What changed
The definition of 'owned funds' in Paragraph 11(21) of the Master Direction has been replaced. Quarterly profits can now be included, but only after a limited review/audit and after deducting 25% of the average dividend paid over the last three years. Losses in the current year must be fully deducted. Additionally, Right-of-Use (ROU) assets from tangible leases are no longer deducted from Owned Fund.
What it means for you
CICs can now boost their Owned Fund by including eligible quarterly profits, which may improve capital adequacy ratios. However, the dividend adjustment formula ensures that only retained profits are counted. The exclusion of ROU assets for tangible leases reduces a previous deduction, potentially increasing Owned Fund for CICs with significant lease portfolios.
What you must do
- Update internal policies to include quarterly profits in Owned Fund computation only after limited review/audit by statutory auditors.
- Apply the formula EP_t = NP_t - 0.25 * D * t to calculate eligible quarterly profits, using average dividend of last three years.
- Ensure current year losses are fully deducted from Owned Fund as per the amended definition.
- Stop deducting Right-of-Use assets from Owned Fund for tangible leases under Ind AS 116.
- Review and adjust regulatory filings to reflect the new Owned Fund calculation immediately.
Who it affects
All Core Investment Companies (CICs) registered with RBI, Statutory auditors of CICs, Compliance and finance teams at CICs
Can we include quarterly profits without audit?
No, quarterly profits can only be included if the financial statements are subjected to limited review or audit by the statutory auditors on a quarterly basis.
How do we calculate eligible quarterly profits?
Use the formula EP_t = NP_t - 0.25 * D * t, where NP_t is net profit up to quarter t, and D is the average dividend paid in the last three financial years.
Are Right-of-Use assets always excluded from deduction?
Only if the underlying asset taken on lease is a tangible asset. ROU assets from intangible leases are not covered by this exemption.