Does non-compliance with applicable accounting standards result into violation of Listing Agreement/LODR Regulations?
According to Section 129(1) of the Companies Act, 2013, every company is under an obligation to ensure that its financial statements give a true and fair view of the state of affairs of the company and it complies with the accounting standards notified in Section 133 of the Companies Act, 2013. As per Section 133 of the Companies Act, 2013, the accounting standards are prescribed by the Central Government as recommended by the Institute of Chartered Accountants of India in consultation with and after examination of the recommendation by the National Financial Reporting Authority (NFRA). Further, in terms of Section 129(5) of the Companies Act, 2013, where a financial statement do not comply with the accounting standards, the company is required to disclose such deviation and its financial effects in the financial statements. In terms of Section 129(7) of the Companies Act, 2013, in case of contravention of the requirement of Section 129, the Officer of the Company
responsible to ensure compliance or all the directors are liable for punishment. The company being legal entity acts through human mind represented by the Board of Directors which is responsible for all the acts of omission and commission by the Company. The directors are expected to take utmost care in dealing with the affairs of the Company and to ensure that all applicable laws are being complied with.
In terms of Regulation 4(2)(f)(i)(2) and Regulation 4(2)(f)(ii) (6) and (7) of the LODR Regulations the Board of Directors are required to conduct themselves as to meet the expectations of operational transparency to stakeholders, managing potential conflict of interest in related party transactions and to ensure the integrity of the listed company’s accounting and financial systems. As per Regulation 4(2)(f)(iii)(1),(3),(6) and (12), the Board of Directors is required to ensure effective monitoring of the management, to act in god faith, with due diligence and care and in the interest of the listed company and shareholders. In terms of Regulation 33(2)(a) of the LODR Regulations, Chief Financial officer is required to certify that the financial results do not contain any false or misleading statement.
The Hon’ble Supreme Court, in the matter of N Narayanan v. Adjudicating Officer, SEBI (Civil Appeals No. 4112 – 4113 of 2013) had observed that “Company though a legal entity cannot act by itself, it can act only through its Directors. They are expected to exercise their power on behalf of the company with utmost care, skill and diligence.” Moreover, the Hon’ble Apex Court while describing what is the duty of a Director of a company held in Official Liquidator v. P.A. Tendolkar (1973) 1 SCC 602 that, a Director may be shown to be placed and to have been so closely and so long associated personally with the management of the company that he will be deemed to be not merely cognizant of but liable for fraud in the conduct of business of the company even though no specific act of dishonesty is provided against him personally. He cannot shut his eyes to what must be obvious to everyone who examines the affairs of the company even superficially.”
Investors as well as other stakeholders come to know about financial health of the company through financial statements of the company. Financial statements and figures stated therein have direct impact on price of securities of such company. Thus, financial statements of a company form an important basis for investor’s decision to invest or divest the securities of such company.
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