2.12 Provisions, contingent liabilities and contingent assets
A provision is recognized if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. When discounting is used, the increase in the provision due to the passage of time is recognized as a finance costs.
The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at reporting date, taking into account the risks and uncertainties surrounding the obligation.
When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, the receivable is recognized as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably. The expense relating to a provision is presented in the statement of profit and loss net of any reimbursement.
Contingent liabilities are possible obligations that arise from past events and whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events not wholly within the control of the Company. Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Contingent liabilities are disclosed on the basis of judgment of the management/independent experts. These are reviewed at each balance sheet date and are adjusted to reflect the current management estimate.
Contingent assets are possible assets that arise from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Company. Contingent assets are disclosed in the financial statements when inflow of economic benefits is probable on the basis of judgment of management. These are assessed continually to ensure that developments are appropriately reflected in the financial statements.
2.13 Impairment of non-financial assets
The carrying amounts of the Company's non-financial assets are reviewed at each reporting date to determine whether there is any indication of impairment considering the provisions of Ind AS 36 ‘Impairment of Assets'. If any such indication exists, then the asset's recoverable amount is estimated.
The recoverable amount of an asset or cash-generating unit is the higher of its fair value less costs to disposal and its value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the “cash-generating unit", or “CGU”).
An impairment loss is recognized if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount. Impairment losses are recognized in profit or loss. Impairment losses recognized in respect of CGUs are reduced from the carrying amounts of the assets of the CGU.
Impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.
2.14 Leases
At inception of a contract, the Company assesses whether the contract is, or contains a lease. A contract is, or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
Company as a lessor
• The Company classifies each of its leases as either an operating lease or a finance lease.
Leases in which the Company does not transfer substantially all the risks and rewards of ownership of an asset are classified as operating leases. Rental income from operating lease is recognised on a straight-line basis over the term of the relevant lease. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised over the lease term on the same basis as rental income. The depreciation policy for depreciable underlying assets subject to operating leases is consistent with the Company's normal depreciation policy for similar assets.
Contingent rents are recognised as revenue in the period in which they are earned.
Leases are classified as finance leases when substantially all of the risks and rewards of ownership transfer from the Company to the lessee. Amounts due from lessees under finance leases are recorded as receivables at the Company's net investment in the leases. Finance lease income is allocated to accounting periods so as to reflect a constant periodic rate of return on the net investment outstanding in respect of the lease.
Company as a lessee
At the contract commencement date, the Company recognizes right - of - use asset and a lease liability. A right - of - use asset is an asset that represents a lessee's right to use an underlying asset for the lease term. The Company has elected not to apply the aforesaid requirements to short term leases (leases which at the commencement date has a lease term of 12 months or less) and leases for which the underlying asset is of low value as described in paragraphs B3 - B9 of Ind AS 116.
A right of use asset is initially measured at cost and subsequently applies the cost mode ie less any accumulated depreciation and any accumulated impairment losses and adjusted for any remeasurement of lease liability. Ind AS 16, Property, Plant and Equipment is applied in depreciating the right - of - use asset.
A lease liability is initially measured at the present value of the lease payments that are not paid at that date. The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be readily determined, the Company's incremental borrowing rate is used. Subsequently, the carrying amount of the lease liability is increased to reflect interest on lease liability; reduced to reflect the lease payments; and remeasured to reflect any reassessment or lease modifications or to reflect revised in - substance fixed lease payments.
2.15 Securitisation of Finance Lease Receivable
Lease Receivables securitised out to Special Purpose Vehicle in a securitisation transactions are de-recognised in the balance sheet when they are transferred and consideration has been received by the Company.
The resultant gain/loss arising on securitization is recognised in the Statement of Profit & Loss in the year in which transaction takes place.
Lease Receivables assigned through direct assignment route are de-recognised in the balance sheet when they are transferred and consideration has been received by the Company. Profit or loss resulting from such assignment is accounted for in the year of transaction.
2.16 Leasing of Railway Infrastructure Assets
In terms of Indian Accounting Standard116, the inception of lease takes place at the earlier of the date of the lease agreement and the date of a commitment by the parties to the principal provisions of the lease.
The commencement of the lease term is the date from which the lessee is entitled to exercise its right to use the leased asset. It is the date of initial recognition of the lease.
As such, in respect of Railway Infrastructure Assets, which are under construction and where the Memorandum of Understanding / terms containing the principal provisions of the lease are in effect with the Lessee, pending execution of the lease agreement, the transactions relating to the lease are:
(a) presented as “Advance against Railway Infrastructure Assets to be leased”; and thereafter
(b) transferred to “Project Infrastructure Assets under Finance Lease Arrangement” on receipt of utilization report from the lessee; and thereafter
(c) transferred to lease receivable as per Ind AS 116 on execution of lease agreement.
2.17Dividends
Dividends and interim dividends payable to the Company's shareholders are recognized as changes in equity in the period in which they are approved by the shareholders' meeting and the Board of Directors respectively.
2.18 Material Prior Period Errors
Material prior period errors are corrected retrospectively by restating the comparative amounts for the prior periods presented in which the error occurred. If the error occurred before the earliest period presented, the opening balances of assets, liabilities and equity for the earliest period presented, are restated.
2.19 Earnings per share
Basic earnings per equity share is computed by dividing the net profit or loss attributable to equity shareholders of the Company by the weighted average number of equity shares outstanding during the financial year.
Diluted earnings per equity share is computed by dividing the net profit or loss attributable to equity shareholders of the Company by the weighted average number of equity shares considered for deriving basic earnings per equity share and also the weighted average number of equity shares that could have been issued upon conversion of all dilutive potential equity shares.
