CS Saptarshi Basu
Board’s Report under the existing act as compared with proposed amendment under Companies Amendment Bill, 2016
As we are all aware that the Central government on 16th of March, 2016 introduced in the Lok Sabha a bill to further amend the Companies Act, 2013 as part of efforts to address difficulties faced by stakeholders and improve the ease of doing business in the country, which is yet to get approval from Rajya Sabha very soon.
In my previous article we discussed on the impact of Companies Amendment Bill 2016 on “Loan to Director”. Its year ending time, annual general meetings are yet to be convened and conducted. As we all know that directors provide the shareholders with latest financial position and working of the company in their report addressed to the shareholders known as “Board’s Report”.
The structure of Board’s report is proposed to be changed under Companies Amendment Bill 2016 to a large extent by doing away with the provision of extract of annual return in the report, instead just providing a web address of the annual return uploaded on the website of the company, thus reducing the duplication of information to a larger extent.
♣ Section 92 of the Act if amended after passing of the Bill shall look like- every company shall prepare a return (hereinafter referred to as the annual return) in the prescribed form containing the particulars as they stood on the close of the financial year regarding—
(a) Its registered office, principal business activities, particulars of its holding, subsidiary and associate companies;
(b) Its shares, debentures and other securities and shareholding pattern;
(c) Its indebtedness;
(d) Its members and debenture-holders along with changes therein since the close of the previous financial year;
(e) Its promoters, directors, key managerial personnel along with changes therein since the close of the previous financial year;
(f) Meetings of members or a class thereof, Board and its various committees along with attendance details;
(g) Remuneration of directors and key managerial personnel;
(h) Penalty or punishment imposed on the company, its directors or officers and details of compounding of offences and appeals made against such penalty or punishment;
(i) Matters relating to certification of compliances, disclosures as may be prescribed;
(j) Details, as may be prescribed, in respect of shares held by or on behalf of the Foreign Institutional Investors indicating their names, addresses, countries of incorporation, registration and percentage of shareholding held by them; and
(k) Such other matters as may be prescribed, and signed by a director and the company secretary, or where there is no company secretary, by a company secretary in practice:
♣ Provided that in relation to One Person Company and small company, the annual return shall be signed by the company secretary, or where there is no company secretary, by the director of the company.
♣ Provided further that Central Government may prescribe abridged form of annual return for One Person Company and Small Company.
♣ Annual return filed by listed companies or public companies having paid up capital of Rupees 10 Crores or more or turnover of Rupees 50 Crores or more shall obtain a certificate from a Practising Company Secretary in Form MGT 8.
♣ An extract of Annual Return in Form MGT 9 shall be annexed to Board’s Report. Every company shall place a copy of annual return on the website of the company and the web-link of such annual return shall be disclosed in the Board’s Report.
Under such circumstances, let us discuss in detail Section 134- Board’s Report, as compared with the proposed amendment in Companies Amendment Bill 2016.
Comparison with the Existing Act
1) The financial statement, including consolidated financial statement, if any, shall be approved by the Board of Directors before they are signed on behalf of the Board at least by the chairperson of the company where he is authorised by the Board or by two directors out of which one shall be managing director and the Chief Executive Officer, if he is a director in the company, the Chief Financial Officer and the company secretary of the company, wherever they are appointed, or in the case of a One Person Company, only by one director, for submission to the auditor for his report thereon.
Note: This means even a CEO, even if he is not a director can sign the financial statements wherever he is appointed as such.
2) The auditors’ report shall be attached to every financial statement.
