Directors Report Companies Act 2013 – A referencer

Introduction to Directors Report

The Companies Act, 2013 has marked the end to the era of Companies Act, 1956 with changes in law, rules and brought in transparency in dealing with the affairs of the Company. The governance of Company is witnessing day-by-day considerable changes. The new Act plays a significant role with respect to the responsibilities of the Directors,  and also has widened the contents of Director’s Report commonly known as “Board’s Report” and this book gives an insight into the various provisions in preparation of Director’s Report under the Companies Act, 2013.

New Provision added in Companies ACT-2013 with respect to Directors Report.

The changes – Old v/s New Act:

It’s noteworthy that generally the legal frame work under old Companies Act, 1956 has been maintained however following new provisions are added:

• Extract of annual return [Section 92(3)],
• Explanations to adverse qualification in Secretarial audit report, statement on declaration given by independent director, if any [Section (149)],
• Policy on directors’ appointment, qualifications remuneration etc., particulars of loans, guarantees and investments. [Section 186],
• Particulars of related party transactions {section 188(1)],
• Steps taken as per CSR policy approved by the Board,

An Innovative provision u/s. 131(1) (third proviso) that in case of revision of/re-opening of financial statements or Board report, detailed reasons must be stated In the director’s report for such revision of statements or Director’s Report.

Voluntary revision of Board’s Report (New Norms):

This is new provision under Section 131 of the Act. It permits revision of Board’s Report In case of non-compliance of any provisions of section 134 subject to the compliance with provisions of that Section.

Disclosure Requirement in Board’s Report.

Contents of Board’s Report:

1. The extract of the annual return as provided under sub-section (3) of Section 91 (this is a new requirement).

2. The numbers of meetings of the Board held during the financial year. (This already find place under Clause 49 of Listing Agreement in the case of listed companies under corporate governance report).

3. The Directors’ Responsibility Statement (corresponds to the provisions of section 217 (2AA) of old Act).

4. A statement of declaration given by independent directors under sub-section (6) of section 149. (New requirement).

5. All the listed companies and such class of companies as may be prescribed [section 178(1)] must disclose company’s policy on directors’ appointment and remuneration including criteria for determining qualifications, positive attributes, independence of a directors and other matters provided under section 178(3).

6. Explanations or comments by the Board on every qualification, reservation or adverse remark of disclaimer made (a) by the Statutory Auditor in his report, and (b) by the Company Secretary in practice in his Secretarial Audit Report {Section 204(3)] (additional requirement).

7. Particulars of loans, guarantees or investments under section 186 (New requirement).

8. Under Rule 8 of The Companies (Accounts) Rules, 2014 the particulars of contracts or arrangements with related parties referred to in sub-section (1) of section 188 is to be reported in the prescribed AOC.2 (New requirement).

9. The state of the company’s affairs (continuing requirement).

11. The amounts, if any, which it proposes to carry to reserves (continuing requirement).

12. The amount, if any, which it recommends should be paid by way of divided (continuing requirement).

13. 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 or the report. (New requirement).

14. The conservation of energy, technology absorption, forign exchange earning and outgo. (Continuing requirement). The Rule 8(3) of the Companies (Accounts) Rules, 2017 specifies the manner in which these are to be reported.

15. 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. (New requirement). The clause 49 of listing agreement is also having similar reporting requirements.

16. The details about the policy developed and implemented by the company on corporate social responsibility initiative taken during the year. (New requirement).

17. The Rule 8(4) of the Companies (Accounts) Rules, 2014 says that in case of a listed company and every other public company having paid-up share capital of 25 crores or more, 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 an individual directors. (New requirement)

18. Such other matters as may be prescribed under 134(3)(q). the Rule 8(5) of the Companies (Accounts) Rules, 2014 prescribes that in addition to the information and details specified in sub-rule (4), the report of the Board shall also contain:

