Analysis of Report of Board of Directors to Shareholders

(a) The state of the company’s affairs;

(b) The amounts, if any, which it proposes to, carry to any reserves in such balance sheet;

(c) The amount, if any, which it recommends should be paid by way of dividend;

(d) 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 balance sheet relates and the date of the report;

(e) The conservation of energy, technology absorption, foreign exchange earnings and outgo, in such manner as may be prescribed in terms of the Companies (Disclosure of Particulars in the Report of Directors) Rules, 1988, shall be attached to every balance sheet. The key particulars needs to be disclosed are:

Particulars of Employees

Sub-Section 2A of Section 217 of the Act prescribes that the report of Board of Directors should include a list showing the names of employees of the company who are in receipt of salary in excess of limits specified in Companies (particulars of employees) Rules, 1975. The current limits are Rs.2, 00,000/- per month, if the employees worked for part of the year and Rs.24, 00,000/- per annum, if they worked for a full year. A Statement to be included in the Board’s Report shall have to contain the particulars listed below, which are prescribed in the aforementioned rules.

1)     Name of the Employee.

2)     Designation.

3)     Remuneration received.

4)     Nature of Employment – Contractual or otherwise.

5)     Other terms and conditions.

6)     Nature of duties.

7)     Qualification and Experience.

8)     Date of Commencement of Employment.

9)     Age of the Employee.

10)      Last Employment held before joining the company.

11)      Percentage of equity shares held by the employees.

Particulars of employees of companies, engaged in ‘Information Technology’ sector, who are working in foreign countries and drawing more than Rs.24 Lakhs per financial year or Rs.2 Lakhs per month when they worked for part of the year, as the case may, need not be included in such statement attached to the Board’s Report.

Directors’ Responsibility Statement

Sub-Section 2AA of Section 217 provides that the Board’s Report should include a Directors’ Responsibility Statement, indicating therein:

(A) That accounting standards had been followed in the preparation of annual accounts and/or explanation for material departures from accounting standards;

(B) accounting policies are selected and applied consistently, and judgments and estimates are made that are reasonable and prudent so as to give a true and fair view of the state of affairs at the end of the financial year and profit / loss of the company during the year;

(C ) Directors have taken proper and sufficient care for (a) maintenance of accounting records as per law, (b) safeguarding assets of the company, and (c) Preventing and detecting fraud and other irregularities;  and

(D) Directors have prepared the annual accounts on a going concern basis.

The Board should, as a good corporate practice, certify that the financial statements do not contain any materially untrue or misleading statements or omit any material fact. The cross reference of accounting policies as mentioned in financial statements of the company should also be highlighted in the Board’s Report. Any ‘material departures’, as mentioned in clause (i) above, should be conspicuously stated and the directors should carefully identify materiality of the departure from the accounting standards. The Directors’ Responsibility Statement should form part of the Board’s Report and should not be given as an annexure to it.

References in other sections of the Act

Apart from requirements of Section 217 of the Act, we may find references about Board’s Report, Balance Sheet and Profit and Loss account and other annexure, in several sections of the Companies Act, 1956.

Section 212 of the Act prescribes that Balance Sheet of a holding company to include particulars of its subsidiaries. Holding company must attach balance sheet and profit and loss account and report of Board of directors as well as report of auditors of each of its subsidiary company. It is a duty to attach a statement of holding company’s interest in the subsidiary companies.

Section 219 of the Act deals with right of members to receive copies of Balance Sheet, Profit and Loss account, the Auditors Report and other attachments which is to be laid before a company in general meeting. Sub?section (1) of section 219 of the Companies Act, 1956 requires that every company has to send a copy of its balance sheet, profit and loss account and other documents attached or annexed to the balance sheet to its members and other persons specified therein. The Companies (Amendment) Act, 1988 has inserted a new proviso (b)(iv) to sub?section (1) which provides that a company listed on a recognised stock exchange may, instead of sending a copy of the documents as aforesaid, send a statement containing the salient features thereof in the prescribed form, subject to complying with certain conditions.

Section 220 of the Act mandates the filing of Balance Sheet and Profit and Loss Account with Registrar of Companies after they have been laid at Annual General Meeting.

Section 222 of the Act deals with construction of references in the Companies Act, 1956 to documents annexed or required to be annexed to a company’s accounts shall not include the Board’s Report, the auditors report or any document attached or required to be attached.

Sub-Section (4) of Section 292A of the Act requires that annual report of the company shall disclose in its annual report, the composition of Audit Committee constituted by the company pursuant to this section.

Proviso to Section 383A of the Companies Act, 1956 require that companies having a paid up share capital of Rs.10 Lakhs and more up to Rs.2.00 Crores shall have to attach a compliance certificate obtained from a practicing Company Secretary, along with the Board’s Report and file it with the Registrar of Companies, whether the company has complied with all provisions of the Act.

Other Requirements

The Board’s Report of companies whose shares are listed on a stock exchange must include additional information as mandated in the Listing Agreement. Apart from the above, additional disclosures that are to be included in the Board’s Report were prescribed under the Reserve Bank of India Act, 1934, the Securities and Exchange Board of India Act, 1992 and other connected regulations, Notifications, circulars, etc.

