Background:
In April 2019, the Ministry of Corporate Affairs (“MCA”) constituted a Committee to make recommendations to expand the ambit of the Companies (Auditor’s Report) Order, 2016, (CARO), which lays down audit reporting norms. The Committee had recommended the inclusion of disclosures on cryptocurrency holdings and trading under Schedule III of the Companies Act.
Let us understand what does Schedule III of Companies Act, 2013 include:
Schedule III of the Companies Act, 2013 provides a general reporting format of Financial Statements for companies. It is divided into three parts, i.e. Division I, Division II and Division III.
Division I is applicable to entities preparing their financial statements as per the Companies (Accounting Standards) Rules, 2006;
Division II is applicable to entities preparing their financial statements as per the Companies (Indian Accounting Standards) Rules, 2015; and
Division III is applicable to non-banking financial institutions preparing their financial statements as per Ind AS.
MCA Notification:
Consequent to the recommendations of the Committee, the MCA vide its Notification dated March 24, 2021, amended Schedule III of the Companies Act, 2013, with effect from April 1, 2021, mandating companies to make certain disclosures with respect to virtual currency / crypto currency transactions undertaken by them during the financial year.
The details required to be disclosed in the financial statements included:
- Profits or loss on transactions involving crypto currency or virtual currency
- Amount of currency held as on reporting date
- Deposits or advances from persons for the purpose of trading or investing in crypto currency / virtual currency.
Market Sentiments:
Cryptocurrency is fast gaining ground as an exciting option among investors in India. The past few years have seen a burgeoning number of investors. Most of its recent users come from small cities and towns in India. However, despite the mounting excitement, much ambiguity persists around the legality of cryptocurrency in India. If you are considering investing in cryptocurrencies, you want to be sure you are not breaking any law or regulations. Therefore, it’s important to understand the legality that surrounds cryptocurrencies clearly.
Here’s a quick guide for you to get going.
Is Crypto a Legal Tender?
As things stand today, Crypto currencies are not owned or controlled by any particular country or a bank. They are not issued by a Central Bank of any country as legal tender.
Most (Not all) Governments around the globe have not recognised crypto as legal tender and neither they are being regulated by any Regulatory body, as on date. There are no laws that prohibit trading in crypto.
In that sense, cryptocurrency is like any other asset class such as gold, commodities or real estate. People trade in gold or other assets without the government creating a law for it. Same is the status of cryptocurrency at the moment.
In India, crypto is not a valid currency in the conventional sense, which means that one cannot pay with cryptocurrency to buy and sell anything in India. The currency of a country is legal tender backed by a sovereign guarantee. In India, only the Reserve Bank of India can issue any currency.
Crypto, on the other hand, is minted across the world by a complex decentralised, peer-to-peer distributed software systems. Since it can be traded online, cryptocurrencies are digital currencies and valid as an asset class in India.
Supreme Court judgement on Crypto:
In 2018, the Reserve Bank of India had prohibited banks, Non-Banking Financial Companies (NBFCs) and payment systems regulated by it, from facilitating financial transactions for entities related to cryptocurrencies.
However, this was quashed by the Hon’ble Supreme Court of India in March 2020.
The judgement paved way for financial institutions facilitating the trading of cryptocurrencies, creating the ground for several crypto market exchanges in the country.
Over the past few years, the Government of India has been deliberating over the fate of virtual currencies / cryptocurrencies, and has released various advisories cautioning investors against the risks associated with virtual currencies/ cryptocurrencies in India.
The MCA Notification may possibly indicate a step to meet expectations of the investors.
The Crypto Bill:
The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 seeks to create a facilitative framework for creation of the official digital currency to be issued by the Reserve Bank of India and to prohibit all private currencies in India but allows for certain exceptions to promote the underlying technology and its uses.
The Bill will take some more time to be introduced in the Parliament and may not be introduced in the forthcoming budget session.
Conclusions:
Currently, cryptocurrencies are unregulated, but not banned. Hence, companies are required to report all their investments and transactions in such virtual currencies for the purpose of transparency and compliance. This will help authorities to check tax evasion and give an idea of penetration of cryptocurrencies in corporate transactions.
This disclosures mandated by the MCA Circular will serve as a useful data point to the government, at a time when a law to regulate cryptocurrencies is to be finalised and rolled out.
The reporting is a year-end disclosure, as opposed to regular market trade linked disclosures, which is what would be needed if the aim is to regulate dealing in cryptocurrency.
The rules on disclosures have made it clear that the government wants to gather data on digital currencies. The government can also use this data for evaluating the FEMA (Foreign Exchange Management Act) and taxation impacts of trading in cryptocurrency. It will also help investors in evaluating if companies are taking money out of core business and investing in cryptocurrency. There is an inherent conflict between the government’s directive to companies to report transactions in cryptocurrencies and the proposed bills seeking to ban private cryptocurrencies. The apparent conflict may be resolved once the understanding of ‘private’ cryptocurrencies is made clear.
This article is written by the
Crypto Legal team of RKS ASSOCIATE
Very informative article.
Great description
Excellent