• • The financial summary or highlights; (continuing requirement)
  • The change in the nature of business, if any; (New requirement).
  • The details of directors or key managerial personnel who were appointed or have resigned during the year (new requirement).
  • The names of companies which have become or ceased to be its subsidiaries, joint ventures or associate companies during the year; (New requirement).
  • The details relating to deposits, covered under Chapter V of the Act (New requirement):
  • Accepted during the year;
  • Remained unpaid or unclaimed as at the end of the year;
  • Whether there has been any default in repayment of deposits or payment of interest thereon during the year and if so, number of such cases and the total amount involved-
  • At the beginning of the year;
  • Maximum during the year;
  • At the end of the year;
  • The details of deposits which are not in compliance with the requirements of Chapter V of the year;
  • The details of significant and material orders passed by the regulators or courts or tribunals impacting the going concern status and company’s operations in future; (New requirement).
  • The details in respect of adequacy of internal financial controls with reference to the Financial Statements. (New requirement).

19. All new concept that the Board’s report shall disclose the composition of audit committee and reasons for not accepting recommendations of audit committee, If any [Section 177(8)]

20. Moreover, the Board to report on establishment of vigil mechanism. [Section 177(10)]

21. The Secretarial Audit Report, If applicable, in prescribed form (Form MR. 3) shall be annexed to Board’s report [Section 204].

22. The Act and Rules are silent for conventional mention of reappointment of retiring directors and retiring auditors; however the tradition may be continued.

23. This is an important & authentic communiqué from the company; therefore, the directors are free to convey other thoughts. There are no restrictions under the provisions of the Companies Act, 2013.

24. In terms of Section 118(10) of the Act, every company shall observe secretarial standards with respect to General and Board Meetings specified by the Institute of Company Secretaries of India (ICSI) and approved as such by the Central Government. Since the Secretarial Standards has now become obligatory & binding on the company, shall also have to be compiled with as and when issued by the ICSI.

Step’s Required for preparation of Director’s Report.

Steps for Annual Report Preparation

(i) Importance of Annual Report o/s 22 of POSH.

(ii) Disclosure in Board’s Report – about S-4, S-22 of POSH.

(iii) Disclosure Requirement for Listed Companies.

CSR and it’s Disclosure in Board’s Report.

The Relevant Provisions (Sec. 135)

• The Board’s report under sub-section (3) of section 134 shall disclose the composition of the Corporate Social Responsibility Committee.
• The Board of every company referred to in sub-section (1) shall,-
• after taking into account the recommendations made by the Corporate Social Responsibility Committee, approve the Corporate Social Responsibility Policy for the company and disclose contents of such Policy in its report and also place it on the company’s website, if any, in such manner as may be prescribed; and
• ensure that the activities as are included in Corporate Social Responsibility Policy of the company are undertaken by the company.
• The Board of every company referred to in sub-section (1), shall ensure that the company spends, in every financial year, at least two per cent, of the average net profits of the company made during the three mediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy:

Provided that the company shall give preference to the local area and areas around it where it operates for spending the amount earmarked for Corporate Social Responsibility activities:

Provided further that if the company fails to spend such amount, the Board shall, in its report made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount.

Explanation- For the purposes of this section “average net profit” shall be calculated in accordance with the provisions of section 198.”

 Board’s Action :

(a) Approve the CSR policy of the Company after taking into account the recommendations of the CSR Committee;

(b) Disclose the content of policy in its report and place on website, if any of the company;

(c) ensure that the activities as are included in CSR Policy of the company are undertaken by the company;

• ensure that atleast 2% of average net profits of the company made during three immediately preceding financial years shall be spent on such policy every year.
• Board shall give in its report the reasons for not spending.
• While the Act does not specifically provide for any penalties in case a company fails to spend required amount or undertake the activities as prescribed under the policy, it does require to provide an explanation in the Board’s report.

Matters to be prescribed

Section 135(4)(a): Manner of disclosing the contents of CSR Policy in which the contents of CSR policy Board’s Report and the Company’s website.

• Board meeting to approve:
• CSR policy with or without change to the recommended draft policy by CSR committee,
• Annual meeting to earmark some,
• Regular/quarterly CSR Committee meeting to monitor CSR policy and activities,
• Board Report to report compliance or failure on CSR activities and spending of earmarked amount, specify reason for any failure, and
• Go to step one at beginning of every financial year.
• About CSR expenditure MCA has the power to call for information u/s 206 of Companies Act. 