Listing agreement requires several disclosures and information that are to be furnished in the annual reports. Obviously, this compliance applies only to the companies whose shares are listed in any of the stock exchanges in India.

Attachment and Annexure

There are various requirements, in respect of Board’s Report under the Act, which are in the form of attachment, annexure, and addendum. Some of the disclosures are to be included as a part of the report. An analysis of such requirements is made in a table furnished below.

Management Discussion and Analysis Report

It is a report prepared by the Key management personnel and Board of Directors of a company, informing the members about the performance and initiatives taken by the company to achieve better results and material developments in Human Resources and industrial relations.  In accordance with Clause 49 of the listing agreement, the Management Discussion and Analysis Report should be given as an attachment in the annual report to the stakeholders. The Management Discussion and Analysis Report should include a discussion on the following matters.

• Industry structure and developments
• Opportunities and threats
• Segment-wise or product-wise performance and outlook
• Risks and areas of concern
• Internal control systems and their adequacy
• Discussion on financial performance with respect to operational performance
• Material developments in human resources/industrial relations front, including number of people employed.

Management Discussion and Analysis Report should be considered and approved by the Board in a meeting of the Board of directors of the company. It is not to be passed as a resolution by circulation.

It is desirable that Management Discussion and Analysis Report is signed in the same manner as the Board’s Report.

Compliance Report on Corporate Governance

Detailed compliance report on Corporate Governance should be given in terms of Listing Agreement. Non-compliance of any mandatory requirement with reasons and extent of deviation should be specifically highlighted. In addition to the disclosures as specified in clause 49 of Listing Agreement, disclosures should be made in Directors’ Report in the section on ‘Corporate Governance’, if a company intends to pay minimum remuneration to the managerial personnel in case of no profit or inadequacy of profit.

Corporate governance Certification

A ‘Compliance Certificate’ is to be obtained either from Statutory Auditors or Practising Company Secretaries regarding compliance of conditions of Corporate Governance. This certificate should be annexed to Directors’ Report.

CEO/CFO Certification

This Certificate is required to be signed by the Chief Executive Officer and the Chief Financial Officer of the company, which shall be forming part of Corporate Governance Report. However, this certificate is a mandatory attachment.

Disclosure of remuneration to non-executive directors

Remuneration to non-executive directors and their pecuniary relationships or transactions with the company, are required to be disclosed in the corporate governance report.

Dating of the Board’s Report

In accordance with Section 217(3) of the Act, the Board of Directors of a Company is duty bound to give fullest information and explanation in their annual report to the members of the company by way of an addendum to the report on every qualification, reservation or adverse remark in the auditors’ report. The Board’s Report may bear the same date as that of the auditors’ report but it could be dated later than the date of the auditors’ report if it contains any of such reservation, qualification or adverse remark.

Signing of the Board’s Report

Section 217(4) provides that the Board’s Report and any addendum thereto should be signed by the Chairman of the Board on behalf of the Board of Directors. The Board should authorize the Chairman to sign the report. When he is not so authorized, the report may be signed by not less than two directors of the company and one of whom shall be a managing director, where there is one.

Filing of Annual Reports

Section 220 provides that after the balance sheet and the profit and loss account have been laid before the company at an annual general meeting, three copies of the balance sheet and the profit and loss account along with all documents that are required to be annexed or attached thereto should be filed electronically in e-form Nos. 23AC and 23ACA with the Registrar of Companies within 30 days through MCA-21 portal. The Board’s Report has to be attached to the balance sheet. In the case of listed companies, the full version of the annual report, including the Board’s Report, should be filed on EDIFAR, the electronic data information filing and retrieval website. Now SEBI has amended the listing agreement and mandates the listed companies to file on the CFDS – (Corporate Filing and Dissemination System) viz. www.corpfiling.co.in, such information, statements and reports as may be specified.

Penal Consequences

Section 215(5) & 215(6) of the Act provides that company’s directors are responsible for ensuring compliance of provisions of Section 217 in respect of directors’ report. If any director fails to take all reasonable steps, ensuring compliance with the provisions of section 217(1) to 217(3) of the Act, he shall be liable to be punished with imprisonment up to 6 months or fine up to Rs.20,000/- or with both. Where there is no wilful default by the directors in compliance of the above provisions of the Act, no imprisonment would be imposed on them.

Conclusion

From the foregoing discussion, one may appreciate the significance of Board’s Report and its attachments, inclusions and annexure that is to be presented to the stakeholders. Board of Directors of a company provides leadership and management to the company and exercises control over the company and hence they are accountable to the shareholders. By presenting a detailed report to its members and other stakeholders, they are not only fulfills the legal requirements Act and Regulations, but also implementing good corporate governance.

Written By:-

CS.PR. RAAMAANATHAN, M.Com, B.G.L, FCS, DTL, DFM, PGDFTM.

COMPANY SECRETARY, CHENNAI.