This article is written by Monesh Mehndiratta, a law student at Graphic Era Hill University, Dehradun. It explains the concept of financial statements and the process of approval, along with board reports given under Section 134 of the Companies Act, 2013. It further provides the penalty mentioned in the said Section in case of any contravention.
This article has been published by Sneha Mahawar.
Have you ever calculated the amount that you spend in a month or year? Do you keep a record of your savings?
I am sure most of you must be doing so.
If you are earning, you must be in the habit of keeping a record of all your expenses and savings, and if you are not earning, you must have seen your parents doing the same. This is done to keep a check on the amount of money expended and saved so that if there is an unnecessary expense, it can be cut down in the future. Similarly, companies and ventures keep a record of their finances and accounts. They are required to prepare a financial statement annually in which all the expenses and other necessary information is given.
Apart from this, a company is also required to prepare various reports like audit reports, board reports, etc., which consist of different kinds of necessary information. Out of these board reports, one is attached with the financial statement. It consists of the number of meetings conducted in that particular year, the amount spent on technology absorption, conservation of energy, the amount proposed to be transferred into reserves, the initiatives taken by companies for fulfilling corporate social responsibility, etc.
The Companies Act, 2013 specifically deals with the functioning of a company, its registration, meetings, managerial personnel, etc in detail. In the article, we will study Section 134 of the Companies Act, 2013, in detail, which deals with financial statements and board reports. The Section prescribes the manner in which a financial statement is to be approved and also provides the contents of a report made by the board. It further explains the contents of the board report along with the manner of publication of the financial statement along with the provision of penalty as inserted by the Companies (Amendment) Act, 2020. The article also compares Section 134 of the present Act and that of the 1956 Act. It finally concludes with some recent case laws on the topic.
Financial statements under the Companies Act, 2013
The financial statement of any company or business provides insights into the affairs of the company and its position and status. It helps in understanding the progress and growth of a company. Every company must prepare its financial statement at the end of every financial year, according to Section 129 of the Act. The board of directors must present the financial statement before the annual general meeting. The approval of the financial statement along with necessary attachments is provided under Section 134 of the Act.
Information disclosed in the financial statement
Schedule III of the Act gives the manner in which the information disclosed in the financial statement i.e., the balance sheet, statement of profits and losses, and consolidated financial statements are prepared. If a company has any subsidiaries or joint ventures, then it must prepare a consolidated financial statement at the end of every financial year. According to Section 2(40) of the Act, a financial statement consists of the following:
This statement shows the financial position of the company at the end of a financial year. It includes details of the company’s assets, liabilities, and equity.
Profit and Loss Account
This statement shows the company’s financial performance during the financial year. It includes details of the company’s revenues, expenses, and profits or losses.
Cash Flow Statement
This statement shows the inflow and outflow of cash during the financial year. It helps in assessing the liquidity and solvency of the company.
Notes to Accounts
These are additional disclosures that provide explanations of specific line items, accounting policies, and other relevant information. The notes to accounts help in providing more clarity and transparency in the financial statements.
Filing and publication of financial statements
The provisions relating to the filing and publication of financial statements are given by the SEBI (Listing Obligations and Disclosure) Regulations, 2015. All the requirements given in the regulations of 2015 for this purpose are explained below.
Notice of the board meeting
The first and foremost requirement is that the Stock Exchange be given five days’ notice regarding the board meeting of the company that is listed there. It must also disclose that the quarterly, half-yearly and annual financial results will be considered and discussed in such a meeting.
All the financial results must be prepared based on various accounting policies adopted by the company. It must also comply with the accounting standards prescribed by the central government as given under Section 133 of the Act. Apart from this, it should also disclose the details of assets and liabilities as recorded at the end of the half year.
The quarterly or annual financial results may be audited or unaudited. If unaudited results are submitted, it will be reviewed by the statutory auditors, who will submit a limited review report. However, audit reports will be submitted in the case of audited financial results.
The time limit for submitting a quarterly financial result is 45 days from the end of the quarter other than the last quarter. Similarly, unaudited or audited financial results for a half-year can be submitted within 45 days from the end of that half-year. However, the audited financial results of a particular financial year can be submitted within 60 days from the end of the year.
