Energy Price Risk Management in Dynamic Market: Harnessing Volatility Using MCX Crude Oil, Natural Gas & Electricity Futures in a Geopolitical Evolving World
By CA. Ruchi Shukla (Head–Energy, MCX)
India's strong economic growth is underpinned by its ability to navigate a high degree of dependence on imported crude oil, with nearly 89% of its crude oil requirements sourced internationally, while demonstrating resilience and adaptability amid unprecedented shifts in global energy markets. The joint US-Israel military strikes on Iran (Operation Epic Fury, February 28, 2026) and Iran's consequent closure of the Strait of Hormuz drove energy commodity prices and slashed OMC earnings estimates. Against this backdrop, Multi Commodity Exchange of India Limited's (MCX) complete energy hedging suite — crude oil futures and options, natural gas futures, and India's first electricity futures contract — offers India's energy value chain participants a transparent, liquid, INR-denominated toolkit to manage price risk. This article examines the geopolitical drivers reshaping global energy trade through 2026, the resulting price volatility across crude, gas and power markets, and how systematic hedging by India's energy value chain, OMCs, fertiliser producers, generators, DISCOMs and energy-intensive industries can materially protect margins and strengthen national energy security.
The Geopolitical Reshaping of Global Energy Markets: 2022-2026
India's energy security landscape has been shattered and remade twice in four years. The Russia-Ukraine war restructured global crude supply chains from 2022. Now, the conflict triggered by joint US-Israel strikes on Iran, launched on February 28 under Operation Epic Fury, has evolved into a prolonged and repeatedly escalating crisis rather than a contained shock. Iran's initial closure of the Strait of Hormuz gave way to a fragile ceasefire and memorandum of understanding in June, but the truce collapsed within weeks after Iran struck commercial vessels that had bypassed its preapproved shipping corridor. A drone strike on a cargo ship on June 25 set off a chain of hostilities that put the US and Iran back on a path toward all-out war less than a month after they had agreed to stop fighting.
By mid-July the conflict had resumed in full, with US forces reporting strikes on roughly 140 Iranian military targets in a single week and the US disabling an empty oil tanker sailing toward Kharg Island, effectively blockading Iran's key export terminal. For India, caught in both shocks simultaneously and now navigating a conflict that has already outlasted several predicted end-dates, the case for systematic energy price risk management has moved from prudent to essential.
The initial post-February price spike has since given way to a second, sharper leg up rather than the gradual normalisation many analysts had expected. Crude oil prices have risen more than 14% over the past month and are up nearly 29% year-on-year, with WTI rallying to a five-week high as escalating hostilities kept the Strait of Hormuz closed and tightened global supplies. The volatility is being compounded by contagion beyond the Gulf itself: Houthi militants have threatened to block Saudi maritime traffic in the Red Sea, prompting at least one Saudi tanker to reverse course, while attacks on the Caspian Pipeline Consortium terminal on Russia's Black Sea coast have disrupted Kazakh exports as well. Markets have been whipsawed between escalation and diplomacy throughout July, rallying on fresh strikes and pulling back on reports of proposed truces, including a floated 10-day ceasefire late in the month.
Amid this, rather than retreating from Russian barrels because of Gulf risk, Indian refiners have leaned further into them. Russian crude has continued to account for roughly half of India's oil imports through July, averaging around 2.5 million barrels per day, with Kpler describing it as India's strongest energy-security hedge, particularly since the Strait of Hormuz disruptions began. India's Russian crude purchases hit an all-time high in June 2026, worth an estimated €4.5 billion, a 34% increase over May. At the same time, refiners are visibly rebuilding Gulf supply lines as a hedge against sanctions risk: Saudi crude purchases jumped more than 150% month-on-month in July even as Russia held its share above half of the basket, while imports from the United States dropped sharply as refiners continued to favour discounted Russian barrels over long-haul Atlantic cargoes. This dual-track strategy of record Russian intake alongside a simultaneous Gulf-supply rebuild functions as a hedge against two distinct tail risks: a Hormuz-driven Gulf supply stop and a US-driven sanctions or tariff clampdown on buyers of Russian oil, a risk sharpened by Washington's proposal to impose 100% tariffs on such buyers.
Indian refiners have, so far, converted this disruption into margin. India's fuel exports are on track to hit a 10-month high of about 1.4 million barrels a day in July, roughly a fifth higher than a year earlier and nearly 50% above May's volumes, as war-driven shortages elsewhere lift refining margins. Lower export taxes and domestic inventories sufficient for 75-80 days have supported this run, though any disruption to Hormuz flows could quickly alter the picture.
That, in essence, is the crux of the risk-management argument for India's energy ecosystem: the same geopolitical premium currently boosting refiners' margins is a two-sided exposure, and a sudden Hormuz closure or a Russian-sanctions shock could reverse it just as quickly as it arrived. Financial risk management, in other words, is no longer a hedge against a single crisis; it is now the operating condition for participating in Indian energy markets at all.
In this evolving environment, the role of energy derivatives traded on the MCX has gained strategic importance. MCX crude oil, natural gas, and electricity futures are increasingly emerging as essential instruments for managing volatility, stabilising procurement costs, protecting margins, and improving financial resilience across India's energy value chain.
"The IEA called the 2026 Hormuz crisis the greatest global energy security challenge in history. India's OMC earnings were slashed 28-47%. Every crore lost to unhedged energy price exposure is a crore that systematic hedging on MCX could have protected."
Why Energy Price Risk has Become Structural
Historically, energy price volatility was often viewed as cyclical and temporary. However, the events of the last few years suggest that volatility has become structural.
Several long-term factors are driving this transformation:
Geopolitical fragmentation and sanctions
Military conflicts in energy-producing regions
Climate-driven weather disruptions
Supply-chain vulnerabilities
Renewable energy intermittency
Shipping bottlenecks
Currency fluctuations
Rapid changes in global demand patterns
The Iran conflict of 2026 has intensified all these pressures simultaneously. According to the IEA, crude and oil-product flows through the Strait of Hormuz plunged from nearly 20 million barrels per day to just above 2 million barrels per day during the peak disruption period. Gulf producers were forced to reduce production while global inventories declined rapidly. The impact has extended beyond oil markets. LNG cargo availability has tightened, bunker fuel prices have surged, freight costs have increased sharply and electricity markets across Asia have become increasingly volatile.
For India, these developments have direct economic implications because energy imports influence:
Inflation
Industrial competitiveness
Fiscal balances
Transportation costs
Manufacturing economics
Electricity tariffs
This is why energy price risk management is now becoming a strategic necessity rather than a financial option.
MCX Crude Oil Futures and India's Refining Sector
Crude oil remains India's largest energy import exposure. With nearly 85% dependence on imported crude, India's economy remains highly sensitive to global oil price movements. The ongoing geopolitical crisis has demonstrated how quickly procurement economics can change.
Refiners have faced rising feedstock costs due to:
Higher WTI crude prices
Elevated tanker freight rates
Increased marine insurance premiums
Delays in cargo movement
Market uncertainty regarding Gulf supplies
Refining margins have become increasingly volatile because downstream product prices often adjust with a lag while feedstock costs rise immediately. In this environment, MCX crude oil futures linked to WTI benchmarks provide an important hedging mechanism for refiners and downstream companies.
By hedging a portion of future crude procurement through futures contracts, refiners can partially reduce exposure to sudden price spikes and improve visibility regarding procurement costs. Hedging cannot eliminate all market risk, but it allows companies to stabilise cash flow and improve financial planning.
The strategic value of such hedging becomes particularly important during geopolitical crises. During the 2026 Iran conflict, crude oil prices reacted sharply to every military escalation, ceasefire rumour, or disruption in shipping activity. For Indian refiners, the ability to manage this volatility through domestic exchange-traded contracts has become increasingly valuable.
The aviation sector faces similar challenges. Aviation turbine fuel prices are closely linked to crude oil markets, and rising fuel costs have placed enormous pressure on airline profitability globally. Analysts have noted that refined products such as jet fuel and diesel have risen even faster than crude itself due to downstream supply constraints. MCX crude oil futures, therefore, provide aviation and logistics companies with a mechanism to partially stabilise fuel costs and improve budgeting certainty.
Natural Gas Volatility and The Growing Importance of Gas Hedging
India has actively promoted natural gas as a transition fuel capable of supporting industrial growth while reducing emissions relative to coal and oil. LNG import infrastructure has expanded significantly, city gas distribution networks have grown rapidly, and industrial gas consumption continues to rise. However, the current geopolitical crisis has exposed the vulnerability of global LNG supply chains.
Qatar remains one of the world's largest LNG exporters, and disruptions in the Strait of Hormuz have created serious concerns regarding LNG availability across Asia. Reports suggest that LNG spot prices in Asia surged dramatically after fears emerged regarding interruptions to Gulf exports.
