This article is written by M.S.Bushra Tungekar from the University of Mumbai Law Academy. The author in this article attempts at a detailed analysis of requirements under the board report under the Companies Act 2013.
Table of Contents
Introduction
The Companies Act, 2013 is comprehensive legislation governing the incorporation, dissolution, and functioning of the company. The companies Act aims at facilitating the ease of doing business.it focuses on providing transparency by way of enhanced disclosures.
The Act requires certain disclosures to be made by the board of directors. Disclosures regarding annual returns, risk management, finances, evaluations, disclosures relating to corporate social responsibility,and many other similar discourses are to be made.
These disclosures are made in the Board report, therefore the board of directors report is an important means of communication. The report covers both financial and non-financial information.
Provisions pertaining to financial statements and board of directors report are under the Companies Act are set forth under Section 134 of the companies act, 2013. Rule 8 to rule 12 of the Companies (Accounts) Rules 2014.
Furthermore, the Board report of those companies that are listed under the stock exchange must include further information as per the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
Key terms
Before getting into the details, it is essential to understand certain key terms with respect to financial statements and the board’s report.
Financial statement
According to section 2 (40) of the companies Act 2013, a financial statement in relation to a company is a combination of:
- Balance sheet;
- Profit or loss statement (in case of non-profit income and expenditure sheet);
- Cash flow statement;
- A statement showing changes in equity (if applicable); and
- Annexed explanatory notes relating to the above-mentioned documents.
Financial year
Financial year under the Companies Act of 2013 means a year ending on 31st of March of every year as provided under section 2 (41).
The companies Act 2013 mandates the board of directors to attach the board report along with the financial statements and it is to be put before the shareholders at the annual general meeting in accordance with section 129 of the Companies Act.
Preparation of a Financial statement
A financial statement providing for true and fair information regarding the state of affairs of the company. The financial statement is to be prepared in accordance with Schedule III and is to be presented before the shareholders at the Annual general meeting.
Furthermore, section 129 deals with the preparation of financial statements.
The signing of the financial statement
According to Section 134(1) of the companies Act 2013, the financial statement is to be approved by the board of directors. The financial statement includes the consolidated financial statement.
The statement is then signed on behalf of the board by:
- Where a Chairperson of the company has been authorized by the board or by two directors one of which shall be a managing director,
- the Chief Executive Officer,
- the Chief Financial Officer,
- the company secretary of the company, and
- In the case of a one person company, only by one director.
The financial statement is then submitted to the auditor. The auditor shall prepare a report for the same. As per section 134 (2) the auditors’ report shall be attached to the financial statement.
Basis for preparation of Board report
As per Rule 8 of the Companies (account) rules, 2014, the board report is to be prepared on the basis of the standalone financial statements. The report shall also contain a section wherein the performance of subsidiaries, joint venture companies, and associated companies shall be highlighted.
Along with that, it shall also mention the contribution of subsidiaries, joint venture companies, and associated companies to the performance of the company.
Contents of the Board report
The Web address
As per section 134 (3) (a), the earlier requirement of submitting an extract of the annual return under section 92 (3) has been replaced with the submission of the web address.
Number of board meetings
Section 134 (3) clause (b) mandates that the number of board meetings held in the financial year shall be disclosed in the Board report.
Directors responsibility statement
Directors responsibility statement is a crucial disclosure, it is to be made on mainly 3 points:
- Establishment and maintenance of mechanisms ensuring compliance.
- Competency of such mechanisms.
- Effectiveness of such mechanisms.
As per section 134 (5), the directors’ responsibility statement declares the following:
- The applicable accounting standards along with appropriate explanations have been followed while preparing the annual accounts.
- The applied accounting policies have been selected by the directors. Furthermore, the directors have made judgments and estimates that are reasonable and provide for a true and fair position of the company at the end of the financial year.
- Satisfactory care has been taken by the directors for the preservation of the accounts in compliance with the provisions of the Companies Act 2013. The directors have taken due care for the purpose of prevention and detection of fraud.
- The annual accounts prepared by the directors are on the basis of a going concern.
- In the case of a listed company, the directors had laid down sufficient and efficient internal financial controls. Furthermore, these internal financial controls were followed by the company.
Internal financial control for the purpose of directors’ responsibility statement means procedures and guidelines laid down for ensuring the business is being carried on in a proper and orderly manner, detection and prevention of frauds, protection of its assets, and compliance of company rules and regulations.
- A mechanism for the purpose of ensuring compliance with all the applicable provisions of law has been put in place by the directors. Furthermore, such a mechanism is functioning effectively.
Details in respect of fraud
The Companies (Amendment) Act, 2015 included disclosure of frauds that are reported by the auditor under section 143 (12) of the companies Act of 2013.
