The basic confusion is that our profitability is derived from accounts based on the `going concern' policy. During globalisation and stiff competition while drawing up accounts, we ignore the technological changes taking place and the replacement cost required. Such remarks have to be ignored in the future, not only on excessive profits, but one has to critically examine whether corporations are following prudent policies to survive. This explains why, and how the distributable income for tax purposes is different from the income available for dividend purpose.

The different entities, corporations may follow different methods of raising capital,borrowing and reserves. The corporations with a very conservative dividend policy may build up the general reserves by distribution of small portion of income or from sale of old property, value of which might have increased tremendously over the years, during the course of time, and reduce borrowings. In this case, the interest cost may go down considerably hence they may be better in profitability, compared to industries and firms not following the same course. To reflect the correct profitability, many firms globally take into account the notional interest on working capital employed before arriving at the profit. This will reflect the true profitability of the company and may be, otherwise then stated in the balance sheet. A company with huge general reserves can issue bonus shares and raise capital and in this case the profit of the company may not look high on the capital, as return on the capital and for dividend purpose compared to the company which has not followed the same method. Corporations withbuildings bought long back and machinery well maintained will definitely have lower cost than newly established corporations. But can we say that these entities are making excess profits? Their operational profits are more since they have not sold old buildings and have not increased other income.

As mentioned earlier, we mostly follow the depreciation policy, as defined in the Companies Act or in the Income-Tax Act, but we all know that technology is changing fast and in many cases, replacement cost will be much high. Hence, sufficient funds have to be reserved for that purpose. In the pharma industry even intangible assets or assets whose value is not determined, sometime depreciation has to be considered since companies can loose or substantially decrease its profitability in the future e.g., on the expiry of patent.

Based on the assumption that our accounts are drawn on historical cost basis some corporations build-up huge reserves, as stated above prices of the shares of these corporations are farmore in the market than the face value of the shares. Such dividends usually goes up to 15 per cent after 4-5 years, when these sound firms issue bonus shares. Investors buy these shares at high prices since they are sure of stable dividend. Their high-value assets are well-trained personnel - the values of which are not reflected in balance sheets. These technocrats are insured heavily abroad to safeguard against contingencies. It will be outrageous in such cases to use the term excessive profits and high percentage of dividend distribution.

The profitability of the firm is not to be considered only on `going concern' basis but must take into account: The technological changes taking place and the capacity to absorb these changes, replacement cost, depreciation policy, patent life of the product, notional interest on the working capital employed due to the fact that some companies have borrowings and some may not have the borrowing, and capital and reserves should be taken together to arrive at the returnof investment since some companies may issue bonus shares out of the reserves and some may not.

Without considering these aspects, it will be very risky to pick up the Balance Sheet and make statements about the excessive profits or to talk about high market price of its share any action or regulations based on this wrong concept of excess profit will be detrimental to the industry and for future progress. Fortunately, the Institute of Chartered Accountants of India is making fast progress on research and adoption of International Accounting standards. It is very much hoped that some of the misgivings will be removed soon.

The author is vice-chairman of Apeejay Stya Group and the views expressed are his own