For Indian LNG importers and city gas distribution companies, procurement has become significantly more uncertain. Industrial consumers such as fertiliser manufacturers, ceramics producers, petrochemical companies, and glass manufacturers remain heavily dependent on natural gas as a feedstock or fuel source. Sharp increases in LNG prices directly affect profitability and production economics. MCX natural gas futures, therefore, play an increasingly important role in India's energy risk management ecosystem.
Natural gas futures allow companies to hedge future procurement exposure and partially protect themselves against sudden spikes in imported gas prices. Fertiliser companies can stabilise feedstock costs; industrial users can improve fuel budgeting; city gas distribution companies can better manage procurement planning and tariff decisions.
The importance of these contracts increases significantly during periods of geopolitical uncertainty when LNG prices respond immediately to shipping disruptions, sanctions, or military developments. The 2026 crisis has reinforced the reality that gas procurement is no longer merely a sourcing issue; it has become a financial risk management function.
Electricity Futures and The Transformation of India's Power Markets
Electricity markets are undergoing profound transformation globally, and India is no exception. Unlike crude oil or natural gas, electricity cannot easily be stored economically on a scale. Supply and demand must remain balanced in real time, making electricity markets inherently volatile.
India's power sector is becoming increasingly complex due to:
Rapid growth in renewable energy
Rising electricity demand
Climate-driven heatwaves
Renewable intermittency
Transmission bottlenecks
Thermal fuel uncertainties
During the summer of 2026, heatwaves pushed electricity demand to record highs across India. At the same time, uncertainty in global fuel markets increased pressure on thermal power generation economics.
Against this backdrop, the launch of electricity futures on MCX in 2025 represents a major milestone in India's evolving energy architecture. The contracts are linked to Day Ahead Market (DAM) prices and provide a transparent mechanism for managing electricity price risk. Their strategic relevance has become particularly clear during the current geopolitical and climatic environment.
Power-intensive industries such as steel, cement, aluminium, fertilisers, chemicals, and data centres now face significant uncertainty regarding future electricity costs. Electricity futures provide these industries with a mechanism to hedge future procurement prices and improve financial planning.
Distribution companies (DISCOMs) may derive even greater long-term benefits. Indian DISCOMs have historically struggled with fluctuating procurement costs and dependence on expensive short-term power purchases during peak demand periods. Electricity derivatives create the possibility of more structured procurement strategies.
By locking in future electricity prices through exchange-traded contracts, DISCOMs can potentially reduce exposure to spot market volatility and improve procurement discipline. Globally, mature electricity markets in Europe and North America rely extensively on derivatives for risk management and price discovery. India's move toward electricity futures therefore aligns its market structure more closely with international practices.
Energy Derivatives and Industrial Competitiveness
The strategic importance of energy derivatives extends beyond energy companies themselves. For many industrial sectors, energy now represents one of the largest and most volatile components of operating expenditure. Steel plants, cement manufacturers, data centres, petrochemical facilities, fertiliser companies, and manufacturing industries all face increasing exposure to fluctuations in fuel and electricity costs.
The current geopolitical crisis has highlighted how rapidly energy volatility can affect industrial competitiveness. Rising oil and LNG prices have increased freight costs, manufacturing expenses, transportation charges, and inflationary pressures globally.
Modern treasury management therefore increasingly treats energy exposure similarly to currency or interest-rate risk. Companies capable of managing energy price risk effectively are likely to gain significant competitive advantages through:
Stable operating costs
Better financial planning
Improved pricing visibility
Reduced earnings volatility
Greater resilience during market disruptions
In this context, energy derivatives are no longer speculative tools. They are strategic financial instruments that support long-term business stability.
Challenges in India's Energy Derivatives Ecosystem
Despite growing importance, India's energy derivatives market still faces several structural challenges. Liquidity in newer products such as electricity futures will require sustained participation from utilities, industrial consumers, financial institutions, and traders.
Many Indian corporates still lack commodity risk management frameworks and internal expertise related to derivatives pricing, hedging strategies, and margin management. Awareness regarding structured hedging remains uneven across industries. Some corporates continue to associate derivatives primarily with speculative trading rather than risk management. However, the current geopolitical crisis is gradually changing these perceptions.
Regulatory bodies in India have also pushed several initiatives aimed at strengthening corporate governance and transparency, holding listed entities to defined disclosure standards. A key example is the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, under which listed companies must disclose commodity price risk exposure as a mandatory part of their Corporate Governance Report, per Schedule V, clauses C(9)(n) and C(10)(g). In June 2017, SEBI also constituted the Kotak Committee on Corporate Governance to raise governance benchmarks among listed entities. Among its recommendations, the committee urged boards and management to treat disclosure and transparency not as compliance formalities but as tools for building stakeholder trust — encouraging proactive sharing of material information that could influence decision-making.
A further significant development has been India's move toward aligning domestic accounting standards with IFRS through the phased rollout of Ind AS. In this context, Ind AS 107 (Financial Instruments: Disclosures) mandates that entities provide detailed quantitative and qualitative disclosures on financial instruments in their financial statements — including exposure to commodity price risk arising from derivative and hedging positions.
Specifically, Ind AS 107 requires entities to disclose the nature and extent of risks arising from financial instruments, along with how those risks are managed. For commodity price risk, this translates into several concrete disclosure obligations. Entities must present a sensitivity analysis showing how profit or loss and equity would be affected by reasonably possible changes in relevant commodity prices, along with the methods and assumptions used to arrive at those figures. Where an entity uses derivative contracts such as futures or options on crude oil, natural gas, or other commodities to hedge price exposure, it must disclose the hedging relationship, the risk management strategy behind it, and how hedge effectiveness is assessed and measured.
The standard also requires disclosure of the carrying amounts of financial assets and liabilities by category, information on fair value measurement (including the valuation techniques and inputs used, categorized under the fair value hierarchy), and details of any hedge accounting applied under Ind AS 109. For companies with material commodity exposure — such as those in energy, metals, or agri-commodities — these disclosures are intended to give stakeholders a clearer picture of how price volatility could affect financial performance, and what risk mitigation measures, including exchange-traded derivatives, the entity has put in place.
Taken together, these requirements push companies beyond narrative statements about risk and toward quantified, comparable disclosures — reinforcing the broader governance push toward transparency.
For companies with commodity price exposure, exchange-traded derivatives such as those available on MCX for crude oil, natural gas, and other commodities offer a transparent, regulated route to hedge this risk while also generating the price and valuation data needed to meet Ind AS 107's disclosure requirements. By hedging through standardized, exchange-traded contracts, companies can demonstrate defined risk management strategies and objectively measurable hedge effectiveness — helping translate the regulatory push for transparency into practical, auditable risk management on the ground.
The Future of Energy Security Includes Financial Resilience
The events of 2026 have fundamentally altered how governments, companies, and investors think about energy security. The Iran conflict and repeated disruptions in the Strait of Hormuz demonstrated that energy markets can no longer be viewed solely through the lens of physical supply. Financial exposure to price volatility has become equally important.
For India, this shift carries profound implications. As the country moves toward becoming one of the world's largest energy consumers and fastest-growing economies, energy price risk management will become increasingly critical for protecting industrial competitiveness, financial stability, and economic resilience.
MCX crude oil, natural gas, and electricity futures are emerging as important instruments within this evolving framework. These contracts allow value chain participants — refiners, LNG importers, airlines, industrial consumers, DISCOMs, and other participants across the energy value chain — to manage uncertainty more effectively and improve operational resilience.
India imports about two-thirds of its natural gas demand. Because of its peculiar nature and lack of enough cross-country pipelines for gas transportation, natural gas is largely imported in liquefied form, that is, LNG, and majorly from Qatar.
The MCX crude oil futures contract mirrors the NYMEX WTI crude oil price. Based on the authors' own analysis (see Methodology Note below), Brent and WTI crude oil prices show more than 96% correlation. The correlation between MCX crude oil and NYMEX WTI crude oil is 99.50%.
Methodology Note:
The correlation coefficients cited in Fig. 1 (99.50% for MCX crude oil–CME WTI) reflect the authors' own calculations of running series of closing prices of the MCX WTI contract and the CME WTI contract (From Jan 2023–July 2026).
The correlation coefficients cited in Fig. 2 (99.50% for MCX Natural Gas – CME Nymex Henry Hub Natural Gas) reflect the authors' own calculations of running series of closing prices of MCX Natural Gas contract and CME Nymex Henry Hub Natural Gas (From Jan 2023 to July 2026).
Benefits of Hedging on Commodity Derivatives Exchanges
Trading unit & trade timing in lieu of domestic requirements
No counterparty risk involved & cash-settled
INR-denominated contracts
Fixed daily price limits
MCX Commodity Hedging Examples
Example A1: Crude Oil Refinery
Who Uses It: Oil Refinery Wanting To Lock In Purchase Price
Situation: The refinery expects to buy 1,000 barrels in 30 days. Current MCX price: ₹6,800/bbl. Fear: price may rise.
