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Preparing financial statements for 2021-22? What does every company need to know about strike-off companies?

Financial statements of a company give information about profit and loss statements as well as its assets and liabilities. A shareholder or analyst often analyses these documents, in order to gauge the company’s performance. In addition, the notes section makes some material disclosures (say on loans or guarantees) that are of financial importance.

The Ministry of Company Affairs or MCA recently introduced more elaborate financial disclosures. Effective from April 1, 2021 i.e for all financial statements prepared by companies for 2021-22 and beyond, they need to disclose transactions with companies struck-off under Section 248 of the Act, or Section 560 of the Companies Act, 1956 by the Registrar of Companies (RoC).

In addition, they need to disclose the following details:

  • Name of the struck-off company
  • Nature of transaction with the struck-off company
  • Balance outstanding and relationship with it

First of all, what is a strike-off company?

Strike-off, as the name suggests, means removing the name of the company from the register of the RoC. In effect, it ceases to be a legal entity and cannot trade, sell its assets or make payments. There are serious consequences for directors of companies which are involuntarily struck-off, especially if the company is still continuing with its operations.

Two modes of Strike-off

  1. A) The Companies Act 2013 provide two modes of strike-off
  • Strike-off by the RoC under Section 248(1) of the Act

Provision for strike-off can be enacted on the following premises:

  • The company hadn’t commenced its operations even after a year of its incorporation
  • The company has not been pursuing any business or activity for the preceding two financial years, for which it hasn’t sought the status of a dormant company under Sec 455 of the Act

When the strike-off is done by the RoC, it may issue a notice to the companies and its directors. This process results in a compulsory removal of names from the RoC.

  • Strike-off on its own accord under Section 248(2) of the Act

Some companies can also file an application for a strike-off on its own accord for which it needs to pass a special resolution (consented by 75% of its members).

However, all companies cannot be struck-off and there are exceptions to the list:

  • Listed companies
  • Vanishing companies (those listed for inspection or investigation)
  • Any ongoing litigation is pending
  • Any director is disqualified
  • The company has changed its name or relocated its registered office to another state in the last three months
  1. B) Similarly, Section 560 of the Indian Companies Act, 1956 gives the power to the Registrar to strike defunct companies off-register. If it has apprehensions about the company’s business operation, it sends a letter inquiring whether the company is carrying its business or operation.

How to facilitate reporting?

The big challenge for companies preparing financial statements for 2021-22 is to compile a comprehensive list of such struck-off companies and check if it has dealt with them last year.

Multiple RoC (about 22 of them) lists names of such struck-off companies and in an ad-hoc manner. So, essentially one needs to keep a tab of all updates of all the RoCs. Moreover, searching for names manually from the MCA website can take a long time.

That’s where the cloud-based company database services could come handy. It compiles data from disparate public sources and provides a fast-searching tool from its comprehensive database of segregated public records.

Effectively, in a single frame, you would be able to get a consolidated list of all struck-off companies.

Takeaway

There are at least 4.2 lakh strike-off companies, as of today. To comply with the new norms of financial reporting, ensure you have the backbone of up-to-date company databases to filter them out. It would not only ensure proper compliance but also save considerably on time and effort.

About Probe42:

  • Probe is an independent Information Services company focused on providing financial information on Unlisted and under-covered companies in India
  • Our Customers have found value in using Probe42.in to enable their decisions involving Identifying prospects, sales preparation, credit and competitor analysis, etc.
  • The Probe42 platform has been extensively used by Banks and Corporates.

 

 

Reversal of interest rate cycle – Are you fully quantifying the credit risk?

A ship in harbour is safe, but that’s not what ships are built for. Similarly, it is next to impossible to grow a business without taking credit risks. However it’s important that risk mitigation measures are also in place lest your business succumbs to a stormy business environment.

RBI recently increased the repo rate, the rate at which commercial banks borrow money by selling securities to RBI, by 40 basis points. The annualized yield of 10-year benchmark government bond yields in turn is now at 7.2% – up by 100 basis points since Aug 2021.

