Indian Government Accounting Standard (IGAS) 9

IGAS 9: Government Investments in Equity

Introduction and Objective

The IGAS 9, a standard developed by the GOVERNMENT ACCOUNTING STANDARDS ADVISORY BOARD. This standard is specifically focused on Government Investments in Equity.

Governments, including the Union Government, State Governments, and Governments of Union Territories with Legislatures, make investments in various entities. These investee entities can include Government companies, Statutory Corporations, other Joint Stock Companies, and Cooperative Banks/Societies, among others. Additionally, the Union Government can also invest in international bodies such as the International Monetary Fund (IMF), Asian Development Fund (ADB), and International Finance Corporation (IFC).

Government investments in equity, as covered by this standard, include direct investment in share capital, the conversion of outstanding loans (both principal and interest) into equity, and the conversion of dividends declared by the entity but not yet received into equity. IGAS 9 covers all such investments in equity, but it specifically does not cover investment in the loan capital of the entity. The document later provides a more detailed definition of “Government investment in equity” which encompasses investments obtained through payment of cash or exchange of any other asset, the issuance of bonus shares, the exercise of a right granted by the investee, the reinvestment of dividends, and the conversion of loans into equity.

The primary objective of this standard is to lay down the norms for the recognition, measurement, and reporting of investments made by the Government in the Financial Statements. The goal is to ensure that the financial statements provide a true and fair view of the Government’s investments, consistent with best international practices.

Scope of the Standard

IGAS 9 applies to investments made in different investee entities by the Government for the purpose of incorporation and presentation in the Financial Statements. A crucial aspect of its scope is that this standard will apply only to Government accounts being maintained on a cash basis.

The standard applies specifically to investments in equity. It clarifies that it does not apply to investments in debt instruments such as debentures, bonds, and other instruments. However, an exception is noted: it will apply to these debt instruments if they are normally accounted for by the investee entities as long term and short term debt. The Financial Statements are to be considered as giving a true and fair view of investments only if they comply with this Standard.

Definitions of Key Terms

The standard provides definitions for several terms used throughout the document to ensure clarity. These definitions are applicable unless the context requires otherwise.

  • Accounting Authority: This refers to the authority responsible for preparing the financial statements of the Government.
  • Accounting Period: This is defined as the financial year covered by the financial statements. It is typically considered to be from 01 April to 31 March.
  • Bonus Shares: These are shares issued free of cost to the shareholders by an investee entity. This is done by the investee entity capitalising its reserves and/or the security premiums, provided this is permitted by the relevant law.
  • Cash basis of accounting: This is described as one where the accounting transactions of a financial year are distinguished based on the amount due to or from the investee entity during the same period. This means the focus is on cash receipts and disbursements.
  • Disinvestment/Divestment/retirement of Government Equity: This term signifies the sale or transfer of equity shares by the Government.
  • Equity share: This is defined simply as a share which is not a preference share.
  • Financial Statements: These refer to the Annual Finance Accounts of the respective Government.
  • Government: This term includes the Union Government or any State Government or the Government of any Union Territory with Legislature.
  • Government investment in equity: This definition is more comprehensive than the one in the introduction. It includes investment in equity shares obtained by the Government on payment of cash or in exchange of any other asset. It also covers investments arising from the issuance of bonus shares, the exercise of a right granted by the investee entity, the reinvestment of dividends, and the conversion of loans into equity.
  • Historical Cost: This is defined as the cost incurred for the acquisition of equity shares.
  • Investee Entity: This is the entity in which an investment is made by the Government.
  • Investee Group: This refers to a group of investee entities that share similar nature and characteristics. The standard provides examples of how these groups might be distinctly addressed, such as Statutory Corporations, Joint Stock Companies, International Bodies, State Cooperative Banks/other banks, Cooperative Societies, and Employees Consumer Cooperative Societies, etc..
  • Preference shares: These are shares that possess two specific characteristics. First, they have a preferential right with respect to dividends, carrying a preferential right to be paid a fixed amount or an amount calculated at a fixed rate. Second, with respect to capital, they have a preferential right over the equity share holders on winding up or repayment of capital, entitling them to be repaid the amount of capital paid up or deemed to have been paid up.
  • Right shares: These are shares allotted to shareholders on the issue of fresh capital by an investee entity. The allotment is made to the existing shareholders in proportion to their current holding, granting them the entitlement to obtain a certain number of shares already held by him.