Hedge Action: BUY 10 MCX crude futures contracts @ 6,800/bbl today (long position).
Lots Required: $10\text{ lots} \times 100\text{ bbl} = 1,000\text{ bbl}$
Price at Expiry: The spot price rises to ₹7,000/bbl.
Physical Buy: Buy 1,000 bbl in the spot market @ ₹7,000 = ₹7,000,000.
Futures Gain: Sell 10 lots @ 7,000 → Profit = ₹200 × 1,000 = ₹200,000.
Net Cost: ₹7,000,000 − ₹200,000 = ₹6,800,000 ≈ ₹6,800/bbl.
Outcome: The refinery is protected from price rises.
Example B1: Natural Gas Producer
Who Uses It: A Natural Gas Production Company Wanting To Lock In A Selling Price
Situation: The gas producer expects to deliver 1,250 MMBtu in 60 days. MCX price: ₹250/MMBtu. Fear: post-monsoon softening.
Hedge Action: SELL MCX natural gas futures lot @ ₹255/MMBtu today (short position).
Lots Required: $1\text{ lot} \times 1,250\text{ MMBtu} = 1,250\text{ MMBtu}$
Price at Expiry: Spot falls to ₹220/MMBtu.
Physical Sale: Sell 1,250 MMBtu in the spot market @ ₹220 = ₹275,000.
Futures Gain: Buy back 1 lot @ ₹220 → Profit = ₹35 × 1,250 = ₹43,750.
Net Realisation: ₹275,000 + ₹43,750 = ₹318,750 ≈ ₹255/MMBtu.
Outcome: The producer secured the target price despite the spot price fall.
Example B2: Natural Gas Consumer
Who Uses It: Gas-based power plant/fertiliser unit needing gas as fuel/feedstock
Situation: The power plant needs 5,000 MMBtu next month. MCX price: ₹250/MMBtu. Fear: summer demand surge.
Hedge Action: BUY 4 MCX natural gas futures lots @ ₹253/MMBtu today (long position).
Lots Required: 4 lots × 1,250 MMBtu = 5,000 MMBtu
Price at Expiry: The spot price rises to ₹310/MMBtu.
Physical Purchase: Buy 5,000 MMBtu in spot @ ₹310 = ₹1,550,000.
Futures Gain: Sell 4 lots @ ₹310 → Profit = ₹57 × 5,000 = ₹285,000.
Net Effective Cost: ₹1,550,000 − ₹285,000 = ₹1,265,000 ≈ ₹253/MMBtu.
Outcome: Power plant capped fuel cost despite ₹60/MMBtu price surge.
Hedging by means of exchange-traded hedging instruments also has the advantage of avoiding the need to negotiate prices bilaterally in the future and giving both procuring and selling companies greater planning certainty.
Concerns have been voiced about how industry can cope with high energy prices — will they wipe out the profitability of industrial companies? The answer is no. Hedging is a widely used and very convenient way for businesses to protect themselves against energy price volatility and manage their energy price risks.
Businesses typically love predictability, including when it comes to energy pricing. Industrial companies that manufacture goods use large amounts of energy, and price volatility makes it increasingly difficult to predict operational costs. This naturally affects business planning. Hedging helps companies reduce risks and maintain a clearer, more accurate outlook.
The future of India's energy markets will depend not only on securing a reliable energy supply but also on building robust financial mechanisms capable of navigating persistent volatility. In an increasingly uncertain geopolitical environment, companies that manage energy risk intelligently may ultimately prove more resilient, competitive, and strategically prepared for the energy economy of the future.
India's energy value chain managers who did not hedge before the Hormuz crisis bore losses that disciplined hedging would have prevented. The only rational response to the 2026 shock is to build the frameworks, governance, and expertise that ensure it never happens unprotected again.
References
Petroleum Planning & Analysis Cell (PPAC), Ministry of Petroleum & Natural Gas, Government of India, crude oil import dependence data; reported in KNN India, "India's Crude Oil Import Bill Surges 61% to Record USD 49.66 Billion in Q1 FY27," 2026, and ThePrint, "India's crude import dependence rises to record 88.7% as domestic output continues to decline," 2026.
Britannica, "2026 Iran War,"
britannica.com/event/2026-Iran-war Kotak Institutional Equities FY2027 EBITDA estimates for BPCL, HPCL and IOCL, cited in Wright Research, "Is India In An Oil & Gas Crisis? Iran War & Strait of Hormuz Disruption," April 2026.
International Energy Agency (IEA), "How global oil supplies have readjusted to help fill the huge gap left by the Strait of Hormuz shock," IEA, Paris, 2026, iea.org/commentaries.
Multi Commodity Exchange of India Ltd. (MCX), press release on the launch of the Electricity Futures Contract effective 10 July 2025; reported in Business Standard, "MCX launches Electricity Futures Contract," 2025.
MCX India, "Crude Oil," product page,
mcxindia.com/products/energy/crude-oil
Readability of IPO Disclosures and SEBI Audio Video Mandate
Retail investors in India possess limited resources and the aptitude to decode the distorted information flow from an IPO-bound company. These distortions are caused by weak financial quotient, complex disclosures in the prospectus and regulated media intervention. Amidst concerns about complicated prospectuses, financially unaware investors, and an impactful media presence, SEBI has made it mandatory for companies to publish audio-video disclosures in a bilingual manner. Through this article, the author has outlined the need for such a disclosure mandate, its possible impact, and alternatives.
Introduction
The Indian capital market saw a 72% increase in IPOs from 2022 to 2023. Wall Street has endorsed India as the prime investment destination for the next decade. The wave of deals has allowed individual investors to take part in India's unprecedented wealth boom making IPOs a lucrative asset class for investors. IPO debut gains have been about one-third of the five-year average, and an index of newly listed small stocks has fallen 11% in the past month.
SEBI is cautious about the risk of a bubble. Regulators are concerned that novice investors are buying into a bubble, backing small companies with limited track records, and being spun by an investment industry determined to churn out short-term stock winners. Many of the firms going public on India's small-cap exchanges have high valuations even though they are very "ordinary" (Preeti Singh et al., 2024).
To calm the frenzy, regulators are targeting "finfluencers" who promote IPOs through online videos in which they quickly scroll through prospectuses and highlight data points with a red marker.
The Securities and Exchange Board of India (SEBI) has recently issued new regulations for companies launching Initial Public Offerings (IPOs). The regulator has mandated that disclosures in prospectuses and price band advertisements for main-board public issues should be made in audio-visual (AV) format for ease of understanding. The AV content must also include a warning not to rely on any other document, content, or information provided by financial influencers on the internet or other platforms. The guidelines aim to make it easier for investors to understand the features of the public issue and the company.
The video will be accessible on the issuer's website, social media channels, website of the Association of Investment Bankers in India and can also be found within offer documents via a QR code. The AV content must be factual, non-repetitive, and non-promotional. The ten-minute video should provide details about the issue and the inherent risk. The lead manager should create the presentation in a bilingual version, i.e., both English and Hindi (SEBI, 2024).
The guideline is voluntary for companies filing prospectuses from July 1, but is mandated for draft documents filed after October 1. SEBI aims to boost investor confidence and protection in capital markets by offering standardised, reliable video disclosures. SEBI aims to target and refine the IPO information flow, reducing distortion caused by externalities to benefit retail investors. It becomes pertinent to comprehend the IPO information flow and its barriers to comment on the probable effectiveness of the order.
