ICAI journal October 2026 .... Pt 2

 

Securities Lending and Borrowing: A Practical Guide for Investors

Dr. Amit Kumar Agrawal

Deputy Secretary, ICAI

The Securities Lending and Borrowing (SLB) mechanism is an important component of the securities market, enabling investors to temporarily lend eligible securities through a regulated framework in return for a lending fee. It facilitates efficient utilisation of securities while providing investors an opportunity to earn additional income from securities they intend to hold for the longer term.

However, participation in SLB requires an understanding of key aspects such as eligibility, lending fees, tenure, liquidity, recall, corporate actions, charges, margins and associated risks. The accompanying Frequently Asked Questions (FAQs) on Securities Lending and Borrowing provide a simple and practical explanation of these aspects and address common queries that investors may have before participating.

The objective is to enhance investor awareness and facilitate a better understanding of the SLB mechanism, enabling investors to make informed decisions based on their individual requirements and the applicable regulatory framework.

Frequently Asked Questions (FAQs) on Securities Lending and Borrowing (SLB) Mechanism

1. What is Securities Lending and Borrowing (SLB)?

Answer: Securities Lending and Borrowing (SLB) is a regulated mechanism through which an investor who owns eligible securities can temporarily lend those securities to another market participant in return for a lending fee.

The borrower uses the securities for permitted market activities and is required to return equivalent securities of the same type and class in accordance with the applicable settlement mechanism.

In simple words: You own shares $\rightarrow$ lend them temporarily $\rightarrow$ earn a lending fee $\rightarrow$ receive equivalent shares back.

2. Is SLB the same as selling my shares?

Answer: No.

When you sell your shares, you permanently dispose of your investment. Under SLB, the securities are temporarily lent, and the borrower is required to return equivalent securities in accordance with the applicable SLB framework.

• Selling: Shares $\rightarrow$ Sold $\rightarrow$ Investment disposed of

• SLB: Shares $\rightarrow$ Lent $\rightarrow$ Lending fee earned $\rightarrow$ Equivalent securities returned

3. Why would someone want to borrow my shares?

Answer: One important reason is short selling.

For example, a market participant may expect the price of a particular security to fall. Subject to applicable rules, the participant may borrow the security, sell it in the market and subsequently acquire equivalent securities to return to the lender.

SLB therefore provides a mechanism through which securities can be borrowed for permitted market activities.

4. Is SLB only for large institutional investors?

Answer: No.

SLB is available to different categories of investors, including retail and institutional investors, subject to the applicable requirements.

An investor generally participates through an eligible SLB Participant/Clearing Member.

5. Can I lend shares that I am holding for the long term?

Answer: Yes, provided the securities are eligible for SLB.

For example, if you intend to hold eligible shares for the long term and do not expect to need them during the lending period, you may consider lending them to potentially earn additional income.

However, you should consider your liquidity requirements before lending.

6. Is lending shares similar to renting out a house?

Answer: The basic concept can be understood similarly, although the legal and market mechanics are different.

• House: Owner rents it $\rightarrow$ receives rent $\rightarrow$ property is returned.

• SLB: Investor lends securities $\rightarrow$ receives lending fee $\rightarrow$ equivalent securities are returned.

Unlike a private rental arrangement, SLB operates through a regulated market and clearing mechanism.

7. Is SLB regulated by SEBI?

Answer: Yes.

The Securities Lending and Borrowing mechanism operates under the regulatory framework prescribed by the Securities and Exchange Board of India (SEBI), including the Securities Lending Scheme, 1997, and subsequent amendments and circulars.

SEBI has issued several circulars reviewing and amending the SLB framework over the years, including an amendment to the Securities Lending Scheme, 1997, in March 2023.

8. Is there a SEBI mandate that I must lend my shares?

Answer: No.

SLB is a facility available to investors. An investor is not required to lend securities merely because those securities are eligible for SLB.

The decision to lend is voluntary.

9. Does SEBI fix the lending fee?

Answer: No.

SEBI establishes the regulatory framework, but the lending fee is generally market-determined through the SLB platform.

Participants quote the lending fee per share, and orders are matched through the applicable order-matching mechanism.

10. Which securities are eligible for SLB?

Answer: Not every listed security is automatically eligible for SLB.

The securities eligible for lending and borrowing are determined under the applicable SEBI and exchange/clearing-corporation framework.

The framework includes securities traded in the F&O segment, liquid index ETFs meeting specified criteria, and certain other securities satisfying prescribed eligibility conditions.

The eligible list may change from time to time.

Investor tip: Always check the latest list of securities eligible for SLB before placing an order.

11. Can I lend shares lying in my demat account?

Answer: Yes, provided the securities are eligible and the applicable requirements are satisfied.

SLB transactions are undertaken in dematerialised form through the prescribed market infrastructure.

12. Can I lend all the shares in my portfolio?

Answer: No.

Only securities eligible under the applicable SLB framework can be lent.

Also, investors should consider whether they may need some of their holdings for their own investment or liquidity requirements.

13. What if nobody wants to borrow my shares?

Answer: Your lending order may remain unmatched.

Simply owning an eligible security does not mean that you will automatically earn a lending fee.

There must be sufficient borrowing demand at the fee quoted by the participants.

14. Why should I lend my shares?

Answer: The primary reason is to potentially earn additional income from securities that you intend to continue holding.

For example, if you are a long-term investor and do not expect to sell your eligible shares during the relevant period, lending them through SLB may provide an additional source of income.

15. What are the advantages of lending shares?

Potential advantages include:

• Additional income through lending fees.

• Better utilisation of securities already held in the portfolio.

• Continued economic exposure to the underlying investment, subject to the applicable SLB framework.

• Access to a regulated market and clearing mechanism.

• Applicable corporate benefits are dealt with under the SLB framework.

However, investors should consider the associated risks and restrictions before participating.

16. Can SLB provide a fixed or guaranteed return?

Answer: No.

The lending fee is market-determined and is not a fixed or guaranteed return.

The fee can vary depending on the security, demand, availability, tenure and prevailing market conditions.

17. Can SLB make me rich quickly?

Answer: No.

SLB should not be viewed as a quick-profit or guaranteed-income product.

The lending fee can vary considerably, and the underlying securities remain subject to market risks.

18. What is a lending fee?

Answer: A lending fee is the amount paid by the borrower to the lender for borrowing the securities.

It is generally quoted per share. For example: $1,000 \text{ shares} \times \text{₹}5 \text{ lending fee per share} = \text{₹}5,000 \text{ gross lending fee}$.

19. How is the lending fee decided?

Answer: The lending fee is market determined.

Participants place lending and borrowing orders on the SLB platform, and orders are matched according to the applicable price-time priority mechanism.

