 2013 and this led to inconsistent reporting in Form AOC-4 and Form MGT-7.

Paid-up share capital of the Company in Form AOC-4 XBRL is presented as per the Financial Statements which are prepared in accordance with Ind-AS while in Form MGT-7 paid up share capital is disclosed as per Companies Act, 2013 , without any adjustments.  While filing Form AOC-4 XBRL in MCA21 V2 portal, the paid-up share capital was getting updated due to the direct tagging of figures from the Ind AS compliant balance sheet. As a result,  two different paid-up capital amounts are being reported to MCA, and in some cases, it has led to a reduction of share capital and misclassification of the Company as a Small Company due to understatement of paid-up share capital.