IPO information
Readability of IPO p
rospectus Media Impact
Financial Literacy and Financial Attitude
Accounting for Crowdfunding: A Practical Approach with Proposed Journal Entries
Publication: The Chartered Accountant (ICAI Journal), Vol. 75, No. 03 (September 2026), Pages 372–379 (Journal Pages 44–51)
Authors: Babu Lal Gedar (Academician), Dr. Shilpa Lodha (Academician)
Abstract / Summary
Crowdfunding is a trending and emerging concept that is an alternative way of raising funds for any project
Introduction
Crowdfunding is an alternative way of raising funds for innovative, entrepreneurial, and creative projects, startups, and social causes, which provide funds at a lower cost and in less time
Challenges in Accounting for Crowdfunding
Accounting for crowdfunding presents significant challenges due to its diverse models and evolving regulatory landscape
Accounting Standards and Crowdfunding
So far, there is no dedicated accounting standard for crowdfunding in any of the countries
Accounting Treatment for Different Types of Crowdfunding
There are three major issues related to accounting for crowdfunding transactions: the accounting for the amount raised, accounting for expenses made on fundraising, and accounting for the refund of the amount raised
For expenses made by a fundraiser company on crowdfunding, again, accounting treatment will be based upon the type of crowdfunding
For accounting of the refund of the amount raised through crowdfunding, the entry made at the time of receipt of money is reversed
Research Problem and Gap
Despite the growing relevance of crowdfunding, there is a noticeable lack of accounting guidance on how to recognize, classify, and disclose such transactions
Research Methodology
This article studies an exploratory research design, aiming to propose journal entries for various crowdfunding models based on general accounting principles and applicable international standards
Objective of the Study
To suggest prospective accounting practices for crowdfunding
Practical Examples & Journal Entries
1. Accounting for Equity-Based Crowdfunding
Example 1: X Ltd. raised funds through the 'Crowdcube' equity-based crowdfunding platform
| Date | Particulars | Amount (₹) |
| 2022 Apr 21 | A company raises funds via an equity-based crowdfunding platform with a 10% premium, and fund is received by the platform. | 1,10,000 |
| Apr 23 | The company spends on professional services (e.g., administrative, marketing) to set up the crowdfunding campaign. | 4,000 |
| May 21 | Campaign fund is transferred to X Ltd. The platform charges a 5% fee, deducted from the total funds raised. | 1,10,000 |
| 2023 Jul 1 | The company declares in dividends to be paid to equity-based crowdfunding investors. | 10,000 |
| Jul 15 | The company pays the declared dividends to investors. | 10,000 |
Solution: Journal Entries for Equity Crowdfunding
Journal of Fundraiser Company (X Ltd.)
2022 Apr 23
Crowdfunding Expenses A/c Dr. ₹4,000
To Bank A/c ₹4,000
(Paid for indirect expenses related to campaign)
2022 May 21
Crowdcube's A/c Dr. ₹1,10,000
To Share Application A/c ₹1,10,000
(Amount due from Platform)
2022 May 21
Bank A/c Dr. ₹1,04,500
Platform Fees A/c Dr. ₹5,500
To Crowdcube's A/c ₹1,10,000
(Being funds received from platform after deducting platform fees)
2022 May 21
Share Application A/c Dr. ₹1,10,000
To Share Capital A/c (Par value) ₹1,00,000
To Securities Premium A/c ₹10,000
(Being funds transferred to capital account)
2023 Mar 31
Securities Premium A/c Dr. ₹5,500
To Platform Fees A/c ₹5,500
(Charging of platform fees from securities premium)
2023 Mar 31
Profit & Loss A/c Dr. ₹4,000
To Crowdfunding Exp. A/c ₹4,000
(Charging of other expenses from P&L A/c)
2023 Jul 1
Profit & Loss A/c Dr. ₹10,000
To Dividend Payable A/c ₹10,000
(Being declaration of dividend)
2023 Jul 15
Dividend Payable A/c Dr. ₹10,000
To Bank A/c ₹10,000
(Being payment of dividend)
Journal of CF Platform (Crowdcube)
2022 Apr 21
Bank A/c Dr. ₹1,10,000
To Investor Payable A/c ₹1,10,000
(Received funds from backers)
2022 May 21
Investor Payable A/c Dr. ₹1,10,000
To X Ltd. A/c ₹1,10,000
(Amount due to X Ltd.)
2022 May 21
X Ltd. A/c Dr. ₹1,10,000
To Bank A/c ₹1,04,500
To Revenue A/c (Platform fees) ₹5,500
(Being funds transferred after deducting platform fees)
2023 Mar 31
Profit & Loss A/c Dr. ₹5,500
To Revenue A/c ₹5,500
(Transfer of Revenue to P&L A/c)
Note: According to section 52 of the Companies Act, 2013, securities premium can be used for the writing off the expenses of or the commission paid or discount allowed on, any issue of shares or debentures of the company
2. Accounting for Debt-Based Crowdfunding
Example 2: Y Ltd. raised funds through the 'Catapooolt' debt-based crowdfunding platform
| Date | Particulars | Amount (₹) |
| 2022 Jun 30 | A company raises fund via a debt-based crowdfunding platform and fund is received by platform | 1,00,000 |
| Jul 1 | The company paid for professional services (e.g., administrative, marketing) to set up the crowdfunding campaign. | 2,000 |
| Jul 30 | Campaign's funds are transferred to Y Ltd. The platform charges a 5% fee, which is deducted from the total funds raised. | 1,00,000 |
| 2023 Jan 1 | Interest accrues on the loan for the period. | 10,000 |
| Jan 1 | Payment of interest on the loan for the period. | 10,000 |
Solution: Journal Entries for Debt Crowdfunding
Journal of Fundraiser Company (Y Ltd.)
2022 Jul 1
Crowdfunding Exp A/c Dr. ₹2,000
To Bank A/c ₹2,000
(Paid for marketing expenses related to campaign)
2022 Jul 30
Catapooolt's A/c Dr. ₹1,00,000
To Loan Application A/c ₹1,00,000
(Amount due from Platform)
2022 Jul 30
Bank A/c Dr. ₹95,000
Financial Cost A/c Dr. ₹5,000
To Catapooolt A/c ₹1,00,000
(Being fund received through platform after deducting platform fees)
2022 Jul 30
Loan Application A/c Dr. ₹1,00,000
To Loan Payable A/c ₹1,00,000
(Loan amount transferred to Loan Payable A/c)
2023 Jan 1
Financial Cost A/c Dr. ₹10,000
To Interest Payable A/c ₹10,000
(Being interest accrued on loan)
2023 Jan 1
Interest Payable A/c Dr. ₹10,000
To Bank A/c ₹10,000
(Being repayment of the loan principal and interest)
2023 Mar 31
Profit & Loss A/c Dr. ₹17,000
To Crowdfunding Exp. A/c ₹2,000
To Financial Cost A/c ₹15,000
(Financial costs transferred to P&L A/c)
Journal of CF Platform (Catapooolt)
2022 Jun 30
Bank A/c Dr. ₹1,00,000
To Investor Payable A/c ₹1,00,000
(Received funds from backers)
2022 Jul 30
Investor Payable A/c Dr. ₹1,00,000
To Y Ltd. A/c ₹1,00,000
(Amount due to Y Ltd.)
2022 Jul 30
Y Ltd. A/c Dr. ₹1,00,000
To Revenue A/c (Platform fees) ₹5,000
To Bank A/c ₹95,000
(Being deducted platform fees and transferring funds to fundraiser)
2023 Mar 31
Profit & Loss A/c Dr. ₹5,000
To Revenue A/c ₹5,000
(Transfer of Revenue to P&L A/c)
3. Accounting for Reward-Based Crowdfunding
Example 3: Z Ltd. raised funds through the 'Patreon' reward-based crowdfunding platform
| Date | Particulars | Amount (₹) |
| 2022 May 1 | A company receives fund in crowdfunding contributions from backers for rewards yet to be delivered and fund is received by the platform. | 50,000 |
| May 5 | Expenses related to the crowdfunding campaign. | 1,000 |
| May 15 | The company spends on advertising and promotional activities for the crowdfunding campaign. | 5,000 |
| Jun 1 | Transfer of the campaign's funds to Z Ltd. The crowdfunding platform charges a 5% fee before transferring funds to the company. | 50,000 |
| Oct 1 | The company spends on producing the promised rewards. | 20,000 |
| 2023 Jan 1 | The company delivers all promised rewards, fulfilling its obligations. The previously recorded as Unearned Revenue is now recognized as revenue. | 50,000 |
| Jan 1 | The company spends on shipping the rewards to backers. | 3,000 |
| Jan 31 | After fulfilling backer rewards, the worth of unsold inventory remains. | 2,000 |
Solution: Journal Entries for Reward Crowdfunding
Journal of Fundraiser Company (Z Ltd.)
2022 May 5
Crowdfunding Expenses A/c Dr. ₹1,000
To Bank A/c ₹1,000
(Paid for expenses related to crowdfunding campaign)
2022 May 15
Crowdfunding Expenses A/c Dr. ₹5,000
To Bank A/c ₹5,000
(Paid for advertising expense)
2022 Jun 1
Patreon A/c Dr. ₹50,000
To Unearned Revenue A/c ₹50,000
(Being amount due from platform)
2022 Jun 1
Bank A/c Dr. ₹47,500
Platform Fees A/c Dr. ₹2,500
To Patreon A/c ₹50,000
(Being funds transferred from platform)
2022 Oct 1
Production Cost A/c Dr. ₹20,000
To Bank A/c ₹20,000
(Being cost of manufacturing the rewards is recognized as an expense)
2023 Jan 1
Unearned Revenue A/c Dr. ₹50,000
To Revenue A/c ₹50,000
(Being delivery of rewards)
2023 Jan 1
Shipping Fees A/c Dr. ₹3,000
To Bank A/c ₹3,000
(Being charge shipping costs)
2023 Jan 31
Inventory A/c Dr. ₹2,000
To Production Cost A/c ₹2,000
(Being excess inventory is recorded as an asset)
2023 Mar 31
Profit & Loss A/c Dr. ₹29,500
To Crowdfunding Expenses A/c ₹6,000
To Platform Fees A/c ₹2,500
To Production Cost A/c ₹18,000
To Shipping Fees A/c ₹3,000
(Expenses transferred to P & L A/c)
Journal of CF Platform (Patreon)
2022 May 1
Bank A/c Dr. ₹50,000
To Backers' A/c ₹50,000
(Received funds from backers)
2022 Jun 1
Backers' A/c Dr. ₹50,000
To Z Ltd. ₹50,000
(Being amount due to Z Ltd.)