The lending fee is quoted per share.

20. Is there a standard lending fee or fixed percentage?

Answer: No.

There is no single fixed lending fee applicable to all securities.

The fee may vary depending on: demand for the security, availability of the security, market conditions, expected demand for borrowing, tenure, and other market factors.

21. What is the usual lending fee?

Answer: There is no single "usual" lending fee that applies across the market.

The fee can vary significantly between securities and over time.

Therefore, investors should check the actual prevailing fee for the specific security and SLB series rather than relying on a general percentage.

22. What is the minimum period for which I can lend my shares?

Answer: The available tenure depends on the SLB series.

NSE currently provides monthly SLB contracts with tenures up to 12 months and has also introduced an R3 shorter-tenure series, with a reverse-leg settlement at $T+3$, effective August 17, 2026.

Therefore, investors should check the currently available SLB series before placing an order.

23. What is the maximum tenure?

Answer: The maximum tenure under the SLB framework is 12 months.

The framework also provides for rollover in specified circumstances, but the total duration of the contract, including permitted rollovers, cannot exceed the prescribed maximum period.

24. How long will my shares be unavailable to me?

Answer: Your shares will generally remain subject to the SLB arrangement until the applicable reverse-leg settlement date, unless an eligible early recall is successfully executed.

Therefore, before lending, ask yourself: "Will I need these shares during the lending period?"

If you may need to sell them urgently, SLB may reduce your flexibility.

25. Can I get my shares back before the end of the tenure?

Answer: Yes. The lender has an early recall facility, subject to the applicable SLB mechanism.

NSE permits lenders to place recall orders through the SLB platform. The lending fee applicable to the remaining period is market-determined.

However, early recall does not necessarily mean that the securities will become available immediately. The applicable order-matching and settlement process has to be completed.

26. What if I suddenly need to sell my shares?

Answer: While the securities are out on loan, you generally cannot simply sell those same securities in the normal market.

You may need to initiate an early recall and wait for the securities to be returned through the applicable settlement mechanism.

Investor tip: Do not lend securities that you may need for an immediate sale.

27. Is there any security or collateral against the shares I lend?

Answer: Yes.

SLB transactions are subject to margin and risk-management requirements prescribed by the clearing corporation.

For example, NSE Clearing currently specifies various margins, including VaR, Extreme Loss Margin, Mark-to-Market Margin and lending-price-related margins, depending on the transaction and stage of settlement.

28. Is there a 125% margin in SLB?

Answer: The commonly mentioned 125% should not be treated as a universal SLB margin requirement.

Under the current NSE framework, different margins apply to lend and borrow transactions.

For example, NSE specifies 25% of the lending price as a margin for lend transactions until securities pay-in, while 100% of the lending price is collected for borrow transactions from $T+1$ until the securities are returned, along with other applicable margins.

The actual margin requirements should therefore be checked under the latest clearing-corporation framework.

29. Is there a guarantee that I will get my securities back?

Answer: SLB transactions operate through a structured clearing and settlement mechanism, with margins and risk-management procedures designed to manage settlement and counterparty risks.

NSE states that the clearing mechanism provides for the return of securities to the lender and procedures such as auction and financial close-out in case of failure to return securities.

However, investors should not interpret this as meaning that SLB is an entirely risk-free investment product.

30. What happens if the borrower fails to return my securities?

Answer: If the borrower fails to return the securities on the applicable reverse-leg settlement date, the clearing corporation may conduct a buy-in/auction to procure the securities.

If the securities cannot be procured through the auction, the transaction may be financially closed out in accordance with the applicable rules.

31. Will someone pay me a separate "guarantee amount"?

Answer: No.

The lender receives the agreed lending fee.

Margins and collateral maintained through the clearing mechanism are primarily risk-management arrangements and are not an additional guaranteed return payable to the lender.

32. Can I directly lend my shares to another person?

Answer: The exchange-based SLB mechanism is not simply a private arrangement between two individuals.

The transaction is undertaken through the prescribed market infrastructure and eligible SLB Participants/Clearing Members.

33. Do I need a broker to participate in SLB?

Answer: An investor generally participates through an eligible SLB Participant/Clearing Member.

At NSE, eligible clearing members, including specified banks and custodians, register as SLB Participants. Participants can undertake lending/borrowing transactions on their own account or on behalf of clients, subject to the applicable requirements.

Investors should check whether their broker/intermediary provides SLB services.

34. What are the eligibility requirements for an SLB Participant/broker?

Answer: The intermediary must satisfy the applicable requirements prescribed by SEBI, the stock exchange and the clearing corporation.

Where transactions are undertaken on behalf of clients, prescribed client agreements and identification requirements also apply.

35. Are there any charges for the lender?

Answer: Yes.

Depending on the intermediary and transaction, charges may include:

• brokerage;

• depository/settlement charges;

• applicable statutory levies and taxes; and

• other charges prescribed by the intermediary.

The investor should ask the intermediary for a complete schedule of applicable charges before participating.

36. Is brokerage charged on SLB?

Answer: An intermediary may charge brokerage for facilitating an SLB transaction.

The investor should check the applicable brokerage and other charges with the concerned SLB participant before placing the transaction.

37. Are there transfer or depository charges?

Answer: Applicable depository, settlement, intermediary or other transaction-related charges may apply depending on the transaction and intermediary.

Investors should obtain a clear disclosure of all applicable charges before participating.

38. What happens to my dividend if I lend my shares?

Answer: The economic benefit of the dividend is passed on to the lender under the applicable SLB framework.

The dividend amount is recovered from the borrower and passed on to the lender through the prescribed settlement mechanism.

39. What happens to my voting rights if I lend my shares?

Answer: Investors should pay particular attention to this issue.

The treatment of AGM/EGM-related rights depends on the SLB contract series and applicable rules.

NSE currently provides separate contract series, including:

• Series A: contracts that are mandatorily foreclosed in case of AGM/EGM; and

• Series B: contracts that are not foreclosed in case of AGM/EGM.

Therefore, if exercising voting rights is important to you, check the applicable SLB series and recall provisions before lending.

40. What happens if the company announces a stock split?

Answer: The SLB position is appropriately adjusted so that the lender receives the revised quantity of securities in accordance with the applicable corporate-action provisions.

For example, if a stock split results in an increase in the number of shares, the borrower's obligation is correspondingly adjusted.

41. What happens if there is a bonus issue, merger or another corporate action?

Answer: The treatment depends on the nature of the corporate action and the applicable SLB rules.

Under the framework, corporate actions such as bonus, merger/amalgamation and open offer may result in foreclosure of the contract on the ex-date, with appropriate treatment of the lending fee.

Therefore, investors should check the applicable treatment of the particular corporate action.