Recognition of Investments

An investment made in equity is required to be recognised as an asset of the Government. The point of recognition is the date on which the investment details are entered in the books of the Government.

For investments arising from the conversion of loans into equity, or from dividends declared but not yet distributed and subsequently treated as equity investments, they are to be treated as equity investments from the date on which the conversion takes place or the entry is made in the books.

Measurement of Investments

The standard specifies how Government investments in equity are to be measured.

  • Initial Measurement: The method for the initial measurement of investments in the financial statements is based on historical cost.
    • If the investment is in equity shares obtained through the payment of cash, the historical cost is the amount of cash disbursed.
    • If equity shares are acquired in exchange for any other asset, the historical cost is considered to be the fair value of the asset given up.
    • For bonus shares, the historical cost is nil, as there is no payment of cash involved in their acquisition.
    • When acquiring equity shares through the exercise of a right, the historical cost is the payment of cash.
    • For the conversion of outstanding loans (principal and interest) into equity, the historical cost is the amount of loan outstanding against which the shares are allotted.
  • Subsequent Measurement: Investments made subsequent to the initial measurement are also to be reflected in the financial statements at historical cost.

The standard also addresses the total amount of investments shown at the end of an accounting period. This amount is calculated by taking the investments at the beginning of the period, adding the additions made during the period, and subtracting the disinvestments / sale of investments during the period.

For investments where the shares are of listed companies and are regularly traded on a recognised stock exchange during the year, the total market value of the investment will be calculated. This calculation is based on the price quoted on the last day of the financial year. If the price for that date is not available, the price quoted on the day immediately preceding the closing of the financial year is to be used. This market value calculation for listed securities is mentioned as an item that may also be disclosed.

Disclosure Requirements

The standard outlines comprehensive disclosure requirements to provide detailed information about the Government’s equity investments.

The Financial Statements are required to disclose the additional investments, disinvestments/retirement/write down of capital/transfer of share that occurred during the reporting period. This disclosure should show the opening balance at the beginning of the period and the movement (additions/disposals) during the period.

If the acquisition of equity investments involved the exchange of goods or other assets, the types of goods or other assets specifically mentioned and the acquisitions of investments in terms of exchange of revenue for the period are also to be recorded. The amount of dividend received during the period must be reflected as revenue.

The Financial Statements must disclose the following details under the heading ‘Statement of investments made by the Government’:

  1. A Detailed Statement of Investments made Investee Entity wise (Table 1).
  2. A Detailed Statement of Disinvestments / divetsments / retirement of capital / transfer of shares made Investee Entity wise (Table 1A).
  3. A Summary of investments Investee Group wise (Table 2).
  4. Additional Disclosures of Investee Entities which have not submitted Annual Accounts and / or have suffered a loss during the preceding three consecutive years (Table 3).

Specific additional details that the statement should report include the full name of the entity, the investee group it belongs to, and the Ministry or Department under which the investee falls. It should also indicate whether the enterprise is in operation or not.

Details of disinvestments / retirement of capital / transfer of share disclosed under Table 1A should include the type and number of units, the units acquired, and bonus shares allotted, which should be depicted separately along with the year of allotment (Table 1A). This detailed information is intended to help indicate the extent of government control and whether the investment has increased or decreased.

As mentioned earlier, where the units of investments are traded in the market, the amount of investment in terms of market value may also be disclosed. The price used for this disclosure should be the price quoted on the last day of the financial year on that particular stock, or the price quoted in the primary market or trading if the quoted price is not available on the last day. The price quoted before the closing of the financial year may be taken into account.

The amount of dividend received and credited to Government revenue should also be reported entity wise. If the dividend received relates to previous accounting periods, the year to which the amounts actually pertain should be disclosed by way of a foot note (Table 1).

