Disclosure in Board's report-Companies Act & Listing Agreement

CS Deepak Banga

Contents to be disclosed in Board’s Report in terms of Companies Act, 2013 and Listing Agreement

Introduction

The Board’s Report is an important document of Annual Report in which the Board gives a complete review of the performance of the company during the year under review and other information. There is no restriction to put any matter in the Board’s Report, if the Board intends to mention it. However, certain matters, as part of statutory compliance, needs to be put in the Board’s Report in terms of the Companies Act, 2013 and the Listing Agreement (for listed company).

The Board’s Report is to be prepared based on the stand alone financial statements of the Company and it should 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.

In the previous Companies Act, 1956 there was a separate section 217 which related to ‘Board’s Report’. In the new Companies Act, 2013, section 134 corresponds to the earlier section 217. However, apart from section 134, a lot of other sections of the Companies Act, 2013 make it mandatory to disclose certain facts in the Board’s Report.

The Board’s Report for the financial year 2014-15 shall be made for the first time in terms of the provisions of the new Companies Act, 2013. The listed companies shall further incorporate certain additional contents in the Board’s Report for the first time in compliance of the revised Listing Agreement post amendment to Clause 49 of the Listing Agreement w.e.f. 01.10.2014.

The following article consolidates the contents to be disclosed in the Board’s Report as per the provisions of the Companies Act, 2013 read with the Rules framed thereunder and in terms of the Listing Agreement.

CONTENTS TO BE DISCLOSED IN TERMS OF COMPANIES ACT, 2013

♥ As per Section 134(3) of the Companies Act, 2013 read with Companies (Accounts) Rules, 2014, the Board’s Report shall include:

(a)       The extract of the annual return as provided under sub-section (3) of section 92 –in prescribed Form MGT-9;

(b)         Number of meetings of the Board;

(c)  * Directors’ Responsibility Statement as per section 134(5);

(d)         A statement on declaration given by independent directors under sub-section (6) of section 149;

(e)        In case of a company covered under sub-section (1) of section 178, company’s policy on director’s appointment and remuneration including criteria for determining qualifications, positive attributes, independence of a director and other matters provided under sub-section (3) of section 178;

(f)         Explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer made-

(i) by the auditor in his report; and

(ii)  by the company secretary in practice in his secretarial audit report;

(g)   Particulars of loans, guarantees or investments under section 186;

(h)  Particulars of contracts or arrangements with related parties referred to in sub-section (1) of section 188 in the prescribed Form AOC-2;

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

(j)  The amounts, if any, which it proposes to carry to any reserves;

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

(l)  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 of the report;

(m)   ** The conservation of energy, technology absorption, foreign exchange earnings and outgo, in the manner as prescribed in Rule 8(3) of the Companies (Accounts) Rules, 2014 [Chapter IX];

(n)  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;

(o)  The details about the policy developed and implemented by the company on corporate social responsibility initiatives taken during the year;

(p)  In case of a listed company and every other public company having paid-up share capital of twenty five crore rupees or more, calculated at the end of the preceding financial year, 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 and individual directors;

(q) ** Such other matters as may be prescribed.

* As per Section 134(5) of the Companies Act, 2013, the Directors’ Responsibility Statement 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;

(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; and

(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.

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.

** Such other matters as may prescribed has been given in Rule 8 of the Companies (Accounts) Rules, 2014

Rule 8 of the Companies (Accounts) Rules, 2014:

Rule 8(1): The Board’s Report shall be prepared based on the stand alone financial statements of the company and 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.

Rule 8(2): The Report of the Board shall contain the particulars of contracts or arrangements with related parties referred to in sub-section (1) of section 188 in the Form AOC-2.

Rule 8(3): The report of the Board shall contain the following information and details, namely:-

(A) Conservation of energy –

(i) the steps taken or impact on conservation of energy;

(ii)      the steps taken by the company for utilising alternate sources of energy;

(iii) the capital investment on energy conservation equipments;

(B) Technology absorption –

(i) the efforts made towards technology absorption;

(ii)      the benefits derived like product improvement, cost reduction, product development or import substitution;

(iii)     in case of imported technology (imported during the last three years reckoned from the beginning of the financial year)-

(a)      the details of technology imported;

(b)      the year of import;

(c)      whether the technology been fully absorbed;

(d) if not fully absorbed, areas where absorption has not taken place, and the reasons thereof; and

(iv)     the expenditure incurred on Research and Development.

