Networth as per Companies Act 2013 in India is defined in Section 2(57). It means the total of the paid-up share capital and all reserves created out of profits and securities premium account, after deducting accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as shown in the company’s audited balance sheet. Reserves created from revaluation of assets and write-backs of depreciation are not counted.
Breaking the definition down
The definition looks wordy, but it follows a simple logic. Start with what shareholders have put in, add what the company has retained from its earnings, and subtract what it has lost.
What is included
- Paid-up share capital, meaning the money shareholders have actually paid.
- Securities premium account, which holds the premium received on shares issued above face value.
- Free reserves and other reserves created out of profits.
What is deducted
- Accumulated losses, shown as a negative balance of profit and loss.
- Deferred expenditure not yet written off.
- Miscellaneous expenditure not yet written off.
What is excluded
Reserves created through revaluation of assets, and amounts written back from depreciation, do not count. The reason is that a revaluation raises the accounting value of an asset without any new money coming in, so it would otherwise flatter the company’s real strength.
A worked illustration
Suppose a company shows paid-up capital of 50 crore rupees, securities premium of 20 crore, free reserves of 30 crore, a revaluation reserve of 10 crore and accumulated losses of 15 crore. Net worth would be 50 + 20 + 30 – 15 = 85 crore. The 10 crore revaluation reserve is left out. The numbers are only an example and do not describe any real company.
Why the number matters
Corporate social responsibility
Section 135 requires certain companies to have a CSR committee and spend a share of profits on CSR when they meet a threshold of net worth, turnover or net profit in a preceding financial year. The commonly cited thresholds are net worth of 500 crore rupees or more, turnover of 1,000 crore or more, or net profit of 5 crore or more. Always check the current text, since rules have been amended.
Other uses
Net worth appears in several other places. Loan and bank covenants often refer to it. Eligibility criteria for tenders and public contracts frequently require a minimum net worth. Some provisions on inter-corporate loans and investments refer to related measures such as paid-up capital and free reserves. The definition also appears in older sick-company regimes, in which erosion of net worth was a key test.
networth versus book value and market capitalisation
It helps to separate three terms. Net worth under the Act is an accounting measure taken from the balance sheet. Book value usually means total assets minus liabilities, which in practice gives a similar picture for many firms but may differ in treatment of revaluation reserves. Market capitalisation is the stock price multiplied by the number of shares and reflects what investors expect, not what is on the balance sheet.
Where to find the figures
Look at the audited financial statements, in particular the statement of changes in equity and the balance sheet. Listed companies publish them on stock exchange websites. Unlisted companies file with the Ministry of Corporate Affairs, and the filings can be accessed through the MCA portal, sometimes for a fee.
Common mistakes
- Including revaluation reserve in net worth.
- Forgetting to subtract deferred expenditure.
- Using unaudited figures when the law refers to audited ones.
- Applying the test on the wrong year, since many thresholds look at the immediately preceding financial year.
Differences under Ind AS
Companies that follow Indian Accounting Standards present equity somewhat differently, with items such as other comprehensive income. Practitioners usually map those line items back to the statutory definition, and judgement can be needed. If you work with a company that has complex reserves, check with a chartered accountant or company secretary.
Final summary
Net worth under the Companies Act is a statutory measure of shareholders’ funds, calculated from audited accounts with specific additions and deductions. It is used in CSR applicability, contracts and various regulatory tests. For a decision with legal consequences, read the current Act and rules or consult a qualified professional.
This is general information, not financial advice.
Bottom line on networth as per companies act
That is the quick view on networth as per companies act. Treat every figure as an estimate and check the date on the source before you quote it.
Featured photo: Ravi Dwivedi via Wikimedia Commons (CC BY-SA 4.0).