2.20 Statement of Cash Flows
Statement of cash flows is prepared in accordance with the indirect method prescribed in Ind AS 7 ‘Statement of cashflows'.
2.21 Operating Segments
The Managing Director (MD) of the Company has been identified as the Chief Operating Decision Maker (CODM) as defined by Ind AS 108, “Operating Segments”.
The Company has identified ‘Leasing and Finance' as its sole reporting segment.
2.22 Financial Instruments
A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.
2.22.1.Financial Assets
Initial recognition and measurement
All financial assets are recognized initially at fair value plus, in the case of financial assets not recorded at fair value through profit or loss, transaction costs that are attributable to the acquisition or issue of the financial asset.
Subsequent measurement Debt instruments at amortized cost
A ‘debt instrument' is measured at the amortized cost if both the following conditions are met:
(a) The asset is held within a business model whose objective is to hold assets for collecting contractual cash flows, and
(b) Contractual terms of the asset give rise on specified dates to cash flows that are solely payments of principal and interest (SPPI) on the principal amount outstanding.
After initial measurement, such financial assets are subsequently measured at amortized cost using the Effective Interest Rate (EIR) method. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortization is included in finance income in the profit or loss. The losses arising from impairment are recognized in the profit or loss. This category generally applies to trade and other receivables.
Debt instrument at Fair value through Other Comprehensive Income (FVTOCI)
A ‘debt instrument' is classified as at the FVTOCI if both of the following criteria are met:
(a) The objective of the business model is achieved both by collecting contractual cash flows and selling the financial assets, and
(b) The asset's contractual cash flows represent SPPI
Debt instruments included within the FVTOCI category are measured initially as well as at each reporting date at fair value. Fair value movements are recognized in the OCI. However, the Company recognizes interest income, impairment losses & reversals and foreign exchange gain or loss in the profit and loss. On derecognition of the asset, cumulative gain or loss previously recognized in OCI is reclassified from the equity to profit and loss.
Debt instrument at Fair value through profit or loss (FVTPL)
FVTPL is a residual category for debt instruments. Any debt instrument, which does not meet the criteria for categorization as at amortized cost or as FVTOCI, is classified as at FVTPL.
In addition, the Company may elect to classify a debt instrument, which otherwise meets amortized cost or FVTOCI criteria, as at FVTPL. However, such election is allowed only if doing so reduces or eliminates a measurement or recognition inconsistency (referred to as ‘accounting mismatch'). Debt instruments included within the FVTPL category are measured at fair value with all changes recognized in the profit and loss.
Equity investments
All equity investments in entities other than subsidiaries and joint venture companies are measured at fair value. Equity instruments which are held for trading are classified as at FVTPL. For all other equity instruments, the Company decides to classify the same either as at FVTOCI or FVTPL. The Company makes such election on an instrument by instrument basis. The classification is made on initial recognition and is irrevocable. The Company has decided to classify its investments into equity shares of IRCON International Limited through FVTOCI.
If the Company decides to classify an equity instrument as at FVTOCI, then all fair value changes on the instrument, excluding dividends, are recognized in the OCI. There is no recycling of the amounts from OCI to statement of profit and loss, even on sale of investment. However, the Company may transfer the cumulative gain or loss within equity.
Equity instruments included within the FVTPL category are measured at fair value with all changes recognized in the profit and loss.
De-recognition
A financial asset (or, where applicable, a part of a financial asset or part of a Company of similar financial assets)is primarily derecognized (i.e. removed from the Company's balance sheet) when:
• The rights to receive cash flows from the asset have expired, or
• The Company has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through' arrangement; and either (a) the Company has transferred substantially all the risks and rewards of the asset, or (b) the Company has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.
Impairment of financial assets
In accordance with Ind AS 109, the Company applies expected credit loss (ECL) model for measurement and recognition of impairment loss on the following financial assets and credit risk exposure:
(a) Financial assets that are debt instruments, and are measured at amortized cost e.g., loans, debt securities, deposits and bank balance.
(b) Financial assets that are debt instruments and are measured as at FVTOCI.
(c) Lease receivables under Ind AS 116.
(d) Loan commitments which are not measured as at FVTPL.
(e) Financial guarantee contracts which are not measured as at FVTPL.
For recognition of impairment loss on other financial assets and risk exposure, the Company determines that whether there has been a material increase in the credit risk since initial recognition. If credit risk has not increased materially, 12 month ECL is used to provide for impairment loss. However, if credit risk has increased materially, lifetime ECL is used. If, in a subsequent period, credit quality of the instrument improves such that there is no longer a material increase in credit risk since initial recognition, then the entity reverts to recognizing impairment loss allowance based on 12 month ECL.
2.22.2.Financial liabilities
Initial recognition and measurement
Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or loss, borrowings, payables, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. All financial liabilities are recognized initially at fair value and, in the case of borrowings and payables, net of directly attributable transaction costs. The Company's financial liabilities include trade and other payables, borrowings including bank overdrafts, financial guarantee contracts and derivative financial instruments.
Subsequent measurement
The measurement of financial liabilities depends on their classification, as described below:
Financial liabilities at amortized cost
After initial measurement, such financial liabilities are subsequently measured at amortized cost using the EIR method. Gains and losses are recognized in profit or loss when the liabilities are derecognized as well as through the EIR amortization process Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortization is included in finance costs in the profit or loss. This category generally applies to borrowings, trade payables and other contractual liabilities.
