Section 16C in The Companies (Indian Accounting Standards) Rules, 2015
16C. Some financial instruments include a contractual obligation for the issuing entity to deliver to another entity a pro rata share of its net assets only on liquidation. The obligation arises because liquidation either is certain to occur and outside the control of the entity (for example, a limited life entity) or is uncertain to occur but is at the option of the instrument holder. As an exception to the definition of a financial liability, an instrument that includes such an obligation is classified as an equity instrument if it has all the following features:
(a)It entitles the holder to a pro rata share of the entity's net assets in the event of the entity's liquidation. The entity's net assets are those assets that remain after deducting all other claims on its assets. A pro rata share is determined by:(i)dividing the net assets of the entity on liquidation into units of equal amount; and(ii)multiplying that amount by the number of the units held by the financial instrument holder.(b)The instrument is in the class of instruments that is subordinate to all other classes of instruments. To be in such a class the instrument:(i)has no priority over other claims to the assets of the entity on liquidation, and(ii)does not need to be converted into another instrument before it is in the class of instruments that is subordinate to all other classes of instruments.(c)All financial instruments in the class of instruments that is subordinate to all other classes of instruments must have an identical contractual obligation for the issuing entity to deliver a pro rata share of its net assets on liquidation.