Section 143(12) read along with Rule 13 Companies (Audit and Auditors) Rules, 2014 , states that during the course of performance of his duties, the auditor of the company believes or has a reason to believe that an offence of fraud has been committed in the company must be reported.
If the amount of which the fraud has been committed is less than INR 1 crore then the offence is to be reported to the board or the audit committee by the auditor of the company. If the amount is more than INR one crore then the said offence is to be reported to the central government.
The following details of the fraud that has been reported by the auditor must be disclosed in the board report:
- Description and nature of fraud reported.
- The estimated amount of fraud.
- If remedial action not taken then the Parties involved.
- In the case of remedial action taken, then the details of such action.
Statement on declaration provided by Independent directors.
Every independent director submits a statement declaring that he meets the criteria mentioned under section 149 sub-section 6 of the companies Act. This statement is provided by him at the first meeting of the board where he participates in the meeting as a director.
The board report shall contain a statement on the declaration given by the independent director.
Nomination and remuneration committee
Companies covered under section 178 subsection (1) of the Act, are required to constitute a nomination and a remuneration committee of three or more non-executive directors. Independent directors on the committee shall not be less than one – half of the committee.
The nomination committee and the remuneration committee shall lay down the criteria for qualification, policy relating to the remuneration of the directors, key personnel management, independence of directors, and recommend the same to the board.
It is necessary that the company policies are disclosed in the board report. It shall also be disclosed on the company website along with its salient features.
Explanation by the board
The board of directors is required to provide their comments and explanations with respect to qualifications, remarks made by the following:
- Auditor of the company in his report.
- Company secretary in the secretarial audit report.
The explanations are supposed to be in detail regarding all the remarks and observations.
Particulars of loans and investments of the company.
The board report must disclose the particulars of the loans given by the company, the investments made by the company and the guarantees given by the company under section 186 of the companies Act of 2013.
The report shall also disclose the purpose for which such a loan or guarantee is given. These particulars are to be mentioned in the financial statement and the reference of such note is to be mentioned in the board report.
Related party transactions
The board report shall contain the particulars of any contracts or arrangements that have been entered into with related parties referred to in section 188 of the Companies Act, 2013.
As per Rule 8 (2) of Companies (Accounts) Rules, 2014, the particulars of related party contracts or arrangements shall be in the Form AOC-2.
Form AOC- 2 can be accessed from here.
Section 188 (2) requires that a justification for entering into a contract or arrangement with a related party is also to be disclosed in the board report.
State of company affairs
The board report must disclose the position of the company affairs, it must underline the situations affecting the company’s business, operational changes, development, and growth of the company, future plans of the company, etc.
Transfer to Reserves
According to section 134(3) clause (j), the board report must disclose the amount that has been transferred to the reserves of the company. Such reserve may be a general reserve, or a capital redemption reserve, or a debenture redemption reserve, or any other reserve created.
Interim dividend
Section 123 of the Companies Act states that dividend can only be declared by the company:
- Out of profits earned by the company for the financial year.
- The money provided by the government for the purpose of declaring a dividend in pursuance of a guarantee given by the government.
Subsection 1 of section 123 further provides that no company shall declare dividends out of its reserves other than free reserves.
However, the board of directors can declare an interim dividend, out of the surplus in the profit and loss account or out of the surplus in the profit.
The interim dividend may be declared during any financial year or at any time between the period from the closure of the financial year till the annual general meeting.
If a company during the current financial year up to the end of the quarter immediately leading to the declaration date has incurred any loss then the dividend shall not be declared more than the average rate of dividends declared by the company. The average rate of dividend paid by the company shall be calculated on the basis of dividend declared by the company during the immediate 3 preceding years.
The board of directors shall recommend the amount of dividends, in the board report. The shareholders may decrease the amount recommended by the board by the amount cannot be increased. Details of such dividends are to be disclosed in the Board report.
Material changes
It is necessary for the board report to disclose any material changes or commitments that have occurred and which have an effect on the financial position of the company.
Such changes may have occurred post the financial statements.
The changes, their effects, and the details of the impact of such changes and commitments should be disclosed in the board report. Further, the details of the cause and remedial measures taken by the board must also be disclosed in the board report.
Conservation of energy, technology, etc
As per rule 8 of the Companies (Accounts) Rules, 2014, the board report shall contain details regarding the conservation of energy, technology absorption by the company, and foreign exchange earnings.
According to the rule, the following matters shall be covered under this part of the board report:
- Conservation of energy
- Impact and measures are undertaken for energy conservation.
- Measures were undertaken for utilizing alternate sources of energy.
- Capital investment by the company in furtherance of energy conservation equipment.
- Technology absorption
- Steps were undertaken towards technology absorption.
- Benefits derived from technology absorption.
- Imported technology which has been absorbed within the last 3 years, the details of such technology.
- Amount of money spent on research and development.
- Foreign exchange earnings
The details of the inflow and outflow of foreign exchange during the year in terms of actual outflow.
This shall not apply to any government company engaging in the production of defense equipment.
Development and risk management.
The board report shall disclose a statement providing for the details of the development and implementation of risk management for the company.
The statement shall include:
- Elements of risk that exist which may threaten the existence of the company in the opinion of the board; and
- The measures to decrease such risks.
Corporate Social Responsibility Initiatives
Rule 9 of the Companies (Accounts) Rules, 2014 mandates disclosure of Corporate Social Responsibility policy of the company. The disclosure is to be made on the company’s website and the board report.
The disclosure shall state the company policy regarding CSR that has been developed and implemented.
Evaluation of board performance
Section 134 read along with rule 8 clause (4) of the Companies (Accounts) Rules, 2014, states that every listed and public company having a paid-up share capital of INR 25 crores or more, the capital is calculated at the end of the previous financial year.
Such a company shall include a statement by the board of directors regarding the manner in which a formal performance evaluation of the board of directors, the committees that have been conducted. The said statement shall be disclosed in the board report.
Additional disclosures as per rule 8(5)
Rule 8 clause 5 provides for further disclosures that are to be included in the board report. These disclosures are in addition to the ones already covered by section 134. The additional disclosures are as follows:
- Highlights or the summary of the financial.
- If any change in nature of the business of the company.
- Details of appointments or resignations of and by directors or key managerial employees.
- A statement regarding the integrity, expertise, and experience of independent directors that have been appointed during the financial year.
- Names of the new addition or deductions to the company’s subsidiaries or ventures or associated companies.
- Details regarding the deposits; details such as:
- Number of deposits accepted during the year
- Deposits that remained unpaid or unclaimed.
- Defaults in repayment of deposits or default in payment of interest.
- Details of those deposits that are not in compliance with Chapter V of the Companies Act.
- Details of important orders passed by the courts or regulators affecting the company and its future operations.
- Details regarding the efficiency of internal financial controls.
- Statement regarding the compliance of the company with the provisions of prevention of Sexual harassment at Workplace (prevention, prohibition, and Redressal ) Act, 2013.
Disclosures relating to employees
According to Rule 5 of (Appointment and Remuneration of Managerial Personnel) Rules, 2014, every listed company shall disclose the following particulars with respect to their employees in the board report:
- The ratio of remuneration paid to a director to that of the median remuneration paid to the employees.
- If any increase in remuneration of directors or chief Executive Officer, Chief Financial Officer, Company Secretary, or Manager.
- Percentage growth in the median remuneration of the employees.
- The number of permanent employees.
- A declaration that remuneration is in accordance with the policy.
Disclosures pertaining to Employee Stock Option and Employee Stock Purchase Schemes shall also be mentioned in the board report. Rule 12(9) of Companies (Share Capital and Debentures) Rules, 2014.
Disclosure of commission
According to section 194 sub-section 14 of the companies Act, the managing director or whole-time director of the company who receives a commission from the company shall not be disqualified from receiving such commission subject to its disclosure in the board report.
Approval of the Board report
The board report must be approved and signed at the Board meeting. Section 134 sub-section (6) of the companies act states that the board report along with its annexures must be signed by:
- The chairperson of the company only if he has been authorized to do so.
- If the chairperson is not authorized then the board report shall be signed by a director and the managing director.
- In case if there is only one director then the report is to be signed by that director.
Attachments to the Financial statement
The financial statement shall have a signed copy of the following attached to it:
- Any notes or annexures.
- Auditors report.
- Board report.
Fine and penalty
In case of non-compliance with the provision of section 134 of the Companies Act and the allied rules, the company shall be liable to a fine of INR 3 lakhs.
Further, the officers who are in default shall also be liable to a fine of INR 50 thousand.
One persCn company
In the case of one person company, the report of the board of directors would mean, a report that contains explanations on every qualification, or remark, or comments, or reservations or disclaimers made by the auditor in his report. (section 134 subsection (4) of the companies Act 2013.) Further subsection 3 of section 134 of the companies Act 2013 is not applicable to a One Person company.
Copies of the Board report and the financial statement
Section 136 of the companies Act states a copy of the financial statement, the board report along with all the annexures such as auditors report, and any other notes that are to be laid before the shareholders at the annual general meeting must be sent to every member of the company.
The said copy must be sent at least 21 days before the meeting. A listed company may also update the consolidated financial statements and its attached documents on the company website.
Annexures to the Board report:
- Related party contracts,arrangements – Form No. AOC-2
- Yearly report on Corporate social responsibility initiatives undertaken by the company.
- Extract of Annual Return – Form No. MGT-9
- Secretarial audit report – Form No MR3 ( applicable only for public companies having
- Having a paid-up share capital of INR 50 crore or more;
- Having a turnover of INR 250 crore or more;
- Companies having loans or borrowing one hundred crore rupees from banks or any financial institutions.
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