Financial liabilities at fair value through profit or loss
Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss. Financial liabilities are classified as held for trading if they are incurred for the purpose of repurchasing in the near term. This category also includes derivative financial instruments entered into by the Company that are not designated as hedging instruments in hedge relationships as defined by Ind AS 109. Separated embedded derivatives are also classified as held for trading unless they are designated as effective hedging instruments.
Gains or losses on liabilities held for trading are recognized in the statement of profit and loss.
Financial liabilities designated upon initial recognition at fair value through profit or loss are designated at the initial date of recognition, and only if the criteria in Ind AS 109 are satisfied. For liabilities designated as FVTPL, fair value gains/losses attributable to changes in own credit risks are recognized in OCI. These gains/losses are not subsequently transferred to profit and loss. However, the Company may transfer the cumulative gain or loss within equity. All other changes in fair value of such liability are recognized in the statement of profit and loss. The Company has not designated any financial liability as at fair value through profit and loss.
De-recognition
A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognized in the statement of profit and loss.
Derivative financial instruments
Initial recognition and subsequent measurement
The Company uses derivative financial instruments, such as forward currency contracts, cross currency swaps and interest rate swaps to hedge its foreign currency risks and interest rate risks of foreign currency loans. Such derivative financial instruments are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative. Any gains or losses arising from changes in the fair value of derivatives are taken to statement of profit and loss. Where the derivative is designated as a hedging instrument, the accounting for subsequent changes in fair value depends on the nature of item being hedged and the type of hedge relationship designated. Where the difference is a pass through the lessee, the amount is received/ reimbursed to the lessee.
2.23 Standards issued but not yet effective:
Ministry of Corporate Affairs (“MCA”) notifies new standards or amendments to the existing standards under Companies (Indian Accounting Standards) Rules as issued from time to time. For the year ended March 31, 2024, MCA has not notified any new standards or amendments to the existing standards applicable to the Company.
Note 33: Leases
Receivables (Note No. 6) include lease receivables representing the present value of future Lease Rentals receivables on the finance lease transactions entered into by the Company.
The lease agreement in respect of these assets is executed at the year-end based on the lease rentals and Implicit rate of return (IRR) with reference to average cost of annual incremental borrowings plus margin decided at that time. Any variation in the lease rental rate or the implicit rate of return for the year is accordingly adjusted at the year end.
Reconciliation of the lease receivable amount on the gross value of leased assets worth Rs. 39,56,061.73 millions (31 March 2023 : Rs. 36,09,576.41 millions, 1st April 2022: Rs. 30,12,490.62 millions) owned by the Company and leased to the Ministry of Railways(MoR) is as under:
Note 33.1
Company as a Lessee
The Company has lease contracts for office premises. The Company has recognised Right of Use Asset and Lease Liability for all the leases. Refer to Note 2.14 material accounting policy on leases.
Lease term includes the renewal term wherever the lessee has the option to renew the lease as it is reasonably certain for the lessee to exercise the option. However, the Company is not reasonably certain to exercise the termination option after the expiry of lock in period. There are no restrictions imposed by lease arrangements.
b. Claims against the Company not acknowledge as debt - relating to service matter pending in Court - amount not ascertainable.
c. The procurement/acquisition of assets leased out by the Company to the Indian Railways is done by Ministry of Railways (MOR), Government of India. As per the lease agreements entered into between the Company and MOR, the Sales Tax/ VAT liability, if any, on procurement/acquisition and leasing is recoverable from MOR. Since, there is no sales tax/ VAT demand and the amount is unascertainable, no provision is considered necessary.
d. Director-General of GST Intelligence (DGGI), Chennai Zonal unit has served a show cause notice dated 16-4-2019 on the company alleging contravention of the provision of sec 67,68 and 70 of the Finance Act, 1994 by the company and as to why service tax of H26,537.65 million along with interest and penalty be not demanded from the company. The company has submitted a reply to Commissioner, CGST, Delhi East (Adjudicating Authority) stating that there is no contravention of the provision of any of the above-stated sections of the Finance Act, 1994. Further, the company has also filed counter comments against the comments given by the department and the hearing is going on. Management is of the view that the company is not liable to pay the tax. However, if any liability arises that would be recoverable from the Ministry of Railways, Government of India.
e. The disputed demand of tax (including interest thereon) for the AY 2015-16 was Rs. 9.48 million. Against the said demand, the company has filed a rectification application u/s 154. Based on the decisions of the Appellate Authority in similar matters and the interpretation of relevant provisions, the Company is confident that the demand will be either deleted or substantially reduced, and accordingly, no provision is considered necessary. However, the said demand of H9.48 million has been adjusted by the department, out of the refund to IRFC for the AY 2016-17.
f. During the Financial year 2021-22, an intimation u/s 143(1) for AY 2019-20 was received from the CPC. In the said intimation, TDS credit has been short-granted by Rs. 1502.46 million despite it appearing in Form 26AS. Further Book Profit has been increased by Rs. 1462.42 million without any reason and additional tax and interest thereon has been raised. The demand of Rs. 2043.26 million has been adjusted against the refund claimed for AY 2020-21. Against the said demand issued by the CPC u/s 143 (1), an appeal was filed at CIT (A) on 28-1-2022, which has considered TDS credit which was short granted and also made an addition of Rs. 6135.12 million on account of income tax paid (the company has already added provision for tax in the computation of taxable income) and Rs. 154790.38 million on account of General reserves, etc, in book profit, against which the company has filed an appeal before the Honourable Income Tax Appellate Tribunal (ITAT) on 17-4-23 for the total addition of Rs. 162387.93 million. During the hearings, the company submitted all the details and documents against the additional demands raised. Management is of the view that no provision is required.