The central bank usually increases interest rates whenever inflation goes above their comfort levels. A higher interest rate tends to moderate economic growth by keeping a check on demand. For one, high-interest rates increase the cost of borrowing and reduce disposable income thereby putting limits on consumer spending.

With interest rates bottoming out, and with further rate hikes expected in the future, it is important that your credit management systems are in place.

Determine sector-wise exposure

First of all, assess your customer’s sensitivity to interest rate shocks. One of the ways to do this is by classifying them into industries they belong to.

Banking and finance, auto, real estate, consumer durables, capital goods and allied sectors tend to get more affected by a rate hike than the others. For instance, an increase in interest rates (which is usually linked to repo rate) for a house or car loan affects the affordability factor. Instead of paying higher EMI, potential customers might prefer waiting on the sidelines. This in turn could affect the businesses/finances of residential property builders and auto manufacturers and their ability to make payments to you on time. So, find out how much percentage of revenues comes from these vulnerable sectors?

Promptly, red-flag customers in these sectors with a history of late payments, legal issues and bankruptcy.  Review their credit policies periodically and if need be, move towards a 100% prepayment model to avoid potential bad debts.

Analyze creditworthiness

A company might operate in an interest-rate sensitive sector but still exude financial prowess. So, have a look at company’s financials to get a glimpse of its indebtedness and liquidity situations.

In a rising interest rate scenario, the profitability of debt-ridden (leveraged) companies takes a hit in two ways – one by way of drop-in company sales from reduced consumer demand and two, from its higher financial costs.

However, cash-rich companies or those with zero debt on their books are on a relatively better footing.

Moreover, while analyzing the financials, look at the business and financial risk profiles of the company and its subsidiaries as well. A high degree of operational and management integration, common promoters, and shared brand equity makes the consolidated performance more relevant.

Similarly, figure out if the customer is part of a big industrial group with deep financial pockets? If yes, they usually tend to have the financial backing of its parent to wade through tough times.

One way to keep yourself updated about the financial status of a customer is by actively tracking ratings of its debt papers as well as their updates.

Step-up data intelligence

Cloud-based databases often give deep and critical financial information about customers, competitors as well as industry. By leveraging such data, credit managers can easily assess creditworthiness and make informed business decisions. Moreover, it is important that this data is up-to-date and relevant to facilitate quick decision-making. For instance, analyzing financial performance of customers over the long-term and across multiple business cycles could give an inkling of its resilience factor.

Takeaway

Reversal of the interest rate cycle can increase bad debts if proper credit risk management systems are not in place. Ensure you use data insights to stay ahead of the curve.

About Probe42:

  • Probe is an independent Information Services company focused on providing financial information on Unlisted and under-covered companies in India
  • Our Customers have found value in using Probe42.in to enable their decisions involving Identifying prospects, sales preparation, credit and competitor analysis, etc.
  • The Probe42 platform has been extensively used by Banks and Corporates.

 

 

 

Popular company identifiers you should know and their importance

Once a private bank was sifting its corporate client list using PAN numbers. To their surprise, they found the names of 15 clients registered under a single PAN. In effect, 15 different versions of its name had led to the client name being registered differently by the bank officials.

Company identifiers are a valuable database tool that can be strategically used by banks and corporations in various areas including CRM and risk management.

Here are some of the popular company identifiers that you should know of:

CIN

CIN or Corporate Identification Number is a 21-digit alphanumeric code that is assigned by the Registrar of Companies (ROC) to companies registered in India. It is provided to all companies including private/public limited companies, one-person companies, companies owned by the Government of India and State Government companies. However, for Limited Liability Partnerships (LLP) registered in India, a separate seven-digit identification number called the LLPIN (Limited Liability Partnership Identification Number) is given by ROC.