42. What are the limitations or disadvantages of lending my shares?

Important considerations include:

1. Reduced liquidity: You may not be able to immediately sell the securities while they are lent.

2. Voting considerations: You need to consider the applicable treatment of voting rights and AGM/EGM events.

3. Recall limitations: Although early recall is available, the securities do not necessarily become available immediately.

4. Variable income: The lending fee is market-determined and is not guaranteed.

5. Market risk: The value of the underlying shares can rise or fall.

6. Corporate-action considerations: Certain corporate actions may result in adjustment or foreclosure of the SLB contract.

7. Charges: Brokerage and other charges reduce the net income.

8. Operational considerations: The investor must comply with the applicable SLB procedures and documentation.

43. What happens if the price of my shares falls while they are lent?

Answer: Lending the shares does not protect you from market losses.

For example:

• You own shares worth ₹1,00,000.

• The share price subsequently falls, and the shares are worth ₹80,000.

• Your investment has fallen in market value by ₹20,000, although you may have earned a lending fee.

The lending fee does not eliminate market risk.

44. What happens if the price of my shares rises?

Answer: You continue to have economic exposure to the underlying investment, subject to the applicable SLB framework.

For example:

• Investment value: ₹1,00,000

• New market value: ₹1,20,000

The lending fee may provide additional income alongside the change in the value of the underlying securities.

45. Can I lose money by lending shares?

Answer: The lending fee itself is intended to provide income, but the underlying securities remain exposed to market movements.

Investors should also consider charges, liquidity constraints, corporate actions and other applicable risks.

Therefore, SLB should not be viewed as a risk-free method of earning additional income.

46. Is SLB the same as short selling?

Answer: No.

They are related but different.

• Short selling: Selling a security that the seller does not own, subject to the applicable regulatory framework.

• SLB: Borrowing securities through the prescribed mechanism.

SLB can facilitate the availability of securities for permitted short-selling and other market activities.

47. Can the borrower sell the shares that I have lent?

Answer: Once securities are transferred to the borrower under the applicable SLB mechanism, the borrower may deal with those securities in accordance with the applicable regulatory framework.

The borrower is ultimately required to return equivalent securities in accordance with the SLB contract.

48. What happens if the borrower makes a profit by selling the borrowed shares?

Answer: The borrower's trading profit or loss is separate from the lender's lending fee.

The lender receives the agreed lending fee, while the borrower bears the economic consequences of its own trading strategy.

49. How much money can I earn by lending my shares?

Answer: There is no fixed amount.

Your gross lending income is generally calculated as:

$\text{Number of securities lent} \times \text{Lending fee per security}$

For example:

$1,000 \text{ shares} \times \text{₹}5 \text{ per share} = \text{₹}5,000 \text{ gross lending fee}$

The actual net amount received will depend on applicable brokerage, charges and taxes.

50. How much will I actually earn after charges and taxes?

Answer: Investors should not consider the quoted lending fee as their final income.

A simple way of looking at it is:

• Gross Lending Fee

• Less: Brokerage and applicable charges

• Less: Applicable taxes/levies

• = Net amount received

For example, if:

• Shares lent = 1,000

• Lending fee = ₹5 per share

• Then: Gross lending fee = ₹5,000

The investor should subsequently account for applicable brokerage, transaction/depository charges, taxes and other applicable deductions to determine the actual net amount.

The tax treatment of income arising from securities lending depends on the applicable tax laws and the circumstances of the investor. Investors should consult a tax professional for advice specific to their circumstances.

51. Does the entire lending fee go into my pocket?

Answer: No.

The quoted lending fee represents the gross amount before considering applicable brokerage, transaction-related charges, taxes and other deductions.

Therefore, investors should compare the net income, rather than merely the quoted lending fee.

52. Will I need these shares for any immediate purpose?

Answer: This is one of the first questions an investor should ask before lending.

If you may need to:

• sell the shares,

• participate in a particular corporate action,

• exercise voting rights, or

• otherwise have immediate access to the securities.

You should understand the applicable recall and settlement provisions before lending.

53. What should I check before lending my shares?

Answer: Before participating in SLB, an investor should check:

1. Is my security eligible for SLB?

2. What lending fee is currently available?

3. How long will my shares be unavailable?

4. Can I recall them early?

5. What charges will I have to pay?

6. What happens to dividends?

7. What happens to voting rights?

8. What happens if there is a bonus, split, merger or other corporate action?

9. What margin and settlement arrangements apply?

10. What happens if the borrower fails to return the securities?

11. Will I need these shares for any immediate purpose?

12. What will be my net income after charges and applicable taxes?

54. Explain SLB with a simple example.

Answer: Suppose Mr. A owns 1,000 shares of ABC Ltd.

He intends to hold these shares as a long-term investment and does not expect to sell them during the relevant period.

The shares are eligible for SLB, and there is demand from borrowers.

He lends the 1,000 shares at a lending fee of ₹4 per share.

Gross lending income:

$1,000 \times \text{₹}4 = \text{₹}4,000$

The borrower uses the securities for a permitted purpose.

At the end of the applicable period, the borrower is required to return equivalent securities through the SLB settlement mechanism.

Thus:

Own shares $\rightarrow$ Lend shares $\rightarrow$ Earn lending fee $\rightarrow$ Equivalent securities returned

The investor should then account for applicable charges and taxes to determine the net amount earned.

SLB at a Glance

Particular	Simple Explanation
What is SLB?	Temporary lending of eligible securities for a fee
Who can lend?	Investors holding eligible securities
Who can borrow?	Eligible market participants
Why lend?	To potentially earn additional income
Is it a sale?	No
Is it regulated?	Yes, under SEBI's framework
Which securities?	Securities eligible under the applicable framework
Lending fee	Market-determined
Fixed return?	No
Maximum tenure	Up to 12 months
Early recall?	Available, subject to applicable mechanism
Dividend	Passed on to lender under applicable framework
Voting rights	Depend on applicable SLB series/rules
Corporate actions	Adjusted/foreclosed as applicable
Margins	Applicable under the clearing framework
Borrower default	Auction/buy-in and financial close-out mechanisms apply.
Brokerage/charges	May apply
Market risk	Continues to exist
Guaranteed profit?	No
Main benefit	Potential additional income
Main consideration	Securities are temporarily unavailable for normal sale.

Investor Awareness Message

SLB allows an investor holding eligible securities to potentially earn additional income by lending those securities temporarily to another market participant. However, before participating, investors should understand the lending fee, tenure, recall facility, applicable charges, voting rights, treatment of dividends and corporate actions, margin and settlement arrangements, and associated risks.

