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December 7, 2020

CA requires permission from council for derivatives transaction on stock exchanges

by CA Shivam Jaiswal in ICAI

CA requires permission from council for derivatives transaction on stock exchanges

The Institute of Chartered Accountants of India (ICAI) is a statutory body established by an Act of Parliament, (The Chartered Accountants Act, 1949) for regulating the profession of Chartered Accountancy in the country. Over a period of time the ICAI has achieved recognition as a premier accounting body not only in the country but also globally, for maintaining highest standards in technical, ethical areas and for sustaining stringent examination and education standards.

A professional accountant is required to comply with the following fundamental principles:

  • Integrity – Being straightforward and honest in all professional relationships
  • Objectivity – Not allow bias, conflict of interest or undue influence of others to override professional judgments
  • Professional Competence and Due Care – Maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent professional service based on current developments in practice, legislation and techniques
  • Confidentiality – The confidentiality of information acquired – should not disclose any such information to third parties without proper and specific authority unless there is a legal or professional right or duty to disclose. Confidential information acquired as a result of professional and employment relationships should not be used for the personal advantage of the professional accountant or third parties.
  • Professional Behavior – Should comply with relevant laws and regulations and should avoid any action that discredits the profession.

However, sometimes there are circumstances that do not let a professional to comply with the required principles. This is where the ‘Code of Ethics’ comes into picture. According to the Code, there are dedicated provisions that apply to all professional accountants in all circumstances, when dealing with ethics and independence issues. There is the emphasis that if threats cannot be addressed, the professional Accountant must decline or end the specific professional activity. The Accountant is required to form an overall conclusion about whether the actions he takes, or intends to take, to address the threats created to eliminate those threats or reduce them to an acceptable level.

According to Clause 11 of the of Part 1 of the First Schedule of the CA Act, 1949, a Chartered Accountant in practice shall be deemed to be guilty of professional misconduct, if he engages in any business or occupation other than the profession of chartered accountants unless permitted by the Council so to engage. However, nothing shall disentitle a chartered accountant from being a director of a Company, (not being a managing director or a whole time director), unless he or any of his partners is interested in such company as an auditor

This is a provision introduced to restrain a member in practice from engaging himself in any business or occupation other than that of Chartered Accountant except when permitted by the Council to be so engaged. The objective is to restrain members from carrying on any other business in conjunction with the profession of accountancy and combining such work with any business which is not in keeping with the dignity of the profession. Another reason for the introduction of such prohibition is that a Chartered Accountant, if permitted to enter into all kinds of business, would be able to advertise for his other business and thereby secure an unfair advantage in his professional practice

Clarification by the Ethical Standard Board (ESB)

Code of Ethics’ is a publication of ESB. It is revised by the Board as frequently as necessary to tune with the requirements of the present day. ICAI had adopted International Federation of Accountants (IFAC) /International ethics Standards Board for Accountants (IESBA) ‘Code of Ethics for professional accountants’ subject to variances, wherever required, to make it compatible with Indian laws. ESB keeps track of IESBA developments with regard to Code of Ethics, and accordingly takes further steps for its incorporation.

ESB in their 148th meeting clarified that derivative transaction on stock exchange is a business which is prohibited under Clause 11 of Part 1 of the First Schedule of the CA Act, 1949. Derivative transactions are not to be treated as an investment.

Derivatives Transactions means any transaction that is a contract, agreement, swap, future, forward, option, swap, repurchase agreement, reverse repurchase agreement, securities lending agreement, collar, floor, or other transaction recognized as a derivative that has a valuation based, in whole or in part, on the value of, any interest in, or any qualitative measure or the occurrence of any event relating to, one or more commodities, securities, currencies, interest or other rates, or other assets; provided, this Agreement shall not be considered a Derivatives Transactions for the purposes hereof.

So, a practicing chartered accountant cannot be engaged in any other business unless permitted by the ICAI. He shall be guilty of professional misconduct under clause 11 of part 1 of first schedule of Chartered accountant act 1949. So, he should get prior permission from council of the Institute to engage in any other business or profession including trading in stocks and derivatives. However, he can invest in stocks and can also deal in derivatives for hedging but not speculative purpose.

The Code of Ethics is a guiding force to the members of the profession and today the professionals act totally on the principles enunciated in the Code of Ethics.

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