2022 Jun 1
Z Ltd. A/c Dr. ₹50,000
To Revenue A/c (Platform fees) ₹2,500
To Bank A/c ₹47,500
(Being deducted platform fees and transferred funds to fundraiser)
4. Accounting for Donation-Based Crowdfunding
The International Accounting Standards Board (IASB) does not have an international accounting standard for non-profit Organisations
Example 4: An NGO raised funds through the 'Ketto' donation-based crowdfunding platform
| Date | Particulars | Amount (₹) |
| 2022 Apr 15 | A donor contributes in a crowdfunding campaign, and fund is received by the platform. | 60,000 |
| Apr 16 | A freelancer is paid for designing the campaign's promotional video. | 1,200 |
| Apr 17 | Paid as salaries for project staff involved in managing the crowdfunding campaign and project execution. | 4,000 |
| Apr 18 | Other expenses related to the crowdfunding campaign. | 1,000 |
| Apr 19 | Paid for social media advertising to promote the crowdfunding campaign. | 2,000 |
| May 15 | Funds of campaigns are transferred to the NGO. Crowdfunding platform charges 3% for facilitating donations. | 60,000 |
Solution: Journal Entries for Donation-based Crowdfunding
Journal of Fundraiser (NGO)
2022 Apr 16
Crowdfunding Expenses A/c Dr. ₹1,200
To Bank A/c ₹1,200
(Paid for campaign design)
2022 Apr 17
Crowdfunding Expenses A/c Dr. ₹4,000
To Bank A/c ₹4,000
(Paid salary to project staff)
2022 Apr 18
Crowdfunding Expenses A/c Dr. ₹1,000
To Bank A/c ₹1,000
(Paid for expenses related to crowdfunding campaign)
2022 Apr 19
Crowdfunding Expenses A/c Dr. ₹2,000
To Bank A/c ₹2,000
(Paid for social media advertising)
2022 May 15
Ketto's A/c Dr. ₹60,000
To Donation Revenue A/c ₹60,000
(Being Amount due from platform)
2022 May 15
Bank A/c Dr. ₹58,200
Platform Fees A/c Dr. ₹1,800
To Ketto's A/c ₹60,000
(Being donation received net of platform fees)
2023 Mar 31
Profit & Loss A/c Dr. ₹10,000
To Crowdfunding Expenses A/c ₹8,200
To Platform Fees A/c ₹1,800
(Crowdfunding expenses transferred to P & L A/c)
Journal of CF Platform (Ketto)
2022 Apr 15
Bank A/c Dr. ₹60,000
To Backers' A/c ₹60,000
(Received funds from backers)
2022 May 15
Backers' A/c Dr. ₹60,000
To NGO's A/c ₹60,000
(Being amount due to NGO)
2022 May 15
NGO's A/c Dr. ₹60,000
To Revenue A/c (Platform fees) ₹1,800
To Bank A/c ₹58,200
(Being deducted platform fees and transferred funds to NGO)
5. Accounting for Crowdfunding Platform
There may be some specific transactions for crowdfunding platforms
Example 5: Pass the journal entries in the books of crowdfunding platform 'Kickstarter' for the following crowdfunding transactions:
| Date | Particulars | Amount (₹) |
| 2022 Apr 15 | Funds pledged by backers, but not yet transferred to the campaign creator. | 50,000 |
| Apr 15 | Net amount is transferred to campaign creators after the deducted platform charges a fee @ 5%. | 2,500 |
| May 1 | Operating expenses, such as hosting fees or employee salaries. | 10,000 |
| Jul 15 | Funds held in escrow earn interest before being distributed. | 5,000 |
| Aug 1 | Funds are refunded to backers due to a campaign failing to meet its goal. | 30,000 |
Solution: Journal of Kickstarter (Platform)
| Date | Particulars | L.F. | Debit (Dr.) | Credit (Cr.) |
| 2022 Apr 15 | Bank A/c Dr. To Backer's/Investor Payable A/c (Being received funds from backers) | ₹50,000 | ₹50,000 | |
| 2022 Apr 15 | Backer's/Investor Payable A/c Dr. To Revenue A/c (Platform fees) To Bank A/c (Being deducted platform fees and transferring funds to the fundraiser) | ₹50,000 | ₹2,500 ₹47,500 | |
| 2022 May 1 | Operating Expenses A/c Dr. To Bank A/c (Being paid platform operating expenses, like hosting fees or employees' salaries etc.) | ₹10,000 | ₹10,000 | |
| 2022 Jul 15 | Bank A/c Dr. To Backer's/Investor Payable A/c (Being received funds from backers) | ₹5,000 | ₹5,000 | |
| 2022 Aug 1 | Backer's/Investor Payable A/c Dr. To Bank A/c (Being refund to backers due to the campaign failed) | ₹30,000 | ₹30,000 |
Conclusion
The study presents significant accounting issues related to crowdfunding transactions
References
Gedar, B. L., & Lodha, S. (2024). Crowdfunding as a source of finance in India: An empirical study. IUP Journal of Applied Finance, 30(1), 25-41.
IFRS 9 issued by International Accounting Standard Board.
IFRS 15 issued by International Accounting Standard Board.
IAS 32 issued by International Accounting Standard Board.
https://www.linkedin.com/pulse/accounting-crowdfunding-tom-clendon/
Authors: Babu Lal Gedar (babulal.gedar1993@gmail.com) & Dr. Shilpa Lodha (eboard@icai.in)
THE CHARTERED ACCOUNTANT | DIRECT TAX
The End Of An Era: How The Income Tax Act 2025 Re-Writes Provisos After 65 Years
CA. Sukrati Agrawal, Member of the Institute
For six and a half decades, tax practitioners have been dealing with the Income-tax Act of 1961, which consists of over 1,200 provisos and 900 explanations—a complex construct that has developed out of more than 4,000 amendments based on judicial interpretations and changes in policies
Introduction: Why Should A Tax Professional Care About Provisos Disappearing?
For many years, tax professionals have learnt to read an income-tax provision not from top to bottom, but from the last proviso upwards
The Income Tax Act 2025, which has been enacted by Parliament to replace the 1961 Act, marks the beginning of a new era in Indian taxation, characterized by the elimination of provisos as a drafting tool and their replacement by sub-sections, clauses, and tabular arrangements
From a technical perspective, this development represents more than just an improvement in the architecture of tax legislation; it represents a profound recognition that accessibility, uniformity, and simplicity are essential, not desirable, attributes of a viable tax system
Understanding The Proviso: What Is A 'Proviso' And Why It Existed
A. Legal Definition and Conceptual Foundation
In statutory law, a proviso is referred to as a clause or a condition that qualifies, limits, or makes an exception to the main provision or the enacting clause
Consider the difference through example:
Enacting Clause (Main provision): "No deduction shall be allowed for any sum payable."
Proviso: "Provided that if such sum is paid before the due date for filing the return, a deduction may be allowed."
Explanation: "For the purposes of this section, 'sum payable' means any liability arising under law."
The enacting clause states a rule, the proviso provides a carve-out to the rule, and the explanation defines terms without providing an exception and does not change the main rule
B. The Doctrine of Proviso: Foundational Principles
Over the last six decades, the Indian judiciary has evolved a full-fledged set of principles for the interpretation of provisos
The most important principle is that a proviso must be read in relation to the main provision
The Supreme Court has held in its landmark judgments, such as S. Sundaram Pillai v. V.R. Pattabiraman (1985) 1 SCC 591 [Constitution Bench], State of Rajasthan v. Leela Jain (AIR 1965 SC 1296), and Dwarka Prasad v. Dwarka Das Saraf (1976) 1 SCC 1282: "A proviso must be read in relation to the main provision to which it is subordinate."
In the landmark case of S. Sundaram Pillai v. V.R. Pattabiraman (1985) 1 SCC 591, a Three-Judge Bench of the Supreme Court of India set out practical rules for reading provisos
The following are the extracts from paragraphs 27-44 of the decision, which summarize the cumulative judicial wisdom on provisos developed over the years:
First the court explained the difference between a proviso and explanation
The Court referred to Odgers (Construction of Deeds and Statutes (5th Edn.)) that describes proviso as a drafting device that qualifies the main clause by taking certain cases out of it
Apex Court explained that usually, a proviso narrows the main rule
The Supreme Court has repeated these themes in several cases
In State of Rajasthan v. Leela Jain (1965) 1 SCR 276, AIR 1965 SC 1296, (1966) 1 SCJ 37 the following observations were made:
In the case of STO, Circle-I, Sales Tax Officer, Circle-I, Jabalpur v. Hanuman Prasad (1967) 1 SCR 831, AIR 1967 SC 565, (1967) 19 STC 87, the Court made following point:
In Dwarka Prasad v. Dwarka Das Saraf (1976) 1 SCC 128, (1976) 1 SCR 277, AIR 1975 SC 1758 Krishna Iyer, J. speaking for the Court stressed on the following approach:
The Court in the end summed up the legal position by establishing following four broad ways in which provisos may operate are often discussed:
(1) qualifying or excepting certain provisions from the main enactment;
(2) it may entirely change the very concept of the intendment of the enactment by insisting on certain mandatory conditions to be fulfilled in order to make the enactment workable;
(3) it may be so embedded in the Act itself as to become an integral part of the enactment and thus acquire the tenor and colour of the substantive enactment itself; and
(4) it may be used merely to act as an optional addenda to the enactment with the sole object of explaining the real intendment of the statutory provision.
As stated in Dwarka Prasad, it sins against the fundamental rule of construction to read a proviso as if it were independent of the main enactment
A second principle emerged from necessity: the presumption of necessity
Third, courts developed the principle of scope limitation: a proviso only embraces the field covered by the main provision
These principles would have been unnecessary if provisos had been kept to a minimum
C. Provisos in Indian Income Tax Law: Historical Background
The Income Tax Act of 1961 replaced the Income Tax Act of 1922 with the objective of creating a modern body of taxation code
The Accumulation Narrative: How A Tax Code Evolved Into Complicated Framework
A. Phase I (1961-1975): Starting Point
The first fifteen years of operation of the 1961 Act represent a period of respective solidity
B. Phase II (1975-1990): Judicial Decisions as the runway of Accumulation
The second phase is marked by the appearance of a pattern that would influence the next fifty years: judicial interpretations of provisions in ways that were not foreseen by Parliament, followed by legislative provisos intended to cure or clarify judicial interpretations
A paradigmatic example is Section 43B
Section 43B was introduced into the statute with effect from April 1, 1984, as follows: "No deduction shall be allowed for any sum payable unless that sum has been paid during the relevant previous year."
The increase in the number of provisos led to divergent interpretations
While some courts were of the view that the expression "sum payable" in Section 43B was restricted to the amount payable in the same accounting year, others took a wider view
Parliament's response was to insert the first proviso to Section 43B in the Finance Act of 1987:
This single proviso, remedying an obvious omission in the main section, was treated as retrospective by the Supreme Court because it supplied "an obvious omission" that made the original provision "unworkable or unjust in a specific situation."
The story does not end at this point
This trend was seen throughout the Act
C. Phase 3 (1990-2010): Economic Liberalization and the Proliferation
The economic liberalization process triggered a speedy widening of provisos, as new exemptions and deductions were brought in under tangled conditions
D. Phase 4 (2010-2025): Escalating Complexity and Structural Fatigue
In the 2010s, the Income Tax Act of 1961 had seen more than 4,000 amendments in 65 Finance Acts, turning a relatively clean piece of legislation into a historical document that is full of redundant provisos for expired assessment years, transitional provisions, and superseded depreciation regimes
In the lead-up to the 2025 Bill, the Comprehensive Review undertaken by the CBDT, in addition to stakeholder consultations, found that step by step changes were insufficient and that a broad constructional makeover was required
Reasoning of Legislative Action by Parliament in 2025
A. Accessibility and Compliance Crisis
The 1961 Act was well stocked with over 1,200 provisos and 900 explanations, which posed a challenge that only specialists could overcome
B. Litigation and Datedness
The complex proviso regime resulted in conflicting decisions of the High Court and required frequent interventions of the Supreme Court
C. Modernistic layout
The modern global taxation system uses sub-sections, tables, and themes instead of provisos
Elimination of Provisos and Commencement of Clarity
The Income Tax Act 2025 makes a comprehensive revamp of the regime by removing over 1200 provisos and reducing them to sub-sections or clauses
Likewise, Section 32 (Depreciation) involved navigating through a series of provisos for different classes of assets
To explain further, section 11 was the hub of 16 provisos
(i) fewer cross-references;
(ii) step-by-step eligibility tests sit together;
(iii) tables make rate/conditions visible at a glance; and
(iv) the scope of the exception is clearer because it is written as part of the same rule.
Various doctrines like Clubbing of income, which were previously narrated via provisos, are now represented as separate formulas setting out conditions and scenarios
Conclusion: Closing a 65-Year Chapter, Opening a New Era
The Income Tax Act 1961 started clean but accumulated 4,000+ amendments, 1,200+ provisos, and 900+ explanations over 65 years
References
https://www.casemine.com/judgement/in/5609ac1ee4b014971140e13c https://indiankanoon.org/doc/68571/ itatonline.org/digest/allied-motors-p-ltd-v-cit-1997-224-itr-677-139-ctr-364-91-taxman-205-sc/
https://bcajonline.org/journal/deductibility-of-advance-payments-section-43b/ incometaxindia.gov.in/Documents/income-tax-bill-2025/faqs-income-tax-bill.pdf
incometaxindia.gov.in/Documents/income-tax-act-1961-as-amended-by-finance-act-2025.pdf
incometaxindia.gov.in/Documents/Budget/budget-2025/faqs-budget-2025.pdf
prsindia.org/files/bills_acts/bills_parliament/2025/The_Income-tax_Bill, 2025.pdf
prsindia.org/billtrack/the-income-tax-bill-2025
Author may be reached at casukagrawal2014@gmail.com and eboard@icai.in
GIST OF OPINIONS • THE CHARTERED ACCOUNTANT
1. Classification of Bank Fixed Deposits held under Lien as Current or Non-Current Assets under Ind AS framework
A. Facts of the Case
The Company avails Bank Guarantee (BG) and Letter of Credit (LC) facilities from several banks to support its business operations. The Company's banking arrangements can be categorised into two distinct models:
General Lien Arrangements: Banks provide BG/LC facilities against a general lien on the Company's total deposits, with facility limits based on a percentage of deposits. No specific deposits are earmarked against individual BG/LC.
Specific Deposit-backed Facilities: Other banks provide BG/LC facilities against deposit of equivalent amounts, where specific fixed deposits are placed as margin money or security for individual guarantee or credit facilities.
The Company maintains these deposits with varying maturity periods, predominantly structured with original maturities of less than twelve months, irrespective of whether they are subject to lien arrangements or held free of any encumbrance.
C&AG's Audit Observation:
Bank balances amounting to 22,257.31 lakhs held as margin money and security deposits under lien against borrowing/bank guarantee/LC having claim end dates exceeding 12 months are not realisable by the Company within its operating cycle, and therefore should be classified as non-current assets rather than current assets.
Company's Contention:
As per Schedule III to the Companies Act, 2013, bank deposits with more than 12 months maturity shall be disclosed under 'Other financial assets Non-Current Assets'.
All bank deposits in question, including those under lien, uniformly carry original maturity periods of less than twelve months.
Therefore, their classification as 'Current Assets' in the balance sheet as of March 31, 2025, is consistent with the explicit requirements of Schedule III.
B. Query
Whether bank fixed deposits with original maturity periods of less than twelve months as on the reporting date, but held under lien arrangements against bank guarantees, letters of credit, or borrowing facilities that extend beyond twelve months from the reporting date, should be classified as 'Current Assets' or 'Non-Current Assets' under Schedule III to the Companies Act, 2013.
Whether the original contractual maturity period of the deposit should be the primary determining factor for current/non-current classification, or whether the period of the underlying lien arrangement (BG/LC/borrowing facility) should govern the classification.
The appropriate accounting treatment when deposits are held under general lien arrangements where specific linking to individual guarantees or facilities is not practically feasible.
C. Points Considered by the Committee and Opinion
The Committee notes that each asset as at the reporting date has to be assessed as current or non-current on the basis of the relevant criteria as per the definition of 'current asset' under Ind AS 1, 'Presentation of Financial Statements' and Division II of Schedule III to the Companies Act, 2013.
The Committee further notes the requirements of Ind AS 7, 'Statement of Cash Flows' which states that the cash equivalents are short-term, highly liquid investments with maturity of normally three months or less from the date of acquisition and which are readily convertible to a known amount of cash and subject to an insignificant risk of changes in value.
