This article is written by Shivani Bharti, pursuing a Diploma in Companies Act, Corporate Governance, and SEBI Regulations from Lawsikho.com.

Introduction

The Companies (Amendment) Act, 2020 incorporated certain inclusions to the Companies Act, 2013, one of which is the addition of Section 129A to the Act. These changes were suggested by the Company Law Committee. Prior, the law was that only listed companies were required to submit periodical financial statements annually to the Registrar of Companies, and the private unlisted companies furnished financial data only through their annual statements to the Registrar of Companies. With the new 2020 amendment, a certain class of unlisted companies is also required to prepare financial results periodically, which will be audited or reviewed by an external professional. This provision was enforced by a notification issued in January 2021 by The Ministry of Corporate Affairs. In this article, we will see how unlisted companies submit their periodic financial statements in accordance with the Companies Act. However, before discussing the provision in-depth, it is important that we first understand what is meant by a ‘financial statement.’   

The financial statement

Chapter IX of the Act contains provisions of law that deal with the account of companies, while Section 129 in this chapter makes provision for financial statements. According to Section 129(2), the Board of Directors of a company must submit the financial statement for the financial year at every Annual General Meeting. However, if a company has one or more subsidiaries i.e. associate company and joint venture, then as per Section 129(3), it shall prepare and lay a Consolidated Financial Statement before the Annual General Meeting. The manner of consolidation of accounts of companies has been provided by the Central Government in Rule 6 of the Companies (Accounts) Rules, 2014. Now talking about what constitutes a financial statement; as per Section 2(40) of the Act, ‘Financial Statement’ of a company includes: 

• Balance sheet,
• Profit and loss account or Income and expenditure account (as the case may be),
• Cash flow statement (not required for one person company, a small company, or a dormant company),
• Statement of changes in equity (if applicable), and
• Explanatory note annexed thereto.

It is also noteworthy that there are companies which are not required to comply with the basic legal requirements as stated in the provisions of Section 129(1) of the Act; they are insurance company, banking company, electricity company, or any other class of company for which a form of financial statement has been specified in or under the Companies Act, 2013 governing such class of company. It is also specified in the proviso of Section 129(1) that the financial statements shall not be interpreted as not disclosing a true and fair assessment of the company’s condition of affairs simply because they do not disclose:

• In the case of an insurance company, any matters which are not required to be disclosed by the Insurance Act, 1938, or the Insurance Regulatory and Development Authority Act, 1999;
• In the case of a banking company, any matters which are not required to be disclosed by the Banking Regulation Act, 1949;
• In the case of a company engaged in the generation or supply of electricity, any matters which are not required to be disclosed by the Electricity Act, 2003;
• In the case of a company governed by any other law for the time being in force, any matters which are not required to be disclosed by that law.

Nevertheless, when the requirement to furnish periodical financial results was incorporated for certain unlisted companies with the new 2020 Amendment Act, it’s necessitated that we know what kind of companies come under this ambit. 

Unlisted companies that come under the ambit of Section 129A

We are familiar with the SEBI Regulations requiring listed companies in India to disclose their financial statements every three months. However, the law was lax on big unlisted companies by requiring them to prepare only annual financial statements; and not requiring them to furnish financial statements on a quarterly or half-yearly basis. Nonetheless, with this new provision of Section 129A, even big unlisted entities, the likes of Flipkart or Zomato comes under the ambit of the aforementioned provision. However, it must be mentioned that these unlisted companies which are subject to the new amendment i.e. the criteria for deciding which classes of unlisted companies will have to submit their periodic financial results is reportedly yet to be decided by the Ministry. 

According to the latest report by the Ministry of Corporate Affairs, there are technically 16 lakh registered companies in India, with roughly 11-12 lakh being active. Of which, there are approximately 6,500 publicly traded listed companies, with the remainder being unlisted ones. Therefore, this provision of law is significant especially against the backdrop of instances of financial woes at certain large unlisted entities. Large unlisted companies that are systemically important must now adhere to more strict financial reporting requirements like that followed by the publicly traded companies. This is because in the case of unlisted entities having exposure to banks and financial institutions there is a public interest. As a result, this new provision increases transparency for such companies, and the necessity of quarterly or half-yearly reports is dependent on the extent of exposure to financial institutions and turnover, rather than for all unlisted businesses. Consequently, it is now critical that we first comprehend what Section 129A deals with. 

Periodical financial results

The Amendment of 2020 inserts a new provision, i.e. Section 129A, as per which the Central Government may require such class or classes of unlisted companies as discussed above, or as may be prescribed:

• to prepare the financial results of the company on such periodical basis and in such form as may be prescribed; 
• to obtain approval of the Board of Directors;
• complete audit or limited review of such periodical financial results in such manner as may be prescribed;
• file a copy with the Registrar within a period of thirty days of completion of the relevant period with such fees as may be prescribed. 

As a result of this new section of the Act, in addition to annual financial report submissions, these unlisted companies as prescribed will be required to prepare financial statements on a ‘periodic’ basis in accordance with the Ministry’s Rules. More so, specific unlisted companies must prepare quarterly or biannual financial statements and have them reviewed or audited, according to corporate affairs ministry rules and guidelines. The new law allows the government to define the periodicity of financial statements to be prepared, the format to be followed, and the extent of review practiced by the auditor. This is done insofar as to improve the corporate governance of these classes or classes of unlisted companies.

Responsibility for furnishing financial statements

The Act places a certain responsibility on persons or members of a company for the compliance requirements of the provisions of Section 129 of the Companies Act, 2013. They can be the managing director, the chief financial officer, the whole-time director in charge of finance, or any other person charged by the board of directors to comply with Section 129. However, in the absence of any of these members, all the directors of that company shall be punishable in case of non-compliance with the requirements. 

Adding on to that, if a company contravenes the provisions of Section 129, the relevant aforementioned responsible persons shall be punishable with imprisonment up to 1 year, or fine of minimum rupees fifty thousand or maximum up to five lakh rupees, or both including imprisonment coupled with the fine.

What does this new provision entail?  

Quarterly financial reporting entails the revelation of more up-to-date financial information about the company, which the government feels is necessary for stakeholders to take timely action in the event that the fortunes or governance of a systemically significant entity deteriorates. It is common practice in the corporate sector to keep the holding company unlisted and list individual businesses, even at huge conglomerates. The government does not want to take away this flexibility, but it wants the companies to be more transparent about the unlisted holding entity’s operations. The ministry is mandating more transparency in corporate ownership, investments, and decision-making, as well as requiring directors on company boards to know their customers. It has also made steps to ensure that independent directors have the necessary qualifications and expertise to serve on the board.

Conclusion

It is not implausible to assume that compliance with this new law will enable early fraud detection and ensure statutory compliance. With the law being operative, the Registrar of Companies will have to mandatorily analyse the results filed with them which in otherwise cases had become just a filing exercise. Owing to this fact, it is pertinent to note that governance is not only required for listed entities but also for equally sized large unlisted entities. This is due to the fact that many unlisted companies have grown in size and have a broader stakeholder engagement including employees, lenders, suppliers, investors, etc. 

As a result, the government aims to make financial results reporting more frequent in order to regulate such massive unlisted enterprises. More importantly, when financial statements following the end of the financial year are submitted annually rather than on a periodical basis, it loses their relevance for timely review and intervention in the public interest whenever necessary; as well as the chances of discovering frauds or financial irregularities is also mitigated. Therefore, it is important that the financial results should be accessible for public inspection and scrutiny once they have been submitted with the Registrar of Companies.

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