Approval and authentication
The financial results must be approved by the board of directors and certified by the Chief financial officer and Chief executive officer that they do not contain any false information that may be misleading. Another requirement is that it must be signed by the chairperson or the managing director or a whole-time director, or any other director who is authorised to do so.
The company is required to publish a notice in the newspaper that specifies the date of the meeting of the board at which the financial results will be discussed in detail. These financial results, if approved, must be published within 48 hours from the time the meeting is concluded.
Requirement of additional information
Apart from the above-mentioned information, the financial result must also contain the following information:
- Any changes in credit rating.
- Available assets cover.
- Ratio of debt to equity.
- Previous due date for payment of interest or dividend for non-convertible redeemable preference shares along with the next date on which such payment can be done.
- Ratio of debt service coverage.
- Ratio of interest to the service coverage.
- Quantity and value of redeemable preference shares.
- Redemption reserve for capital or debentures
- Net worth of the company.
- Net profit made by the company after paying the tax.
- Money earned by the company on every share.
A board report is essential for evaluating the performance of a company in a particular financial year. It helps the shareholders and other stakeholders determine whether the company is making profits and whether this will lead to growth and success in the future. Section 134(3) of the Act provides that a report by the Board of Directors must be attached along with the financial statement. Section 134(6) further requires that the report must be signed by:
- The Chairman of the board and if he is not authorised to do so then it must be signed by at least two directors in which one must be a Managing Director.
- However, in case there is only one director, he will have to sign it.
Elements of Section 134 of the Companies Act, 2013
Section 134 of the Act deals with important reports and documents required in a company like financial statements, board reports, directors’ responsibility statement, etc. Firstly, it prescribes the manner in which the financial statements are to be approved. The Section further states that before the directors sign the statement it must be approved by the board of directors. Also, it provides that the auditor’s report must be attached with it. Apart from this, a board report is also required to be attached. The section also provides the list of content that has to be mentioned in the report. However, according to the first proviso, if any of the information or content is already mentioned in the financial statement then there is no need to repeat the same in the report. The second proviso further provides that in case the details of policy implemented by the directors during the financial year has been given on the website of the company, it will be considered as successful compliance of the provisions of the section. The policy must be mentioned in brief in the board’s report along with the web address where its details are given.
Section 134(3A) gives power to the Central Government that they may prescribe an abridged board report in case of one person company in order to comply with the provisions of this section. This report will contain comments made by the board on every qualification, reservation or any adverse remark made by the auditor. Section 134(6) states that any annexure attached to the board report must be signed by the chairperson of the company, if he is no authorised to do so then at least two directors, one of them being a managing director, must sign the report or if there is only director then he must sign it.
To get a better understanding of the Section, its elements are discussed below.
Approval of financial statements
Section 134(1) of the Act prescribes the manner of approval of financial statements. It provides that every financial statement, including consolidated financial statements, must be:
- Approved by the board of directors and signed by the chairperson of the company if he authorised to do so or by two directors in, of whom one must be the Managing Director and Chief Executive Officer, if he is the director along with the Chief Financial Officer and the Company Secretary of the company. It must be further submitted to the auditor for his report.
- In case of one person company, the director will have to sign the statement and submit it to the auditor for his report.
- If a company is related to the banking sector, then the balance sheet or accounts of profits and losses must also comply with the provisions of the Banking Regulation Act, 1949.
- Section 134(2) provides that the auditors’ report must be attached along with the financial statement.
Circulation and publication of financial statements
According to Section 134(7), a signed copy of a financial statement or consolidated financial statement will be circulated and published along with any notes that are attached to such statements, auditor’s reports, and board reports. The Act also provides that these copies will also be sent to all the members of the company 21 days before the annual general meeting. Apart from the members, it must be sent to all the trustees and debenture holders of the company as they are a part of the company and must know about its financial condition, audits and progress in a particular year, as discussed under Section 136.
Contents of a Board’s Report
Section 134(3) of the Act mentions the list of information that board reports will contain.
- Web address where the annual return has been placed according to Section 92(3) of the Act which requires an extract of it to be placed in the report.
- Number of board meetings conducted so far.
- Statement regarding directors’ responsibilities which also contains details of fraud reported by the auditor as given under Section 143(12) of the Act except for those which are reportable to the government.