g. An intimation u/s 143 (1) for AY 2022-23 was received from the CPC on 16-3-23. During the year, the company also received a notice u/s 142 (1) on 20-10-23 for the submission of information. Order u/s 143(3) dt 19-3-24 was received which, disallowed certain expenditures amounting to H7.59 million, and raised the demand of H2.14 million. Against the order, the company has filed an appeal before the CIT (Appeal) on 18-4-24, and Management is of the view that no provision is required.
h. During the FY 23-24, Asst. Commissioner, State Tax, Chennai issued a demand order of H3531.79 million in respect of ITC available in GSTR-2A but not claimed (lapsed), ITC availed on RCM invoices, etc for the FY 20-21. The company filed a writ and stay petition before the Hon'ble High Court of Madras in June-23 against the said demand order. The Honourable High Court of Madras, through its order dt 04-07-23 granted a Stay on the demand order and the proceedings are still ongoing. Further, Asst. Commissioner, State Tax, Chennai also issued a demand order of H2370.35 million for disallowance of partial ITC for the year 21-22. The Company filed an appeal before the Dy. Commissioner, State Tax, Appeal, Chennai on 22-02-24. At the personal hearing conducted on 14-3-24, the company elucidated that the ITC was claimed in accordance with the GST law and adequate amount of ITC is also available in the electronic credit ledger. The management holds the perspective that no provision is deemed necessary in either scenario.
i. During the FY 23-24, The Assistant Commissioner, State Tax, Chennai issued show cause notices for FY 20-21 to FY 22-23 for Rs. 6689.78 million on the grounds of excess/wrong ITC availment, short payment of tax etc. along with interest and penalty thereon. The company filed replies against the said notices during Oct-23 and Nov-23 stating that ITC has been claimed as per GST law and no interest and penalty shall be applicable. The Company also elucidated the same during personal hearings held in the above matter. The management holds the perspective that no provision is deemed necessary for the above.
Note 36: Segment reporting
The Company has identified "Leasing and Finance"as its sole reporting segment. Thus, there is no inter-segment revenue and the entire revenue is presented in the statement of profit and loss is derived from external customers all of whom are domiciled in India, the Company's country of domicile.
All non-current assets other than financial instruments are also located in India.
The Company derives more than 10% of its revenue from a single customer (ie. Ministry of Railways, Government of India (MOR) and entities under the control of MOR). The break up of the revenue is an under:
38.2.2: Fair value measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions, regardless of whether that price is directly observable or estimated using a valuation technique.
In order to show how fair value have been derived, financial instruments are classified based on hierarchy of valuation techniques as explained below:
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2: Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices in markets that are not active) or indirectly (i.e. quoted prices for similar assets or liabilities);
Level 3: Inputs for the asset or liability that are not based on observable market data (unobservable inputs).
Set below is a comparison, by class, of the carrying amounts and fair value of the financial instruments. This table does not include the fair value of non-financial assets and non-financial liabilities.
Fair value of financial assets and financial liabilities that are not measured at fair value (but fair value disclosures are required).
The directors consider that the carrying amounts of financial assets and financial liabilities recognised in the financial statements approximate their fair values.
38.3 Financial risk management
The Company's activities expose it to a variety of financial risks which includes market risk (including currency risk, interest rate risk and other price risk), credit risk and liquidity risk.
The Company's focus is to ensure liquidity which is sufficient to meet the Company's operational requirements. The Company monitors and manages key financial risks so as to minimise potential adverse effects on its financial Performance. The Company has a risk management policy which covers the risks associated with the financial assets and liabilities. The details for managing each of these risks are summarised ahead.
38.4: Market risk
Market risk is the risk that the expected cash flows or fair value of a financial instrument could change owing to changes in market prices. The Company's activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates.
Company use derivative instruments to manage market risk against the volatility in foreign exchange rates and interest rates in order to minimize their impact on its results and financial position. Company policy is not to utilize any derivative financial instruments for trading or speculative purposes.
38.5: Foreign currency risk management
The Company undertakes transactions denominated in foreign currencies; consequently, exposures to exchange rate fluctuations arise.
The carrying amounts of the Company's foreign currency denominated monetary assets and monetary liabilities at the end of the reporting period are as follows.
38.6: Interest rate risk management
The Company is exposed to interest rate risk because it borrows funds at both fixed and floating interest rates. The risk is managed by the Company by maintaining an appropriate mix between fixed and floating rate borrowings. Company use financial instruments to manage its exposure to changing interest rates and to adjust its mix of fixed and floating interest rate debt on long-term debt.
The Company's exposures to interest rates on financial assets and financial liabilities are detailed in the liquidity risk management section of this note.
Interest rate sensitivity analysis
The sensitivity analyses below have been determined based on the exposure to interest rates for both derivatives and non-derivative instruments at the end of the reporting period. For floating rate liabilities, the analysis is prepared assuming the amount of the liability outstanding at the end of the reporting period was outstanding for the whole year. A 50 basis point increase or decrease represents management's assessment of the reasonably possible change in interest rates.
If interest rates had been 50 basis points higher/ lower and all other variables were held constant, the Company's:
i) Profit for the year ended 31 March 2024 would decrease/increase by Rs. 11029.71 millions (31 March 2023: decrease increase Rs. 10,256.73 millions, 01 April 2022: decrease/increase Rs. 9,318.74 millions). This is mainly attributable to the Company's exposure to interest rates on its rate debt securities;
ii) Profit for the year ended 31 March 2024 would decrease/increase by Rs. 9744.32 millions (31 March 2023: decrease increase Rs. 9,926.92 millions, 01 April 2022: decrease/increase Rs. 8,469.44 millions). This is mainly attributable to the Company's exposure to interest rates on its rate borrowings.
