Understanding the financial year of a company is crucial for accurate financial reporting and compliance. Section 2(41) of the Companies Act, 2013, defines the financial year and sets the standard for its determination. This article delves into the reasons companies may choose to change their financial year, the process involved, and the compliance steps required.
Section 2(41) of the Companies Act, 2013, pertains to the definition of a “financial year” for a company. The financial year is the accounting period for which the financial statements of a company are prepared. Here’s the text of Section 2(41):
“financial year” means the period ending on the 31st day of March every year, and where it has been incorporated on or after the 1st day of January of a year, the period ending on the 31st day of March of the following year, in respect whereof financial statement of the company is made up
In simpler terms, the financial year for a company generally ends on the 31st day of March each year. However, if a company is incorporated on or after the 1st day of January of a year, its first financial year will end on the 31st day of March of the following year.
Let’s illustrate this with an example:
Suppose a company, XYZ Pvt. Ltd., is incorporated on February 15, 2023. According to Section 2(41), its first financial year will end on March 31, 2024. Subsequent financial years will then end on March 31 of each year.
So, for XYZ Pvt. Ltd.:
- First Financial Year: February 15, 2023, to March 31, 2024
- Subsequent Financial Years: April 1 to March 31 of each year
Reasons for change of financial year of the company
A company may decide to change its financial year for various reasons, and such a change typically requires compliance with legal provisions and approval from relevant authorities. Here are some common reasons for a change in the financial year of a company:
1. Alignment with Business Cycle: The company may want to align its financial year with its natural business cycle. For example, if the company’s major projects or revenue streams follow a different cycle than the current financial year, changing the financial year may provide a more accurate reflection of its financial performance.
2. Acquisition or Merger: In the case of an acquisition or merger, the company may need to harmonize financial reporting with the newly acquired or merged entity. Aligning financial years can simplify the consolidation of financial statements.
3. Change in Management or Ownership: A change in management or ownership may lead to a reassessment of the financial reporting structure. The new management may decide to align the financial year with its reporting preferences or industry standards.
4. Global Operations: If a company operates globally and wishes to align its financial reporting with the fiscal cycles of its international operations or parent company, it might consider changing its financial year.
5. Compliance with Regulatory Changes: Changes in statutory or regulatory requirements may necessitate adjustments to the financial year. For instance, changes in tax laws or reporting standards may prompt a company to realign its financial year.
6. Seasonal Business Considerations: Companies with significant seasonal variations in their business activities may choose to change their financial year to better reflect their performance during peak and off-peak seasons.
7. Internal Reporting and Management Convenience: Internal reporting structures or management preferences may evolve, leading to a desire for a financial year change that aligns more closely with internal reporting and strategic planning cycles.
8. Consolidation of Financial Statements: When a company is part of a larger group, it may decide to change its financial year to facilitate the consolidation of financial statements at the group level.
Rule 40 of Companies (Incorporation) Rules, 2014
Rule 40 of the Companies (Incorporation) Rules, 2014, in India, outlines the procedure for changing the financial year of a company. Please note that rules and regulations may be subject to updates, so it’s essential to refer to the latest legal provisions or consult with a professional for the most current information. Here is a general overview of the procedure:
Procedure for Changing Financial Year:
1. Board Resolution: The board of directors must pass a resolution proposing the change in the financial year. The resolution should be passed at a board meeting, and the decision should be recorded in the minutes of the meeting.
2. Convene Extraordinary General Meeting (EGM): Convene an Extraordinary General Meeting (EGM) of the shareholders to seek their approval for the change in the financial year. Notice of the EGM, along with the proposed resolution, must be sent to all shareholders as per the prescribed timelines.
3. Passing Special Resolution: At the EGM, a special resolution must be passed by the shareholders approving the change in the financial year. A special resolution typically requires a higher majority, and the exact threshold is specified in the Companies Act.
4. Filing of Special Resolution: File the special resolution along with the explanatory statement and notice of the EGM with the Registrar of Companies (RoC) within 30 days of passing the resolution.
5. Approval from the National Company Law Tribunal (NCLT): In certain cases, especially if the change in the financial year leads to a deviation from the provisions of the Companies Act, approval from the National Company Law Tribunal (NCLT) may be required. This is usually the case if the change involves overriding the statutory provisions regarding financial years.
6. File Form MGT-14: File Form MGT-14 with the RoC within 30 days of passing the special resolution. Form MGT-14 contains details of the resolution and any other relevant information.
7. Amendment to Memorandum of Association (MoA) and Articles of Association (AoA): If the change in the financial year requires an amendment to the MoA and AoA, the company should file the necessary forms for alteration of these documents with the RoC.
8. Intimation to Other Authorities: After receiving approval from the RoC, the company should intimate other authorities, such as the Income Tax Department, about the change in the financial year.
9. Publication of Notice: If required, publish a notice of the change in at least one English-language and one vernacular newspaper in the district of the registered office of the company.
10. Compliance with Other Laws: Ensure compliance with other relevant laws, including tax laws, concerning the change in the financial year.
Rule 40
The application for approval of the concerned Regional Director under sub-section (41) of section 2, shall be filed in e-Form No. RD-1 along with the fee as provided And shall be accompanied by the following documents, namely:-
(a) grounds and reasons for the application;
(b) a copy of the minutes of the board meeting at which the resolution authorizing such change was passed, giving details of the number of votes cast in favor and or against the resolution;(c) Power of Attorney or Memorandum of Appearance, as the case may be;
(d) details of any previous application made within the last five years for a change in the financial year and outcome thereof along
with a copy of the order.
(2) Where the Regional Director on examining the application, referred to in sub-rule (1), finds it necessary to call for further information or finds such application to be defective or incomplete in any respect, he shall give intimation of such information called for or defects or incompleteness, on the last intimated e-mail address of the person or the company, which has filed such application, directing the person or the company to furnish such information, or to rectify defects or incompleteness and to re-submit such application within a period of fifteen days, in e-Form No. RD-GNL-5. Provided that a maximum of two re-submissions shall be allowed.
(3) (a) In case where such further information called for has not been provided or the defects or incompleteness has not been rectified to the satisfaction of the Regional Director within the period allowed under sub-rule (2), the Regional Director shall reject the application with reasons within thirty days from the date of filing the application or within thirty days from the date of last re-submission made as the case may be.
(b) In case where the application is found to be in order, the Regional Director shall allow and convey the order within thirty days from the date of application or within thirty days from the date of last re-submission, as the case may be.
(c) where no order for approval or re-submission or rejection has been explicitly made by the Regional Director within the stipulated time of thirty days, it shall be deemed that the application stands approved and an approval order shall be automatically issued to the applicant.
(4) The order conveyed by the Regional Director shall be filed by the company with the Registrar in Form No.INC-28 within thirty days from the date of receipt of the order along with fee as provided in the Companies (Registration Offices and Fees) Rules, 2014.
Conclusion:
Changing a company’s financial year involves careful consideration of reasons, adherence to legal procedures, and compliance with regulatory requirements. Companies must navigate the process meticulously, from initiating board resolutions to obtaining approvals and filing necessary forms. By understanding the nuances of Rule 40 and the associated legal provisions, companies can ensure a smooth transition and maintain compliance with the Companies Act, 2013.
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