- Declaration by independent directors under Section 149 of the Act.
- Policy of the company regarding the appointment of directors, their salary, qualifications, and other matters as per Section 178 of the Act.
- Explanation of any qualification, reservation, or adverse remark made by the auditor in the report or by the company secretary in the audit report.
- Details of loans, investments, or guarantees according to Section 186 of the Act.
- Details of contracts and arrangements with the parties regarding matters given under Section 188 of the Act in the prescribed form.
- Conditions regarding the affairs of the company.
- Any material changes or commitments that might affect the financial condition of the company. For example, if there has been any changes in the business or dealings of a company it can affect its financial condition and so, must be disclosed in the report.
- Amount proposed to be transferred to reserves of the company.
- Amount recommended to be paid through dividends of the company.
- Details of steps taken for energy conservation, absorption of technology, and earnings from foreign exchange.
- Details of the company’s risk management policy, its implementation, and its development.
- Initiatives taken by companies towards corporate social responsibility during a year.
- If the company is a public company with paid-up share capital, then the report must also disclose details of the performance of the board and its committees, along with the performance of individual directors.
Reserves and dividends
According to Section 134(3)(j) and Section 134(3)(k), the board report must contain the amount that is proposed to be transferred to reserves and the amount recommended to be paid as a dividend, respectively. It must be noted that the recommendation of the board regarding the amount to be paid as a dividend is not final and might be rejected by the shareholders.
However, they cannot increase the amount recommended but can only reduce it to the extent of nullity. On the contrary, they can increase the amount that is to be transferred to the reserves. In the case of Southern Roadways Ltd. v. CIT (1981), it was held that though the board of directors has the ultimate authority to make recommendations, its decision cannot be final.
Information disclosed in the report
If the above-mentioned information is already disclosed in the financial statement, it need not be repeated again in the board’s report. Section 134(3A) also gives power to the central government so that in the case of a one-person company or small company, a short board’s report can be given if prescribed by the central government.
Details of conservation of energy, technology absorption and foreign exchange
According to Rule 8 of the Companies (Accounts) Rules, 2014, and Section 134(3)(m) of the Act, the report must contain details of efforts made by the company to conserve energy and the equipment used in this process. It must disclose alternate sources of energy and investments made in this regard. It must also highlight the steps taken by the company towards technology absorption and the benefits arising out of such steps, which include cost reduction, product improvement, development, etc. It is also under an obligation to disclose the foreign exchange earned during the financial year. However, companies dealing with the manufacturing of equipment used in defence are exempted from such disclosure.
The rule further provides that if the company is listed or a public company with paid up share capital of 25 crore rupees or more, which is calculated at the end of a financial year, it must also give a statement describing the manner in which the formal annual evaluation has been made by the board regarding its performance along with that of committed and individual directors.
Contracts and arrangements
All the details regarding the contracts, arrangements, and transactions with the parties as given under Section 188 of the Act must be disclosed separately in the report. The rules of 2014 prescribe Form AOC-2 for such disclosure.
Director’s appointment and remuneration policy
According to Section 134(3)(e), the report must contain particulars and details of the policy adopted by the company for the appointment of directors. It should also contain the criteria for their selection and the qualifications required in this regard. All the public companies with paid-up share capital will also disclose the manner in which the annual performance of the board has been evaluated. This is given under Rule 8 of the Companies (Accounts) Rules, 2014.
Number of board meetings
The board report must also disclose the total number of board meetings conducted during that particular year, along with meetings attended by the directors.
Report on Corporate social responsibility
Section 134(3)(o) of the Act requires that the policies and initiatives adopted by the company for fulfilling corporate social responsibility be disclosed in the board report. According to Section 135 of the Act, companies having a net worth of rupees five hundred crores or more, a turnover of one thousand crore rupees or more, or a net profit of five crore rupees or more during the preceding financial year, must constitute a corporate social responsibility committee of the board, which consists of three or more directors and at least one independent director.
Composition of Audit Committee
As per Section 177, the listed companies have to constitute an audit committee, which makes recommendations to the board on matters regarding the appointment of auditors, internal financial controls, etc. The composition of this committee must be disclosed in the board report, along with any recommendations made by the committee that have not been accepted by the board.