(C) Foreign exchange earnings and Outgo –

The Foreign Exchange earned in terms of actual inflows during the year and the Foreign Exchange outgo during the year in terms of actual outflows.

Rule 8(4) Every listed company and every other public company having a paid up share capital of twenty five crore rupees or more calculated at the end of the preceding financial year shall include, in the report by its Board of directors, 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 and individual directors.

Rule 8(5) In addition to the information and details specified in sub-rule 8(4), the report of the Board shall also contain –

(i) the financial summary or highlights;

(ii) the change in the nature of business, if any;

(iii) the details of directors or key managerial personnel who were appointed or have  resigned during the year;

(iv) the names of companies which have become or ceased to be its Subsidiaries, joint ventures or associate companies during the year;

(v) the details relating to deposits, covered under Chapter V of the Act,-

(a) accepted during the year;

(b) remained unpaid or unclaimed as at the end of the year;

(c) 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-

(i) at the beginning of the year;

 (ii) maximum during the year;

(iii) at the end of the year;

(vi) the details of deposits which are not in compliance with the requirements of      Chapter V of the Act;

(vii) 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;

(viii) the details in respect of adequacy of internal financial controls with reference to the Financial Statements.

Apart from the above, certain other sections of the Companies Act, 2013 as well, mandates some disclosures to be made in the Board’s Report which are as under:

S. No.	Section	Disclosure
1.	Section 43 read with Rule 4(4) of the Companies (Share Capital and Debentures) Rules, 2014 [Chaper IV]	Disclose the details of equity shares with differential rights, as per the Rule, in the Board’s Report for the financial year in which the issue of equity shares with differential rights was completed.
2.	Section 54 read with Rule 8(13) of the Companies (Share Capital and Debentures) Rules, 2014	Disclose the details of sweat equity shares, as per the Rule, in the Board’s Report for the year in which the shares are issued.
3.	Section 62(1)(b) read with Rule 12(9) of the Companies (Share Capital and Debentures) Rules, 2014	Disclose details of Employees Stock Option Scheme, as per the Rule.
4.	Proviso to Section 67(3) read with Rule 16(4) of the Companies (Share Capital and Debentures) Rules, 2014	Disclose details of voting rights not exercised directly by the employees in respect of shares to which the scheme for provision of money for purchase of or subscription for shares by employees or by trustees for the benefit of employees, as per the Rule.
5.	Third proviso to Section 131 (not yet enforced)	Disclose detailed reasons for revision of financial statement or report of the Board, in the Board’s Report in the relevant financial year in which such revision is being made.
6.	Section 135(2)	Composition of the Corporate Social Responsibility (CSR) Committee.
7.	Section 135(4)(a) read with Rule 8(1)/9 of the Companies (Accounts) Rules, 2014 [Chapter IX]	Disclose contents of the CSR Policy in the Board’s Report and on the company’s website, if any, as per annexure attached to the Companies (Corporate Social Responsibility Policy) Rules, 2014.
8.	Second proviso to Section 135(5)	If the company fails to spend the requisite amount on CSR activities, the Board shall in its report specify the reasons for not spending the amount.
9.	Section 149(10)	An Independent Director shall hold office for a term upto 5 consecutive years but shall be eligible for re-appointment on passing of special resolution and disclosure of such appointment in the Board’s Report.
10.	Section 177(8) read with Rule 6 of the Companies (Meetings of the Board and its Powers) Rules, 2014 [Chapter XII]	Disclose the composition of an Audit Committee, where applicable, and where the Board has not accepted any recommendation of the Audit Committee, the same shall be disclosed in the report alongwith the reasons therefor.
11.	Proviso to Section 177(10)	Disclose details of establishment of Vigil Mechanism.
12.	Section 178(3)	Nomination and Remuneration Committee shall formulate a policy relating to the remuneration for the directors, KMPs and other employees and such policy shall be disclosed in the Board’s Report.
13.	Section 197(14)	Subject to the provisions of section 197, any director who is in receipt of any commission from the company and who is a managing or whole-time director of the company shall not be disqualified from receiving any remuneration or commission from any holding company or subsidiary company of such company subject to its disclosure by the company in the Board’s report.
14.	Section 204(1)	Every listed company and every public company having a paid-up share capital of fifty crore rupees or more OR turnover of two hundred fifty crore rupees or more, shall annex with its Board’s report, a secretarial audit report, given by a company secretary in practice, in Form MR-3.
15.	Section 204(3)	Explain in full any qualification or observation or other remarks made by the company secretary in practice in his Secretarial Audit Report pursuant to section 204(1).