3) There shall be attached to statements laid before a company in general meeting, a report by its Board of Directors, which shall include—
a. the extract of the annual return as provided under sub-section (3) of section 92 the web address if any where annual return referred to sub- section (3) of section 92 has been placed ;
b. number of meetings of the Board;
c. Directors’ Responsibility Statement;
d. a statement on declaration given by independent directors under sub-section (6) of section 149;
e. in case of a company covered under sub-section (1) of section 178, company’s policy on directors’ appointment and remuneration including criteria for determining qualifications, positive attributes, independence of a director and other matters provided under sub-section (3) of section 178;
f. explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer made–
i. by the auditor in his report; and
ii. by the company secretary in practice in his secretarial audit report;
g. particulars of loans, guarantees or investments under section 186;
h. particulars of contracts or arrangements with related parties referred to in sub-section (1) of section 188 in the prescribed form;
i. the state of the company’s affairs;
j. the amounts, if any, which it proposes to carry to any reserves;
k. the amount, if any, which it recommends should be paid by way of dividend;
l. material changes and commitments, if any, affecting the financial position of the company which have occurred between the end of the financial year of the company to which the financial statements relate and the date of the report;
m. the conservation of energy, technology absorption, foreign exchange earnings and outgo, in such manner as may be prescribed;
n. a statement indicating development and implementation of a risk management policy for the company including identification therein of elements of risk, if any, which in the opinion of the Board may threaten the existence of the company;
o. the details about the policy developed and implemented by the company on corporate social responsibility initiatives taken during the year;
p. in case of a listed company and every other public company having paid-up share capital of Rupees 25 Crores or more calculated at the end of preceding financial year, a statement indicating the manner in which formal annual evaluation has been made by the Board of its own performance and that of its committees and individual directors annual evaluation of the performance of the Board, its Committees and of individual directors has been made; the financial summary or highlights, change in nature of business, details of directors and KMPs who were appointed and resigned during the year, the names of the companies which have become or ceased to be its Subsidiaries, Joint Venture or Associate Companies during the year, details of deposits covered under chapter V of the act- whether accepted during the year or remained unpaid or unclaimed during the year or where there has been any default in repayment of deposits along with interest- Number of such cases at the beginning of the year, maximum during the year and at the end of the year and details of adequacy of internal financial controls with reference to Financial Statements
q. Such other matters as may be prescribed.
Provided that where disclosures referred to in this sub-section have been included in the financial statements, such disclosures shall be referred to instead of being repeated in the Board’s report. This means that there is no need to repeat again what is already disclosed earlier in the financials.
Another sub-section (3A) is proposed to be inserted where power is given to the Central Government to prescribe an abridged form of Board’s report for One Person Companies and Small Companies, so as to bring these companies into the compliance of Board’s Report.
4) The report of the Board of Directors to be attached to the financial statement under this section shall, in case of a One Person Company, mean a report containing explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer made by the auditor in his report.
5) The Directors’ Responsibility Statement referred to in clause (c) of sub-section (3) shall state that—
a. in the preparation of the annual accounts, the applicable accounting standards had been followed along with proper explanation relating to material departures;
b. the directors had selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the financial year and of the profit and loss of the company for that period;
c. the directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities;
d. the directors had prepared the annual accounts on a going concern basis; and
e. the directors, in the case of a listed company, had laid down internal financial controls to be followed by the company and that such internal financial controls are adequate and were operating effectively.
f. Explanation.–For the purposes of this clause, the term “internal financial controls” means the policies and procedures adopted by the company for ensuring the orderly and efficient conduct of its business, including adherence to company’s policies, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information;
6) The directors had devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively.
7) The Board’s report and any annexures thereto under sub-section (3) shall be signed by its chairperson of the company if he is authorised by the Board and where he is not so authorised, shall be signed by at least two directors, one of whom shall be a managing director, or by the director where there is one director.
8) A signed copy of every financial statement, including consolidated financial statement, if any, shall be issued, circulated or published along with a copy each of—
a. any notes annexed to or forming part of such financial statement;
b. the auditor’s report; and
c. The Board’s report referred to in sub-section (3).
PENALTY For Contravention [Section 134]
♠ Company: Rupees 50,000 – Rupees 5,00,000 AND
♠ Officer in default:
Conclusion: The present structure of Board’s Report gives the feeling of a History syllabus uptill now. By amending the said section a lot of duplicate information will be reduced to a larger extent. Now even a CEO, even if he is not a director can sign the financial statements wherever he is appointed as such. Also the Central Government shall have the power to prescribe an abridged form of Board’s report for One Person Companies and Small Companies, so as to bring these companies into the compliance of Board’s Report, thus ensuring more relaxation in complying with this section for small and one person companies to a larger extent.