SLB is a regulated market mechanism, but it is not a guaranteed-return investment product. Investors should make an informed decision based on their own liquidity requirements, investment objectives and understanding of the applicable terms.

Important: The SLB framework, eligible securities, contract series, margins, settlement arrangements and other operational parameters may be revised from time to time. Investors should refer to the latest SEBI, stock exchange and clearing-corporation circulars/information before participating. SEBI's SLB framework and current NSE information should be treated as the operative sources for applicable requirements.

Author may be reached at eboard@icai.in

THE CHARTERED ACCOUNTANT — GIST OF OPINIONS

1. Accounting treatment of expenditure incurred on Type Tests Reports under Ind AS framework

A. Facts of the Case

• A company is into manufacturing of polymer insulators having wide application in power sector.

• The main buyers are State Electricity Boards, Power Grids and all Engineering, Procurement, and Construction (EPC) contractors.

• For getting empanelled with the above said buyers, the polymer insulator suppliers need to get their insulators tested by testing agencies which should be approved by National Accreditation Board for Testing and Calibrations Laboratories (NABL).

• These reports are commonly known as TTR (Type Tests Reports).

• Though the TTR does not mention any validity period but the State Electricity Boards, Power Grid and other vendors do not accept any TTR if it is older than five years.

• (This period of five years has recently been increased to ten years).

• They put this as one of the conditions for getting empanelled for supply of insulators.

• The tests include testing of insulators on various parameters including climatic conditions, stress test and other technical tests including electrical and mechanical tests.

• Further, if a new range or new variant of insulator are introduced, then all the above set of tests need to get done over that new insulator too.

• Type tests are conducted and the TTR is obtained during the product development stage to meet the prescribed testing requirements and only thereafter the products are marketed to the buyers.

• The products are designed and developed by the Company as per International Electrotechnical Commission (IEC) standards and then, the prototype samples are produced and the samples are type tested in NABL Laboratory before the sale.

• The type test report creates an enduring 'right' that provides access to specified markets/customers.

• The type tests are mandatory to sell the products to customers and utilities.

• However, same TTR can be used for different customers or set of customers.

• The Company has 100% success rate of the type test reports.

• These tests involve a major expenditure and the Company is expecting to expend further in next five to six months.

• However, after that, for a gap of few years, there would not be any TTR related expenditure because the report shall be valid for next ten years.

• The auditor of the Company is of the opinion that the entire expenditure should be booked in the year in which it has been incurred considering Indian Accounting Standards (Ind AS) requirements.

• The Company is seeking to spread the above expenditure on testing to next ten years as it shall reap benefits for the same period.

B. Query

• Whether the expenditure on TTR can be spread over ten years instead of booking entirely in the year in which it is incurred.

C. Points considered by the Committee

• At the outset, the Committee understands from the facts supplied that the expenditure on TTR is incurred on testing the new product, viz. polymer insulator (or its new type or variant) during the product development stage so that the product can be sold or marketed to specified customers or market.

• The Committee notes from the requirements of Ind AS 38, 'Intangible Assets' that the prototype (due to knowledge embodied in developing a prototype) can be considered as an internally generated intangible asset.

• Also, testing of pre-production or pre-use prototype and model is considered as an example of development activities.

• Further, Committee notes from paragraph 57 of Ind AS 38 that an intangible asset arising from development shall be recognised if, and only if, an entity can demonstrate all of the conditions mentioned therein.

• Furthermore, as per paragraph 65 of Ind AS 38, the cost of an internally generated intangible asset is the sum of expenditure incurred from the date when the intangible asset first meets the recognition criteria.

• Considering the requirements of Ind AS 38, the Committee is of the view that the prototype of new polymer insulator or a new variant thereof can be considered as an internally generated 'intangible asset'.

• Also, type test can be considered as development activity of the prototype.

• This is so because in the extant case, without successful completion of this test, development of prototype will not be complete and prototype cannot be considered as ready for its intended use/sale.

• Thus, the type test activity forms an integral part of the development stage itself rather than a post-development or marketing activity.

• The Committee further notes that as per the requirements of Ind AS 38, TTR cost being part of development costs, should be recognised as cost of internally developed intangible asset (viz., prototype), only if during the type test stage, all the recognition requirements in paragraph 57 of Ind AS 38 are satisfied.

• Since successful completion of type test will ensure that the Company shall be able to sell/market the product developed and considering the 100% success rate of TTR, all the conditions in paragraph 57 of Ind AS 38 will be met at this stage, such as, the criterion of technical feasibility of completing the intangible asset, how the intangible asset will generate probable future economic benefits, etc.

• The Committee also notes that paragraph 66 of Ind AS 38 requires the cost of an internally generated asset to comprise all directly attributable costs necessary to create, produce and prepare the asset to be capable of operating in the manner intended by management.

• Since obtaining the TTR is a mandatory step for demonstrating compliance with the prescribed technical requirements and for preparing the developed prototype capable of being used or sold in the intended market, the expenditure incurred on such testing is directly attributable to the development of the prototype and shall form part of cost of intangible asset (viz., prototype of polymer insulator).

• Further, subsequent to recognition, at each reporting date, the cost of the intangible asset (prototype) so developed shall be amortised, considering its useful life (rather than the validity of the TTR, which may be considered as one of the factors in determining useful life of prototype) as per the requirements of Ind AS 38.

2. Presentation of Advance given for construction of Office Space

A. Facts of the Case

• A Company applied for procurement of floor space through E-Auction in the Commercial Complex constructed by N Ltd.

• The space was allotted to the Company vide allotment letter dated 21st Nov 2022.

• The payment for the said procurement was to be made in 13 installments with first 8 installments due on time basis, while the remaining 5 installments to be made on the basis of completion of milestones specified in the allotment letter.

• The Company had made payment of 12 installments, and only final installment was pending which was to be made within 60 days of offer of possession.

• In the month of December 2024, the Company received offer of possession from N Ltd.

• The Company requested N Ltd. to revoke the possession letter citing issues pending on the end of N Ltd., relating to lifts, washrooms, water supply, seepage, safety hazards, etc.

• Based on the Company's request, N Ltd. withdrew the offer letter in the month of February 2025.

• No further payment was made by the Company during financial year (F.Y.) 2024-25 to N Ltd.

Accounting Treatment and Presentation done by the Company

• The Company has recognised such 'Advance Payment to N Ltd.' under the sub-heading of 'Capital Advances' under heading of 'Other Non-Current Assets' based on the provisions of the Guidance Note on Division II Ind AS Schedule III to the Companies Act, 2013 which inter alia states as follows:

  • "Capital Advances are not to be classified under Capital Work in Progress, since they are specifically to be disclosed under other non-current assets."