The 21-digit CIN is easily translatable and helps in finding basic information about the company. Moreover, any change in listing status, location or industry of operation and you get a whiff of it from its CIN status.

GSTIN

GSTIN is an abbreviated form of Goods and Services Tax Identification Number that is allotted by GST Network after applying for the GST registration.

GST is a destination-based indirect tax levied on the supply of goods and services. So, a company operating in two or more states applies for a separate 15-digit GSTIN number in each state. GSTIN can provide information about the business entity, date of registration, the state in which it is operating as well as the kind of business it is doing.

For instance, its 13th digit denotes the number of registrations the business entity has for business verticals in the state and under the same PAN.  So, if the business gets a GST number for its fourth business vertical in the state, its 13th digit will be 4 and so on.

PAN

A Permanent Account Number or PAN is a 10-digit alphanumeric number that contains vital information about the PAN cardholder and is arguably the most popular company identifier. For instance, an entity might have multiple GSTIN registrations due to its operations in different states or due to its operations in multiple business verticals in a single state. However, all such GSTINs will have to be compulsorily linked to the same PAN of the entity. Thus, one can use PAN to identify, for instance, the lending exposure of a bank to a single business group.

LEI

From the 1st of April 2021, this 20-digit Legal Entity Identifier or LEI is applicable for all payment transactions of value Rs 50 crore and above undertaken by entities (non-individuals) using centralized payment systems like RTGS and NEFT. All entities receiving or initiating transactions to that effect need to get the LEI number from the Legal Entity identifier India (LEIL).

TAN

Tax deduction and collection account number or TAN is a 10-digit alphanumeric identifier. It is compulsory to obtain TAN for individuals or businesses mandated by the Government to collect or deduct tax. A single entity can obtain different TANs for its various branches or divisions.

You can verify the TAN of anyone using the Income Tax Department’s website to ensure deductions for payments made to you were rightfully and legally done.

The Approach

Ministry of Corporate Affairs or MCA website gives CIN-based details, while the Income Tax website will give details about PAN and TAN. GSTIN-related company details could in turn be found on the GST government website.

Additionally, there are some cloud-based data providers that integrate all this company information and provide it in a user-friendly format. Use them as strategic tools for your business decision making.

 

About Probe42:

  • Probe is an independent Information Services company focused on providing financial information on Unlisted and under-covered companies in India
  • Our Customers have found value in using Probe42.in to enable their decisions involving Identifying prospects, sales preparation, credit and competitor analysis, etc.
  • The Probe42 platform has been extensively used by Banks and Corporates.

 

 

 

How to analyze the financial performance of a company in a flash?

An entrepreneur wants to know the financial health of customer/suppliers in order to make informed business decisions. A manager in turn needs financial metrics to direct his team better while an investor makes it an important criterion for his investment decisions.

Financial performance analysis entails a full diagnosis of the profitability and financial soundness of a business. Basically, it involves analyzing company data available in the three financial statements – the Balance sheet, the Profit & Loss Account and the Cash-flow statement.

Turn data insights into actions  

Data from these financial statements are compiled by cloud-based company data providers in a user-friendly format. By leveraging these data, you can analyze the financial performance of a company.

Broadly, there are four categories of financial ratios to look at:

Liquidity ratio

It measures the extent of liquidity a company has to meet its debt obligations.

One of the popular measures is the current ratio – which is calculated by dividing current assets by current liabilities. The higher the ratio, the better is the company’s liquidity.

A ratio of one or more is generally acceptable; it however varies across industries. A lower current ratio than the industry average could mean you might want to review your credit/collections policies. Too high a ratio also pinpoints underutilized capital.

Solvency ratios

Solvency ratios give a peep into the long-term solvency of the company. The debt-to-equity ratio is calculated by adding all of the company’s liabilities and dividing it by shareholder’s equity.

Lower the debt-to-equity ratio better is the company’s financial health. A low ratio also gives the company the elbowroom to borrow more, if need be, to fund its growth path.