 CONTENTS TO BE DISCLOSED IN TERMS OF LISTING AGREEMENT

Listed companies shall in addition disclose the following in the Board’s Report in terms of the Listing Agreement

S. No.	Particulars	Clause No. of Listing Agreement	Where
1.	Details of shares lying in the suspense account	5.A.(I).g/ (II).h	In Annual Report
2.	i) In case the shares are delisted, it shall disclose the fact of delisting, together with reasons thereof ii) In case the securities are suspended from trading, explain the reason thereof iii) The name and address of each stock exchange at which the issuer’s securities are listed and also confirm that Annual Listing Fee has been paid to each of the exchange.	32 (iii)b.i to iii	In Director’s Report
3.	If there are material variations between the projections and the actual utilisation/ profitability made by the Company in its prospectus or letter of offer or object/s stated in the explanatory statement to the notice for the general meeting for considering preferential issue of securities, the company shall furnish an explanation therefore in the advertisement and shall also provide the same in the Directors’ Report	43(3)	In Director’s’ Report
4.	Criteria for performance evaluation of Independent Directors, as laid down by the Nomination and Remuneration Committee.	49.II.B.5.b	In Annual Report
5.	The remuneration policy relating to the remuneration of the directors, key managerial personnel & other employees and the evaluation criteria laid down by Nomination & Remuneration Committee	49.IV.B.4	In Annual Report
6.	Details of familiarization programme for Independent Directors	49.II.B.7.b	Web link shall be disclosed in Annual Report
7.	The details of establishment of vigil mechanism (Whistle Blower Policy)	49.II.F.3	In the Board’s Report
8.	Policy for determining ‘material’ subsidiaries	49.V.D	Web link shall be disclosed in Annual Report
9.	Policy on dealing with related party transactions	49.VIII.A.2	In Annual Report
10.	Declaration of CEO regarding compliance by Board members and Senior management personnel	49.II.E.2	In Annual Report
11.	Remuneration of Directors	49.VIII.C.1/2/3/4	In Annual Report
12.	Where in the preparation of financial statements, a treatment different from that prescribed in an Accounting Standard has been followed, the fact shall be disclosed in the financial statements, together with the management’s explanation as to why it believes such alternative treatment is more representative of the true and fair view of the underlying business transaction in the Corporate Governance Report.	49.VIII.B	In the Corporate Governance Report forming part of the Board’s Report.
13.	⇒ All pecuniary relationship or transactions of the non-executive directors vis-a- vis the company shall be disclosed. ⇒ In addition to the disclosures required under the Companies Act, 2013, the following disclosures on the remuneration of directors shall be made in the section on the Corporate Governance of the Annual Report: a. All elements of remuneration package of individual directors summarized under major groups, such as salary, benefits, bonuses, stock options, pension etc. b. Details of fixed component and performance linked incentives, along with the performance criteria. c.  Service contracts, notice period, severance fees. d. Stock option details, if any – and whether issued at a discount as well as the period over which accrued and over which exercisable. ⇒ The company shall publish its criteria of making payments to non-executive directors in its annual report. Alternatively, this may be put up on the company’s website and reference drawn thereto in the annual report. ⇒ The company shall disclose the number of shares and convertible instruments held by non-executive directors in the annual report.	49.VIII.C.1/2/3/4	In the section on the Corporate Governance Report forming part of the Board’s Report.
14.	Contents of Management Discussion and Analysis report	49.VIII.D	As part of the Director’s Report or as an addition thereto forming part of the Annual Report
15.	Disclosure of relationships between directors inter-se	49.E.2	In Annual Report
16.	Report on Corporate Governance	49.X.A/49.XI.B read with Annex. XII & XIII	Separate section in the Annual Report as a part of the Board’s Report
17.	Certificate from either the auditors or practicing company secretaries regarding compliance of conditions of corporate governance	49.XI.A	Certificate to be annexed with the Director’s Report
18.	Business Responsibility Reports in the suggested format	55	As part of Annual Report

 Further, listed companies are also required to disclose the following in terms of the Companies Act, 2013:

→ As per Section 197(12) of the Companies Act, 2013 read with Rule 5 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 [Chapter XIII], 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 given in Rule 5 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 [Chapter XIII].