  • "Capital advances are advances given for procurement of Property, Plant and Equipment including bearer plants, Typically, companies do not expect to realise them in cash. Rather, over the period, these get converted into Property, Plant and Equipment respectively, which are non-current assets. Hence, capital advances should be treated as other non-current assets irrespective of when the Property, Plant and Equipment are expected to be received."

• According to the Company, the allotment letter specifically mentioned that the allottee (the Company) is a purchaser of specified built-up area, and has only rights of the purchased freehold specific built-up area and not control over construction of the aforementioned building.

• Accordingly, the amount paid by the Company to N Ltd. is towards procurement of the floor space, and not towards construction.

• As given in the Guidance Note, capital advances can be given for assets which are built over a period of time, and it is not mandatory for asset to be created at a specific point in time. Therefore, advance given for procurement of built-up area is a part of capital advance.

Comptroller and Auditor General of India's (C&AG's) Observation

• "...capital advance is overstated and capital work in progress is understated payments are being made on the achievement of specific milestone basis as mentioned in the allotment letter....As per the Guidance Note on Terms used in Financial Statements, term "Capital Work-in-progress" is Expenditure on capital assets which are in the process of construction or completion. Since the Company is making milestone payment; therefore, it should have been booked in CWIP instead of advance...".

B. Query

• Whether such advance payments form part of 'Capital Advances' to be shown under the heading of 'Other Non-current Assets'; or such advance payments should be included under Capital Work-in-Progress; or any other presentation as EAC may consider appropriate in the case.

C. Points considered by the Committee

• The Committee notes that in the extant case, N Ltd. does not transfer the undivided share in land and building corresponding to the unit sold in the complex individually; rather, it transfers the combined item.

• Thus, it cannot be said that the Company has obtained undivided share in the land on issuance of allotment letter.

• Further, it is presumed from the facts supplied that N Ltd. is not undertaking the construction activity as an agent on behalf of the Company along with the other buyers/allottees.

• The Committee notes from Note 6 of the General Instructions for Preparation of Balance Sheet under Division II of Schedule III to the Companies Act, 2013 and Guidance Note on Division II - Ind AS Schedule III to the Companies Act, 2013 as follows:

  • Capital advances are to be disclosed under 'Other non-current assets'.

  • Capital advances are advances given for procurement of property, plant and equipment (PPE) including bearer plants, etc. which are non-current assets.

  • Thus, until the underlying non-current asset is recognised in the financial statements, the advance is treated as capital advance.

• The Committee further notes that although Schedule III and the Guidance Note require separate presentation of PPE and capital work-in-progress (CWIP), recognition and measurement of CWIP (which is a PPE under construction) is dealt with under Ind AS 16 as these are tangible items.

• As per the requirements of Ind AS 16 (paragraph 7), an item of PPE can be recognised as an asset if, and only if: (a) it is probable that future economic benefits associated with the item will flow to the entity; and (b) the cost of the item can be measured reliably.

• To better understand and apply the above recognition requirements of Ind AS 16, the Committee also notes the Conceptual Framework for Financial Reporting under Indian Accounting Standards (Ind AS) as follows:

  • Only items that meet the definition of an asset are recognised in the balance sheet (paragraph 5.6).

  • For recognition as an asset, the entity should be able to control the economic resource, viz., a right having the potential to produce economic benefits.

  • The Conceptual Framework links the recognition of an asset with control over economic resource having future economic benefits.

• Therefore, the Committee is of the view that in case of procurement, an asset viz., PPE, should be recognised when control is transferred to the purchaser.

• Thus, with regard to conversion from capital advance to the underlying non-current asset, what is relevant is when the Company obtains 'control' of the property being purchased/procured.

• Since the property in the extant case is being constructed over time, it is relevant to understand whether the Company obtains the control of the property over the construction period as and when the asset (viz., property) is created or only when the construction is complete.

• If the Company controls the asset that is being constructed or created (for example, the part-constructed real estate property) as it is created/constructed, the Company should recognise the underlying asset as and when the asset is so created or constructed.

• Further, since during that period, the asset is under construction and not complete in all respects for it to be in the location and condition necessary for it to be capable of operating in the manner intended by management, as per the requirements of Ind AS 16, the same should be presented as capital work-in-progress.

• As far as 'control' is concerned, the Committee further notes from the requirements of Conceptual Framework as follows:

  • An entity controls an economic resource or asset if it has the present ability to direct its use and obtain the economic benefits that may flow from it (such as, through sale or pledge of the partly constructed real estate unit, in the extant case).

• The Committee is of the view that whether and when the 'control' of under-construction unit is transferred from seller to buyer is a matter of judgement in the specific facts and circumstances, including the terms and conditions of the arrangement, the rights and obligations of the parties, the legal framework governing such arrangements etc.

• Thus, in the extant case, on exercise of the judgement, if it is concluded that the Company obtains through ownership or otherwise, control of under-construction property as and when the construction takes place, it should present the same as capital work-in-progress (CWIP).

• However, if the Company does not obtain control of the under-construction property as and when the construction takes place, the same should be presented as capital advance.

• Further, the CWIP to be recognised should represent the value of partly constructed unit controlled by the Company and should not include any advance in relation to the construction which is yet to take place. The payments made should be treated as capital advance only for such advance, in respect of which the Company is yet to obtain control of the asset.

3. Accounting treatment of land purchased under a ninety-year lease deed, as per Ind AS 116

A. Facts of the Case

• A Company acquired a plot under a 90-year lease deed executed with the New Okhla Industrial Development Authority (hereinafter referred to as 'NOIDA Authority').

• The Company expects the lease to be renewed upon expiry, in line with prevailing practices of the Authority.

• The plot is retained for the Company's own office and business purposes, with no intention of sale or transfer.

Important clauses in Lease Deed and Contextual Note provided by the Querist

• Clause 4: In addition to the premium of plot, lease rent @2.5% of the premium per annum shall be payable in advance. Apart from premium, the Company made a One Time Lease Rent payment, which covered the entire lease rent obligation in advance.

• Clause 8: The Lessee shall have to complete the building within five years from the date of allotment or four years from the date of the possession whichever is less. No further extension shall be allowed - The Lessee has to complete building within five years from the date of allotment or four years from the date of possession whichever is less. However, the land remained vacant and not built upon within the stipulated period and therefore, the Company had to pay extension charges multiple times.

• Clause 14: The Lessee may with the previous permission, mortgage the Demised Premises for raising loans and in the event of foreclosure of the mortgage, the Lessor shall be entitled to claim and recover such percentage as decided by the Lessor of the unearned increase in the value of Demised Premises and Lessor shall have the pre-emptive right to purchase the mortgaged or charged property. The Company has never mortgaged the said land and has no intention of mortgaging or exiting the property.