Other additional information
According to Rule 8(5) of the Companies (Accounts) Rules, 2014, the following are some other information that must be disclosed additionally in the report:
- Financial highlights.
- Any change in the nature of business or dealings of the company.
- Details of directors and other managerial personnel that were appointed or have resigned in the particular year.
- Companies that have ceased to be its subsidiaries, joint ventures, or associate companies.
- Details of deposits that are not paid or remain unclaimed.
- Any order of the court or tribunal that affects or concerns the status of the company.
- Details of internal financial controls.
Directors’ Responsibility Statement
According to Section 134(3)(c) and Section 134(5) of the Act, directors’ reports must contain statements regarding the responsibility of directors. It contains the following particulars:
- Accounting standards that have been followed while preparing the annual accounts as given under Section 134(5)(a). If these are not followed properly, then the report must contain an explanation as to why they were not followed.
- Policies adopted by the board for the growth and profit of the company and whether those policies have been applied fairly and consistently. It must also contain judgments and estimates made by the directors in order to give a true and fair view of the company’s affairs along with its profit and loss at the end of the financial year.
- Whether proper care has been taken for maintaining records of accounts. It also states the directors’ responsibility to safeguard the company’s assets and prevent frauds.
- Adequate internal financial controls adopted by the directors in case of listed companies and whether they are operating effectively.
- Annual accounts made by the directors based on a going concern.
- Other systems or mechanisms that were laid down in order to comply with the provisions of the Act.
According to guidelines of Securities and Exchange Board of India on employees’ stock option scheme, the report also contains few of the following:
- Number of shares approved by the shareholders.
- Pricing formula.
- Options that are granted, vested, exercised, forfeited, etc. along with the total number of options in force and options given to senior managerial personnel.
- Diluted earnings per share.
Section 134(2) requires that the auditor’s report must be attached with the financial statement of a company. It is a report made by the auditors expressing their views on whether the financial statement of the company has complied with all the provisions and there are no ambiguities or misstatements. Section 143 of the Act provides the duties of an auditor. According to the Section, an auditor can access the books of accounts or vouchers of the company at any time and at any place, even in the registrar’s office. The auditor will have to perform the duties mentioned therein. For example:
- He has to examine the transactions of the companies.
- Whether proper accounts of the company have been made.
- Whether the financial statement complies with all the standards and required provisions.
- Disqualification of directors, if any.
- Whether the company has required internal financial controls and so on.
Penalty in contravention of Section 134 of the Act
If a company contravenes the provisions of Section 134, all the officers at fault will be liable along with the company. The punishment for the company consists of a penalty of three lakh rupees. Any officer at fault will be liable to pay fifty thousand rupees. This penalty is given under Section 134(8) of the Act.
Comparison with Companies Act, 1956
Section 215 of the Companies Act, 1956, dealt with the authentication of balance sheets along with profits and losses. It provided that the balance sheet must be signed by the people mentioned in Section 29 of the Banking Companies Act, 1949, if it is a banking company, or else by the manager or secretary, or by at least two directors, of which one must be a managing director. It also required that the same must be first approved by the board. On the other hand, Section 134 of the 2013 Act deals with financial statements, its approval, board’s report etc. The manner of approval in the current Act has already been discussed above.
Further, Section 216 of the 1956 Act required that the profit and loss account will be annexed to the balance sheet along with the auditor’s report. Section 217 dealt with the board’s report to be attached along with it and contents to be mentioned. However, all this is mentioned under one section in the 2013 Act.
In the case of Nimain Charan Biswal v. Registrar of Companies, Gujarat (2018), certain criminal cases were filed against the company and the petitioner, out of which one pertained to violations of provisions of Section 217 of the 1956 Act read with Section 134 of the 2013 Act. It was alleged that the company did not attach the board’s report with a financial statement in a proper manner. No information regarding the conservation of energy and other material facts related to the nature of the business was disclosed. Moreover, no timely reply was submitted by the directors when asked by the registrar. It was contended that they are liable for penal action.
