The Securities and Exchange Board of India’s (SEBI) order against EKI Energy Services Ltd has put a technical accounting question at the centre of an enforcement case: at what point in a multi-year carbon credit project can a developer count its contract money as revenue?
The regulator’s October 30 order found that the Indore-based carbon credit developer recognised Rs 197.04 crore of revenue early across the first three quarters of FY 2022-23. In SEBI’s view, distributing and registering cookstoves under EKI’s clean cooking projects did not complete the company’s obligations under the contracts, because the verification and delivery of carbon credits were still pending.
While SEBI’s Rs 197.04 crore finding rests on the timing of revenue from multi-year carbon projects, the company said it changed its own numbers before the year’s accounts were closed.
The finding does not question whether the revenue existed. EKI’s contracts had identified counterparties, and the company says the contract amounts were received. The dispute is over when that revenue should have entered the books.
The answer turns on Ind AS 115, the accounting standard that ties revenue to the fulfilment of performance obligations under a contract. A carbon credit project runs in stages over months or years: cookstoves are installed in rural households, the project is registered, emission reductions are monitored and independently verified, and only then are credits issued. Carbon credit contracts are also a relatively new category for Indian accounting.
EKI recognised revenue in its quarterly results on one reading of these obligations. When a more conservative view emerged during the audit process, the company adopted it. It revised the figures before the year’s accounts were finalised, and its audited financial statements for FY 2022-23 carry the revised numbers.
The revisions were disclosed to the stock exchanges. The disputed figures, as a result, never became part of the company’s audited annual accounts.
According to EKI’s filing with BSE, SEBI’s order records this sequence and treats the revision as a mitigating factor. EKI’s position is that by adopting the stricter interpretation of its own revenue, revising its numbers within the same reporting year and disclosing each step to the market, it allowed the reporting system to do what it is designed to do.
EKI has said it does not concur with certain assertions in the order. In its November 2 filing with BSE, the company said it is preparing to challenge the matter before appropriate authorities, “including appeal before the Securities Appellate Tribunal under Section 15T of the SEBI Act, 1992.” It has said it will place its position on revenue before the tribunal.
The tribunal has weighed a revenue-timing dispute involving long-gestation projects this year. In January, SAT set aside penalties of over Rs 15 crore that SEBI had imposed on Bombay Dyeing and Manufacturing Company and its promoters.
The company had recognised Rs 2,492.94 crore of revenue between FY 2011-12 and FY 2017-18 using the percentage-of-completion method under Accounting Standard-7, which SEBI had alleged was inflated.