• Clause 18 and 19: Lessee will not assign, relinquish, sublet, transfer etc. without previous permission of Lessor. That every transfer, assignment, relinquishment, mortgage or subletting of the whole of the Demised Premises or building or both shall be subject to the transferee, assignee or the sublessee being bound by all covenants and conditions and being answerable to the Lessor in all respect. The Company has never attempted to exit, assign, or transfer the demised premises by any means.

CAG Observation during Supplementary Audit

• Audit observed that the Company has not recognised the Right-of-Use (ROU) asset and lease liability in its financial statements, as per Ind AS 116.

• Instead, the Company has shown the leasehold lands under 'Property, Plant, and Equipment' and is charging depreciation on them.

• Thus, the accounting treatment of leased assets was not in compliance with provisions of Ind AS 116.

B. Query

• Will provisions of Ind AS 116 as to creation of Right to Use Assets be applicable on the above land?

C. Points considered by the Committee

• The Committee notes that in case of long-term leases or right of use arrangements, an important aspect to be examined is whether the arrangement or contract grants rights that represent in-substance purchase, viz., transfers control of the underlying asset (irrespective of the legal title) or only right to control the use of the asset throughout the arrangement/contract is being transferred.

• If former is the case, viz., the transferee obtains control of the asset, the same should be accounted for as per Ind AS 16, 'Property, Plant and Equipment'.

• The Committee notes from the requirements of Ind AS 115 that control of an asset refers to the ability to direct the use of, and obtain substantially all of the remaining benefits from the asset.

• Similarly, as per the Conceptual Framework for Financial Reporting under Indian Accounting Standards (Ind AS), an entity controls an economic resource or asset if it has the present ability to direct its use and obtain the economic benefits that may flow from it.

• An entity has the present ability to direct the use of an economic resource if it has the right to deploy that economic resource in its activities, or to allow another party to deploy the economic resource in that other party's activities.

• The Committee notes from the arrangement between the Company and NOIDA Authority that the lessee has been granted the right to use the demised premises for a period of ninety years for construction/erection of building or other facilities upon payment of premium and annual lease rent.

• Further, it can also assign, relinquish, sublet, transfer or part with possession of any portion of the land and building thereon or cause any sub-division thereof with the previous permission of Lessor.

• Therefore, it can be said that the Company has the right to deploy it in its activities, or to allow another party to deploy it in that other party's activities; and thus, the Company has the present ability to direct the use of the land for the period of ninety years.

• However, the Committee notes that such right is subject to various conditions contained in the lease deed, such as, the right to transfer, assign, sublet etc. is subject to prior permission of the lessor and subject to such terms and conditions as the lessor may determine.

• Further, the lessee may mortgage the demised premises only with prior permission of the lessor and, in the event of foreclosure of the mortgaged property, the lessor is entitled to claim and recover a specified share in the unearned increase in the value of the land and also has a pre-emptive right to purchase the property.

• Additionally, the lessee is required to use the land only for the specified purpose and in accordance with the plans, building regulations and directions of the lessor, and non-compliance with the prescribed conditions may result in cancellation of the lease and resumption of possession of the demised premises by the lessor.

• In view of the above conditions governing the use and transfer of the land, the Committee is of the view that it cannot be said that all of the remaining or future economic benefits associated with the underlying land will entirely flow to the Company.

• The Company has merely the right to significant economic benefits from the use of the asset and not from the asset (which include right to sell etc.).

• Also, considering the various restrictions, the Company in the extant case is not exposed to significant risks and rewards of ownership.

• Accordingly, the Committee is of the view that the land cannot be considered to be controlled by the Company.

• The Committee is also of the view that accounting is based on the current rights and obligations arising from the contractual arrangement and not merely on the basis of general practices.

• Usage or intention regarding usage of a resource/asset for a specified purpose does not determine control over that resource/asset.

• Further, the manner or timing of payment of lease rent does not change the nature of the arrangement.

• The Committee is of the view that payments of extension charges indicate continuation of the lease arrangement and support the view that the Company does not exercise absolute control over the present use (or non-use) of the asset.

• The Committee also notes that the lease deed permits mortgage only with prior permission of the lessor and subject to specified conditions, including the lessor's entitlement to a share in the unearned increase in the value of the land and a pre-emptive right to purchase the property in certain circumstances.

• Accordingly, the ability to mortgage the demised premises under such conditions cannot be considered as having ownership over the land.

• At present, the land given to the Company is a leasehold land and there are no documents or evidence to substantiate that the land will be converted into freehold.

• Even assuming that the land will be converted into freehold land in future, for the reasons already given above, at present, there is no control of the land by the Company.

• Accordingly, the land in the extant case cannot be recognised as property, plant and equipment under Ind AS 16.

• The Committee further examines the issue as to whether the lease or right of use of land in the extant case can be considered as a 'lease' within the scope of Ind AS 116 and notes that a contract contains lease only if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

• In the extant case, the identified asset is a specific plot of land.

• The lease arrangement is for a defined period of 90 years, which satisfies the requirement of 'a period of time'.

• Further, the Company has been granted the right to use in exchange of consideration that has been paid in the form of upfront premium and stipulated lease rentals.

• The Company is permitted to construct and use the land for its purposes in accordance with the approved plans and conditions specified in the lease deed.

• Accordingly, the Company can obtain economic benefits from the use of the land during the lease term and has the ability or right to direct the manner in which the land is used, subject to specified conditions in the Lease Deed.

• The arrangement does not transfer ownership of the land; rather, it grants a right to use the underlying asset for a period of time.

• The lease deed contains clauses relating to lease rent, cancellation, reversion, etc., which are consistent with a lease arrangement rather than a sale.

• Accordingly, the Committee is of the view that the contract in the extant case conveys the right to control the use of an identified asset (land) for a specified period in exchange for consideration and, therefore, the arrangement is in the nature of a lease within the scope of Ind AS 116, 'Leases'.

New Frontiers: Accounting Challenges in Deep Tech Startups

Vikram Venkat

Investment Professional

India's ecosystem of deep tech startups is rapidly growing, backed by investor funding and government policies. These companies are building highly innovative, disruptive technologies, rooted in substantial research and development, over long timelines. Consequently, application of accounting principles to these startups has several complexities: revenue recognition is uncertain and difficult to estimate for milestone-based contracts with multiple diverse revenue streams; costs need to be appropriately expensed or capitalized; grants and different funding received need to be carefully recognized; and intangible assets should be captured appropriately on the relevant financial statements.

To handle this complexity, accountants should blend rigorous application of standards and frameworks with careful interpretive judgment and a deep technical understanding of the product and business model.

Deep Tech in India: An Introduction to the Emerging Ecosystem

Deep tech companies are organizations that build transforming, cutting-edge technologies that are rooted in substantial scientific research, engineering, and innovation. Often, these companies build both hardware and software. Some examples of sectors typically considered to be deep tech are robotics, aerospace and defense, advanced semiconductors, quantum computing, frontier biotechnology, advanced manufacturing, and new energy technologies.

India has already built a strong base of deep tech companies. NASSCOM estimates that there are over 4,200 deep tech startups active in India currently, making it the sixth largest market globally. Deep tech startups have also raised significant amounts of funding, together raising $1.65 billion in investments from leading Indian and global investors in 2025, as per TechCrunch estimates. This represented a 50% growth over 2024; it was also the fourth year in a row where startups raised over $1 billion cumulatively. According to the India Deep Tech Alliance's 2026 Report, deep tech accounted for 15% of all venture capital and private equity funding raised in India in 2025, a sharp and rapid growth from just 4% in 2016. Deep tech is an even more massive market globally, with US deep tech startups raising $147 billion in funding in 2025, and Chinese deep tech startups raising $81 billion.

Key Structural Drivers Behind the Deep Tech Growth Story

Deep tech startups now operate under an extended regulatory horizon—longer recognition tenure and higher turnover thresholds, aligned with their inherently long gestation and innovation cycles. Government policies are becoming more startup-friendly and also allowing for more deep tech innovation. The government recently strengthened the Startup India Action Plan by revising the recognition framework for startups.

Under the traditional DPIIT criteria, startups are recognized based on their age (up to ten years from incorporation), turnover (up to 200 Crore in any previous year), their corporate structure (partnership or private limited or limited liability company), and a commitment towards innovation or improvement of products or services, with the potential to generate employment and/or wealth. The revised criteria extended the age limit for deep tech companies up to twenty years from incorporation and also increased the turnover limit to ₹300 Crore. This was especially useful as deep tech startups need longer time horizons for R&D, product building, and navigating long sales cycles.

Additionally, multiple new funding pathways are emerging. Government funding for startups has grown rapidly, especially with the launch of the Research Development and Innovation (RDI) Fund (which has a corpus of rupees one lakh crore) as well as the rise of deep tech venture capital firms in India.

Leading technical and business universities across the nation are encouraging innovation and entrepreneurship through accelerators, student funds, and academia-industry collaborations. Both Indian and multinational organizations, such as leading semiconductor manufacturers, automotive companies, aerospace organizations (both public and private) continue to grow their interest and footprint in India. These act as early customers and partners for Indian deep tech startups, as well as provide additional talent pool for founders to draw from.

Structural Differences: Why Traditional Accounting fails for Deep Tech

Deep tech startups have several characteristics that set them apart from most traditional companies and even most startups.

• First, revenue and cost structures for deep tech startups tend to be highly complicated. Revenue is often across multiple different streams leading to significant uncertainty and complications while modeling. There are often significant gaps between signing of contracts, recognition of revenue, and actual cash flows, leading to complex accounting judgments when correlating across the different financial statements. Cost structures have similar issues, with multiple different cost heads that need to be accounted for. Handling these requires accountants to make judgments across different types of expenses and capitalization and represent the relevant depreciation and amortization schedules.

• Second, deep tech companies have extremely long development cycles, often needing seven to ten years before commercialization. This R&D phase results in extended periods of losses before any revenue can be generated; the company only sustains itself based on external funding during this period. Given the large amounts of funding needed over extended periods, deep tech companies often have multiple different sources of financing. These are often delivered through multiple different vehicles, instruments, and structures. Many of these instruments come with restrictions around their usage, differing maturity dates, and other constraints, and need to be treated appropriately on financial statements.

• Third, there are various intangible assets that are often significant determinants of company valuation and success. These include intellectual property, ongoing research, and human capital related to the expertise and capabilities of the team. Valuing these appropriately and capturing them in financial statements requires significant specialized expertise.

Complex Revenue Models in Deep Tech Startups: Application of Ind AS 115

Deep tech companies often have a mix of hardware and software products which are monetized across multiple different streams, including:

• Sales or leasing of hardware

• Software subscription fees

• Usage-based / consumption-based fees for specific software elements, such as AI tokens

• Non-recurring engineering fees for custom development and installation

• Specific maintenance or support contracts, which are often recurring

• Royalties, if the technology is embedded into the customer's product (for example, driver assistance systems being embedded into a vehicle)

• Licensing fees if the technology is transferred to a customer

Different revenue streams for hardware, software, and maintenance within contracts need to be unbundled to ensure appropriate treatment. Further, many deep tech contracts are structured to be milestone-based, with revenue tied to validation of prototypes, successful integration with customer systems, achievement of goals set out in the proof-of-concept phase, and receipt of relevant regulatory approvals. Consequently, there is often significant uncertainty in the actual accrual of revenue; this is especially complex for accountants reviewing management projections.

While there is uncertainty around the revenue, the cash flow often occurs independently. Contracts may have upfront payments, or regular payments on a monthly, quarterly, or annual basis, or milestone-based payments. Consequently, cash flows as recorded in the financial statements are often detached from revenue recognition timelines; this leads to significant challenges while matching across the statement of cash flows and the profit and loss statement.

Ind AS 115, "Revenue from Contracts with Customers," lays down a clear five-step model for recognizing revenue appropriately. This involves:

1. Identifying the contracts with the customer and validating all the terms to ensure clarity and reliability

2. Identifying the relevant performance obligations as per the contract

3. Determining the transaction price the seller expects to be entitled to

4. Allocating the transaction price appropriately against each performance obligation, based on standalone selling prices

5. Recognizing the revenue when the entity satisfies the performance obligations and transfers control of the technology, product, or service

For deep tech companies, the key accounting challenge arises from the complexity of pinpointing the change of control. Recognition of revenue often would require estimating progress against contract goals and proportionately allocating revenue against these; if not clearly defined in the contracts, this needs to be done with caution and only recognized when the probability of payment reversal is extremely low. Estimating progress using the percentage-of-completion method often requires usage of proxies, such as the amount of costs incurred during development. Intellectual property licensing also requires differentiated treatment; functional IP (such as software) can be recognized at a specific point in time when it is made available to the customer for control and usage, while symbolic IP can be recognized over a period.

"Recognition of revenue often would require estimating progress against contract goals and proportionately allocating revenue against these; if not clearly defined in the contracts, this needs to be done with caution and only recognized when the probability of payment reversal is extremely low."

