This article has been written by Utsav Pachouri, pursuing a Diploma in Advanced Corporate Taxation and Tax Litigation from LawSikho and edited by Shashwat Kaushik.
It has been published by Rachit Garg.
Table of Contents
A statement is given by the directors of a company that states their responsibilities, obligations, and duties following the respective laws and regulations. The directors in this statement assure the shareholders, auditors, creditors, and other stakeholders of the company that they have acted in the best interest of the company and have maintained good corporate governance, accountability, and transparency standards.
In the Indian Companies Act of 2013, it is a legal requirement for directors’ responsibility statements. The Indian Companies Act of 1956 was replaced with the Indian Companies Act of 2013. It introduced several changes and reforms in the Code that improved the ease of doing business, protected minority shareholders’ interests, enhanced corporate social responsibilities, and prevented fraud.
In this article, we will examine the concept and significance of a director’s responsibility statement, as well as the challenges and risks directors might face when preparing and presenting the statement. We are also going to discuss the legal provisions and principles that govern director’s responsibility statements under the Indian Companies Act of 2013 and other relevant laws and regulations in India.
Obligations and risks associated with directors’ responsibility statement
It is a tough task for a company’s directors to prepare and present the director’s responsibility statement, which is full of various challenges and risks. These factors can significantly affect the quality and credibility of the directors’ responsibility statement, as well as the directors’ reputation and potential liabilities. We will discuss the following obligations and risks of the directors’ responsibility statement.
- Compliance with accounting standards and policies: Directors should ensure that the company’s financial statements comply with relevant accounting standards and principles. They must provide adequate explanations of any significant differences between these standards. These standards and principles are formed based on recording, measuring, reporting, and disclosing financial transactions and events. The correct application of these standards and principles ensures that the financial statements accurately describe the financial results and condition of the company.
- Maintaining appropriate accounting and internal controls: Directors are bound to maintain the financial statements and records of accounting controls. These records usually contain the accounts, ledgers, invoices, contacts, and other financial documents that are used to record the company’s accounting. Internal control documents include policies and procedures of the company’s members. These documents are used for the checks that guarantee the accuracy and completeness of accounting records. These documents protect and control the assets from being misused.
- Disclosure of important events: Directors are bound to disclose major events or transactions that have taken place during the financial year, as they might impact the company’s operations. These events may include the change of share capital, mergers, divestments, joint ventures, litigation, and other major liabilities. There must be transparent disclosure from the director, which plays a huge role in gaining the trust of stakeholders. Disclosure of important events also affects the financial health of the company.
- Reporting on subsidiaries, affiliates, and joint ventures: The board of directors has to report the performance and financial position of subsidiaries, associates, and joint ventures in the financial statements of the company. These consolidated statements in the company’s financial statement provide a comprehensive view of the company’s financial standing and performance as a single entity.
Possible liabilities and consequences which directors may face
Directors may face possible consequences and liabilities if they make any false, misleading, or incomplete statements or fail to provide the required information, which includes the following:
- Civil or criminal penalties: Directors may face penalties imposed by the courts and other respective regulatory authorities of the country. These penalties can be either civil or criminal, depending on the violation. Penalties can range from fines and disqualification to imprisonment, depending on the violation committed.
- Damage to the reputation: If there is a violation, it can lead to the loss of reputation, trust, and confidence among investors, customers, suppliers, employees, and other partners. Such reputational damage can have a lasting impact on the director’s reputation.
As we have discussed in this section about obligations and risks that are associated with the director, as we move past the practical challenges and potential risks faced by the directors, it is important to look at the legal framework that supports the director’s responsibilities.
Legal provisions and principles
Now, we will discuss the legal provisions under the Indian Companies Act of 2013 that deal with the director’s responsibility statement in India. We will also discuss the other relevant laws related to it. These laws and regulations play a huge role in ensuring accountability and transparency in the workings of the country.
- Section 134(3) of the Companies Act of 2013: This section defines the specific content and format requirements of the directors’ responsibility statement and it also assures its validity.
- Section 134(5) of the Companies Act of 2013: This section defines the responsibilities that the directors’ responsibility statement must address. This provision of the statute plays a huge role in ensuring disclosure.
- Section 134 (6) of the Companies Act of 2013: This section defines the precise procedure for approval of the directors’ responsibility statement and improves authenticity.
- Section 134(8) of the Company Act of 2013: This section makes it mandatory to file and publicise the director’s responsibility statement along with the company’s annual report. This provision helps to build transparency.
- Section 447 of the Companies Act, 2013: This is a critical section of the statute that defines fraud, imposes penalties for fraudulent activities committed in the company, and promotes ethical conduct.
- Section 448 of the Companies Act of 2013: This section prohibits publishing false statements in the company’s documents. It helps improve truthfulness and commitment to accuracy.
- Section 449 of the Companies Act of 2013: This section penalises the recording of false statements made under the company’s document. It reinforces the seriousness of accurate reporting.
Now, these are some other relevant laws that may apply depending on the company’s operations, in addition to the Companies Act of 2013. These laws are as follows:
- The Securities and Exchange Board of India (SEBI) Regulations Act, 1992: The S.E.B.I. Regulations Act of 1992 mandates that every listed company should comply with disclosure and corporate norms that are prescribed under the SEBI Regulations Act of 1992.
- The Banking Regulation Act, 1949: The Banking Regulations Act of 1949 mandates that every banking company should comply with the accounting standards that are set by RBI and shall maintain a balance sheet of profits and loss account along with the director’s report and auditor’s report.