Interest Rate Benchmark Reform:
Exposure directly affected by the interest rate benchmark reform as required by Ind-AS 107, para 24-I and 24-J
The total amount of exposure that is directly affected by Interest Rate Benchmark Reform (IBOR) i.e. after June 2023 is USD 3,300 million (Amount in H 2,77,357.32million) as on 31.03.2024. Out of this, the amount of the derivative exposure linked with such liabilities and accounted for under hedge accounting is USD 225 million (Amount in H 3,130.70 million)
Significant assumptions for exposure affected by the interest rate benchmark reform
The alternative reference rate/benchmarks for the LIBOR linked loans and their derivatives have been agreed with the lenders and the derivative bankers. As a result of such reform there has been no change in the relationship of the hedged items, hedged instruments and its corresponding hedge effectiveness.
The hedge accounting relationships that are affected by the adoption of the temporary exceptions are presented in the balance sheet in note 5, ‘Derivatives Financial Instruments'.
38.7: Other price risks
The Company has a small amount of investment in equity instruments, price risk of which is not considered material.
38.8: Credit risk management
Credit risk arises from the possibility that the counterparty will default on its contractual obligations resulting in financial loss to the company. To manage this, the Company periodically assesses the financial reliability of customers, taking into account the financial conditions, current economic trends, and analysis of historical bad debts and ageing of accounts receivable.
The Company consider the probability of default upon initial recognition of assets and whether there has been a significant increase in credit risk on an ongoing basis through each reporting period. To assess whether there is significant increase in credit risk, it considers reasonable and supportive forward looking information such as:
(i) Actual or expected significant adverse change in business.
(ii) Actual or expected significant changes in the operating results of the counterparty.
(iii) Financial or economic conditions that are expected to cause a significant change to the counterparty's ability to meet its obligation.
(iv) Significant increase in credit risk and other financial instruments of the same counterparty.
(v) Significant changes in the value of collateral supporting the obligation or in the quality of third party guarantees or credit enhancements.
RBI vide its circular dated 13 March 2020 “Implementation of Indian Accounting Standards by Non-Banking Financial Companies and assets Reconstruction Companies”, required the Board of Directors to approve sound methodologies for computation of Expected Credit Losses (ECL). As such company has formed a ECL policy to manage its credit risk.
The Company's major exposure is from lease receivables from Ministry of Railways, Government of India and loans to Rail Vikas Nigam Limited and IRCON International Limited which are under the control of Ministry of Railways. There is no credit risk on lease receivables being due from sovereign. With respect to loan given to Rail Vikas Nigam Limited and IRCON International Limited, the company consider the Reserve Bank of India MASTER DIRECTION - RESERVE BANK OF INDIA (NON-BANKING FINANCIAL COMPANY -SCALE BASED REGULATION) DIRECTIONS, 2023), DOR.FIN.REC.NO.45/03.10.119/2023-24, DATED 19/10/2023, to be adequate compliance with the impairment norms as per Ind AS 109, Financial Instruments, as IRCON International Limited and Rail Vikas Nigam Limited, both, are under Ministry of Railways, Government of India and the Company do not expect any concern in the repayment of aforesaid loans.
38.9: Liquidity risk management
Liquidity risk is defined as the potential risk that the Company cannot meet the cash obligations as they become due.
Ultimate responsibility for liquidity risk management rests with the board of directors, which has established an appropriate liquidity risk management framework for the management of the company's short, medium, and long-term funding and liquidity management requirements. The Company manages liquidity risk by maintaining adequate reserves and banking facilities, by continuously monitoring forecast and actual cash flows, and by matching the maturity profiles of financial assets and liabilities. Besides, there is a provision in the lease agreements with the Ministry of Railways (MOR) whereby MOR undertakes to provide lease rentals in advance (to be adjusted from future payments) in case the Company doesn't have adequate liquidity to meet its debt service obligations.
38.10: Derivative financial instruments
The Company holds derivative financial instruments such as foreign currency forward contracts to mitigate the risk of changes in exchange rates on foreign currency exposures. The objective of hedges is to minimize the volatility of INR cash flows of highly probable forecast transaction.
Hedge effectiveness is determined at the inception of the hedge relationship, and through periodic prospective effectiveness assessments to ensure that an economic relationship exists between the hedged item and hedging instrument, including whether the hedging instrument is expected to offset changes in cash flows of hedged items.
(a) Lease rental is charged on the assets leased from the first day of the month in which the Rolling Stock assets have been identified and placed on line as per the Standard Lease Agreements executed between the Company and MOR from year to year.
(b) Ministry of Railways (MOR) charges interest on the value of the assets identified prior to the payments made by the Company, from the first day of the month in which the assets have been identified and placed on line to the first day of the month in which the money is paid to the MOR. However, no interest is charged from the MOR on the amount paid by the company prior to identification of Rolling stock by them.
(c) (i) Interest rate variation on the floating rate linked rupee borrowings and interest rate and exchange rate variations on interest
payments in the case of foreign currency borrowings are adjusted against the lease income/ pre-commencement lease income in terms of the variation clauses in the lease agreements for Rolling Stock/ memorandum of understanding (MoU) for funding of Infrastructure assets executed with the Ministry of Railways. During the year ended 31 March 2024, such differential has resulted in an amount of Rs. 36,581.97 millions refundable to the Company (31 March 2023: Rs. Rs. 17,928.97 millions, 1 April 2022: Rs. 684.66 millions refundable to MoR) which has been accounted for in the lease income/ pre-commencement lease income.