On the other hand, a company with a debt-equity ratio of more than two is considered riskier. Again, this ratio needs to be analyzed from an industrial perspective.

One challenge with only reviewing company debt is that they do not tell you anything about the company’s ability to service it. This is exactly what the interest coverage ratio aims to fix. It is calculated by dividing earnings before interest and taxes by the company’s interest expense. The higher the ratio, the more poised it is to repay its debts while a ratio below one indicates a precarious financial position.

Efficiency ratios

It measures the company’s ability to use its assets to generate income. The inventory turnover ratio indicates how long it takes for inventory to be sold and replaced during the year. The longer the stock sits on company shelves, the more are its costs.

It is calculated by dividing the cost of goods sold by the average inventory for a period. Similarly, account receivable turnover tells how often it is collected and paid.

Accounts payable turnover: Measures how fast you pay off your creditors

Total asset turnover: Showcases how well you use your assets to generate revenue

Profitability ratios

Popular profitability ratios are

Net profit margin – How much a company earns after taxes relative to its sales? A company with a higher net profit margin than its peers is usually more efficient and dynamic.

Operating profit margin – How efficiently a company generates profit from its core operations before paying its interest and taxes?

Return on Equity indicates how much are shareholders earning on their investments. It is calculated by dividing Profit After Tax by the shareholder’s equity.

Return on Assets (ROA) specifies how well the management is utilizing the company’s resources or assets. Capital-intensive industries usually tend to have low ROA than the service industry. It is calculated by dividing net profit by average total assets.

There are many more financial ratios for making advanced analysis. All need not be looked at in isolation but analyzed in conjunction to get a big picture. Time-series analysis and comparison vis-à-vis industrial benchmarks in turn could help gain deep financial insights.

 

About Probe42:

  • Probe is an independent Information Services company focused on providing financial information on Unlisted and under-covered companies in India
  • Our Customers have found value in using Probe42.in to enable their decisions involving Identifying prospects, sales preparation, credit and competitor analysis, etc.
  • The Probe42 platform has been extensively used by Banks and Corporates

 

 

Migrating from Internet Explorer to Edge, Chrome or Firefox

Microsoft has retired Internet Explorer and will go out of support on June 15, 2022. Click here to read more from Microsoft on this. Continuing to use a browser not supported will result in serious security risks and vulnerabilities. Click here to read more on what Microsoft says. Considering this it is advisable to migrate to other new browsers like Microsoft Edge, Google Chrome or Mozilla Firefox.

If you are working in an organisation like Bank, Large Corporates etc., browser installations will be mostly managed by the internal technical support team. In such cases, please raise a ticket requesting your technical support team to install Microsoft Edge, Google Chrome or  Mozilla. Kindly note you can have more than one browser on your PC if you want.

 

Please find below steps to download and install browsers on your own if you have the rights to install browsers.

I. Steps to Download and Install Microsoft Edge:

In most computers Microsoft Edge will be built-in by default. Meaning you dont have to separately download and install them. To check if you have Microsoft Edge Installed or not, Open your start menu and search for Microsoft Edge. If install you will see search result like in below screenshot. You can click on “Open” to open and start using Microsoft Edge.

If Microsoft Edge is not installed, please follow below steps to install Microsoft Edge..

  1. Open your current Internet browser and go to the Microsoft Edge download page.
  2. Click the Download button, depending on your version of Windows.
  3. Follow the on-screen instructions to install Microsoft Edge.

II. Steps to Download and Install Google Chrome:

  1. Open your current Internet browser and go to the Google Chrome download page.
  2. Click on Download Chrome Button to download latest version of Google Chrome.
  3. Follow the on-screen instructions to install Google Chrome.

III. Steps to Download and Install  Mozilla Firefox:

  1. Open your current Internet browser and go to the Mozilla Firefox download page.
  2. Click on Download Firefox button to download latest version of Mozilla Firefox.
  3. Follow the on-screen instructions to install Mozilla Firefox.