Importance of Director’s Responsibility

Statement in– Board’s Report –

Director’s Responsibility Statement:

Pursuant to the Provisions of section 134(3)(c) of the Act, the Directors, based on the representations received from the Operating Management, confirm that:

• In the preparation of the annual accounts, the applicable accounting standards had been followed along with proper explanation relating to material departures;
• The directors had selected such accounting policies and applied them consistency 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;
• 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;
• the directors had prepared the annual accounts on a going concern basis; and
• 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.
• 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.
• Clauses (e) and (f) above are new additions to the Directors’ Responsibility Statement and the addition of the same is one step forward in the right direction towards corporate governance and compliance where an increased focus of the board can be expected towards internal financial controls and systems to ensure compliance with the provisions of applicable laws.

Various Rule under companies Act and 2/s Disclosure norms in Board’s Report.

B.3 New Heading :

Web Link of Annual Return.

Following is web-link,  where the Annual Return filed with Ministry of Corporate Affairs as per requirement of Section 92(3) of Companies Act, 2013, read with MCA’s Notification dated 28.8.2020.

B.4 Composition of Internal Complaint Committee with regard to Section 4 of Sexual Harassment Act.

B.5 Annual Report with regard to Section 22 of Sexual Harassment Act.

B.6 Rule 8(1) of The Companies (Accounts) Rules, 2014:

The report shall contain a separate section wherein a report on the performance and financial position of each of the subsidiaries, associates and joint venture companies included in the consolidated financial statement is presented.

B.7 Rule 8(5)(iv) of The Companies (Accounts) Rules, 2014: The report of the Board shall also contain the names of companies which have become or ceased to be its Subsidiaries, joint ventures or associate companies during the year;

B.8 Rule 8(5)(viii) of The Companies (Accounts) Rules, 2014:     The details in respect of adequacy of internal financial controls with reference to the Financial Statements ;

B.9 Rule 8(5)(vii) of The Companies (Accounts) Rules, 2014: The details of significant and material orders passed by the regulators or courts or tribunals impacting the going concern status and company’s operations in future;

B.10 Rule 5 of The Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014:

A statement showing following details of every employee of the Company who was in receipt of remuneration in excess of Rs. 60 Lacs, if employed throughout the year or Rs. 5 Lacs per month, if employed for part of the financial year or received remuneration in excess of that drawn by the MD/WTD/Manager & holding 2% or more of equity share capital of the Company (himself alongwith spouse & dependent children):

• Name, age & designation of the employee
• remuneration received;

• nature of employment, whether contractual or otherwise;
  • qualifications and experience of the employee;
  • date of commencement of employment;
  • the age of such employee;
    • the last employment held by such employee before joining the company;
    • the percentage of equity shares held in the alongwith spouse & dependent children ;
    • whether any such employee is a relative of any director or manager of the company and if so, name of such director or manager;

B.11 Section 67(3) of the Companies Act, 2013: Giving of any loans to persons in the employment of the company other than its directors or KMP, for an amount not exceeding their salary or wages for a period of six months to purchase or subscribe for fully paid-up shares in the company or its holding company to be held by them by way of beneficial ownership, then disclosures of voting rights not exercised directly by the employees in respect of shares to which the scheme relates.

B.12 Please find Director’s Attendance F.Y.2020-21 [Already emailed on 8.6.2021, Out.No.2645 – CSD Task 435 (A)].

B.13 Please include MGT-9, F.Y.2020-21 [Already emailed on 31.5.2021 and 8.6.2021. At Clause VI of MGT-9, Please include details of remuneration to Directors & KMP as per AO Salary’s Note bearing No.E-37695 dated 11^th June, 2021].

B.14 The Secretarial Audit Report [MR-3] 2020-21 is under progress and will be sent after approval of Board.

• Filing Requirement of Companies Act-2013.
• Higher Additional Fee U/S 403 of Companies Act.
• Amendment – 2017
• Amendment-2021
• Importance of Independent Director and it’s
• Disclosure Role in Director’s Report.

Step’s to be taken before preparation of

Board Report.

List of Section involved in Preparation of Board Report.

CHECK LIST – DIRECTORS’ REPORT

Following are the select provisions of the Companies Act, 2013 and relevant rules: