Directors Report under Companies Act, 2013- Disclosures in Brief

Akhilesh Kumar Jha

The Directors Report is the part of Annual Report in which the details of Company has been mentioned. There is no restriction to put any matter in the Directors Report if the Directors have intention to mention there apart from legal provisions. In view of this various company put a lot of matters, issues and publications which are not mandatory for putting in the Directors Report but if directors do, they may.

In previous law there was a separate section 217 of the Companies Act, 1956. The whole section was related to the Report of Directors.

But in the Companies Act, 2013, a lot of sections make mandate to disclose the facts in the Director Report.  In this link, we are discussing the followings disclosures in brief:-

1-      SECTION 67 RESTRICTIONS ON PURCHASE BY COMPANY OR GIVING OF LOANS BY IT FOR PURCHASE OF ITS SHARES.

The disclosers in the Board Report shall be required in case of the voting rights not exercised directly by the employees in respect of shares to which the any scheme relates. The manner of reporting in the Board Reports shall be prescribed.

If the company or its officer shall not disclose the matter in the Board Report or violate the provisions of this section, they shall be penalized a sum of Rs. 5 lacs which is extended up to 25 lacs along with imprisonment for a term which is extended to three years.

2-      SECTION 92 ANNUAL RETURN

For every company, it is mandatory to prepare Annual Return for the previous financial years as per detailed in the Section 92 of the Act,

Under subsection (3) of this Section, it is also mandatory to enclose the extract of the Annual Return with Director Report. The extract of the Annual Return shall be prescribed and it is the part of Director Report.

3-      SECTION 131 VOLUNTARY REVISION OF FINANCIAL STATEMENT OR BOARD REPORT

Financial statement of the company or report of director shall be revised for period at least preceding three years, in any case, with the permission of Tribunal. In this connection, the revision shall be disclosed in the director report for the current year also.

4-      SECTION 134 FINANCIAL STATEMENT AND BOARD REPORTS ETC.

A.     Contents of Directors Report

The following contents are mandatory to mention in the Director Report

1-Extract under section 92

We have already discussed above, the extract shall be prescribed.

2-Number of meeting of Board of Directors

It is important information demanded by the Government, previously unlisted company need not to require make any information regarding it, but under the Companies Act, 2013 it is favorable, and it is mandatory for companies to put information about the Board Meeting. In that case, an unlisted company cannot play with the dates of meetings at least.

3- Directors Responsibility Statement

Some modification has been made since previously, the detailed is below mentioned.

4- Under section 149

Who may be an independent Director, the Section 149 (6) is clarified the following:-

An independent director in relation to a company, means a director other than a managing director or a whole-time director or a nominee director,—

(a) who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience;

(b) (i) who is or was not a promoter of the company or its holding, subsidiary or associate company;

(ii) who is not related to promoters or directors in the company, its holding, subsidiary or associate company;

(c) who has or had no pecuniary relationship with the company, its holding, subsidiary or associate company, or their promoters, or directors, during the two immediately preceding financial years or during the current financial year;

(d) none of whose relatives has or had pecuniary relationship or transaction with the company, its holding, subsidiary or associate company, or their promoters, or directors, amounting to two per cent. Or more of its gross turnover or total income or fifty lakh rupees or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year;

(e) who, neither himself nor any of his relatives—

(i) holds or has held the position of a key managerial personnel or is or has been employee of the company or its holding, subsidiary or associate company in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed;

(ii) is or has been an employee or proprietor or a partner, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed, of—

(A) a firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company; or

(B) any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary or associate company amounting to ten per cent. or more of the gross turnover of such firm;

(iii) holds together with his relatives two per cent. or more of the total  voting power of the company; or

(iv) is a Chief Executive or director, by whatever name called, of any nonprofit organisation that receives twenty-five per cent. or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds two per cent. or more of the total voting power of the company; or

(f) who possesses such other qualifications as may be prescribed.

Considering the above points, it is a duty of an Independent Director to disclose every point in their statement which shall be annexed with the director Report.

5-      Disclosure in the Board Report u/s 149 (10),

Independent Director shall be appointed for a term of 5 years but it shall be re-appointed by passing of Special Resolution. In this regard, the company must disclose the appointment or re-appointment of Independent Director in the Board Report.

6-       Matters as per section 178 of the act, if applicable

The company shall disclose regarding the committee of Nomination, Remuneration and stakeholders relationship committee in the Board Report.

7-       Reservation and qualification on Auditor Report and Secretarial Report

The directors Report is also contained any reservation and qualification as marked by the Statuary Auditor of the Company in its Auditor Report and by the Company Secretary in whole time practice in its Secretarial Report.

8-      Loans and Guarantee under section 186

The details of Loans, Guarantee and investment shall be mentioned in the Director Report as per provisions of Section 186 of the Act

9-       Particular of Contract and arrangement under section 188

The company shall disclose in its report regarding all transaction which is related to related party.

Comment: – In previous laws, there is no requirement to disclose the above point no. 8 and 9, now it is mandatory to disclose. The sense of Director Report that the Directors disclose all loan, guarantee, investment, related party transaction themselves.

10-   state of company affairs

11-   reserve

12-  dividend

13-  material changes

14-  conservation, technology etc

15-   foreign exchange

Comment:- the aforesaid disclosures from 10 to 15 are remain same.

16-  Risk Management

In its Directors Report, a statement must be enclosed which shows the development and implementation of risk management policy of the company.  Under new Act, there is no meaning and definition of Risk Management. Hence, the statement which is enclosed the director report, may be following elements: – (the following points are just opinion)

1-Introduction

2-Meaning and definitions Risk Management

3-Types of Risks

4- Risk Management

5-Risk Assessment

6-Risk Identification Activities

7-Risk Handling

8-Monitoring and Reporting

9-Conclusion

17-  CSR

The director report shall be contained the policy, development and implementation of CSR project. What initiations have been taken by the Company? It shall also be disclosed in the Director Report.

18-  Formal Annual evaluation

A statement shall be attached with the Board Report which shall be indicated the performance of the Board and its committee and its individual directors. This clause shall be applicable only listed company or prescribed public limited company.

19-  other matter

In case, company has intention to disclose other matter, it may so.

B.      Attachment

The Director Report shall be attached with the Financial Statement of the Company.

C.      Director Responsibility Statement

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.

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;

(f) 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.

D.     Signature

The Directors Report and its annexure shall be signed by the Chairperson of the Company where he is authorized by the Board.

In case of no authorization, Two Directors, one of whom shall be a managing director or by the Director where there is one director only

E.      Publication

A signed copy of Financial Statements along with its annexure etc shall be issued, circulated and published

F.       Penalty

In case of company makes default, it shall be penalized not less than Rs. 50000/- but which may be extended up to Rs.25 lacs

In case of default made by the officer, he shall be penalized by way of imprisonment for a term of three years or with fine not less than Rs. 50000/- but which may be extended up to Rs.5 lacs or both

5- SECTION 135 CORPORATE SOCIAL RESPONSIBILITIES

The section specially force that the Director Report must disclose the composition of Corporate Social Responsibility Committee.

SECTION 149 COMPANY TO HAVE BOARD OF DIRECTORS

Independent Director shall be appointed for a term of 5 years but it shall be re-appointed by passing of Special Resolution. In this regard, the company must disclose the appointment or re-appointment of Independent Director in the Board Report

SECTION 177 AUDIT COMMITTEE

The Board of Directors report shall disclose the composition of an Audit Committee. The composition of Audit Committee shall be disclose in the Board Report and in case of the board has not accepted any recommendation of audit committee, the same shall also disclose in the Board Report with reason.

Apart from above, every listed company or prescribed companies shall establish a vigil mechanism for directors and employs to report genius concern in such matter as may be prescribed.

Such mechanism shall be disclosed by the company on its website, if any, and in the Board of Directors Report

SECTION 178 NOMINATION AND REMUNERATION COMMITTEE AND STAKEHOLDERS RELATIONSHIP COMMITTEE

A Nomination and Remuneration Committee shall be constituted under this section for formulization the criteria for determining qualifications, positive attributes and independence of a director and recommend to the Board a policy, relating to the remuneration for the directors, key managerial personnel and other employees.

Such aforesaid policy shall be disclosed in the Board of Directors Report

SECTION 188 RELATED PARTY TRANSACTIONS

The directors Report shall also be contained the related party transaction. Whatever transaction which is mentioned under this section, if the company transact, the disclosure shall be mandatory in the Director Reports along with the justification about each transactions. So that shareholder of the Company may be aware such transactions.

SECTION 197 REMUNERATION RELATED

Every listed company shall disclose in the Board’s report, the ratio of the remuneration of each director to the median employee’s remuneration and such other details as may be prescribed.

Apart from above, if any director who is managing director or whole time director of the company receive any commission from company,  in that case, such director shall not be disqualified to take commission or remuneration from holding or subsidiary of its company.

In that case the disclosure in the Board Report shall also be mandatory

Section 204 Secretarial Audit for Bigger Companies

The Board of Directors shall be contained any qualification or observation or other remarks made by the company secretary in practice in his secretarial report.

(Author may be contacted at akhilesh_jha@live.com or gtka.akhilesh@mail.com)