The petitioner in this case appeared as a party in person and contended that he is no longer connected with the company and has no relation with it. He was appointed for only three months, after which his position became vacant. He did not attend any meetings during his tenure, and so, according to the 1956 Act, his position was automatically vacated. He also gave a formal resignation regarding the same and did not do anything wrong during his tenure. The court in this case observed that the criminal cases filed by the respondent against the company have already been investigated by the Securities and Exchange Board of India (SEBI), and any further prosecution for the same will violate Article 20(2) of the Constitution of India. Moreover, they failed to prove that the petitioner did anything in contravention of the provisions of the Act during his tenure. As a result, the court ordered to quash the cases filed by the registrar of the company to prevent abuse of the Court proceedings.
Rubberking Tyres India Private Limited, In Re (2017)
Facts of the case
In this case, an application was filed by the Rubber King tyres India Pvt. Ltd. and its directors to the registrar admitting the violation of Section 134(3)(o) for not disclosing appropriate reasons for not spending required money on corporate social responsibility activities during 2014-2015 as this is punishable under Section 134(8) of the Act. The Registrar forwarded the application to the tribunal along with his own report which disclosed that no similar offence has been committed or compounded by the company or its directors in the last 3 years.
Issue involved in the case
Whether the company will be allowed to compound for the offence committed in this case
Judgement of the court
It was observed and indicated by the application that the company was unaware of the corporate social responsibility activities, and so it failed to mention the details regarding the same in the report by mistake. The application further stated that the directors of the company have been involved in the welfare activities for society in their personal capacity in the past years. It was further observed that according to Section 441 of the Act, the tribunal is empowered to compound the offence committed by the company or its directors only if it’s punishable with only fine. However, in this case, the tribunal was not empowered to compound the offence committed by directors but the company. The company was ordered to pay one lakh rupees which were considered sufficient for compounding the violation of Section 134(3)(o) of the Act.
CME India Technology and Support Services, In Re (2018)
Facts of the case
In this case, the Company Secretary made an application of compounding on behalf of the company wherein it was admitted that the company has violated the provisions of Section 134 of the Act. While submitting their financial statement and board’s report they disclosed information that meant to be true during its preparation but were not implemented properly. As a result, the board of directors decided to admit the violations upon reading the report of due diligence of Labour Law compliances. In order to make good the non-compliance, the board of directors decided to compound and pay the penalty for the same. However, an application was made by the Company Secretary.
Issues involved in the case
Should compounding be allowed in this case
Judgment of the court
The registrar observed that the company has suo moto admitted its fault and the violations of provision Section 134 of the Act made therein. But the application for compounding will be decided on merits. After considering the application and other submissions made by the Company Secretary, the following compounding fee was levied upon the company and its directors according to Section 134(8):
- Company – Rs. 1,00,000/-
- Director – Rs. 50,000/-
- Three Erstwhile Directors – Rs. 50,000/- to be paid by each.
- Company Secretary – Rs. 50,000/-
After the remission of the required compounding fee, the offence was compounded.
Intermarket India Pvt. Ltd. v. N/A (2019)
Facts of the case
In this case, the company failed to comply with the provisions of Section 134(3)(o) and Section 135 according to which at least 2% of the average net profit of the company in the immediately preceding financial years must be spent in the corporate social responsibility activities and this has to be ensured by the board of the directors. If the company failed to do so, appropriate reasons must be specified in the board’s report according to Section 134(3)(o) of the Act. As a result, a show cause notice was served on the company and they filed an application for the compounding.
Issues involved in the case
Whether the compounding of offence committed be allowed in this case
Judgement of the court
It was observed that the company and its directors have violated the provisions of Section 134(3)(o) which is punishable under Section 134(8). Further, the application mentioned that the violation was bonafide and done without malafide intentions. A compounding fee of rupees five lakh rupees and seventy five thousand rupees was imposed on the company and each director respectively.
Aaditya Kumar Bhandari v. Serious Fraud Investigation Office (2020)
Facts of the case
In this case, a complaint was filed against the petitioner alleging that he, being a whole time director of Rocklands Hospital Limited (RHL), which was later overtaken by VPS Healthcare Pvt. Ltd., was not a signatory to the financial statement of the company and thus in violation of Section 134 of the Act. The position of director was given to him after the demise of the founder of the company owing to their close relations. The Serious Fraud Investigation Officer (SFIO) admitted that the petitioner was fulfilling his duties of being a director and was not made liable for the false statements in the balance sheet of the company. As a result, a complaint was filed against him. Upon investigation, six instances of fraud were found, which also included manipulation of the balance sheet of the company. The petitioner was arrested for the same.