(ii) In respect of foreign currency borrowings, which have not been hedged, variation clause have been incorporated in the lease agreements specifying notional hedging cost adopted for working out the cost of funds on the leases executed with MOR. Hedging cost in respect of these foreign currency borrowings is compared with the amount recovered by the company on such account on notional cost basis and accordingly, the same is adjusted against the lease income. During the year ended 31 March 2024 in respect of these foreign currency borrowings, the Company has recovered a sum of Rs. 15,835.43 millions (31 March 2023: Rs. 17,148.78 millions, 1 April 2022: H14,117.53 millions) on this account from MOR against a sum of Rs. Nil millions (31 March 2023: Rs. Nil millions, 1 April 2022 :Rs. NIL millions) incurred towards hedging cost and the balance amount of Rs. 15,799.76 millions (31 March 2023: Rs. 17,148.78 million, 1 April 2022: Rs. 14,117.53 millions) is refundable to MOR.
(d) (d)For computing the Lease Rental, in respect of the rolling stock assets acquired and leased to the Ministry of Railways amounting to Rs. Nil millions during the period ended 31st Mar 2024 (31st Mar 2023: Rs. 1,66,341.94 millions, Year ended 1st April 2022: Rs.
2,84,930.23 millions), the Lease Rental Rate and the Internal Rate of Return have been worked out with reference to the average cost of incremental borrowings made during the year plus the margin.
(e) The Leases executed for Rolling Stock in the year 1993-94, 1992-93,1991-92, 1990-91, 1989-90 and 1988-89 for Rs. 9003.80 millions, Rs. 9,618.24 millions, Rs. 15,004. 92 millions, Rs. 11,700.35 millions, Rs. 10,725.60 millions & Rs. 8607.27 millions have expired on 31 March 2024, 31 March 2023, 31 March 2022, 31 March 2021,31 March 2020 & 31 March 2019 respectively. During the primary and secondary lease periods full value of assets (including interest) has been recovered from the lessee (MOR). These assets have outlived their useful economic life.
Note 42:
(a) (i) The Reserve Bank of India has issued Master Direction - Non- Banking Financial Company- Scale Based Regulation)
Directions, 2023 vide notification DoR.FIN.REC.No.45/03.10.119/2023-24 dated 19th October 2023 (updated as on November 10, 2023). The Reserve Bank of India has granted exemption to the Company in respect of classification of asset, provisioning norms and credit concentration norms to the extent of direct exposure to sovereign.
(a) (ii) Till the financial year 2017-18, the Company, being a government NBFC, was exempt from creation and maintenance of Reserve Fund as specified u/s 45-IC of Reserve Bank of India Act, 1934. However, the said exemption has been withdrawn by the erstwhile Reserve Bank of India (RBI) vide Notification No. DNBR (PD) CC.NO.092/0310.001/2017-18 dated 31st May 2018. Accordingly, the Company is now creating the Reserve Fund as required u/s 45IC of RBI Act, 1934, wherein at least 20% of net profit every year will be transferred before the declaration of dividend. No appropriation is allowed to be made from the reserve fund except for the purpose as may be specified by the Bank from time to time and further, any such appropriation is also required to be reported to the Bank within 21 days from the date of such withdrawal.
The Company created a reserve of H12824.21 millions for the year ended 31st March 2024 (Rs. 12674.03 in 31 March 2023) u/s 45IC.
(a) (i) The Finance Act, 2001 provides for levy of service tax on the finance and interest charges recovered through lease rental
instalments on the Financial Leases entered on or after 16-07-2001. The Central Government vide Order No.1/1/2003-ST dated 30 April 2003 and subsequent clarification dated 15-12-2006 issued by Ministry of Finance has exempted the Lease Agreements entered between the Company and Ministry of Railways from levy of Service Tax thereon u/s 93(2) of Finance Act, 1994.
(ii) The GST Council in their meeting held on 19 May, 2017 has exempted the services of leasing of assets (rolling stock assets including wagons, coaches, locos) by Indian Railways Finance Corporation to Indian Railways from the levy of Goods & Service Tax (GST), Notification No. 12/2017 (Heading 9973) which has been made applicable with effect from 1 July, 2017. Vide notification no. 07/2021 dated 30.09.2021 issued by Ministry of Finance, the said GST exemption on leasing of rolling stock by Indian Railways Finance Corporation to Indian Railways is withdrawn w.e.f. 01.10.2021
(b) (i) The Company had deposited a sum of H14,664.47 million towards GST under reverse charge mechanism for funds
transferred to MoR for making payments on behalf of Company to contractors for construction of projects for the period November 2017 to June 2018. As opined by the tax consultant, the above transaction did not involve any supply from MoR to the company and accordingly, no GST under RCM was payable by the Company and hence, refund applications were filed with the GST department for the refund of said deposit of H14,664.47 millions. However, vide orders dated 22-09-2020 and 30-09-2020, the said refund applications have been rejected by the additional commissioner (Department of Trade and Taxes), GNCT of Delhi. The Company has filed 6 appeals before first appellate authority through its attorney, New Delhi against the rejection of refund orders on 24 December 2020 and 29 December 2020.
(ii) In the ultimate event of non-admissibility of refund claims by the GST department, the amount would be adjusted by the Company against the GST liability on lease rentals from infrastructure assets to be lease to MoR or other GST liability in future.