The Committee notes that the bank deposits are not contended by the querist or auditor as highly liquid investments with maturity of normally three months or less from the date of acquisition.
Further, the Company does not seem to intend to hold these deposits for the purpose of meeting short-term cash requirements. Therefore, these deposits do not meet the aforesaid definition of cash equivalents.
The Committee further notes that clause (c) of paragraph 66 of Ind AS 1 states that an entity shall classify an asset as current when it expects to realise the asset within twelve months after the reporting period.
Thus, short-term bank deposits having the original maturity period of less than twelve months would generally qualify as current assets (since as on the reporting date, the maturity period will be less than 12 months).
Now the next issue to be examined is whether such bank deposits held under lien arrangements (general or specific) against bank guarantees, letters of credit, or borrowing facilities that extend beyond twelve months from the reporting date can still be classified and presented as current assets.
In this regard, the Committee notes that the definition of current asset signifies the importance of the expectation of the entity with regard to the asset's realisation, viz., conversion/exchange into cash or use in the settlement of liability at the reporting date.
Thus, the classification of an asset should not be based solely on contractual maturity but should also consider the substance or economic reality regarding expectation of realisation at the reporting date.
Thus, when there are restrictions on realisation of bank deposits and the nature and duration of restrictions are such that bank fixed deposit(s) is (are), in substance, not expected to be realised within twelve months from the reporting date, or where such deposit(s) is (are) required to be continued or renewed by the Company to support long-term BG/LC/borrowing arrangements, which make(s) the deposit(s) not expected to be realisable within twelve months from the reporting date, such deposit(s) should not be classified and presented as 'current asset', but should instead be classified as 'non-current asset'.
The Committee further notes that Ind AS Schedule III requires bank balances other than cash and cash equivalents (which meet the definition of 'current asset') to be presented as 'financial assets' under 'current assets'.
Further, it requires 'Balances with banks to the extent held as margin money or security against the borrowings, guarantees, other commitments' to be disclosed separately.
The Guidance Note further explains these requirements and specifically requires that the disclosure regarding 'bank balances other than cash and cash equivalents' should include items such as balances with banks held as margin money or security against borrowings, guarantees, etc. and bank deposits with original maturity of more than three months but less than 12 months.
Accordingly, the Committee is of the view that bank deposits held (under general or specific lien arrangements) as margin money or security for individual guarantee or credit facilities (such as Letter of Credit) should be presented as 'financial assets' under 'current assets' with a separate disclosure for the same in the financial statements (including notes), provided such bank deposits despite the restrictions due to lien arrangements still meet the definition of 'current asset', as explained above.
2. Accounting treatment of expenditure incurred on repair, recovery and reinstallation of damaged assets during construction phase, under Ind AS framework
A. Facts of the Case
A company is the crude oil and natural gas producer in India.
The construction of production facilities for one of its offshore fields (abc-field) has been executed through Lump Sum Turnkey (LSTK) contracts.
For development of the abc-field project, the Company placed a Notice of Award (NOA) to Consortium X (Contractor) for Subsea Umbilical, Risers and Flowlines (SURF) and Subsea Production Systems (SPS) works covering subsea installations for 34 wells.
As part of these activities, critical subsea assets, viz., Subsea Distribution Unit (SDU-1234) and Associated Umbilical (UM-1234), forming part of the core subsea production network, were installed and proper installation was confirmed by the Third-Party Inspector (TPI) and Project Management Consultant (PMC).
During a pre-lay survey for installation of Steel Tube Flying Leads (STFL), it was discovered that the installed SDU had toppled and separated from its foundation and the umbilical had been dragged and displaced.
Subsequent investigation by PMC and on-board inspectors concluded that the disturbance was "most likely caused by the drilling rig anchor" during demobilisation, and not due to the Consortium X's own operations.
At the time of the incident, the subsea production system was incomplete and non-functional.
First Oil from abc-field was achieved only after reinstatement of the subsea infrastructure.
Consortium X requested for approval of a Change Order (increase in project cost) for recovery, repair and reinstallation of the displaced assets, which was approved by the Company's Board.
The work included recovery of displaced subsea assets, detailed inspection and assessment, repair and refurbishment, reinstallation and integration into the subsea production system, and testing and commissioning readiness activities.
The querist has stated that these reinstatement works were critical for constructing and preparing the production system for First Oil. The related costs were categorised as rebuilding core production infrastructure during the construction phase, not as repairs of an operating asset or periodic maintenance, as the field had not yet been commissioned.
Consortium X notified the Contractor's All Risks (CAR) insurers of the subsea damages.
The Company's management approved acceptance of the Loss Adjuster's recommended settlement amount and final insurer confirmation is awaited.
Consortium X confirmed that any costs recovered through the CAR insurance policy would be passed on to the Company.
The Company capitalised the expenditure as part of 'Capital Work-in-Progress (CWIP)', subsequently transferred to 'Property, Plant and Equipment (PPE)' upon commissioning, during financial year 2023-24, considering it to be directly attributable to bringing the production system to the condition necessary for its intended use under Ind AS 16.
The Comptroller & Auditor General (C&AG) raised an audit observation that the cost incurred in recovery, repair and re-installation of damaged abc-field subsea assets had been capitalised in contravention to the principles of recognition of assets laid down in Ind AS 16. The Company should recognise the expenditure incurred as an abnormal cost or loss and expense it in the statement of profit and loss.
Company's Perspective:
As per Guidance Note on Accounting for Oil and Gas Producing Activities, all expenditure incurred during the development phase which are directly attributable to bringing assets into the condition necessary for intended use must be capitalised. The reinstatement expenditure though arising from a disruptive event qualifies as capitalisable since it constitutes a necessary part of the development works that enabled the field to achieve First Oil.
The reinstatement expenditure clearly passes the 'avoidance test' i.e. without these works, the production system could not have reached its working condition.
The reinstatement works were required to restore SDU and umbilical systems to their specified coordinates and operating conditions, without which First Oil could not have been achieved. Until commissioning ('First Oil'), all necessary costs to bring the asset to working condition should form part of capitalised cost.
The one-time subsea repair/reinstallation was not a routine maintenance activity but a construction-phase reinstatement necessary to complete the asset.
In the offshore operations, such repair and reinstallation costs are an expected and integral component of installation. They are factored into project execution norms globally and are not considered as abnormal or exceptional losses.
B. Query
Whether the Company's accounting treatment of capitalising expenditure incurred for reinstatement of subsea assets during the construction phase is appropriate.
Whether the expected insurance proceeds against capitalised cost incurred for reinstatement of subsea assets should be:
(a) Adjusted against the cost of the related asset (reduction in capitalised expenditure under Ind AS 16), or (b) Recognised as separate income in profit and loss when virtually certain/received.
C. Points Considered by the Committee and Opinion
With regard to the issue raised on accounting treatment of expenditure incurred for reinstatement of damaged subsea assets during development phase of abc-field, the Committee notes that the Guidance Note on Accounting for Oil and Gas Producing Activities (for entities to whom Ind AS is applicable), issued by the ICAI refers to the accounting principles contained in Ind ASs (for example, Ind AS 16) to accounting for costs incurred on activities including development and production of oil and gas.
In the context of damage occurred, the Committee notes from paragraph 66 of Ind AS 16 that impairments or losses of items of property, plant and equipment, related claims for or payments of compensation from third parties and any subsequent purchase or construction of replacement assets are separate economic events and are accounted for separately.
Further, paragraph 63 of Ind AS 16 requires an entity to apply Ind AS 36 to determine whether an item of PPE is impaired.
Thus, in the extant case, when the incident causing damage to the assets occurred, the Company should first assess the impairment as per the requirements of Ind AS 36 (even though the overall production facilities may not have been commissioned at that stage).
Any impairment loss incurred should be recognised in profit or loss as per the requirements of Ind AS 36.
Furthermore, as per paragraph 66 (b) of Ind AS 16, the Company should evaluate as to whether any asset or any component of asset of the previously capitalised asset is destroyed and consequently is no longer expected to generate future economic benefits; and therefore, whether any such asset or component of asset would require derecognition under paragraph 67 of Ind AS 16.
The Committee further notes from the Facts of the Case that the subsea assets were initially confirmed for proper installation by Third-Party Inspector and it is due to subsequent activities involving demobilisation of rig that the incident causing damage took place which necessitated reinstatement activities of sub-sea assets and incurrence of the reinstatement expenditure to restore the assets to their originally intended condition and location.
Thus, such expenditure represents rectification of damage performed subsequent to installation of assets rather than expenditure incurred to complete an unfinished construction or development activity.
Paragraph 10 of Ind AS 16 requires that not only the initial costs of acquisition or construction of an asset but also costs incurred subsequent thereto to add, replace or service the asset needs to be included as cost of the asset. For such costs to be included as part of the cost of the asset, the measurement requirements of Ind AS 16, inter alia, prescribe that, only costs directly attributable to bringing the item of PPE to the location and condition necessary for it to be capable of operating in the manner intended by management should be capitalised as part of the cost of PPE.