Issues involved in the case
Whether the accused is liable in this case
Judgment of the court
The petitioner’s side, in this case, argued that he was aware of the transaction between VPS Healthcare Pvt. Ltd. and RHL, but no complaint of cheating or misappropriation of funds has been filed against him by any bank till date. It was further observed that the SFIO itself admitted that he was not functioning as a decision making director and was not a signatory to the financial statement of the company.
The court in this case observed that there is no doubt that the investigation is complete and the case has been filed. However, because of lockdowns in the entire country due to COVID-19, it was considered that the proceedings may be delayed. On this point, the court also observed that there is no risk of tampering with the evidence from the side of the petitioner, and so he can be released on bail. Thus, the petitioner in this case was released on bail after furnishing a personal bond of Rs. 50,000.
M/S Dalmia Bharat Ltd. v. the Assistant Registrar of Company, Tamil Nadu (2022)
Facts of the case
In this case, Dalmia Bharat Ltd. was inspected by an office of the central government, and he reported that the auditors failed to comment on the effectiveness of operations for internal financial control and that the board has not given any explanation regarding the qualification, reservation, adverse, remark made by the auditor in their report, violating the provisions of Section 134(3)(f) of the Act. As a result of this, a complaint was filed by the respondent. The petitioner on the other side argued that the complaint is barred by limitation and so it must be quashed.
Issues involved in the case
Whether the complaint be quashed in this case
Judgment of the court
The court in this case observed that the respondent had knowledge regarding the commission of the offence since 2018, and there is no need to take prior sanction before initiating any prosecution against the petitioners for the offence committed under the Act. The court held that the period for obtaining sanction cannot be excluded from the limitation period. In the present case, the complaint was filed after 6 months and is thus barred by the Limitation Act, 1963. The court quashed the complaints against the petitioner in this case.
It can be said that a financial statement accompanied by a board’s report and a director’s report is one of the most important documents because it gives an overview of the performance of a company and its accounts of profits and losses. It is mandatory for every company to prepare its financial statement at the end of every financial year so that a record of expenses and other necessary information regarding the affairs of the company can be recorded. It also consists of various reports, like the director’s report, board report, and auditor’s report, which are approved by the board of directors and discussed in the meeting. However, the 1956 Act used the term “balance sheet” instead of “financial statement.” It provided separate provisions with respect to the approval of the report and other required reports. But the 2013 Act has combined all the important information and provisions in this regard.
The financial statement, along with the board’s report, is filed with the registrar. If it is not filed within the prescribed time limit given under the Act, then the company, along with the members of the company at fault, will be liable for punishment. However, the reports and then statements filed can be revised if a court or tribunal orders so on the application of the Central Government, the Income Tax Authorities, and the Securities and Exchange Board of India. This can only be done if the court or tribunal has reason to believe that it was prepared in a fraudulent manner or that the affairs of the company have been mismanaged during its preparation. Apart from this, any contravention of the aforementioned provisions of Section 134 of the Act, whether in a financial statement, board’s report, or director’s responsibility statement will attract a penalty which is mentioned in the Section itself. Thus, for every company, it is important that a proper financial statement of the year along with all the necessary statements is made on time and there must be no contravention of the said provisions.
Frequently Asked Questions (FAQs)
What is the time limit to file the financial statement with the registrar?
According to Section 137 of the Act, a copy of a company’s financial statement can be filed within 30 days from the date of the annual general meeting where it has been adopted. It must be accompanied by all the necessary documents along with form AOC-4 as prescribed by Rule 12 of the Companies (Accounts) Rules, 2014.
Is it mandatory to transfer the amount to reserves?
According to Section 123 of the Act, a company may voluntarily choose to transfer a certain amount to the reserves, though it is not mandatory or obligatory.
What is the purpose of the director’s report?
The aim of the director’s report is to inform shareholders regarding the performance of the company in a particular financial year so that new strategies can be made for its progress and growth.
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