Note 44:
Increase/(Decrease) in liability due to exchange rate variation on foreign currency loans for purchase of leased assets/creation of Infrastructure assets amounting to Rs. 9573.79 millions (31 March 2023: Rs. 42,651.63 millions (recoverable), 01 April 2022 : Rs. 11,188.84 million (recoverable)) has not been charged to the Statement of Profit and Loss as the same is recoverable from the Ministry of Railways (lessee) separately as per lease agreements in respect of rolling stock assets/memorandum of understanding (MoU) for funding of Infrastructure assets to be leased. The notional hedging cost on external commercial borrowings inbuilt into the Lease Rentals amounting to Rs. 2,323.26 millions (31 March 2023: Rs. 817.80 millions, 01 April 2022 : Rs. 16,441.20 millions) is refundable to Ministry of Railways for the year ended 31 March 2023 (Ref of Note 41 C (ii)). Further, a sum of Rs. NIL (31 March 2023: HNil millions, 01 April 2022 : Rs. 105.87 millions) has been recovered towards crystallised exchange rate variation on foreign currency loans repaid during the year ended 31st March 2024. The amount recoverable from MoR on account of exchange rate variation net of notional hedging cost and crystallised exchange rate variation is Rs. 57,947.51 million (31 March 2023: Rs. 69,844.62 millions, 01 April 2022: Rs. 11,448.24 million).
Effective portion of (loss)/gain on account of decrease/increase in the fair value of the derivative assets (hedging instruments) amounting to Rs. 923.06 millions (31 March 2023:H626.47 million, 1 April 2022: H112.75 million) classified as cash flow hedges has not been recognised in the other comprehensive income as the same is recoverable/refundable to the MOR (Lessee) since the derivatives have been contracted to hedge the financial risk of MOR (Lessee).
The Ministry of Railways (MOR) vide letter dated 23 July 2015 had authorized the Company to draw funds from Life Insurance Corporation of India (LIC) in consultation with MOR for funding of Railway Projects in line with finance leasing methodology adopted by Company for funding Railway Projects in past. In addition to funds raised from LIC, the Company has also funded MoR from other borrowings and internal accruals. Pending execution of the Lease Documents, the Company had entered into a Memorandum of Understanding with the Ministry of Railways on 23 May 2017 containing principal terms of the lease transactions. The Company has now entered a fresh Memorandum of Understanding with Ministry of Railways on 2 March 2021 superseding all earlier MoU/arrangement.
During FY 2021-22, the Lease Agreement(s) for Project assets funded under EBR IF 2015-16 and National Projects 2018-19 between MOR and the Company with respect to aforesaid infrastructure assets was executed on 28th March 2022. Similarly, during financial year 2022-23, the Lease Agreement(s) for EBR IF 2016-17 and National Projects 2019-20 and in Financial Year 2023-24, the Lease Agreement for EBR IF 2017-18, between MOR and the Company with respect to infrastructure assets have been executed. Also,the execution of the Lease Agreement for EBR IF 2018-19 is under process and accordingly, the lease recievables have been recognised with effect from 24th March 2024. The accounting as per Ind AS 116 has been carried out for the same during the current financial year
During the year ended 31 March 2024 a sum of Rs. 94,900.21 millions (31 March 2023 Rs. 91,664.39 millions) incurred by the Company on account of interest cost on the funds borrowed for the purpose of making aforesaid advances has been capitalised and added to the 'Project Infrastructure Asset under Finance Lease Arrangements-EBR-IF', ‘Project Infrastructure Asset under Finance Lease Arrangements-EBR Special' and 'Advance funding against National Project'. The same would be recovered through lease rentals in future over the life of the leases as per lease agreement(s) to be entered. Details are as under:
i Ministry of Railways, Government of India is the Parent of the Company. The Company leases various assets including rolling stock, locomotives, project infrastructure assets such as railway tracks, signaling system, railways stations, bridges etc to Ministry of Railways under finance lease model as per IndAS 116. The computation of lease income requires estimation of a number of financial metrics such as source of borrowings, weighted average cost of capital, approved margins, exchange and interest rate variations etc which is determined on a continuous basis in consultation with Ministry of Railways.The weighted average cost of capital and margin have been finalised for the disburment made till FY 2022-23. No disbursement made to the MoR for the FY 2023-24.
ii The reconciliation with the Ministry of Railways uptill FY 2022-2023 has been completed. The reconcilation of balances with MoR as on 31st March 2024 will be carried out in due cousre based on audited accounts of FY 2023-24. The disbursement to MOR for project infrasturure assets for which Lease Agreements are yet to be executed stand at Rs. 17,00,794.85 millions as on 31st March 2024 against which utilisation statement has been received from MoR.
iii Impact of material prior period adjustments
IRFC's principal business is to borrow funds from the financial markets to finance acquisition/creation of rolling stock/ project assets which are then leased out to the Indian Railways (i.e., MoR).
IRFC is currently in the process of implementing the ERP During the transition of data from the legacy system to the ERR it was observed that there was an overstatement by Rs. 7901.36 million in lease receivables, due to variances in capital recovery in the terminal year of the lease agreements which have completed their primary lease period.
Accordingly, the lease receivables and retained earnings as at 1 April 2022 were overstated by H6202.79 million each. The error has also resulted in reduction of profit for the year ended 31 March 2023 by H1698.57 million. The lease receivable and retained earnings as at 31 March 2023 were overstated each by Rs. 7901.36 million and the comparitive figures as at 31 March 2023 and 01 April 2022 have been restated.