Furthermore, paragraph 22 of Ind AS 16, inter alia, states that while determining the cost of a self-constructed asset, the cost of abnormal amounts of wasted material, labour, or other resources incurred is not included in the cost of the asset.
In this regard, the Committee is of the view that to determine what are abnormal costs requires application of judgement considering the overall facts and circumstances.
Accordingly, the Committee is of the view that accounting treatment of expenditure incurred for reinstatement of subsea assets during the development/construction phase shall also require exercise of judgement as to whether the reinstatement expenditure meets the recognition and measurement principles under Ind AS 16.
For example, whether the expenditure qualifies as directly attributable cost in accordance with paragraph 16(b) of Ind AS 16 and whether the expenditure includes any element representing the cost of abnormal amounts of wasted material, labour or other resources (viz. abnormal costs), which cannot form part of the capitalised cost and must be recognised in profit or loss, as discussed above.
The Committee is further of the view that such judgement should be exercised in the specific facts and circumstances and considering the principles, as discussed above; and based on such judgement, it should be decided whether these expenditure or costs need to be capitalised (included in the costs of PPE) or recognised in the statement of profit and loss.
With regard to the issue raised relating to accounting for expected insurance proceeds, the Committee notes from the Facts of the Case that insurance proceeds are in respect of damages or loss incurred on subsea assets.
In this regard, the Committee notes from paragraphs 65 and 66 of Ind AS 16, that compensation from third parties for items of property, plant and equipment that were impaired, lost or given up shall be included in profit or loss when the compensation becomes receivable.
Therefore, in the extant case, the expected insurance proceeds should be recognised in profit or loss when it becomes receivable as per the requirements of Ind AS 16.
3. Accounting treatment of restoration obligation on the project under the Service Concession Arrangement, under Ind AS framework
A. Facts of the Case
A company entered into a concession agreement with the President of India, represented through the Executive Director (Traffic-PPP), Ministry of Railways (MOR), Government of India.
Under this Agreement, the Company was granted the authority to develop, finance, construct, operate, and maintain the project railway and to exercise and/or enjoy the rights, powers, benefits, privileges, authorisations and entitlements as set out in the agreement during the concession period.
The concession period is set for 30 years from the date of commencement of commercial operations or until the Company achieves a Net Present Value (NPV) payback of 14% on its equity investment, whichever occurs first or such extended period as provided for in the agreement, unless terminated earlier.
At the end of concession period, the Company shall be entitled to receive and MoR shall pay to the Company an amount equal to book value.
The Operation and Maintenance of the project railway is being conducted by MoR through Western Railway (WR) and by its own resources under its right, which is co-terminus with the Concession Agreement, entered into between the MoR and the Company.
As per Concession Agreement, there is an obligation on the Company to keep the Project Assets in a proper working condition, including making replacement in accordance with the standards laid down by MoR, of all Project Assets whose lives have expired. Such replacement shall be carried out by the Company either by itself or through MoR, and the costs of such replacements shall be borne by the Company.
The Company has classified the assets arising out of concession arrangement as intangible assets and amortisation has been charged to the Statement of Profit and Loss over the period of concession.
Observations made by C&AG during audit of F.Y. 2023-24:
The Company in the financial statements, has disclosed that at present, reliable estimate for restoration obligation is not available; therefore, provision for same is not provided in financial statements, the same will be provided in the year in which reliable estimate becomes available.
The C&AG stated that the above note of the Company is not correct as it is not impossible to estimate the restoration obligation. Therefore, the Company should estimate the restoration obligation and necessary provisions should be made in the books of account.
Accounting treatment made in the financial statements of F.Y. 2024-25:
In compliance with the observation of C&AG on the financials for the year ending 31st March 2024, the Company estimated obligation for resurfacing of Rs. 14,200 lakhs to be incurred from F.Y. 2024-25 to the end of concession period. The amount of obligation has been apportioned over the period, i.e., each year, certain amount is charged to profit and loss considering time value of money and appropriation of expenses.
In financial year 2024-25, the Company has charged an amount of Rs. 1,045.25 lakh in statement of profit and loss and balance amount shall be charged over the period as finance cost and resurfacing cost.
C&AG's Observation during audit of F.Y. 2024-25:
The Company had estimated a liability of Rs. 14,200 lakhs for replacement obligations in respect of major items of Project Railway which are likely to become due for replacement during the remaining concession period as per their codal lives.
However, against this, the Company has made a provision of Rs. 1045.25 lakhs as on 31st March 2025. Thus, there was a short provision of Rs. 13,154.75 lakhs.
Management Reply to observations of C&AG:
The Company has estimated a total restoration liability of Rs. 14,200 lakhs over the remaining concession period. Of this, Rs. 1,045.25 lakhs has been recognised in the current year, with the balance to be systematically provided in the financial statements over the remaining concession period, towards replacement obligations in respect of major railway assets.
This liability represents a maintenance obligation, accruing over the concession period from inception until the expected replacement of assets as their service potential is consumed.
Since the consumption of assets occurs gradually, the obligation for restoration also accrues over time.
Recognising the entire liability of Rs. 14,200 lakhs in a single year would be inconsistent with the matching concept under Ind AS, as the liability accrues over the next 17 years and becomes payable only in the long term.
B. Query
Whether the accounting treatment adopted by the Company (recognition of restoration obligation progressively over the period i.e. upto the date restoration obligation arises) is appropriate and in accordance with Ind AS, i.e., yearly allocation of expenses and finance cost in statement of profit and loss on a systematic basis.
Whether the treatment suggested by the C&AG (recognising the entire obligation upfront in statement of profit and loss) is appropriate.
C. Points Considered by the Committee and Opinion
The Committee notes the requirements of Appendix D to Ind AS 115 which state that the separate services within a service concession arrangement, i.e., 'construction services', 'upgrade services' or 'operation services', must be disaggregated because each separate phase or element has its own distinct skills, requirements and risks and are accounted for accordingly.
The Committee notes that as per the terms of concession agreement with Railways, the Company has been incurring costs on carrying out the replacement of various items of the Project Railway on expiry of their codal lives within the concession period (viz., restoration activities), however, the Company will not be reimbursed separately by the grantor (viz., MoR) for these restoration activities.
Also, such restoration activities have been considered as maintenance obligation, which do not include any upgrade element and are incurred to maintain the project assets in proper working condition.
The Committee further notes that paragraph 21 of Appendix D requires an entity to recognise and measure its contractual obligations to maintain or restore infrastructure in accordance with Ind AS 37.
Therefore, in the given case, the restoration activity will be accounted for as per Ind AS 37.
In this regard, the Committee also notes the requirements of Ind AS 37 and extracts from Example 2 of Illustrative Examples (IE) to IFRIC 12, issued by IASB.
The Committee notes that the Company's restoration obligation arises as a consequence of use of the project assets during the operating phase and in this regard, assumes that the service potential of these assets is consumed evenly in proportion to their useful life.
Since as per the requirements of Ind AS 37, the restoration obligation is to be measured at the best estimate of the expenditure required to settle the present obligation at each reporting date and since such best estimate of expenditure required to settle the obligation at any date is proportional to the use of the project assets by that date and which will increase proportionately by each passing year (considering the assumption), the provision to be recognised should be increased in annual increments by charge to profit or loss over the useful life of the respective project assets till their expected date of replacement/restoration.
Also, the provision should be discounted to its present value in accordance with Ind AS 37 and the carrying amount of provision in each reporting period is increased to reflect the passage of time, which is to be recognised as borrowing or finance cost in the Statement of Profit and Loss.
Therefore, the Committee notes that the in-principle approach followed by the Company to build and recognise the provision over the concession period (considering the expected replacement of assets); rather than recognising the entire amount at the end of the reporting period, is as per the requirements of Ind AS 37.
Notes & Disclaimers
This gist provides only a summarised version of the Expert Advisory Committee's opinion for general informational purposes. While due care has been taken in preparing the summary, it does not purport to capture all facts, circumstances, assumptions, limitations, reasoning or contextual nuances forming part of the complete opinion. Users should refer, therefore, to the complete opinion for the authoritative text, detailed analysis, and contextual understanding. No reliance should be placed solely on this gist without reference to the full opinion.
The Opinion is only that of the Expert Advisory Committee and does not necessarily represent the Opinion of the Council of the Institute.
Each opinion is based on the specific facts and circumstances as presented by the querist and is finalised considering the applicable laws, statutes, and accounting and/or auditing principles prevailing as on the date of finalisation, which is duly mentioned with each opinion. The Opinion must, therefore, be read in the light of any amendments and/or other developments subsequent to the issuance of Opinion by the Committee.
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