- The Income Tax Act, 1961: The Income Tax Act of 1961 imposes many joint liabilities on every director of the company for the recovery of tax. The directors of the company are responsible for signing and verifying ITR, and can be held liable if they attest to any misleading or false information.
- The Central Goods and Services Tax Act (GST), 2017: The Central Goods and Services Tax Act of 2017 mandates that every director must comply with this Act or any rules and notifications issued.
- The Customs Act, 1962: The Customs Act of 1962 requires every importer or exporter of goods to comply with this act. The directors of a company engaged in importing or exporting are responsible for ensuring compliance with the Customs Act of 1962.
Now, several fundamental legal principles help in the interpretation and application of the above provisions. These principles are as follows:
- Principle of Substance: This principle speaks about how companies should record their financial statements as an economic substance rather than being recorded in legal form. This principle helps to avoid the misrepresentation and manipulation of financial statements.
- Principle of Prudence: This principle speaks about how companies should consider uncertainties while forming a financial statement. This principle ensures that companies should not overstate assets and income and understate expenses and liabilities.
- Principle of Consistency: This principle speaks about how companies should maintain stability and comparability while forming financial reports. This principle ensures the application of accounting policies and methods, barring valid reasons for change.
- Principle of Disclosure: This principle, as it sounds from its name, makes it mandatory for a company to do transparent reporting that provides users with sufficient relevant information to understand the true financial position and performance of the company.
Now, we will see some real-life examples of a director’s responsibility statement in Indian companies, as we have understood all the legal provisions and principles regarding the director’s responsibility statement. This will help us to deeply understand the best practises and challenges in financial reporting.
Examples and cases
Now, in this section, we will discuss the examples and cases of many companies in India that deal with director’s responsibility statements. We will analyse and compare their data, format, and quality on both practises and challenges as the following:
Deneb Investments Limited
Deneb Investments Limited is a publicly listed company that is involved in business in various sectors, which are worthy of the illustration in this article. They published their director’s responsibility statement, which was featured on page 43 of their annual report for the year that ended on March 31, 2021. They published a comprehensive coverage of the director’s responsibility statement in their annual report. They have mentioned all the required outlines in Section 134(5) of the Companies Act of 2013. Also, the responsibility statement was attested and certified by the CEO and CFO of the company, which states that they have reviewed the financial statement and there is no untrue or misleading information. This statement clarifies and completes the underscored commitment to transparency.
HAT Group is a private company that specialises in professional services. They published their director’s responsibility statement, which was featured in their financial annual report for the year that ended on December 31, 2020. However, their director’s responsibility statement only addressed the obligations of the directors, which are specified under Section 134(3) of the Companies Act of 2013, which concerns the director’s responsibility for preparing the financial statement concerning the applicable laws and regulations. This director’s responsibility statement omits the elements that are mentioned under Section 134(5) of the Companies Act of 2013. This Act raises the question about the completeness of the director’s responsibility statement for the Hat Group.
Indian Law Offices LLP
Now, for the last example in this section of the article, we will look at Indian Law Offices LLP, which is a limited liability partnership registered in India. Indian Law Offices LLP is a specialist in legal services. They released their director’s responsibility statement, which can be easily found on page 1 of their financial statement for the year ending March 31, 2020. This director’s responsibility statement marks all the requirements of Section 34(2) of the Limited Liability Partnership Act of 2008 and closely marks all the requirements under Section 134 (5) of the Companies Act of 2013. Additionally, they have also included a declaration from the partners that affirms their responsibilities under the Limited Liability Partnership Act of 2008. The statement’s details and accuracy are of high-standard quality.
As above, we have discussed the practises and challenges that we may face in real-life events while complying with the director’s responsibility statement. We have explored the directions for crafting a director’s responsibility statement. Additionally, we have explored the statements that have come under scrutiny or praise from regulators, auditors, and stakeholders. By doing that, we aim to identify best practises and standards while complying with the corporate world’s critical aspects.
In conclusion, the director’s regulation statement plays a huge role in the corporate world. It helps in reflecting the director’s commitment to transparency and accountability towards the legal requirements of the company. In this article, we have discussed various ideas revolving around the responsibility statement, from its significance to it’s challenges and risks that we may face while dealing with it in real life.
We have looked into the legal provisions that deal with a director’s responsibility statement and also mentioned the essential role of complying with these rules and regulations to make a director’s responsibility statement valid. These legal provisions are mentioned under the Indian Companies Act of 2013 and other relevant rules and regulations of the country. These laws provide us with deep knowledge about the framework for accurate reporting under the responsibility statement. They also underscore the consequences for the directors in cases of omissions and inaccuracies.
In addition, we have also looked at real-life examples of the director’s responsibility statement. These examples were taken from various companies in India, which underscores different levels of best practises in director’s reporting.
In the end, we have discussed the legal provisions that guide us in the application and interpretation of the director’s responsibility statement. That shows how these statements include substance over form, consistency, and disclosure. These principles play a huge role in serving the ethical conduct of the directors, ensuring that the financial statement of the company reflects accurate data on the company’s financial position.
In conclusion, the director’s liability statement is not limited to the compliance requirement but is also a critical tool that is used for maintaining transparency, accountability, and ethical conduct within the company. It builds the trust of the company’s stakeholders and safeguards the integrity of financial reports. To understand the complexities and challenges while drafting these responsibility statements effectively, directors must remain vigilant, follow legal requirements, and embrace best practises in the corporate world. At last, a well-made director’s responsibility statement reflects the ethical and responsible conduct of the company.
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