(a) The Company discharges its obligation towards payment of interest, redemption of bonds and payment of dividend, by depositing the respective amounts in the designated bank accounts. Reconciliation of such accounts is an ongoing process and has been completed upto 31 March 2024. The Company does not foresee any additional liability on this account. The total balance held in such specified bank accounts as on 31 March 2024 is Rs. 319.85 millions (31 March 2023 is Rs. 119.43 millions, 01 April 2022: Rs. 127.58 millions)
(b) The Company is required to transfer any amount remaining unclaimed and unpaid in such interest and redemption accounts after completion of 7 years to Investor Education Protection Fund (IEPF) administered by the Ministry of Corporate Affairs, Government of India. During the year ended 31 March 2024, a sum of H28.10 millions (31 March 2023:H7.52 millions,01 April 2022: Rs. 5.30 million) was deposited in IEPF.
Note 48: Corporate Social Responsibility
As required under section Section 135 of the Companies Act 2013, the Company has formed a Corporate Social Responsibility Committee. The Company has undertaken Corporate Social Responsibility activities during the year, which have been approved by the CSR Committee and are specified in Schedule VII of the Companies Act 2013.
In the year 2020-21, the Ministry of Corporate Affairs (MCA) issued the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021 (the ""Amendment""), and the effective date of the amendments to Section 135 of the Companies Act, as made by the Companies Amendment Act, 2019 and Companies Amendment Act, 2020, was notified as 22.01.2021. In accordance with the amendment under the said notifications, any unspent CSR amount, other than for any ongoing project, shall be transferred to a Fund specified in Schedule VII, within a period of six months of the expiry of the financial year. Any unspent amount pursuant to any ongoing project must be transferred to unspent CSR Account in any scheduled bank within a period of thirty days from the end of the financial year, to be utilised within a period of three financial years, failing which it shall transfer the same to a Fund specified in Schedule VII, within a period of thirty days from the date of completion of the third financial year. Further, if the company spends an amount in excess of the requirement under statute, the excess amount may be set off for three succeeding financial years against the amount to be spent.
As the notification became effective during the FY 2020-21, the Company is complying with the amended provisions of Section 135 of the Companies Act, 2013 from the financial year 2021-22 onwards. Consequently, the Company has set aside provisions for an unspent amount related to ongoing projects totaling H809.38 million for the FY 2023-24 (H590.05 million in FY 2022-23).
(i) For the financial year ended 31.03.2024, the Company paid a gross amount of Rs. 549.58 million (Rs. 236.26 million relates to prior years), while for the year ended 31.03.2023, the Company paid a gross amount of Rs. 675.31 million (Rs. 352.27 million relates to prior years) towards CSR projects. The gross amount required to be spent for the year ended 31.03.2024 was Rs. 1122.70 million, for which the Board approved an amount of Rs. 1122.70 million, which includes H809.38 million towards the CSR projects, H223.32 million towards PM CARES, H45 million each towards Swach Bharat Kosh and Clean Ganga Fund. For the year ended 31/03/2023, the gross amount required to be spent was H913.10 million, for which the Board approved an amount of H913.10 million, which includes H590.05 million towards the CSR projects, H303.05 million towards PM CARES, H10 million each towards Swach Bharat Kosh and Clean Ganga Fund.
As of 31.03.2024, the unspent CSR amount allocated towards various CSR Projects for the Financial Year(s) 2020-21,2021-22, 2022-23 and 2023-24 are H158.92 million, H141.25 million, H487.42 million and 809.38 respectively.
(a) Loans to Directors, Senior Officers and Relatives of Directors
The Company has not given any loan to directors,senior officers and relatives of directors.
Note 61: Applicability of approvals/acknowledgements previously given by the Reserve Bank of India
The Reserve Bank of India has issued Master Directions - Reserve Bank of India (Non-Banking Financial Company - Scale Based Regulation) Directions, 2023, DOR.FIN.REC.NO.45/03.10.119/2023-24, Dated 19/10/2023 (referred to as 'the new Directions'). With the issue of 'the new Directions', the instructions/ guidelines contained in various circulars/ Directions issued earlier by Reserve Bank of India stand repealed (list as provided in section XI of 'the new Directions').
However, all approvals/acknowledgements given under Circulars/Directions mentioned in the repealed list as provided in section XI of 'the new Directions' shall be deemed as given under 'the new Directions'. Notwithstanding such repeal, any action taken/ purported to have been taken or initiated under the instructions/guidelines having repealed shall continue to be guided by the provisions of said instructions/guidelines.
Note 62: Disclosure as per Ind AS 8 - ‘Accounting Policies, Changes in Accounting Estimates and Errors’ Recent accounting pronouncements
Ministry of Corporate Affairs (“MCA”) notifies new standards or amendments to the existing standards under Companies (Indian Accounting Standards) Rules as issued from time to time. For the year ended March 31, 2024, MCA has not notified any new standards or amendments to the existing standards applicable to the Company.
Note 63:
a) Previous year figures have been regrouped/ rearranged, whenever necessary, in order to make them comparable with those of the current year.
The accompanying statement of material accounting policies and notes to the financial information are an integral part of this Balance Sheet.
For M/s. OP TOTLA & Co. For and on behalf of the Board of Directors
Chartered Accountants Indian Railway Finance Corporation Limited
(FRN 000734C)
Sd/- Sd/- Sd/- Sd/-
(CA Naveen Kumar Somani) (Vallabhbhai Maneklal Patel) (Uma Ranade) (Shelly Verma)
(Partner) Independent Director and Chairman and Director (Finance)
M.No. 429100 Chairman Audit Committee Managing Director, DIN: 07935630
UDIN: 24429100BKADAP5200 DIN :07713055 (Addnl Charge), CEO
DIN: 10565537
Sd/- Sd/-
(Vijay Babulal Shirode) (Sunil Kumar Goel)
Company Secretary CFO
Place: New Delhi & JGM (Law)
Date: 20th May 2024 FCS: 6876
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