Additional disclosures are required regarding disinvestments / investments / retirement of capital / transfer of shares made during the reporting period. This applies if these transactions were made by way of a note to accounts in respect of investments in entities which have made a net loss (defined as loss after interest and tax) in the previous accounting period. This also applies where the accounts of the investee entities are in arrear for more than three consecutive years, or have suffered a loss during the preceding three consecutive years. The standard requires that this fact should be disclosed, along with remarks. Remarks are also required in cases where the Government has invested in the entity during the reporting period (Table 3).

The standard specifies that all figures presented in the financial statements are to be in Lakh rupees.

Format for Disclosures (Tables)

The document includes formats for the required disclosures in the financial statements of the Government. These formats are presented as Tables 1, 1A, 2, and 3.

  • Table 1: Detailed Statement of Investments made Investee Entity wise. This table is structured with columns for:
    • Sl. No.
    • Name of the Entity
    • Investee Group
    • Ministry / Union Government / Department for State Government with legislature / Union Territory
    • Enterprises in Operation / Not in Operation
    • Type of Investment
    • Number of Units
    • Face Value of each Unit (in ₹)
    • Invested Amount (in Lakh rupees)
    • Total Invested Amount
    • Closing Balance on March 31 (Market Value) (in Lakh rupees). This column includes a note stating it will be applicable to listed companies whose shares are regularly traded on a recognised stock exchange during the year.
    • Dividend received and credited to Government Accounts (in Lakh rupees)
    • Dividend not paid by investee entities but not paid by them (?). The header is somewhat unclear here.
    • Remarks
  • Table 1A: Detailed Statement of Disinvestments / divetsments / retirement of capital / transfer of shares made Investee Entity wise. This table details movements out of the Government’s investment portfolio. Its columns are:
    • Sl. No.
    • Name of the Entity (Reference no. as in Table 1)
    • Type of Investment
    • Number of Units
    • Face Value of each Unit at the time of disinvestment (in ₹)
    • Disinvested Amount (in Lakh rupees)
    • Remarks
  • Table 2: Summary of investments Investee Group wise. This table provides a high-level overview of investments grouped by the nature of the investee. It includes:
    • Sl. No.
    • Investee Group
    • Balance on April 1, 20X0 (in Lakh rupees). This represents the opening balance.
    • Increase / Decrease of Investment. The table structure suggests this is an overarching category.
    • Investments made during the year (in Lakh rupees).
    • Balance on March 31, 20X1 (3+4-5) (in Lakh rupees). This calculates the closing balance by adding investments made and subtracting some value (presumably disinvestments, although the column header 4 vs 5 is unclear). The formula (3+4-5) might imply column 4 is an increase and column 5 is a decrease/disinvestment, despite the header for column 4 saying “Increase / Decrease of Investment”.
    • Remarks
  • Table 3: Additional Disclosures of Investee Entities which have not submitted Annual Accounts and / or have suffered a loss during the preceding three consecutive years. This table provides specific details about potentially problematic investments requiring additional scrutiny. Its columns are:
    • Sl. No.
    • Name of Entity (Reference no. as per table 1)
    • Details of Investments. This seems to be a section heading for subsequent columns.
    • Year of Investment
    • Type of Shares
    • Number of Shares
    • Face value of each Share
    • Amount Invested (in Lakh rupees)
    • Period of loss (No. of years for which accounts not submitted?). The header includes a clarifying question or alternative meaning in parentheses.
    • Total paid up capital of investee (in Lakh rupees)
    • Remarks

Effective Date and Transition

The standard specifies its applicability date. The Indian Government Accounting Standard becomes effective for financial statements covering periods beginning from the 01 April of the year following the notification of the Standard by the Government.

These notes cover the key aspects of IGAS 9 as presented in the provided excerpts, explaining its purpose, scope, key definitions, rules for recognition and measurement, and the detailed disclosure requirements, including the format and content of the mandated tables. The standard aims to bring consistency and transparency to the reporting of Government equity investments on a cash basis of accounting.