Cost Structures in Deep Tech Companies and Application of Ind AS

As discussed earlier, deep tech companies tend to have very long research and development cycles. These are associated with various costs, including:

• Payroll for team members and contractors working on R&D as well as in other functions (sales, finance, human resources, and others)

• Purchase/lease and usage of equipment, materials, and supplies for R&D and prototyping

• IP and legal costs associated with patent filings and maintenance, regulatory compliance and certification, and legal counsel

• Non-recurring engineering costs for one-time or sporadic design and development

• Manufacturing and shipping costs, especially when hardware is involved

• Traditional general and administrative costs, including rent, travel, utilities, and other similar cost heads

As with the revenue, many of these costs are difficult to appropriately measure and recognize. Various standards including Ind AS 16 "Property, Plant, and Equipment," Ind AS 36 "Impairment of Assets," Ind AS 38 "Intangible Assets," and Ind AS 116 "Leases" provide guidelines that help untangle this complexity.

The distinction between research and development is not merely technical in deep tech startups; it directly shapes financial reporting outcomes. As per Ind AS 38 (Intangible Assets), all research costs must be expensed as there is a high uncertainty about technical feasibility and future economic benefits. Development costs, on the other hand, can only be capitalized if six conditions are met; else, they should be expensed:

1. Technical feasibility: The asset can be completely developed for future sale or use

2. Intention to complete: Management intends to complete developing the asset

3. Available resources: Adequate technical, financial, and other relevant resources are available to complete development of the asset

4. Ability to use or sell: Clear demonstrations exist of how the asset will be used and/or sold in the future

5. Future economic benefits: Proof of existence of a market or internal usefulness that can generate future cash flows

6. Reliable measurement: Development expenses related to the asset can be clearly measured and attributed

Applying capitalization thresholds consistently is complex but essential. This is especially challenging during the early stages of development. Technical feasibility is especially complex to analyze until late in the development cycle, as it requires underwriting complex scientific and engineering risks. Treatment of failed prototypes and tests need to also be consistent to prevent incorrect capitalization.

Premature capitalization of pre-technical-feasibility costs carries several risks. It inflates assets and net income initially and could potentially violate the matching principle by misaligning expenses and revenues. Capitalization could also have tax implications by limiting early expense deductions. Any failed projects (a common occurrence in the pre-feasibility stage) would need to be written off as an impairment loss, damaging future earnings.

Consequently, impairment testing, as explained under Ind AS 36, becomes critical in every reporting period. In the pre-technical-feasibility phase, individual assets are usually insufficient to generate cash flows; consequently, a Cash Generating Unit (CGU) i.e., the smallest identifiable group of assets that can independently generate cash flow, needs to be identified for impairment testing. If the CGU's carrying amount (including any allocated goodwill) exceeds the recoverable amount (calculated basis fair value less disposal costs, or the present value of future cash flows), impairment exists. This could occur due to multiple internal or external factors, such as market value decline, regulatory or legal changes, variances in interest rates, physical damage, technical obsolescence, or evidence of economic underperformance of the asset.

Additionally, deep tech companies often have high levels of capital expenditure associated with property, plants, and equipment. Classifying these assets appropriately and amortizing or depreciating them over a relevant time-period requires an additional layer of decision-making for the accountant; the defined schedules should keep in mind the long development cycle associated with the company. Resale value of specialized equipment should be calculated appropriately, based on its applicability or relevance to other potential users outside of the company.

Ind AS 12 Implications for Tax Losses, R&D Expenditure and Startup Tax Incentives

Given the high R&D spending and recurring losses in early years, deep tech startups can often accumulate Deferred Tax Assets (DTAs). These typically arise when the tax base of an asset is greater than its carrying amount, or the base of a liability is less than its carrying amount. Capitalized development costs can also create DTAs, due to differences between accounting amortization and tax depreciation treatment.

Under Ind AS 12, DTAs can be recognized on the balance sheet when the company has recognized R&D expenses in its books, has tax losses that can be carried forward, and it is probable that future taxable profit will be available against which the deductible differences can be utilized.

"Under Ind AS 12, DTAs can be recognized on the balance sheet when the company has recognized R&D expenses in its books, has tax losses that can be carried forward, and it is probable that future taxable profit will be available against which the deductible differences can be utilized."

However, given the uncertainty of future profitability, accountants should rigorously measure DTA recoverability through future cash flows, using evidence such as contracts, secured IP, funding raised, or pipeline. Subsidies and exemptions, such as the 100% tax exemption (for three consecutive assessment years within the first ten years of their incorporation) offered to DPIIT-recognized deep tech startups should also be carefully accounted for.

Accounting and Classification of Funding Instruments in Deep Tech Startups under Ind AS

Deep tech startups receive funding through a variety of different instruments and structures, including:

• Dilutive, equity-based financing, usually from venture capital or private equity investors, accelerators, incubators

• Non-dilutive grants, usually from governments, foundations, non-profits

• Debt, both from banks as well as from venture capital firms (often in the form of convertible debt, which can be converted to equity at the time of maturity or in case of a liquidation event)

• Subsidies, usually from government agencies

Ind AS 32 and 109 "Financial Instruments" provide guidance for treatment of these various funding structures and how they should be represented in financial statements.

Grants and subsidies often cause significant challenges and need to be treated as per Ind AS 20 "Accounting for Government Grants." While many founders treat these as revenue, and they can be a precursor to genuine government contracts, they need to be handled carefully and classified as funding or income based on appropriate criteria.

Further, Ind AS 102 provides guidance relating to share-based payments, which are often used by early-stage deep tech startups to compensate their employees.

Conclusion

In deep tech startups, long development cycles, uncertain commercialization timelines, milestone-based contracts, multiple funding structures, and heavy reliance on intellectual property create accounting challenges that often require substantial professional judgment.

Accordingly, accountants working with deep tech startups must first understand the company's technology, business model, stage of development, and expected revenue structure before applying accounting standards. Such understanding becomes essential while evaluating revenue recognition, capitalization of development costs, impairment testing, classification of grants and funding instruments, deferred tax assets, and valuation of intangible assets.

Ultimately, the accounting challenges in deep tech startups cannot be addressed through mechanical application of standards alone. They require a balanced combination of technical accounting knowledge, professional skepticism, industry understanding, and careful interpretive judgment. As India's deep tech ecosystem continues to expand, accountants will play an increasingly important role in ensuring transparency, compliance, and credibility in financial reporting for these innovation-driven businesses.

References

• Department for Promotion of Industry and Internal Trade. (2026, February 4). Notification No. G.S.R. 108(E). Ministry of Commerce and Industry, Government of India.

• Institute of Chartered Accountants of India. (2026). Educational Material on Indian Accounting Standards (Ind AS).

• Institute of Chartered Accountants of India. (2026). Compendium of Indian Accounting Standards (2025-2026).

• NASSCOM. (n.d.). Deep Tech Initiatives.

Author may be reached at vikram.venkat@gmail.com and eboard@icai.in