Rule 5 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 is as under:

Rule 5(1): Every listed company shall disclose in the Board’s report-

(i) the ratio of the remuneration of each director to the median remuneration of the employees of the company for the financial year;

(ii) the percentage increase in remuneration of each director, Chief Financial Officer, Chief Executive Officer, Company Secretary or Manager, if any, in the financial year;

(iii) the percentage increase in the median remuneration of  employees in the financial year;

(iv) the number of permanent employees on the rolls of company;

(v) the explanation on the relationship between average increase in remuneration and company performance;

(vi) comparison of the remuneration of the Key Managerial Personnel  against the performance of the company;

(vii) variations in the market capitalisation of the company, price earnings ratio as at the closing date of the current financial year and previous financial year and percentage increase over decrease in the market quotations of the shares of the company in comparison to the rate at which the company came out with the last public offer in case of listed companies, and in case of unlisted companies, the variations in the net worth of the company as at the close of the current financial year and previous financial year;

(viii) average percentile increase already made in the salaries of employees other than the managerial personnel in the last financial year and its comparison with the percentile increase in the managerial remuneration and justification thereof and point out if there are any exceptional circumstances for increase in the managerial remuneration;

(ix) comparison of the each remuneration of the Key Managerial Personnel against the performance of the company;

(x)  the key parameters for any variable component of remuneration availed by the directors;

(xi) the ratio of the remuneration of the highest paid director to that of the employees who are not directors but receive remuneration in excess of the highest paid director during the year; and

(xii)  affirmation that the remuneration is as per the remuneration policy of the company.

Explanation- For the purposes of this rule-

(i) the expression “median” means the numerical value separating the higher half of a population from the lower half and the median of a finite list of numbers may be found by arranging all the observations from lowest value to highest value and picking the middle one;

(ii) if there is an even number of observations, the median shall be the average of the two middle values.

Rule 5(2): The Board’s report shall include a statement showing the name of every employee of the company, who-

(i) if employed throughout the financial year, was in receipt of remuneration for that year which, in the aggregate, was not less than sixty lakh rupees;

(ii) if employed for a part of the financial year, was in receipt of remuneration for any part of that year, at a rate which, in the aggregate, was not less than five lakh rupees per month;

(iii) if employed throughout the financial year or part thereof, was in receipt of remuneration in that year which, in the aggregate, or as the case may be, at a rate which, in the aggregate, is in excess of that drawn by the managing director or whole-time director or manager and holds by himself or along with his spouse and dependent children, not less than two percent of the equity shares of the company.

Rule 5(3): The statement referred to in sub-rule (2) shall also indicate –

(i)  designation of the employee;

(ii) remuneration received;

(iii) nature of employment, whether contractual or otherwise;

(iv) qualifications and experience of the employee;

(v) date of commencement of employment;

(vi) the age of such employee;

(vii)the last employment held by such employee before joining the company;

(viii) the percentage of equity shares held by the employee in the company within the meaning of clause (iii) of sub-rule (2) above; and

(ix) whether any such employee is a relative of any director or manager of the company and if so, name of such director or manager:

Provided that the particulars of employees posted and working in a country outside India, not being directors or their relatives, drawing more than sixty lakh rupees per financial year or five lakh rupees per month, as the case may be, as may be decided by the Board, shall not be circulated to the members in the Board’s report, but such particulars shall be filed with the Registrar of Companies while filing the financial statement and Board Reports.

Conclusion-  As per Section 134(8) of the Companies Act, 2013, if a company contravenes the provisions of Section 134 relating to Board’s Report, the company shall be punishable with fine which shall not be less than Rs. 50,000 but which may extend to Rs. 25 lacs and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 3 years or with fine which shall not be less than Rs.50,000 but which may extend to Rs.5 lacs, or with both. Thus, it is very important that at the time of framing of the Board’s Report it is essential to keep the various provisions of the Companies Act, 2013 as well as Listing Agreement relating to the disclosure of contents in the Board’s Report in mind, being the minimum contents that should be incorporated therein. However, certain contents which are required to be disclosed in the Board’s Report in terms of two different statutory requirement of law but which are common, needs to be taken care of.

(Author – CS Deepak Banga is a Company Secretary working with Jaypee Group and can be contacted at csdeepakbanga@gmail.com)

Read Other Articles from CS Deepak Banga – Policies and Codes to be framed by Companies